Overview
Distribution agreements create the pathways through which products reach markets. A manufacturer appoints distributors who take on the commercial risk and operational burden of market development, inventory management, and customer relationships. In return, distributors obtain access to products, often with territorial exclusivity or other protections that make the business model viable. This mutual dependency creates relationships that must be carefully structured.
The core tension in distribution arrangements is between control and independence. Manufacturers want their products sold consistently with brand positioning, at appropriate prices, through suitable channels. Distributors want freedom to build their businesses using their market knowledge and relationships. The distribution agreement must strike a balance - providing enough control to protect brand integrity while leaving enough freedom for distributors to operate effectively.
Indian distribution law provides significant protections to distributors that must inform agreement design. Though India does not have specific distribution legislation like some jurisdictions, principles from agency law, competition law, and general contract principles create constraints. Abrupt termination of established distributors, unreasonable exclusivity requirements, and resale price maintenance all carry legal risks that the agreement must navigate.
Key Considerations
Appointment and Territory
The scope of the distributor's appointment, territorial boundaries, and any exclusivity commitments from either party.
Performance Requirements
Minimum purchase obligations, sales targets, market development requirements, and consequences of underperformance.
Pricing and Margins
How prices are set, margin structures, and the limits of manufacturer influence on resale pricing under competition law.
Marketing and Brand
Marketing obligations, brand usage guidelines, and coordination between manufacturer and distributor activities.
Inventory and Logistics
Ordering processes, inventory requirements, delivery terms, and return policies.
Termination Protection
Notice periods, termination grounds, post-termination obligations, and compensation for terminated distributors.
Applying the TCL Framework
Technical
- Understanding product characteristics and handling requirements
- Assessing distributor technical capabilities
- Evaluating logistics and supply chain requirements
- Reviewing warranty and service obligations
- Understanding regulatory requirements for distribution
Commercial
- Structuring margins that enable distributor business model
- Balancing minimum commitments with market realism
- Designing incentive structures for performance
- Managing multi-channel distribution economics
- Addressing market development investments
Legal
- Ensuring competition law compliance for pricing and exclusivity
- Structuring termination provisions appropriately
- Addressing intellectual property in marketing materials
- Managing liability for product issues
- Complying with sector-specific distribution regulations
"A distribution relationship is built on mutual dependency. The manufacturer needs market access; the distributor needs product. The agreement must structure this dependency in a way that aligns incentives while preserving each party's ability to protect its interests when alignment fails."
Common Pitfalls
Unrealistic Minimums
Purchase minimums set without market research that become either meaningless or relationship-destroying when markets underperform.
RPM Violations
Resale price maintenance provisions that violate competition law, exposing both parties to regulatory action.
Exclusivity Overreach
Exclusive arrangements that foreclose competition without sufficient justification, raising competition concerns.
Termination Exposure
Summary termination provisions that may not be enforceable against established distributors who have invested in the market.
Territory Ambiguity
Unclear territorial boundaries creating conflict with other distributors or direct sales.
Distribution Regulation
Distribution agreements in India are primarily governed by the Competition Act, 2002 and general contract law principles. The Competition Act prohibits resale price maintenance (fixing resale prices) and scrutinises exclusive arrangements that may foreclose competition. Vertical agreements between parties at different levels of the supply chain are assessed for anti-competitive effects. Sector-specific regulations apply to distribution of pharmaceuticals, food products, alcohol, and other regulated goods. Consumer protection law affects distributor obligations to end customers. Labour law may apply to distributor personnel under certain circumstances.
Practical Guidance
- Conduct thorough due diligence on potential distributors before appointment.
- Set minimum commitments based on realistic market assessment, not aspirational targets.
- Ensure pricing provisions comply with competition law - maximum prices, not fixed.
- Build review mechanisms into exclusivity arrangements.
- Provide reasonable termination notice and consider transition assistance.
- Create clear escalation paths for relationship issues before they become termination scenarios.
Frequently Asked Questions
Related Practice Areas
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