What distribution agreement means
A distribution agreement appoints a distributor to buy a supplier's products and resell them.
The defining feature is that the distributor buys. Title passes to them, they take the stock, they carry the credit risk on their own customers, and they resell at prices they set, subject to whatever the agreement permits.
That distinguishes a distributor from an agent. An agent sells on the principal's behalf, the principal contracts with the end customer, and the agent receives commission. A distributor contracts with the end customer themselves.
The distinction matters for liability, for tax, for who bears bad debts, and for how the relationship ends.
A distributor also needs the right to use the supplier's trademarks in marketing the products, which makes the agreement an intellectual property licence as well as a supply arrangement.
How it is used
A workable distribution agreement covers a settled list.
The products and the territory, defined precisely, including whether online sales into the territory are covered.
The nature of the appointment: exclusive, sole or non exclusive, stated in terms rather than left to the word exclusive.
Minimum purchase obligations, with a stated consequence if they are not met, commonly conversion to non exclusive or a right to terminate.
Ordering and supply: how orders are placed, lead times, and whether the supplier is obliged to accept every order.
Pricing and payment terms, and whether credit is extended.
Trademark licence: what marks the distributor may use, how, and that use enures to the supplier.
Marketing obligations and any agreed spend.
After sales support, warranty handling and product recall responsibilities.
Compliance: regulatory approvals such as product registration, and who obtains them.
Term and termination, including notice, and what happens to stock the distributor holds at the end.
That last point is the one most often omitted and most often disputed.
Key features
- The distributor buys the products and resells on its own account
- Distinct from agency, where the principal contracts with the end customer
- Includes a trademark licence for marketing the products
- Minimum purchase obligations should carry a stated consequence
- Regulatory approvals should be allocated expressly
- Termination should address stock held by the distributor
How this works in Nigeria
Three Nigerian points shape these agreements.
The first is regulatory approval. Where the products are food, drugs, cosmetics, medical devices or similar, NAFDAC registration is required before they can be imported, advertised or sold, and the agreement should state who obtains it and in whose name. A distributor holding the registration has leverage the supplier may not have anticipated, and a supplier holding it can change distributor without the product becoming unsaleable.
The second is trademark registration. A Nigerian distributor sometimes registers the supplier's mark in its own name, either through misunderstanding or deliberately, and because Nigerian trademark registration is first to file, the supplier can find its own brand owned by its distributor. The agreement should require the supplier to hold the registration and prohibit the distributor from applying, and the supplier should actually register.
The third is termination and stock. A distributor that invested in inventory, warehousing and market development, terminable on short notice with no obligation on the supplier to repurchase stock, is exposed. Suppliers want flexibility and distributors want protection, and the compromise is usually a reasonable notice period plus an agreed mechanism for the stock.
Competition law is the further consideration. The Federal Competition and Consumer Protection Act 2018 addresses agreements that restrain competition, and provisions on resale pricing and territorial restriction should be considered against it rather than copied from a foreign template.
Distributor vs agent vs franchisee
Three ways a supplier reaches a market through somebody else.
A distributor buys and resells on its own account. It sets its resale prices subject to the agreement, contracts with end customers, carries their credit risk, and holds the stock.
An agent sells on the principal's behalf. The principal contracts with the end customer, carries the credit risk and sets the price, and the agent is paid commission. The principal has more control and more exposure.
A franchisee operates a business under the franchisor's system and brand, paying fees and following an operating manual. It is the most controlled of the three and the most heavily documented.
The choice affects liability, tax, who bears bad debts and how the relationship ends. A supplier entering Nigeria should choose deliberately rather than describing an arrangement as distribution because that is the word everybody uses.
Limits and risks
A supplier using a distributor loses direct contact with end customers and the data that comes with it.
Exclusive appointments can also lock a supplier out of its own market where the distributor underperforms, unless minimum purchase obligations and a conversion right were agreed.
Quality and brand presentation are harder to control at one remove, and a distributor whose after sales service is poor damages the supplier's reputation.
And termination is expensive and contentious where the distributor has invested, which is why the notice period and the stock mechanism should be negotiated at the start.
Worth knowing
Register your trademark in Nigeria in your own name before appointing a distributor, and hold the product registration yourself where the regulator permits. Nigerian trademark registration is first to file, and suppliers have found their own brand registered by the distributor they appointed.
Questions people ask
What is a distribution agreement?
An agreement appointing somebody to buy a supplier's products and resell them in a territory. The distributor takes title, holds the stock and contracts with end customers on its own account.
How is a distributor different from an agent?
A distributor buys and resells on its own account. An agent sells on the principal's behalf, with the principal contracting with the end customer, carrying the credit risk and paying commission.
What should the appointment say about exclusivity?
It should state in terms whether it is exclusive, sole or non exclusive, and whether the supplier may sell into the territory directly, including online. The word exclusive alone is not enough.
Why do minimum purchase obligations matter?
Because without them an exclusive distributor can lock a supplier out of the market while doing nothing. They should carry a stated consequence, such as conversion to non exclusive or a right to terminate.
Who should hold the NAFDAC registration?
It should be allocated expressly. A distributor holding the product registration has leverage the supplier may not want it to have, and a supplier holding it can change distributor without the product becoming unsaleable.
What happens to stock on termination?
Whatever the agreement says, and it should say. A distributor left holding inventory with no repurchase mechanism is exposed, and this is the clause most often omitted and most often disputed.