The grant is the easy part
A distribution agreement is usually drafted in the week when both parties are pleased with each other. The territory is agreed on a call, the price list is attached, and the document is signed with a photograph that ends up on somebody’s news page. Nothing in that week is difficult. The difficult part is in the same document, in the clauses nobody reads until they are needed.
An agreement of this kind is not a sales contract. It does not sell anything. It sets the rules under which a long series of sales will happen, and the most valuable of those rules are the ones that describe how the arrangement ends. If you want to judge a draft quickly, read it backwards: start at termination and work up to the grant.
What follows is not a template and not legal advice. It is a list of what the document has to decide, in the order a distributor or a factory should think about it. Where a figure belongs, the figure is left out on purpose, because the number that suits one market is wrong in the next one and neither party should take one from an article.
Territory is a boundary, not a compliment
“Europe” is not a territory. It is a continent with different plumbing habits, different approval routes and, in most cases, different languages on the carton. A clause that names a continent has decided nothing; it has postponed the argument to the first shipment that arrives somewhere the factory did not expect it.
The clause has to answer three questions. Which countries, listed by name. Which channel inside those countries: project supply, retail, wholesale, e-commerce, or resale to another distributor. And whether the distributor may appoint sub-distributors, and if so whether those sub-distributors are bound by the same rules as the party that appointed them.
Channel is where most disputes actually live. A distributor with retail rights who supplies a hotel project at a wholesale price has not breached the territory clause. They have breached a channel clause that does not exist. Write the channel down, and write down what happens when an order arrives that does not fit it.
Leakage deserves a sentence of its own. If the goods can be resold into a country the agreement excludes, the agreement should say that this is a breach, what evidence counts, and what the consequence is. That is not distrust. It is the only thing that makes the exclusivity in the next section mean anything.
Exclusivity has to be paid for in something other than hope
Exclusivity is the clause buyers ask for first and define last. It is a transfer of something valuable — the right to be the only route into a market — and it should be exchanged for something equally concrete.
The usual currency is an obligation: a purchase commitment counted in a defined way over a defined period, a marketing obligation, a stock obligation, a reporting obligation. Each has to be written so that a third party could check it without an argument. “Reasonable effort” cannot be checked. A stated period, a stated unit and a quarterly report with the shipping documents attached can be.
Then the ladder. What happens at the first shortfall, at the second, and at the end of the review period. A workable clause has a conversation, then a corrective window, then a change of status — from exclusive to non-exclusive, or from exclusive to terminated. What it should never have is silence, because silence is read differently by each side and always in its own favour.
One more thing belongs here: what exclusivity does not cover. Spare parts. Project orders that the factory sources directly. Public tenders. Each of those is a hole through which an exclusive arrangement leaks, and each is cheaper to describe at signature than to argue about two years later.
Price basis, not price
No serious agreement fixes a price for its whole life, and none should. What it fixes is the basis on which the price is calculated and the mechanism by which it changes.
Five things make up that basis. The list the prices come from, and whether that list belongs to the factory or to the market. The currency, and which party carries the exchange risk between quotation and payment. The delivery term, because a price at the factory gate and a price landed at a destination port are different products. The validity of a quotation, and what the quotation is valid against — a quantity, a model, a finish. And the review mechanism: when prices may be revisited, on what evidence, and with how much notice.
Finish matters more in this category than in most. A white body and a coloured body are not the same line item, and an agreement that lists one price per model without saying which finish it refers to will be argued about on the first coloured order. Put the finish into the price basis, or give it a line of its own.
What should not be in the agreement is a discount structure invented to fill a page. If there is a volume ladder, it belongs in an annex that can be revised without re-signing the whole document, and the annex should say what happens to orders that straddle a threshold halfway through a period.
Commitments: how they are counted, and what follows a shortfall
Most commitment clauses fail on the counting, not on the number. The parties agree on a volume and then discover at the review that one side counted containers and the other counted units, that one included spare parts and the other did not, and that the period ran from signature for one party and from first shipment for the other.
So the clause has to define the unit of counting; whether it is per model, per family or per order; whether it is measured by order date, invoice date or shipment date; whether returns, warranty credits and cancelled lines are deducted; and the period itself, including whether it is fixed or rolling. None of this is bureaucratic. It is the difference between a commitment and a misunderstanding with a schedule attached.
The consequence is the second half. A shortfall should not automatically end the agreement; that produces destructive arguments at the worst possible moment. It should produce a stated sequence: written notice, a period to cure, a review with the numbers on the table, and only then a change of status. Symmetry matters. If the factory misses the agreed production window, the same ladder should run in the other direction.
Force majeure, allocation during a capacity squeeze, and the treatment of a market that collapses belong in this section rather than in a separate one. They are all answers to the same question: what happens when the plan does not hold.
The exit: stock, samples and what survives termination
This is the section the whole document should be built around. At termination there is usually stock in a warehouse, samples in a showroom, artwork in a printer’s queue, and end users who have been told that a warranty exists. None of that disappears because the agreement has ended.
Stock first. Does the factory take back unsold goods, and on what basis is that calculated? Does the distributor get a run-down period to sell what it holds? Is the stock identifiable — branded cartons, private-label artwork, a model only that distributor sells? The more customised the goods, the more the agreement has to say, because nobody else can move them.
Samples and artwork second. Who owns the showroom samples, the printed catalogues, the carton artwork, the photography on the distributor’s website. What has to be returned, what has to be destroyed, and by when. The answer is usually obvious once it is written and never obvious while it is not.
Obligations that survive third. Warranty is the obvious one: an end user who bought a pan before termination still holds whatever warranty was promised at the point of sale, and the factory’s obligation to supply the parts behind it should be written as a surviving clause rather than assumed. Confidentiality, unpaid invoices and claims already in progress belong on the same list.
Governing law and the room where arguments end
Two parties in different countries will disagree. The agreement’s job is to decide where that disagreement is heard before it happens, because afterwards neither side will agree on anything, including that.
The clause needs a governing law, a venue, a language and a method. Arbitration is common in this trade because enforcement across borders is more predictable than with a court judgment, but it is not automatically right for a distributor who needs a fast answer about a single container. What matters is that the method suits the size of the disputes the arrangement is likely to produce.
Put an escalation step in front of it. A named contact on each side, a written notice, a stated period to respond. Most disagreements in this trade are about a shipment rather than a principle, and a shipment can be settled by two people with the file open in front of them.
Then a detail that is almost always left out: which language version prevails if the document is signed in two. A bilingual agreement with no prevailing-language clause is two agreements, and the one that gets enforced is whichever the tribunal finds easier to read.
What to check before signing
Six lines, in the order the clauses appear above. A draft that can answer all six in a sentence each is close to finished.
- Territory — countries named, channel defined, sub-distributors covered, leakage addressed.
- Exclusivity — what it is exchanged for, how that is measured, what happens when it is missed, and what it excludes.
- Price basis — the list, the currency, the delivery term, the validity, the review mechanism, the finish.
- Commitments — unit, period, deductions, consequence, symmetry.
- Exit — stock, samples, artwork, surviving warranty, confidentiality.
- Disputes — law, venue, language, escalation, prevailing version.
If any of the six is answered with “we will sort that out”, the document is not an agreement. It is a letter of intent with a signature on it, and the difference will be discovered on the day it matters most.
Frequently asked questions
Does a distributor agreement have to be exclusive?
No. Non-exclusive distribution is the normal starting point in this trade, because it lets both sides test the market without transferring a right that has to be paid for. Exclusivity is a separate decision that should follow evidence of sell-through, not precede it.
Should the agreement contain a price list?
It should contain a price basis rather than a fixed list: the source list, the currency, the delivery term, the validity and the review mechanism. A list appended to a multi-year agreement is out of date before the second shipment, and renegotiating it becomes harder than renegotiating nothing.
What is the most common drafting mistake?
Defining territory by continent or region and leaving channel undefined. Two distributors can hold the same country on paper and still collide, because one sells to retail and the other supplies projects. The collision is not a breach of anything, which is exactly the problem.
Can the factory still sell directly into my territory?
Only if the agreement says so. Direct project supply, spare parts and public tenders are usually carved out, and the carve-outs should be listed rather than implied. An exclusive clause with an unlisted exception is a clause that will be tested within a year.
How long should an agreement run?
We do not set a term for anyone, and neither should an article. What matters more than length is the review interval: it should be short enough that a struggling territory can be corrected while both sides still want to correct it, and long enough to justify the investment.
What happens to warranty claims after termination?
They continue, which is why warranty has to be written as a surviving obligation. End users hold whatever was promised at the point of sale, and the factory’s part of that promise — parts, documentation, a decision on fault — needs a clause that outlives the distribution arrangement itself.
Related on this site
Documents and certificates
- The plant behind the range: Chaozhou, the tunnel kiln and the QC line
- Send a draft agreement and ask the questions it leaves open
Related reading
- OEM and ODM: how an order runs from drawing to container
- Private label, OEM and ODM: what the difference decides
- From Inquiry to Container: The First Order