Distribution Agreement

What is a Distribution Agreement?

A Distribution Agreement is an agreement entered into between two parties wherein one party (the "distributor"), after purchasing the products of the other party (the "supplier") agrees to market, then sell or distribute the products. The supplier is an individual or organization that supplies or sells the product to the distributor. Suppliers are usually the manufacturers or producers of the product. On the other hand, the distributor is an individual or organization that purchases the product for the purpose of "distributing" the same by re-selling it to end consumers or to other distributors.

In a Distribution Agreement, the parties outline their expectations for the sale and distribution of the products as well as the general behavior and bounds of the relationship between them.

What is the difference between a Distribution Agreement and a Consignment Agreement?

In a Distribution Agreement, the distributor sells, or distributes the products of the supplier, and the distributor obtains ownership over the products before their actual distribution to customers. On the other hand, in a Consignment Agreement, the distributor (called the "consignee") does not buy the products but sells them for the supplier (called the "consignor") in exchange for a fee, which is usually a percentage of the sales price.

Further, in a Consignment Agreement, the ownership of the products will remain with the consignor and the consignee sells the products only on behalf of the consignor, while in a Distribution Agreement, the ownership of the products is transferred from the supplier to the distributor, and the distributor sells the products under this own name.

What does exclusivity mean under a Distribution Agreement?

The supplier and the distributor can agree that the distributor will be the exclusive and only distributor of the products of the supplier. This means there will be no other distributor will be allowed to sell the products. They can also agree that the distributor will be the one who will answer the inquiries about the supplier's products which means that if the supplier will receive inquiries from customers or clients, the supplier should direct them to the distributor.

What can be a performance goal under the Distribution Agreement?

The supplier and distributor can agree on certain goals or metrics that the distributor should accomplish. This could be a certain number of units or products sold within a given period. (e.g. 100 air conditioning units in a 1 month period). If such goal is not met, there could be certain consequences such as the removal of the right of the distributor to exclusively distribute the supplier's products thereby losing income.

Is it necessary to have a Distribution Agreement?

Yes, because this will lay down the terms and conditions of the agreement between the distributor and the supplier and will prevent the parties from reneging on the Distribution Agreement. This will also serve as documentation for what was agreed upon by the distributor and the supplier.

What must a Distribution Agreement contain?

A Distribution Agreement contains the following information:

• The details of the distributor and the supplier,
• The products that will be distributed,
• The place where the products will be distributed,
• The price or fees that will be paid by the distributor including the manner of payment,
• The obligations of the distributor and the supplier, and
• The duration of the agreement.

Who can enter into a Distribution Agreement?

The parties to a Distribution Agreement are the supplier and the distributor and they must sign the same. They may either be individuals or organizations.

The organization's representative must be equipped with a Secretary's Certificate, if the supplier or the distributor is a corporation, a Partners' Certificate if the supplier or the distributor is a partnership, or a Special Power of Attorney if the supplier or the distributor is a sole proprietorship or individual before they sign the Distribution Agreement.

What can be the duration of a Distribution Agreement?

The supplier and the distributor are free to choose how long the Distribution Agreement will last. It can be for a fixed period, and can also be renewed after the end of the Distribution Agreement's fixed period if the supplier and the distributor agree thereto. Note however that the parties cannot agree that the Distribution Agreement should last indefinitely.

What has to be done once a Distribution Agreement is ready?

Once the document is completed, at least two original copies of the Distribution Agreement should be printed, and all of the attachments (referred to in the next question) described in the document should be attached. The supplier and the distributor, or their authorized representatives, should read, and then sign all the copies of the document and each should keep an original copy.

After this, the document may be notarized. If the parties would want to notarize the Distribution Agreement, the document also includes an Acknowledgment portion, in which case, at least three original copies should be printed. Notarization of the document converts the document from a private document to a public document so that it becomes admissible in court without the need for further proof of its authenticity. To notarize the document, the parties must go to a notary public to acknowledge that they have signed the Distribution Agreement freely and voluntarily. They should also present a valid I.D. issued by an official agency bearing their photograph and signature such as a driver's license or a passport, among others.

Once notarized, the supplier and the distributor should each keep at least one copy of the notarized document, and the last one will be given to the notary public.

Which documents should be attached to a Distribution Agreement?

The following should be attached if applicable:

• The document listing the products to be distributed,
• The document listing the appropriate payment methods and their details,
• A copy of the authorization that shows that a representative can act on behalf of the supplier or distributor,
  • The representative must have a Partner's certificate if the supplier or distributor is a partnership, or a Secretary's certificate if the supplier or distributor is a corporation.
  • The representative must have a Special Power of Attorney if an individual supplier or distributor will appoint someone else to sign the Distribution Agreement for him.

Is it necessary to notarize a Distribution Agreement for it to be valid?

No, however, notarization of the Distribution Agreement converts the same from a private document to a public document so that it becomes admissible in court without the need for further proof of its authenticity, meaning, the document will be presumed to be validly written and signed once it is shown to court in case a dispute is brought before it.

What are the costs involved in the finalization of a Distribution Agreement?

If the Distribution Agreement is notarized, a certain percentage of the rent may be asked as a fee by the notary public. This is usually at 1%.

What should be complied with if the supplier sells all of his products under the Distribution Agreement?

If the supplier sells all of his products under the Distribution Agreement, the supplier may be required to apply for a Certificate of Registration of Bulk Sales before the Department of Trade and Industry.

The purpose of this certificate is to avoid defrauding the creditors or other stakeholders of the supplier. The supplier should make a sworn statement laying down the list of creditors to whom the supplier may be indebted including the amount of any existing loans that are not yet paid by the supplier.

The supplier should also provide a detailed inventory of the products before their ownership is transferred to the distributor, and notify the creditors listed in the sworn statement at least ten days before the actual sale of the products by the supplier to the distributor.

The above requirements and other requirements (i.e. sole proprietorship, partners, or corporate board resolution) included in the following website of the Department of Trade and Industry should also be completed.

Which laws are applicable to a Distribution Agreement?

The law on Sales found in the Civil Code of the Philippines applies to this document. Other laws, such as the Philippine Competition Act (Republic Act No. 10667), and the Bulk Sales Law may also apply.

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