A distribution agreement can look deceptively simple: one company supplies the products, another company sells them, and both sides make money. In practice, however, distribution arrangements can create some of the most expensive commercial disputes a business faces.
What happens if the distributor underperforms? Can the manufacturer appoint someone else? Who bears the loss if imported products become significantly more expensive? Can the distributor sell competing products? Who owns the customer relationships? And what happens to unsold inventory when the relationship ends? These issues are much easier to negotiate before the agreement is signed than after the relationship begins to deteriorate.
For Nigerian businesses entering into distribution arrangements, here are seven issues that deserve particular attention.
1. Define the Territory and Be Careful With Exclusivity
One of the first questions should be straightforward:
Where exactly is the distributor authorized to sell the products?
“Territory” could mean Nigeria as a whole, a particular geopolitical zone, specific states, particular customer segments, or even particular sales channels.
The agreement should also distinguish between exclusive, sole and non-exclusive distribution.
An exclusive distributor may expect that no other distributor, and sometimes even the supplier itself, will sell within the territory. That can become commercially dangerous if exclusivity is granted without corresponding performance obligations.
Consider a manufacturer that gives one distributor exclusive rights across Nigeria for five years. Twelve months later, the distributor is only actively selling in Lagos and Abuja.
Without minimum-performance requirements or a right to withdraw exclusivity, the manufacturer may find itself unable to appoint stronger distributors elsewhere without breaching the agreement.
A better structure may make exclusivity conditional on measurable targets such as:
- minimum annual purchases;
- specified sales volumes;
- geographic coverage;
- number of active outlets;
- marketing commitments; or
- agreed revenue targets.
Failure to meet those targets could convert the appointment from exclusive to non-exclusive rather than automatically terminating the entire relationship.
Exclusivity and territorial restrictions should also be considered from a competition-law perspective. Nigeria’s Federal Competition and Consumer Protection framework regulates restrictive agreements, including certain vertical arrangements between suppliers and distributors.
2. Set Minimum Performance Obligations
If a distributor receives valuable commercial rights, the supplier should know what it receives in return.
A statement that the distributor will use its “best efforts” to promote the products may not be enough.
Where performance matters, the agreement should establish objective expectations.
For example:
The distributor must purchase at least ₦250 million of products during each contract year.
That creates a much clearer commercial benchmark than requiring the distributor simply to “actively promote” the products.
Performance requirements can also cover warehousing capacity, staffing, sales representatives, retail presence, advertising expenditure, reporting and inventory levels.
The parties should then agree what happens if the distributor misses a target.
Possible consequences include:
- loss of exclusivity;
- reduction of territory;
- corrective-action periods;
- revised forecasts; or
- termination after repeated failures.
The important point is to negotiate the consequence at the same time as the obligation.
3. Get the Pricing and Payment Mechanics Right
Price disputes are particularly dangerous in long-term distribution relationships because the commercial assumptions in place when the contract was signed may no longer hold.
A supplier should consider whether it has the right to change its wholesale prices and, if so:
- how much notice must be given;
- whether existing purchase orders remain at the old price;
- whether price increases can occur at any time;
- how exchange-rate movements are handled;
- whether import costs can be passed through; and
- which party bears applicable taxes, duties and logistics costs.
For imported goods, the currency question can become particularly important.
Imagine that a supplier imports products in US dollars but sells to its Nigerian distributor in naira at an agreed fixed price. A significant movement in the exchange rate could fundamentally change the economics of the transaction.
The contract should address that possibility before it happens.
The parties should also specify payment timing, credit limits, interest on overdue amounts, and whether the supplier may suspend further deliveries where invoices remain unpaid.
One additional caution: a supplier may want control over the price at which its distributor resells the products, but Nigerian competition law requires care here. The FCCPC’s Restrictive Agreements Regulations identify fixed and minimum resale price maintenance in vertical agreements as a prohibited competition restriction.
Commercial pricing control therefore needs to be structured with competition-law considerations in mind.
4. Decide Who Bears the Risk for Inventory
Inventory is where many distribution relationships become financially complicated.
Suppose the distributor orders ₦150 million worth of products shortly before the agreement ends.
Who owns them?
Can they be returned?
Must the supplier repurchase them?
Can the distributor continue selling the products after termination?
What happens if the products expire, become obsolete or are damaged while sitting in the distributor’s warehouse?
These questions should not be left until termination.
A properly structured agreement should deal with:
Title. When does ownership of the products pass from supplier to distributor?
Risk of loss. Who bears the financial loss if products are damaged during transportation or storage?
Returns. When can products be returned and who bears the cost?
Defective products. What happens where products are damaged, recalled, or do not comply with specifications?
Excess inventory. What happens to remaining stock after termination?
The commercial answer will vary by product, but the agreement needs one.
5. Protect the Brand and Intellectual Property
A distributor often receives permission to use the supplier’s trademarks, logos, product images and other marketing materials.
That permission should have clear boundaries.
The agreement should specify:
- which intellectual property the distributor may use;
- the purpose for which it may be used;
- whether marketing materials require approval;
- whether the distributor may register domain names or social-media accounts incorporating the brand;
- whether the distributor may alter the supplier’s branding; and
- what happens to those rights when the agreement terminates.
This becomes especially important where the distributor builds websites, social-media accounts or customer-facing platforms around the supplier’s brand. The supplier should not discover after termination that an ex-distributor controls an important domain name, Instagram account or marketplace listing containing its trademark.
6. Allocate Compliance Responsibilities Clearly
Distribution is not simply a sales relationship. Depending on the product, regulatory obligations may arise around advertising, labeling, consumer protection, product standards, approvals, recalls, data protection and industry-specific licenses.
The contract should identify who is responsible for what.
For example, who is responsible for obtaining regulatory approvals before a product enters the Nigerian market?
Who must ensure advertisements comply with applicable rules?
Who responds to customer complaints?
Who manages a product recall?
Who reports an adverse event to the relevant regulator?
If the distributor receives customer personal data, who determines how that information may be collected, used, retained, and shared?
Nigeria’s Data Protection Act 2023 regulates the processing of personal data and imposes obligations on organizations acting as data controllers and data processors. Where customer information moves between supplier and distributor, the parties should therefore understand their respective data-protection responsibilities.
The distribution agreement should also require compliance with applicable anti-bribery, competition, consumer-protection and industry-specific laws.
7. Negotiate the Exit Before You Need It
Few businesses start a distribution relationship thinking about how it will end.
They should.
A distribution agreement should address both termination for cause and, where commercially appropriate, termination for convenience.
Termination events might include:
- non-payment;
- repeated failure to meet minimum sales targets;
- insolvency;
- loss of required regulatory approvals;
- material breach;
- misuse of intellectual property;
- corruption or regulatory violations; or
- unauthorized sale outside the agreed territory.
But identifying termination events is only the beginning.
The agreement should also answer what happens after termination.
For example:
- How long can the distributor continue selling existing stock?
- Does the supplier have a right or obligation to buy back inventory?
- Must marketing materials be destroyed or returned?
- What happens to outstanding customer orders?
- Who handles warranties for products already sold?
- Must confidential information be returned?
- When must use of the supplier’s trademarks stop?
- Can the supplier immediately appoint another distributor?
The economics of a distribution arrangement can change dramatically depending on these post-termination provisions.
A distributor sitting on substantial inventory may need a sell-off period. A supplier entering a new distribution relationship may instead want the existing distributor out of the market immediately.
Negotiate that tension at the beginning, not after someone sends a termination notice.
A Distribution Agreement Is Really an Allocation of Commercial Risk
The best distribution agreements do more than state that one party will supply products and another will sell them.
They determine who carries which commercial risk throughout the relationship.
Who bears the risk of poor sales?
Who absorbs currency movements?
Who carries inventory risk?
Who controls pricing?
Who protects the brand?
Who deals with regulators?
And who bears the consequences when the relationship ends?
The answers should reflect the economics of the transaction, not simply whichever party produced the first draft.
For Nigerian businesses, particularly where a distribution arrangement involves exclusivity, significant inventory commitments, imported products, or valuable intellectual property, those questions are worth resolving before issuing the first purchase order.
Considering a Distribution Arrangement?
Chibasco advises Nigerian and international businesses on structuring, drafting, and negotiating distribution, supply, and other commercial agreements.
If you are appointing a distributor, becoming one, or renegotiating an existing distribution relationship, our commercial team can help you identify the risks and structure the agreement around your business objectives.
This publication provides general information only and does not constitute legal advice.