The following distribution agreement checklist will help you draft a thorough distribution agreement and ensure you have covered the main issues. Entering into an agreement with a distributor to sell your product is advantageous as that entity will have a sales channel and network in a particular territory making it easier to sell your product.
A distribution agreement is required when you are ready to commercialize your product. The following checklist applies to distribution agreements in general but also provides some specific clauses related to entertainment distribution agreements.
Typically the manufacturer of the product will provide the right for another entity to sell the product in exchange for a percentage of sales. In other words, the owner or manufacture of the product can have another entity agree to sell your product or service for you.
They purchase the product from you and resell it at their risk and discretion. It is more effective to have someone helping you sell rather than you selling directly so you can focus on making the product even better.
Distribution Agreement Checklist
The following list outlines some of the major points to consider when putting together a distribution agreement.
1) Distribution Agreement Definitions
Specify, define and describe the product and/or service
Define the Licensor
- Place of Incorporation
- Name and title of contact
- Telephone and Fax
- Place of Incorporation
- Name and title of contact
- Telephone and Fax
Production (if this is an entertainment distribution agreement, define the Production):
- Name and author of underlying work (chain of title)
- Copyright registration number of underlying work and name of countries where the underlying works are registered
- Name of author of screenplay
- Copyright registrations numbers of screen (including countries where registered), production (including countries where registered)
- Name and nationality of director
- Name and nationality of producer
- Names of lead performers and characters
- Is production produced in colour or black and white?
- Format of production (35 mm, 16 mm, videotape) and whether originally recorded on film or videotape
- Anticipated Year(s) of production
- Language of production, dubbed version, sub-titled version
In the case of an entertainment distribution agreement, define the media. The grant of rights should either list all the media or outline that it is for all media except those that are specified.
- The following media rights may be granted in an entertainment agreement: theatrical, non-theatrical, home video, pay television, subscription television, free television (network, educational, syndication), CD, DI1, CD-ROM, DVD, 3DO, Internet and other online services.
2) Distribution Grant
- define whether the distributor will have exclusivity or not
- define any specific criteria for maintaining exclusivity
- minimum sales volume
- minimum purchases
- minimum number of customers
- Specify whether the licensor or licensee can claim retransmission royalties. Many countries in Europe, Canada and the US provide royalties to collective societies for the retransmission of television signals by cable operators via a blanket license (for entertainment distribution agreement).
- Specify whether there is a completion guarantee (for entertainment distribution agreement).
Specify whether sub-distributors are permitted and ensure that owner has the right to approve sub-distributor with respect to the sale and distribution of the product.
Will company have to refer all orders to distributors for which they are entitled to a distribution fee? Can the distributor solicit or fill orders outside the territory?
“Distributor agrees that all enquiries with respect to and any orders for Product received, directly or indirectly, by Distributor from outside the Territory shall be referred to Owner”.
Define the territory
It may be important to add a clause that reads:
“Distributor agrees not to distribute, market or sell the product to any person within the Territory if distributor knows or has any reason to believe that such product will be resold by such person, directly or indirectly, outside the Territory.”
Specify the territory for each right granted as these may vary.
Is the term fixed or indefinite? What is the length of the initial term? Are these renewal terms? If so, what are the lengths of the renewal terms and how many renewals are permitted? Is there a minimum criteria for any renewals?
Important to add a provision that any renewal of the terms shall be subject to “minimum annual performance requirements”.
Does the licensee or distributor have the right to enter into agreements that continue beyond the term and who administers such agreement? Who receives license fees after the end of the term?
Are there any “sell-off” rights after the end of the term which the distributor continue to sell the product? Are the sell-off rights exclusive or non-exclusive?
7) Obligations of Distributor:
- Meet minimum wholesale orders/purchase quotes/sales volumes/number of units sold
- Responsible for advertising and promotion within their territory. Specify whether a certain fixed budget will be allocated towards this or whether it will be a percentage of sales?
- Research the market and anticipate needs
- Maintain inventory and warehousing facilities
- Honour company’s warranties
- Request that the distributor provide owner with a list of the different distribution channels which product is intended to be distributed, the names of all the sub-distributors along with the price the product is being sold to the customer
- require that the distributor purchase minimum quantities
- sales and marketing of the product
- best efforts in performance of obligations under the agreement including active solicitation of orders
- adhere to the highest standards of operation
- provide ongoing market evaluation of the product
- help increase market awareness and sales of the product so as to enhance the owner’s name and brand image
- provide owner a record of all contacts made with current and prospective customers
- comply with all applicable laws, rules, regulations and guidelines in the territory
- keep complete and accurate records of all products purchased and sold (and provide owner with a monthly summary of all sales and summary of inventory on hand)
- Responsible for insurance? Term? Limits?
- Are there any distributor approvals? What elements does the distributor have approval over. For entertainment contracts, is is the budget, script, principal cast, line producer, director, technical standards, etc. How is approval granted?
- provide representations and warranties:
- is a valid subsisting corporation incorporated pursuant to the laws of the territory
- has all requisite power and authority to execute and deliver this Agreement and has all necessary power and authority to perform the obligations in the agreement;
- the entering into of this Agreement will not result in the violation of any of the terms and provisions of any agreement, written or oral, to which distributor may be a party;
- the execution and delivery of this Agreement has been duly authorized by all necessary action on the part of distributor and this Agreement, when duly executed and delivered by distributor , will constitute a legal and binding obligation of distributor enforceable in accordance with its terms;
- the performance by distributor of all its obligations hereunder, including the sale of the Product, will be conducted in compliance with all applicable laws in the Territory; and
- possesses a readily available and extensive sales network in the Territory.
8) Pricing, Delivery and Payment:
- comply with Company’s standard pricing and specify the circumstances in which the pricing can change.
- define the payment terms
- define the delivery terms
- outline the risk of loss
- is there a guarantee or advance? If so when are they payable? Is the advance subject to any withholding taxes? If the advance is payable prior to delivery, does the licensee require a registrable security interest or a completion guaranator or both? Are there any security interests granted by the licensor? Which party assumes the risk of currency fluctuations?
- What are the distribution fees? Are the distribution fees inclusive or exclusive of non-arm’s length sub-distributor’s and sub-agent fees? Distribution fees are typically a percentage of gross revenue and the definition of gross revenue should be spelled out along with exclusions such as taxes collected by the distributor (such as GST) and refundable advances or guarnatees (until they are earned).
9) Obligations of Company
- Provide promotional and product/service assistance to distributor
- Responsible for all returns and defective products
- Sell products to distributor as required
- maintaing all intellectual property rights such as copyrights, trademarks and patents
- ensure product safety and meet minimum standards
- provide an indemnity to distribution regarding product liability and intellectual property infringement
- responsible for all packaging and labelling requirements
- make representations and warranties relating to the product/service
- has all the rights to grant distributor rights
- ensuring the quality and standards of the product
- warehousing responsibilities
- product registrations or market authorizations
- responsible for insurance? term? limits?
- provide termination with notice or without notice for specified notice periods and for specified events
- outline the obligations after termination such as providing a release, return of materials, documents, and other confidential information, cease use of trademarks and your option to repurchase back inventory and have outstanding amounts owing paid
- outline the use by the distributor
- specify whether the distributor becomes the registered user
- require the distributor to maintain, enforce and defend trade marks
- indemnify distributor for the use of your IP
- specify whether an assignment is permitted and whether agreement can be assigned to a sub-distributor, subsidiary or affiliate of the distributor
13) Independent Contractor
14) Confidentiality and Non-competition Clause
15) Representations and Warranties
Who is responsible for residuals in the case of an entertainment distribution agreement?
Add the customary representations and warranties.
16) Distribution Expenses
What distribution expenses are paid out of the distribution revenue? What distribution expenses are paid by the distributor?
17) Distributor’s Reporting Obligations
When does the distributor or licensee report? What details are to be provided?
18) Licensor’s Audit Rights
How frequently can the licensor audit the licensee? Where are books kept? How much notice is required to assert the audit rights? Does licensor have to provide licensee with an audit report? Does the licensee have to pay the costs if an error in favour of the licensee is found? What percentage of error before the costs have to be paid?
19) Delivery Materials
List the delivery materials? Who is responsible for the costs?
20) Credits (in the case of an entertainment agreement)
Provide the distributor credits? print and ad credit?
- Force Majeure
- Governing Law
- Notices (Distributor’s address, Company’s address)
- Limitation of liability and indemnities
Be sure to address the use of a trademark in a particular distribution agreement. Read What is a Trademark for information on trademarks.
Marsdd has a distribution agreement template that is a great starting point.