Distribution Agreements: Exclusive vs Non-Exclusive Models

A distribution agreement is the legal backbone of indirect sales channels. For most manufacturers expanding internationally, the choice is not whether to use distributors but how to structure the relationship to protect brand value, ensure performance, and stay within competition law. This guide is part of our master series on business agreements.

What is a distribution agreement?

A distribution agreement is a contract under which a supplier authorises a distributor to buy the supplier’s products and resell them in a defined territory under defined commercial terms. The distributor purchases the goods, takes title and inventory risk, and earns a margin between purchase price and resale price.

Distribution vs. agency vs. reseller — what is the difference?

Three channel structures dominate: distribution, agency, and reseller — each with different legal treatment.

What clauses must every distribution agreement contain?

A complete distribution agreement contains thirteen clauses covering scope, performance, pricing, IP, and termination.

1. Products covered — specific SKUs or product families included.
2. Territory — geographical scope, with treatment of online sales.
3. Exclusivity — exclusive, sole, or non-exclusive distribution.
4. Minimum purchase obligations — annual targets, consequences for missing them.
5. Pricing and discounts — supplier’s pricing structure to distributor; distributor’s freedom on resale price.
6. Orders and delivery — order process, lead times, Incoterms.
7. Marketing and promotion — obligations on the distributor; brand standards.
8. Trademark and brand use — limited licence to use marks in marketing.
9. Quality, warranties, recalls — handling of defective product and recall obligations.
10. Reporting — sales reporting, inventory reporting, end-customer information (subject to data protection law).
11. Compliance — anti-bribery, sanctions, export control, sectoral regulation.
12. Termination — fixed term vs. indefinite; notice; grounds for immediate termination; sell-off rights.
13. Post-termination — return of marketing materials, treatment of remaining inventory, customer transition.

How does competition law constrain distribution agreements?

Distribution agreements are scrutinised heavily under competition law because they can have anti-competitive effects on resale prices, territorial protection, and market access. The EU Vertical Block Exemption Regulation (VBER) and equivalent rules in other jurisdictions provide a safe harbour for arrangements that meet specific conditions.

• Resale Price Maintenance (RPM) — fixing or imposing minimum resale prices is a hardcore restriction in most major jurisdictions. Recommended retail prices (RRPs) and maximum prices are generally permitted.
• Absolute territorial protection — completely insulating one distributor from passive sales by others is usually prohibited. Active sales restrictions are more often permitted than passive sales restrictions.
• Online sales restrictions — outright bans on internet sales are usually unlawful. Restrictions can target marketplaces or specific online platforms within limits.
• Customer allocation — assigning specific customers exclusively to one distributor is generally restricted.

How should exclusivity and minimum purchase obligations be structured?

Exclusivity gives the distributor protection against competing distributors in the territory; minimum purchase obligations protect the supplier against an under-performing distributor. The two are typically paired — exclusivity is granted in exchange for committed performance.

Best practice is to define minimum purchase obligations with clear escalation: missing the target by a small margin triggers conversion to non-exclusive status; missing by a large margin or repeatedly triggers termination. The objective is to give the distributor time to recover from a bad year without locking the supplier into permanent under-performance.

How should distribution agreements be terminated?

Termination of distribution agreements is one of the most litigated areas of commercial law. Many civil-law jurisdictions impose statutory minimum notice periods and, in some cases, indemnity-style compensation similar to that owed to commercial agents.

Even where statutory compensation does not apply, courts may award damages for termination without reasonable notice, particularly where the distributor has made substantial investments specific to the distribution relationship — building inventory, hiring staff, marketing the brand. Termination notice periods of 6–24 months are not uncommon in long-running distribution relationships.

What are the most common drafting mistakes?

Five mistakes recur most often in distribution disputes:

1. Unenforceable resale price language — clauses that fix prices in violation of competition law.
2. No clear termination mechanics — leaving notice and compensation to default law.
3. Vague territory definition — particularly the treatment of internet and cross-border sales.
4. Inadequate brand-protection clauses — allowing distributors to alter product or marketing without supplier approval.
5. Missing sell-off rights — failing to define what happens to remaining inventory after termination.

Frequently Asked Questions

Quick answers to the most common questions readers ask about this topic.