Distribution agreement

What it means

A distribution agreement governs a long-term relationship in which a manufacturer or importer sells goods to a distributor, who resells them in its own name and for its own account. The distributor buys the goods, becomes their owner and earns the difference between the purchase and selling price.

The Commercial Code does not regulate it specifically; it is an innominate contract combining elements of a framework agreement and repeated purchase contracts. Its content therefore matters greatly: whatever the parties do not agree is often not regulated at all.

It differs from a commercial agency contract in risk. An agent sells in the manufacturer’s name and earns commission, whereas a distributor buys at its own risk and bears the loss if the goods do not sell. That is why, when the contract ends, a distributor usually has no statutory claim to compensation as an agent would.

How it works in practice

A good agreement covers territory and exclusivity, minimum purchases, the price list and discounts, delivery terms under Incoterms, payment terms, use of the trademark, marketing, complaints and the notice period. With exclusivity, a clause barring competing products is often key.

With a foreign supplier or distributor, VAT on intra-EU supplies, customs duty on imports from third countries and whether the distributor creates a permanent establishment for the supplier all need thought. The choice of governing law and court matters too.

Volume bonuses and marketing contributions are treated differently in the books and for VAT: sometimes as a retrospective discount that adjusts the taxable amount, sometimes as payment for a service. When drafting, we recommend naming these payments precisely so they can be recorded correctly.

What to watch out for

EU competition law limits what a manufacturer may agree with a distributor. A ban on selling below a set price or a total ban on online sales can be a prohibited agreement. Even small companies should have such clauses checked.

The second risk arises when the relationship ends: what happens to stock the distributor bought, who covers warranties on goods already sold and when the distributor must stop using the brand. If the agreement is silent, a dispute is almost certain.