A distributor is one who buys products from a supplier, warehouses them, then sells them to retailers or to end-use customers. A distributorship agreement is a contract made between an individual or entity (the “distributor”) and the supplier, setting out the terms under which the distributor may sell the products. Products are purchased from the supplier at a low cost, then sold to retailers or consumers at a higher cost to cover the distributor’s costs and earn a profit. To explore this concept, consider the following distributorship definition.
Definition of Distributorship
- A wholesaler with exclusive rights to market and sell the products of a manufacturer or supplier, usually within a specified territory.
1520-1530 Late Latin distribūtor
What is Distributorship Law
Distributorship law pertains to the supply chain that exists during certain business arrangements. When manufacturers supply merchandise to distributors and the distributors supply to retailers, a supply channel is created. In some cases, there is more than one distributor involved, which creates multiple levels, all of which are governed by distributorship law, as well as the written distributorship contracts that secure the agreements.
What is a Distributor
The distributor is considered an independent selling agent. This means that the distributor has permission to sell the product as specified in the contract, but is not entitled to use the trade name as part of its business. The distributorship agreement may also specify that the distributor is bound to sell the supplier’s products exclusively, meaning it cannot sell similar products from another supplier. Large-scale distributors are often referred to as “wholesalers.”
A distributor that is granted exclusive distribution rights is guaranteed to be the only dealer or retailer of a specific product in a specified area, or to be the only dealer or retailer to supply the product to a specified group of people. Contracts for exclusive distribution are most commonly seen in high-end products that require the sales staff to have some degree of training. An exclusive distributorship agreement gives the manufacturer or supplier greater control over how its product is sold. Additionally, exclusive distribution provides some protection to the distributor against other individuals or entities who might attempt to sell the same product at a more competitive price.
Another type of distributor is called a “dealership.” While both entities sell the products of another company (the supplier), there is an important difference: use of the supplier’s name. A distributorship can sell the products of the supplier, post images and advertising proclaiming that it sells the supplier’s products, but the distributorship cannot include the supplier’s name in the name of its own business. A dealership is a type of exclusive distributorship in which the distributor can use the supplier’s name in its own business name.
For example, an authorized distributor in ABC tractors sells a wide variety of farm equipment. The distributor could post promotional signs using the ABC logo and name, but could not name his business “ABC Tractors.” A distributor granted dealership status becomes an exclusive provider of the supplier’s products, often offering sales and service, may call the business by the supplier’s name. For example, a dealership for ABC Tractors may be named “ABC Tractors of Farmington.” This is commonly seen in automotive dealerships.
Responsibilities of Each Party in a Distributorship
Most commonly, the manufacturer does not dictate how the product purchased should be distributed. However, occasions arise where the manufacturer will offer an agent training in order to use the product. The exact conditions and responsibilities of each party are outlined in the distributorship agreement.
Distributorship and Liability
Even though the distributor is not responsible for manufacturing a product, it can be held liable in the event of defects. Under strict product liability laws, the seller, distributor, and manufacturer of a defective product can be held liable if a person is injured due to the defect. Though manufacturers are typically most responsible since they created the product, the liability can also fall to those that distribute or sell the defective items.
This liability law prevents the plaintiff from the need to prove the chain of supply. In order for any entity in the line of distribution to prove it has no fault, it would need to show which entity is actually responsible for the defect.
In order to prove product liability, the plaintiff must prove:
- The product was sold with the defect
- The seller intended to provide the buyer with the product without making changes
- The plaintiff suffered injuries due to the defective product
Related Legal Terms and Issues
- Agent – A person authorized to act on behalf of someone else, such as an employee, broker, or sales representative.
- Contract – An agreement between two or more parties in which a promise is made to do or provide something in return for a valuable benefit.
- Liability – A company’s legal obligations or debts that come up during the course of business
- Plaintiff – A person who brings a legal action against another person or entity, such as in a civil lawsuit, or criminal proceedings.