In this article
- What is a distribution agreement?
- Distributors vs other arrangements
- Distribution strategies: exclusive, sole, non-exclusive, selective
- Key clauses to understand
- Competition law: the part most founders miss
- Distribution agreements vs 3PL agreements
- Before you sign: practical steps
- What Plumlaw can help with
A distributor reaches out. They have an established network, strong relationships with retailers, and a track record moving products like yours. The conversation goes well and they send over an agreement.
It is 35 pages long.
If you have never negotiated a distribution agreement before, that document can feel impenetrable. There are clauses about territory, minimum purchase obligations, resale price maintenance, indemnities and intellectual property licences. There is language about competition law that you were not expecting. And somewhere buried in the boilerplate is a termination clause that could leave you in a difficult position if the relationship does not work out.
This post is a practical guide to distribution agreements in Australia. It covers what these agreements actually do, how they are structured, what each clause means for your business, and where founders most commonly get into trouble.
What is a distribution agreement?
A distribution agreement is a contract between a supplier (often a manufacturer or brand owner) and a distributor. Under the agreement, the distributor purchases products from the supplier for its own account and then on-sells those products to others in the supply chain, whether that is other distributors, retailers or end customers.
The key point is that the distributor buys and resells. It takes title to the goods. It bears inventory risk. If it cannot sell what it has bought, that is its problem, not yours. This is what distinguishes a distributor from some of the other parties you might use to get your product to market.
Distributors vs other arrangements: why the distinction matters
The label you put on an arrangement matters less than what the arrangement actually does. Courts look at substance. Getting this wrong can have significant tax, legal and commercial consequences.
Distributor vs agent
An agent (sometimes called a sales representative, broker or independent sales agent) does not take title to the goods. An agent markets and promotes your products on your behalf, earns a commission on sales, and the contract for sale is made directly between you and the end customer. The agent carries little financial risk.
From a supplier's perspective, this means you retain more control over pricing and the customer relationship. But you also retain more liability. Because the agent acts on your behalf, claims from end customers flow back to you more directly. A distributor, by contrast, takes on liability for the products once it has purchased them, which can act as a commercial buffer.
Distributor vs franchise
This distinction catches a lot of founders off guard. If your distribution arrangement involves granting the distributor the right to carry on a business under a system or marketing plan substantially determined by you, associated with your brand, and requiring an upfront or ongoing payment, it may fall within the definition of a franchise agreement under the Franchising Code of Conduct.
That matters because the Franchising Code imposes strict disclosure obligations, good faith requirements and other obligations that go well beyond a standard commercial contract. Parties cannot contract out of the Code simply by calling the agreement a distribution agreement. Courts look at the substance of the arrangement.
Key point: If your distribution model is tightly controlled, brand-heavy and involves territorial exclusivity, get specific advice on whether the Franchising Code applies before you sign anything.
Distributor vs employee or independent contractor
Depending on how the arrangement is structured, a distributor or their staff could be characterised as employees of the supplier for the purposes of employment law, tax and workers compensation. The risk is higher where the distributor works exclusively for you, uses your equipment, has no independence over how they perform their work, and cannot sub-contract.
Misclassification has real consequences. If a court or the Fair Work Commission finds that a distributor is actually an employee, you may be liable for back pay, entitlements and penalties.
Distribution strategies: exclusive, sole, non-exclusive, selective
How you structure the distributor's appointment determines the commercial dynamics of the whole relationship. There are four main strategies.
Exclusive distribution
Under an exclusive arrangement, you appoint one distributor and agree not to appoint any others within the territory. You also agree not to sell directly to customers in that territory yourself. The distributor gets the full benefit of its sales and promotional effort. In return, it takes on the elevated risk and cost of building the market.
Exclusive arrangements are common when entering a new territory, particularly where the distributor has established local relationships and the supplier wants the distributor motivated to invest. They can also make sense for luxury or high-value products where the supplier wants tight control over brand experience and customer service standards.
Case note
One Australian court found a manufacturer in breach of contract for selling directly to the distributor's customers because the agreement simply described the distributor as "exclusive" without spelling out whether the supplier had reserved any right to sell direct. Ambiguity in exclusivity clauses is litigated. Define precisely what you mean.
Sole distribution
A sole arrangement sits between exclusive and non-exclusive. You appoint one distributor but retain the right to sell directly to customers yourself. The distributor gets priority in the territory but knows you may compete with it in certain circumstances. This gives the supplier more flexibility, particularly if the distributor fails to hit volume targets.
Non-exclusive distribution
A non-exclusive arrangement gives you complete freedom to appoint as many distributors as you like and to sell direct simultaneously. It is common for high-volume, lower-margin products where market saturation is the goal. The terms tend to be less onerous on the distributor than exclusive appointments because the distributor is competing with you and potentially other distributors.
Selective distribution
A selective distribution system involves appointing only distributors who meet specified criteria. This approach is used where the nature of the product requires an enhanced level of service at the point of sale, such as pharmaceutical products, high-end electronics or technical equipment. Selective distribution gives the supplier significant control over how its products are marketed. However, this area sits uncomfortably with competition law and careful legal review is needed before implementing a selective system.
Key clauses to understand
Territory
Territory defines where the distributor can market, promote and sell the products. It can be geographic (states, postcodes, a whole country), industry-specific, or customer-type specific. The agreement should also address how online sales interact with territorial limits. If your distributor has an Australian territory but sells through an e-commerce platform that ships internationally, you need clear rules about what is permitted.
Term and renewal
Distribution agreements can be fixed term or open-ended. Fixed terms suit new relationships where both parties want a defined period to assess performance before committing long term. Renewal provisions matter. Watch for automatic renewal clauses where only one party has the right to give notice to prevent renewal. If the agreement is a standard form contract and one party is a small business, such clauses may be challenged under the unfair contract terms regime in the Australian Consumer Law.
Minimum purchase obligations
A minimum purchase obligation requires the distributor to buy a minimum volume or dollar value of product within a defined period. These provisions are more common in exclusive arrangements. They protect the supplier's return on investment and give the distributor a clear performance target. The consequence of missing a minimum should be clearly specified. Common remedies include the right to terminate, the right to appoint additional distributors, or the conversion of an exclusive appointment to a non-exclusive one.
Pricing and resale price maintenance
You can tell your distributor the maximum price at which it sells your products. You cannot tell it the minimum.
Resale price maintenance (RPM) is a per se prohibition under section 48 of the Competition and Consumer Act 2010 (Cth). This means it is illegal regardless of whether it actually harms competition in the market. The prohibition extends beyond formal contractual terms. Communications that are likely to be understood as specifying a minimum resale price can constitute RPM, including verbal statements or emails. Get specific advice before including any pricing restrictions in your distribution agreement.
Intellectual property licence
To sell your product, the distributor needs permission to use your trade marks, branding and other intellectual property. The distribution agreement should include an express licence that is non-exclusive, royalty-free, non-transferable and non-sublicensable (unless sub-distribution is permitted), limited to the territory and to the purpose of marketing, promoting and reselling the products.
Suppliers should also be aware that if they do not maintain active association with their brand at the distributor level, they risk losing goodwill in unregistered trade marks. A trade mark owner can only enforce rights in an unregistered trade mark if they can demonstrate reputation through use. If your distributor is doing all the visible work and you have no registered trade mark, your position is weaker than you might assume. This is another reason to consider trade mark registration before entering a significant distribution arrangement.
Indemnities and limitation of liability
Indemnity provisions in distribution agreements allocate risk. They specify who bears the cost if something goes wrong downstream, including third-party claims for product defects, intellectual property infringement or regulatory breaches.
Courts construe indemnities strictly against the party giving them. A broadly worded indemnity that does not clearly define what counts as a recoverable loss, which events trigger the obligation, and whether it is exclusive or non-exclusive of other remedies can produce unexpected results in a dispute. Limitation of liability clauses should be read alongside indemnity provisions, insurance requirements and any consumer guarantee obligations under the Australian Consumer Law. Consumer guarantees cannot be excluded, and any clause that attempts to do so is void.
Product recalls
Both voluntary and compulsory product recalls can be required under the Australian Consumer Law. The agreement should include a clear process that addresses who has the right to initiate a recall, notification obligations, logistics, the treatment of returned stock, allocation of costs, and communication with regulators and customers. Discovering during a recall that the agreement is silent on cost allocation is not a good position to be in.
Termination
Distribution agreements typically allow termination in two circumstances: for cause and for convenience. Termination for cause arises from a specific trigger, most commonly an unremedied breach, insolvency or an ongoing force majeure event. The agreement should specify what counts as a material breach, what notice must be given and what opportunity to remedy applies.
Termination for convenience allows a party to end the agreement without a specific reason, on notice. The notice period should reflect the commercial reality of the relationship. If the distributor has made significant upfront investment in warehousing, staffing or marketing for your product, a short notice period for convenience termination may be commercially unfair and, in a standard form context, potentially challengeable.
What happens at termination is often the most practically contested issue in distribution relationships. The agreement should address pending orders, products in transit, outstanding payments, return of confidential information and intellectual property, and the distributor's rights to continue selling unsold stock for a period after termination.
Post-termination restraints
Restraint clauses that apply after termination need to be drafted carefully. In some circumstances, a post-termination non-compete applied in a distribution context can cross into competition law territory. If the parties are competitors and the restraint has the purpose or effect of allocating territories or restricting output, it could constitute a cartel provision under the Competition and Consumer Act. Cartel conduct is both civilly and criminally enforceable.
Unfair contract terms
If the distribution agreement is a standard form contract and one party is a small business, the unfair contract terms regime under the Australian Consumer Law applies. Terms that may be challenged include automatic renewal clauses with unilateral notice rights, unilateral rights to increase prices, indemnities in favour of one party only, excessive limitations of liability, and one-sided termination rights. The consequence of an unfair contract term is that the term is void. The rest of the agreement continues unless it cannot operate without the void term.
Competition law: the part most founders miss
Competition law issues in distribution agreements are not just a concern for large companies. They arise from the structure of the deal itself, and the penalties can be significant.
Exclusive dealing
Section 47 of the Competition and Consumer Act prohibits exclusive dealing where it has the purpose or effect of substantially lessening competition in a market. In the context of distribution agreements, exclusive dealing can arise where a supplier requires a distributor not to carry competing products, or where a distributor's arrangement with a supplier effectively blocks competitors from accessing the distribution network.
Case note: Peters Ice Cream
The Federal Court found that Peters Ice Cream had engaged in exclusive dealing through a distribution arrangement with PFD Food Services that prevented PFD from distributing competing single-serve ice creams in certain territories. Peters was ordered to pay a $12 million penalty and implement a three-year compliance program.
The key factors were that Peters and one other manufacturer dominated the market, PFD was the largest distributor, and the arrangement had the practical effect of preventing new competitors from entering the market. If your company and your distributor are significant players in a concentrated market, get competition law advice before locking in exclusive arrangements.
Dual distribution risks
If you sell both through a distributor and directly to end customers in the same market, you may be operating a dual distribution model. This creates a specific competition law risk that founders often overlook.
The High Court's decision in ACCC v Flight Centre established that a principal and its agent (or distributor) can be in competition with each other where the agent has discretion over pricing and is not required to act in the principal's interests. Flight Centre's attempts to impose price parity on airlines whose tickets it also sold as agent were found to be attempted price fixing. In a dual distribution model, a price parity clause requiring your distributor to charge the same price as your direct channel is very likely to constitute price fixing.
Most favoured nation clauses
An MFN clause promises one distributor that you will not offer another distributor better terms without matching those terms. While MFN clauses do not generally raise significant competition law issues in most distribution agreements, they can in some circumstances amount to price fixing or exclusive dealing. Specific legal advice should be sought before including one.
Distribution agreements vs 3PL agreements
A common point of confusion for product founders scaling their logistics for the first time is the difference between a distribution agreement and a third party logistics agreement (3PL agreement).
A 3PL provider handles warehousing, pick-and-pack and fulfilment on your behalf. It does not take title to the goods and does not sell them. The 3PL is providing a logistics service, not acting as a distributor. The key commercial and legal issues in a 3PL agreement are service levels, liability for lost or damaged stock, insurance obligations, data access and termination. These are different from the issues in a distribution agreement.
Why it matters: Founders sometimes treat their 3PL as though it carries some of the commercial risk that a distributor would carry. It does not. If your 3PL fails to pick and pack correctly, you bear the cost of the customer service issue. Understanding which type of arrangement you have, and drafting it accordingly, is essential to getting the risk allocation right.
Before you sign: practical steps
Conduct basic due diligence on the distributor. Run a company search, check their credit history, and ask for trade references. You are entering an ongoing commercial relationship. The distributor's financial health and operational track record are directly relevant to whether the arrangement will deliver what you are hoping for.
Check your existing agreements. Do you have other contracts with exclusivity or non-compete clauses that could conflict with the proposed distribution arrangement? Do not assume these conflicts will resolve themselves.
Define the commercial mechanics before anything else. Territory, term, exclusivity type, minimum purchase obligations and pricing mechanics should be agreed in principle before the detailed drafting begins. Negotiating these points after the legal drafting is in place tends to be more expensive and more contentious.
Have a lawyer review the indemnity, liability cap and termination provisions. These are the clauses that create the most significant exposure and generate the most disputes. A lawyer who understands distribution arrangements will focus on whether the risk allocation is realistic and whether the provisions are internally consistent.
Get competition law advice if the deal is exclusive or involves volume commitments. The Competition and Consumer Act penalties are substantial and the analysis is fact-specific. This is not an area to navigate without advice.
Think about what happens if the relationship does not work. The termination provisions, treatment of unsold stock, and post-termination obligations are often given less attention during negotiations than they deserve. They become very important when things go wrong.
What Plumlaw can help with
Plumlaw advises Australian startups and scale-ups on commercial agreements including distribution agreements, reseller agreements and 3PL arrangements. We work on a fixed-fee basis, so you know what you are paying before we start. Whether you are reviewing an agreement a distributor has sent you, negotiating the terms of a new arrangement, or starting a distribution relationship from scratch, we can help you understand what you are agreeing to and structure the deal in a way that protects your interests.
This article is general information only and does not constitute legal advice. For advice specific to your situation, speak to a lawyer at Plumlaw.