HOW TO DRAFT A MANUFACTURING DISTRIBUTION AGREEMENT?

HOW TO DRAFT A MANUFACTURING DISTRIBUTION AGREEMENT?

A manufacturing agreement is a contract between two parties for the manufacture and sale of goods. When a company makes a product, they need to sell it to the customers. If the company is already well-established with strong business relations and goodwill, it can directly sell its products in the market. However, a new venture in this field can face certain hardships due to a lack of expertise and reach. The company officials have to direct their attention and efforts towards the plight of the situation. The most rational decision one can make under such circumstances would be to engage a distributor who is knowledgeable and has a proper hold in the market.  To achieve this,  the manufacturer has to sign a  legally binding agreement with the distributor that outlines the terms and conditions of the distribution of the products along with their relations.

In lieu of verbal agreements, most manufacturers prefer a written agreement to avoid disputes and misapprehension. A bonafide manufacturing distribution agreement provides clarity and legal remedies to both the parties involved.  Therefore, it is paramount for the manufacturer and the distributor to understand the significance of written agreements.

There are certain key features that need to be noted before drafting a manufacturing agreement.

 

  • PURPOSE: An agreement can be drafted with different intentions and goals. Some of them may aim to hire a distributor for his expertise in the field, whereas, others may require a distributor for a better reach in the market. These purposes and intentions have to be mentioned in the agreement to prevent future disputes. It often happens that if the purposes are not clearly mentioned, either of the parties may sue each other. [See Smith Machinery Company, Inc. v. Hesston Corporation, 878 F.2d 1290 (10th Cir. 1989)] Hence, clarity of the purpose is a  key feature for drafting a manufacturing agreement.

 

  • TERM: The term of the agreement should always be mentioned precisely. Experts in the field advise that the agreement should always be made for a short tenure which can be renewed later with mutual understanding and approval. The agreements may be for a limited prescribed period of time, for an ongoing arrangement or can be renewable for a further period once the initial term ends. 

 

  • TRADEMARK LICENSING: The manufacturer has to mention the terms and conditions regarding the use of his intellectual property, including brand names and trademarks by the distributor. The manufacturer has to be very careful while granting these rights to the distributor to avoid losing his exclusive ownership over the intellectual property. The clause can be worded as follows:

“During the Term of this agreement, the Distributor shall have the right to publicly show that it is an authorized Distributor of the Manufacturer’s Products. It is authorized by the manufacturer to advertise the Products within the Territory under the Manufacturer’s trademarks, service marks, and trade names that it may adopt from time to time (“Manufacturer’s Trademarks”). Nothing herein shall grant Distributor any right, title, or interest in Manufacturer’s Trademarks. At no time during the Term of this agreement or at any time thereafter shall the Distributor challenge or assist others in challenging Manufacturer’s Trademarks or the registration thereof or attempt to register any trademarks, service marks, or trade name confusingly similar to those of the Manufacturer’s. Manufacturer indemnifies Distributor for all use of Manufacturer’s Trademarks.” 

 

  • DUTIES AND OBLIGATIONS: The manufacturer and the distributor have certain duties and obligations towards each other. The manufacturer must:
  1. Supply the described products
  2. Pay the distributor on time
  3. Provide all the necessary information regarding the product to the distributor
  4. Adhere to the given timelines

 

Whereas, the distributor must:

  1.  Meet the expectations of the distributor
  2.  Maintain an adequate inventory
  3. Provide after-sales support to the customers

 

  • COMPETITION: The competition in the market plays a very vital role in the distribution process. This clause prohibits the distributors from purchasing the same line of products from the competitors in the market. However, if the parties disagree and do not reach a consensus, the matter is taken to the court. The court makes a decision based on aspects like- the amount of hardships faced by the distributor, the activity that has been prohibited and the duration of the prohibition. Often this criteria only applies to the distributor having a monopoly market. The clause can be worded as follows:

 

     “During the Term of this agreement and one year after the expiry thereof, the Distributor shall not, (a) engage in development efforts or marketing or bidding (whether or not with a Manufacturer’s competitor) to develop or market similar Products as that of the Manufacturer’s, or (b) build substantial capability around the Manufacturer’s competitors’ products using the information or Intellectual Property shared with him under this agreement (including sponsoring or investing in training, marketing and solution development of products similar to that of the Manufacturer’s that include Manufacturer’s competitor products and/or that undermine the Manufacturer’s market strategy).”

                

 

  • MARKETING AND PROMOTION: Both parties need to be descriptive in their duties. The function of marketing and promotion is often performed by both the parties. However, if the manufacturer feels that the distributor should solely perform this function then he has to clarify this in the agreement along with the regulations for the same.

 

  • MINIMUM STANDARDS OF PERFORMANCE: A benchmark and performance criteria should be set by the manufacturer for the distributor in order to achieve the desired results. This criteria can be added by the manufacturer stating that if the minimum standards are not met, he may appoint additional distributors. It is very important to set these standards so that the distributor can decide whether he is willing to enter the agreement or not. Having clear standards assists both the parties to be aware of their requirements. 

 

  • CONTRACT TERMINATION CLAUSES: In order to avoid a lawsuit, the termination clauses can be mentioned in the agreement in case things fall out. The manufacturer may insert a termination clause as per his convenience and choice. However, the unresolved business-like due payments and the merchandise with the distributor should not be ignored. 

 

  • EXCLUSIVE OR NON-EXCLUSIVE APPOINTMENT: An exclusive agreement means that a distributor is the sole distributor of that product, whereas, a non-exclusive agreement is the exact opposite of it. The manufacturer demarcates the region within which the distributor has to sell the products. However, non-exclusive agreements often lead to competition within the network.

 

The manufacturers that contract with distributors also create job opportunities to stimulate the economy. The relationship between the two often extends beyond the contracts. It travels to and through many other suppliers and manufacturers that are involved in the creation of the products. Thus the agreements do not only benefit the manufactures and the distributors but the entire economy as a whole.

 

Ridhika Kapoor.

 

 

 

 

A manufacturing agreement is a contract between two parties for the manufacture and sale of goods. When a company makes a product, they need to sell it to the customers. If the company is already well-established with strong business relations and goodwill, it can directly sell its products in the market. However, a new venture in this field can face certain hardships due to a lack of expertise and reach. The company officials have to direct their attention and efforts towards the plight of the situation. The most rational decision one can make under such circumstances would be to engage a distributor who is knowledgeable and has a proper hold in the market.  To achieve this,  the manufacturer has to sign a  legally binding agreement with the distributor that outlines the terms and conditions of the distribution of the products along with their relations.

In lieu of verbal agreements, most manufacturers prefer a written agreement to avoid disputes and misapprehension. A bonafide manufacturing distribution agreement provides clarity and legal remedies to both the parties involved.  Therefore, it is paramount for the manufacturer and the distributor to understand the significance of written agreements.

There are certain key features that need to be noted before drafting a manufacturing agreement.

 

  • PURPOSE: An agreement can be drafted with different intentions and goals. Some of them may aim to hire a distributor for his expertise in the field, whereas, others may require a distributor for a better reach in the market. These purposes and intentions have to be mentioned in the agreement to prevent future disputes. It often happens that if the purposes are not clearly mentioned, either of the parties may sue each other. [See Smith Machinery Company, Inc. v. Hesston Corporation, 878 F.2d 1290 (10th Cir. 1989)] Hence, clarity of the purpose is a  key feature for drafting a manufacturing agreement.

 

  • TERM: The term of the agreement should always be mentioned precisely. Experts in the field advise that the agreement should always be made for a short tenure which can be renewed later with mutual understanding and approval. The agreements may be for a limited prescribed period of time, for an ongoing arrangement or can be renewable for a further period once the initial term ends. 

 

  • TRADEMARK LICENSING: The manufacturer has to mention the terms and conditions regarding the use of his intellectual property, including brand names and trademarks by the distributor. The manufacturer has to be very careful while granting these rights to the distributor to avoid losing his exclusive ownership over the intellectual property. The clause can be worded as follows:

“During the Term of this agreement, the Distributor shall have the right to publicly show that it is an authorized Distributor of the Manufacturer’s Products. It is authorized by the manufacturer to advertise the Products within the Territory under the Manufacturer’s trademarks, service marks, and trade names that it may adopt from time to time (“Manufacturer’s Trademarks”). Nothing herein shall grant Distributor any right, title, or interest in Manufacturer’s Trademarks. At no time during the Term of this agreement or at any time thereafter shall the Distributor challenge or assist others in challenging Manufacturer’s Trademarks or the registration thereof or attempt to register any trademarks, service marks, or trade name confusingly similar to those of the Manufacturer’s. Manufacturer indemnifies Distributor for all use of Manufacturer’s Trademarks.” 

 

  • DUTIES AND OBLIGATIONS: The manufacturer and the distributor have certain duties and obligations towards each other. The manufacturer must:
  1. Supply the described products
  2. Pay the distributor on time
  3. Provide all the necessary information regarding the product to the distributor
  4. Adhere to the given timelines

 

Whereas, the distributor must:

  1.  Meet the expectations of the distributor
  2.  Maintain an adequate inventory
  3. Provide after-sales support to the customers

 

  • COMPETITION: The competition in the market plays a very vital role in the distribution process. This clause prohibits the distributors from purchasing the same line of products from the competitors in the market. However, if the parties disagree and do not reach a consensus, the matter is taken to the court. The court makes a decision based on aspects like- the amount of hardships faced by the distributor, the activity that has been prohibited and the duration of the prohibition. Often this criteria only applies to the distributor having a monopoly market. The clause can be worded as follows:

 

     “During the Term of this agreement and one year after the expiry thereof, the Distributor shall not, (a) engage in development efforts or marketing or bidding (whether or not with a Manufacturer’s competitor) to develop or market similar Products as that of the Manufacturer’s, or (b) build substantial capability around the Manufacturer’s competitors’ products using information or Intellectual Property shared with him under this agreement (including sponsoring or investing in training, marketing and solution development of products similar to that of the Manufacturer’s that include Manufacturer’s competitor products and/or that undermine the Manufacturer’s market strategy).”

                

 

  • MARKETING AND PROMOTION: Both parties need to be descriptive in their duties. The function of marketing and promotion is often performed by both the parties. However, if the manufacturer feels that the distributor should solely perform this function then he has to clarify this in the agreement along with the regulations for the same.

 

  • MINIMUM STANDARDS OF PERFORMANCE: A benchmark and a performance criteria should be set by the manufacturer for the distributor in order to achieve the desired results. This criteria can be added by the manufacturer stating that if the minimum standards are not met, he may appoint additional distributors. It is very important to set these standards so that the distributor can decide whether he is willing to enter the agreement or not. Having clear standards assists both the parties to be aware of their requirements. 

 

  • CONTRACT TERMINATION CLAUSES: In order to avoid a lawsuit, the termination clauses can be mentioned in the agreement in case things fall out. The manufacturer may insert a termination clause as per his convenience and choice. However, the unresolved business like due payments and the merchandise with the distributor should not be ignored. 

 

  • EXCLUSIVE OR NON-EXCLUSIVE APPOINTMENT: An exclusive agreement means that a distributor is the sole distributor of that product, whereas, a non-exclusive agreement is the exact opposite of it. The manufacturer demarcates the region within which the distributor has to sell the products. However, non-exclusive agreements often lead to competition within the network.

 

The manufacturers that contract with distributors also create job opportunities to stimulate the economy. The relationship between the two often extends beyond the contracts. It travels to and through many other suppliers and manufacturers that are involved in the creation of the products. Thus the agreements do not only benefit the manufactures and the distributors but the entire economy as a whole.

 

Ridhika Kapoor.