Business Contracts
Distribution Agreement India: Key Clauses, Exclusivity & Legal Guide
A distribution agreement is the backbone of every B2B product supply chain in India. Whether you are a manufacturer appointing a state-level distributor, a brand entering tier-2 cities, or an importer setting up domestic distribution — the right distribution contract protects your brand, locks in performance, and prevents channel conflicts.
Distributer vs Agent: Critical Legal Distinction
Many businesses confuse the two structures:
- Distributor: Buys goods outright, resells in own name, bears inventory risk, responsible to end customers, earns a margin
- Agent: Acts on manufacturer's behalf, collects commission, manufacturer bears risk and is directly liable to customers
The structure matters for GST, liability, Competition Act compliance, and termination rights. A distributor agreement gives you pricing control through MRP but less day-to-day control over sales activity.
Exclusive vs Non-Exclusive Distribution
- Exclusive: Only one distributor gets the territory. Higher motivation to invest in market development, but manufacturer loses flexibility. Must include minimum performance targets — without them, an exclusive distributor can lock up the territory without selling.
- Non-exclusive: Multiple distributors in the same territory. More competition drives sales activity but creates channel conflicts, price erosion, and grey market risk.
- Sole: Only one distributor, but the manufacturer also retains the right to sell directly in the territory.
10 Essential Clauses in a Distribution Agreement
1. Territory Definition
Define clearly: states, cities, districts, or pin codes. Include whether e-commerce/online sales are included in the defined territory. Vague territory definitions are the #1 source of distributor disputes.
2. Product Scope
List specific SKUs (Stock Keeping Units) covered. Manufacturers reserve the right to introduce new products either within or outside the distribution agreement — state this explicitly to avoid disputes when new products are launched.
3. Minimum Purchase Obligations (MPO)
State minimum quantities/value to be purchased per quarter/year. MPO failure should trigger: (a) loss of exclusivity, (b) right to terminate, or (c) reduction in discount. This is the primary protection against a distributor who locks up a territory passively.
4. Pricing and Discount Structure
Define trade price, MRP, and distributor margins. Note: mandating minimum resale prices is potentially anti-competitive under the Competition Act. You can mandate MRP compliance (legal) but cannot fix minimum selling prices to retailers (risk of RPM violation).
5. Payment Terms
State credit period (typically 30–60 days), late payment interest, and process for disputed invoices. Include: whether payment is advance, on delivery, or post-delivery. Refer to MSME payment rules if your distributor is an MSME.
6. Intellectual Property & Brand Guidelines
Distributor gets a limited right to use manufacturer's trademark/brand for the purpose of distribution only. They cannot: sub-license, modify the brand, create marketing materials without approval, or use the brand for unrelated products. All brand use rights revert on termination.
7. Returns & Defect Policy
Define: what products can be returned (expiry, damage, defect only), return window, refund vs replacement process, and who bears return logistics cost. Without this clause, distributors return slow-moving stock as "defective."
8. Non-Compete & Non-Solicitation
During the agreement: distributor should not distribute competing products without prior consent (list competitor brands explicitly). Post-termination non-compete is void under Section 27 ICA — use non-solicitation of customers instead.
9. Termination and Notice
Define termination triggers: MPO failure, insolvency, brand damage, regulatory violation. Notice period (typically 60–90 days) and what happens on termination: stock buy-back at what price, brand material return, outstanding payment settlement timeline.
10. Dispute Resolution
Most distribution disputes in India go to arbitration. Specify: arbitration institution (DIAC, MCIA), seat (typically the manufacturer's state), language, and number of arbitrators. This avoids state court proceedings which can take years.
Competition Act Compliance
Under the Competition Act 2002, certain distribution clauses trigger scrutiny from the Competition Commission of India (CCI):
- ⚠️ Resale Price Maintenance: Fixing minimum prices distributors charge to retailers — anti-competitive
- ⚠️ Exclusive supply + purchase: Forcing distributors to buy only from you (exclusive purchasing) combined with exclusive supply to only one customer — examined for market foreclosure
- ✅ Territory protection: Generally permissible if it promotes inter-brand competition
- ✅ MRP compliance: Enforcing maximum retail price is legal consumer protection
Protect Your Distribution Channel.
Upload your distribution agreement to ContractShield and identify missing performance clauses, dangerous territory exclusivity gaps, and competition law risks in seconds.
Analyze Your Contract Free →Frequently Asked Questions
What is the difference between an agent and a distributor in India?
An agent acts on behalf of the principal and earns commission; the principal is directly liable to customers. A distributor buys goods outright and resells in their own name; the distributor is directly liable to customers and bears inventory risk.
Can a manufacturer control the resale price of goods sold to a distributor in India?
Hard-core resale price maintenance (fixing minimum resale prices) is anti-competitive under the Competition Act 2002. Manufacturers can enforce MRP compliance but cannot legally fix minimum prices in most cases.
How long is a typical distribution agreement in India?
Distribution agreements typically have an initial term of 1–3 years, with renewal on mutual agreement. Exclusive agreements tend to link exclusivity to minimum performance targets.
Related reads: Agency Agreement India · Vendor Agreement Guide · Franchise Agreement Guide India