Distribution agreements are a common form of legal agreement in South Africa, used to govern the relationship between a supplier and a distributor. In this article, we'll explore the legal requirements and key considerations for distribution agreements in South Africa, including the purpose of distribution agreements, the legal requirements for compliance and the potential benefits and risks associated with distribution agreements.

What is a Distribution Agreement?

A distribution agreement is one under which a supplier or manufacturer of goods agrees that an independent third party will market and sell the goods. The distributor buys the goods on their own account and trades under their own name.

Purpose of Distribution Agreements

Distribution agreements are used to govern the relationship between a supplier and a distributor. Some of the common purposes of distribution agreements include:

• Market access: Distribution agreements can provide a way for suppliers to access new markets and expand their customer base.

• Product distribution: Distribution agreements can formalize the terms of product distribution, including the price, volume, and territory of distribution.

• Legal protection: Distribution agreements can provide legal protection for both parties, including protection of intellectual property and liability for damages.

Types of Distribution Agreements

A distribution agreement can be exclusive and non-exclusive distribution.

What is an Exclusive Distribution Agreement?

An exclusive distribution agreement is where only one distributor is appointed for a particular territory and the manufacturer is excluded from having any other distributors in that territory.

What is an Non-Exclusive Distribution Agreement?

A non-exclusive distribution agreement is where the manufacturer may more than one distributor in the same territory.

What is a Distribution Strategy?

The manufacturer must decide on a distribution strategy when considering what type of distribution agreement to enter into.

A selective strategy calls for a small group of distribution outlets to cover the channel partner's target markets.

An intensive strategy aims to place the product in front of as many potential buyers as possible through widespread distribution. This strategy is typically more appropriate to consumer-oriented products (as opposed to products designed for commercial markets).

Legal Requirements for Compliance

Distribution agreements in South Africa are subject to legal requirements for compliance, including:

• Written agreement: Distribution agreements must be in writing and signed by both parties to be legally binding.

• Competition law: Distribution agreements must comply with South Africa's competition law, including the Competition Act and related regulations.

• Fair dealing: Distribution agreements must be fair and reasonable, and not unduly restrict the rights of either party.

Benefits and Risks of Distribution Agreements

Distribution agreements can offer several benefits for both the supplier and the distributor, including:

• Market access: Distribution agreements can provide a way for suppliers to access new markets and expand their customer base, while distributors can access new products and services to offer to their customers.

• Formalization of terms: Distribution agreements can formalize the terms of product distribution, including the price, volume, and territory of distribution, reducing the risk of misunderstandings or disputes.

• Legal protection: Distribution agreements can provide legal protection for both parties, including protection of intellectual property and liability for damages.

However, distribution agreements also carry risks for both parties, including:

• Legal obligations: Both parties may become legally obligated to perform the obligations of the distribution agreement, and failure to comply with the agreement can result in legal action.

• Commercial risk: The distributor may face commercial risks associated with product distribution, such as inventory management and customer relations.

• Contractual risks: Distribution agreements may have complex contractual obligations, and parties must ensure that they understand their legal rights and obligations before entering into a distribution agreement.

Conclusion

Distribution agreements are an important legal agreement in South Africa, used to govern the relationship between a supplier and a distributor. By understanding the legal requirements and potential benefits and risks associated with distribution agreements, parties can make informed decisions and take proactive steps to protect their commercial interests and ensure compliance with legal obligations.

Our offices commercial attorneys have extensive experience in drafting distribution agreement for various industries. If you would like to find out more, please contact our offices today to schedule a consultation with one of specialist commercial attorneys.