A distributorship is two sales, not one. You sell to the distributor; the distributor sells to the market. That single fact decides when the stock stops being your problem, who can be sued over a defect, whether you may control the resale price, and who is left holding the inventory when the relationship ends. The governing law is not the Contract Act alone — it is the Sale of Goods Act, 1930, the product liability chapter of the Consumer Protection Act, 2019, and Section 3(4) of the Competition Act, 2002. This page is about what those say and what the agreement has to do about them.
The whole of this page follows from one structural fact, so it is worth stating before anything else.
In a distributorship there are two separate sale contracts. The supplier sells to the distributor. The distributor sells to the customer. Title passes twice. There is no contractual relationship at all between the supplier and the end customer, and the distributor is not anybody’s representative — he is a buyer who resells.
That is the opposite of an agency, where the agent never owns the goods and the sale he arranges is the principal’s own. Because the two are constantly confused, and because choosing the wrong one contradicts every clause that follows, our agency agreement page carries the full side-by-side comparison. If the person you are appointing will never take title, stop reading this page and read that one.
Assuming it is a distributorship, the consequence is that the Sale of Goods Act, 1930 governs the supply leg. That Act is ninety-odd sections of default rules about when property passes, who carries risk, what quality is implied, when goods may be rejected and what an unpaid seller may do. Every one of those defaults can be varied by agreement — the Act says so repeatedly with the words “unless otherwise agreed” — and a distribution agreement is, in large part, the document in which the parties decide which defaults they want to keep.
The Act does not fix a single moment. Section 19 provides that property in specific or ascertained goods passes when the parties intend it to pass, and that intention is gathered from the terms of the contract, the conduct of the parties and the circumstances of the case.
Section 25 then gives the supplier a tool he should usually use. Where goods are delivered to the buyer or to a carrier, the seller may reserve the right of disposal until stated conditions are met, and where he does, property does not pass until those conditions are fulfilled. In a credit distributorship that is the statutory basis of a retention-of-title clause: title remains with the supplier until the invoice is paid, even though the goods are in the distributor’s warehouse.
A retention-of-title clause is worth having and worth writing realistically. It should say that title passes only on payment in full of that invoice; that until then the distributor holds the goods as bailee, stores them so they remain identifiable, and does not encumber them; and that he may resell in the ordinary course, with the proceeds of such resale accounted for. Its practical value is greatest at exactly the moment it is needed — when the distributor is in difficulty and the stock is still on his shelves.
Now the section that catches almost everybody.
Section 26, in substance. Unless otherwise agreed, the goods remain at the seller’s risk until the property in them is transferred to the buyer; but when the property is transferred to the buyer, the goods are at the buyer’s risk whether delivery has been made or not. Where delivery has been delayed through the fault of either party, the goods are at the risk of the party in fault as regards any loss which might not have occurred but for such fault.
Sale of Goods Act, 1930 — Section 26.
Risk follows title, not possession. Goods still lying in the supplier’s warehouse, not yet despatched, can already be the distributor’s loss if property has passed. Goods sitting in the distributor’s godown can still be the supplier’s loss if it has not. Almost every commercial argument about a fire, a flood or a theft turns on that sentence, and almost no agreement addresses it.
Transit is dealt with separately. Section 39(1) provides that where the seller is authorised or required to send the goods to the buyer, delivery to a carrier for the purpose of transmission is prima facie deemed to be delivery to the buyer. So transit loss ordinarily lands on the distributor. But Section 39(2) requires the seller to make such contract with the carrier, on the buyer’s behalf, as is reasonable having regard to the nature of the goods and the circumstances; if he omits to do so and the goods are lost or damaged, the buyer may decline to treat the delivery to the carrier as delivery to himself, or may hold the seller responsible in damages. Section 39(3) adds that where goods are sent by a route involving sea transit, the seller must give the buyer notice sufficient to enable him to insure.
The drafting answer is short and should be in every agreement: name the delivery term, say expressly when property passes and when risk passes, say who insures and for what value, say who is named as loss payee, and say what happens to a shortage or damage discovered on opening — within how many days, supported by what evidence.
Section 12 draws the distinction the rest depends on. A condition is a stipulation essential to the main purpose of the contract, breach of which gives a right to treat the contract as repudiated. A warranty is collateral, and breach gives a claim for damages but not a right to reject. Section 13 adds that a buyer may elect to treat a breach of condition as a breach of warranty, and that where the contract is not severable and the buyer has accepted the goods, breach of a condition can only be treated as a breach of warranty.
Section 14 then implies a condition that the seller has a right to sell, Section 15 implies on a sale by description that the goods correspond with it, and Section 17 implies on a sale by sample that the bulk corresponds with the sample.
Section 16 is the one that matters most in branded distribution, and it is narrower than distributors expect.
Section 16(1), in substance. Where the buyer makes known to the seller the particular purpose for which the goods are required, so as to show that he relies on the seller’s skill or judgment, and the goods are of a description which it is in the course of the seller’s business to supply, there is an implied condition that the goods shall be reasonably fit for that purpose. Provided that in the case of a contract for the sale of a specified article under its patent or other trade name, there is no implied condition as to its fitness for any particular purpose.
Section 16(2), in substance. Where goods are bought by description from a seller who deals in goods of that description, there is an implied condition that the goods shall be of merchantable quality; provided that if the buyer has examined the goods, there is no implied condition as regards defects which such examination ought to have revealed.
Sale of Goods Act, 1930 — Section 16.
Read the proviso to Section 16(1) again. Branded distribution is, almost by definition, the purchase of a specified article under its trade name. A distributor who assumes that the law gives him a fitness claim against the supplier is frequently assuming a term the statute has removed. If quality recourse matters — and for a distributor who will face consumers, it matters a great deal — it has to be an express warranty in the agreement, with a stated standard, a stated period and a stated remedy.
Three sections govern what happens when a consignment arrives, and together they decide whether a distributor still has a claim a month later.
Section 41 gives the buyer, where goods are delivered which he has not previously examined, a right to a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the contract, and the seller is bound on request to afford that opportunity.
Section 42 then defines acceptance, and it is broader than people realise. The buyer is deemed to have accepted the goods when he intimates acceptance; or when he does any act in relation to them which is inconsistent with the ownership of the seller; or when, after a reasonable time, he retains the goods without intimating rejection. Reselling a consignment, breaking bulk into retail packs, or simply sitting on it can therefore amount to acceptance, after which a breach of condition drops to a claim in damages under Section 13.
Section 43 is the one distributors are relieved to learn: where goods are delivered and the buyer rightly refuses to accept them, he is not bound to return them to the seller; it is enough that he intimates his refusal. He must, of course, not deal with them as his own.
What all of this means for drafting is a short inspection clause with real numbers — the period within which the consignment must be examined, the period within which a shortage or damage must be notified, the evidence required, and what happens to goods rejected: whether they are collected, replaced or credited, and who pays the freight.
Credit is the normal form of distribution, and the Act gives an unpaid seller remedies that are considerably better than a claim on a ledger.
Section 45 defines the unpaid seller — one to whom the whole of the price has not been paid or tendered, or who has taken a negotiable instrument which has been dishonoured. Section 46 then sets out his rights against the goods, notwithstanding that property has passed: a lien while he is in possession, a right of stoppage in transit where the buyer becomes insolvent and the goods are in transit, and a right of resale; and where property has not passed, a right of withholding delivery.
Section 55 allows a suit for the price where property has passed and the buyer wrongfully neglects or refuses to pay; Section 56 gives damages for non-acceptance; Section 57 gives the buyer damages for non-delivery; Section 59 deals with breach of warranty, allowing the buyer to set up a diminution of price or to sue; and Section 61 deals with interest.
These remedies are far easier to use where the agreement has set up for them: a retention-of-title clause under Section 25, stated credit periods so that it is clear when the lien revives, an obligation to store goods separately and identifiably, and an agreed rate of interest on overdue invoices.
Until 2019 a distributor’s exposure to the end consumer was largely a question of general law. Chapter VI of the Consumer Protection Act, 2019 changed that by creating a statutory product liability action, and by naming the seller as a defendant in his own right.
Section 2(34) defines product liability as the responsibility of a product manufacturer or product seller to compensate for harm caused to a consumer by a defective product or by deficiency in services relating to it. Section 2(37) defines a product seller broadly — in substance, a person who in the course of business imports, sells, distributes, leases, installs, prepares, packages, labels, markets, repairs, maintains or otherwise places a product for a commercial purpose. A distributor is squarely within it, and so is an importer.
Then comes Section 86, which is the section every distribution agreement should be read against.
| Section 86 — a product seller who is not the manufacturer is liable where… | What it means in a distributorship |
|---|---|
| He exercised substantial control over designing, testing, manufacturing, packaging or labelling | Private-label and own-brand distribution walks straight into this |
| He altered or modified the product, and that was a substantial factor in the harm | Re-packing, re-labelling, kitting and local assembly |
| He made an independent express warranty the product failed to meet | Your own brochure, website copy or sales promise, not the manufacturer’s |
| The manufacturer’s identity is unknown, or he cannot be served, or is not subject to Indian law, or an order cannot be enforced against him | Every importer of foreign goods should read this twice |
| He failed to take reasonable care in assembling, inspecting or maintaining, or did not pass on the manufacturer’s warnings or instructions, and that was the proximate cause | The leaflet left in the carton is not a defence |
None of these depends on the distributor having done anything wrong in the ordinary sense. Two of them — the fourth and the fifth — can be triggered by doing exactly what distributors routinely do.
Clause (d) of Section 86 deserves its own treatment because it converts an importing distributor into the practical defendant for everything his supplier makes.
Where the product has been sold by the seller and the identity of the manufacturer is not known, or is known but notice or process cannot be served on him, or he is not subject to the law in force in India, or any order that may be passed cannot be enforced against him — the seller is liable. A consumer in India who has been harmed by an imported product does not have to chase a manufacturer in another jurisdiction. He sues the person who put the product into the Indian market, and that person is the importer.
Two things follow, and both belong in the agreement rather than in hope.
A back-to-back indemnity that is worth something. An indemnity from a supplier who cannot be served in India, given under a foreign governing law with a foreign seat, is an indemnity that costs more to enforce than most claims are worth. What makes it real is a governing law and a dispute forum the Indian party can actually use, and ideally security — a parent guarantee, a retention against payments, or insurance.
Control over what you are exposed to. An importer who re-labels, re-packs or kits products is adding clauses (a), (b) and (e) of Section 86 to a liability he already has under clause (d). If those operations are commercially necessary, they should at least be done under a documented process, with the manufacturer’s warnings and instructions carried through in the required language and form.
Section 87 is the answer, and it is narrower than most people hope but it is not nothing.
The general defence appears in Section 87(1): a product liability action cannot be brought against a product seller if, at the time of the harm, the product was misused, altered or modified. That is a real defence in practice, and it is the reason a distributor should keep records of the condition in which goods left him — batch numbers, seals, packing photographs and delivery documentation are what turn an assertion into evidence.
Section 87(3) adds that a manufacturer is not liable for failing to instruct or warn about a danger which is obvious or commonly known to the user, or which the user ought to have known taking into account the characteristics of the product.
What this means for a distribution agreement is practical rather than theoretical. The agreement should require the supplier to provide warnings, instructions and labelling in a form fit for the Indian market and in the required languages; should place a clear obligation on the distributor to pass them on intact; should prohibit alteration of packaging or labelling without written consent; and should require both sides to preserve batch records for a stated period, because a claim that arrives three years later is won or lost on records nobody thought to keep.
A consumer with a faulty product goes to the person who sold it to him. A distribution agreement that does not say how that is handled leaves the distributor absorbing a cost he never priced.
Four questions should be answered in terms. Who honours the warranty — the distributor at the counter, the supplier by replacement, or an authorised service network? Who funds it, and how is the cost settled: credit note, replacement stock, or reimbursement against claims, and within what period? Who supplies spare parts and consumables, for how long after a model is discontinued, and at what price? And what service capability, tooling and training is the distributor required to maintain, because that obligation is often assumed and rarely written.
Recall deserves a clause of its own, and most agreements do not have one. It should say who may initiate a recall and on what basis; that each side must notify the other immediately of any safety issue, complaint pattern or regulatory contact; who bears the cost of retrieval, replacement, communication and destruction; that the distributor must maintain traceability records sufficient to identify where affected batches went; and who speaks publicly. In a recall the expensive question is almost never whether to act but who pays, and the agreement is the only place that gets settled in advance.
Exclusivity is the commercial heart of most distribution negotiations, and it is three separate questions that should be answered separately.
Is the territory exclusive to the distributor? That is, will the supplier appoint another distributor there? The clause should define the territory precisely — by State, district, pin code or named accounts — because a vague territory is the seed of every later argument about who a customer “belongs” to.
May the supplier sell directly in the territory? This is the question most often left out, and it is the one that destroys the relationship. An “exclusive” distributorship under which the supplier keeps the three largest accounts for himself is worth a fraction of what the distributor thought he was buying. Either reserve those accounts by name, or say that direct sales in the territory carry a stated compensation to the distributor, or say plainly that there will be none.
Is the distributor exclusive to the supplier? An obligation not to handle competing lines during the term is ordinary and enforceable. What does not survive is a post-termination non-compete: Section 27 of the Contract Act voids agreements restraining a person from exercising a lawful profession, trade or business, subject to the narrow goodwill exception, and Indian law does not apply the reasonableness test English law uses. Confidentiality, non-solicitation of specific customers and brand-exit obligations do survive, and they do the real work.
Every supplier wants some control over the price at which his product reaches the market. This is where distribution agreements most often cross a line.
Section 3(4), in substance. Any agreement amongst enterprises or persons at different stages or levels of the production chain, in respect of production, supply, distribution, storage, sale or price of, or trade in goods or provision of services — including a tie-in arrangement, an exclusive supply agreement, an exclusive distribution agreement, a refusal to deal and resale price maintenance — shall be in contravention of sub-section (1) if it causes or is likely to cause an appreciable adverse effect on competition in India.
Competition Act, 2002 — Section 3(4).
Note the structure. None of the five is unlawful in itself. Each is tested for appreciable adverse effect, and Section 19(3) lists what that test weighs: creation of barriers to new entrants; driving existing competitors out of the market; foreclosure of competition by hindering entry; accrual of benefits to consumers; improvements in production or distribution; and promotion of technical, scientific and economic development. A modest supplier granting one district to one distributor is a very different case from a nationwide network of exclusivity operated by a dominant supplier, where Section 4 on abuse of dominant position also becomes relevant.
Resale price maintenance is the clause to be most careful with, because it is so easy to slip into. A recommended or maximum retail price is ordinary. An enforced minimum, a rule that discounts may not exceed a figure, a penalty for underselling, or withholding supply from a distributor who discounts, are the arrangements the section is aimed at. So is a price-parity clause requiring that the product never be sold below the price at which it is offered elsewhere.
Two related problems arrive in every modern distribution negotiation, and both are usually handled badly.
The first is online resale. Suppliers want it restricted, because online listings break territorial boundaries and compress prices. A blanket prohibition on all internet selling is hard to defend as anything other than a restriction on the distributor’s ability to compete. What is defensible is a set of objective, stated conditions applied consistently: sale only through authorised channels or the distributor’s own site; minimum presentation and product-information standards; genuine after-sales capability; original packaging and intact labelling; no removal of batch or serial identifiers; and no sale outside the territory. Drafted as quality standards with reasons attached, those are brand protection. Drafted as “no online sales”, they are a restraint.
The second is parallel or grey-market goods, and the law here is more specific than most agreements reflect.
Section 30(3), in substance. Where goods bearing a registered trade mark are lawfully acquired, further sale or other dealing in those goods by the purchaser, or by a person claiming under him, is not infringement merely because the mark has been assigned after acquisition, or because the goods have been put on the market under that mark by the proprietor or with his consent.
Section 30(4), in substance. Sub-section (3) does not apply where there exist legitimate reasons for the proprietor to oppose further dealings, in particular where the condition of the goods has been changed or impaired after they were put on the market.
Trade Marks Act, 1999 — Section 30.
That pairing tells a supplier where his strength actually lies. A complaint that amounts to “we did not authorise this seller” is weak. A complaint that the goods have been repacked, relabelled, had batch codes removed, been stored improperly, or are being sold without the warranty and instructions that accompany authorised stock is a complaint about condition, and that is what Section 30(4) addresses. Agreements should therefore impose real obligations about condition, handling and traceability, because those obligations are what make an anti-diversion clause enforceable.
The pricing clause has to do more than name a number, because prices move and distribution runs for years.
Discount structures deserve particular care because of one tax condition that catches almost every distributorship.
Section 15(3), in substance. The value of a supply shall not include a discount given after the supply has been effected unless the discount is established in terms of an agreement entered into at or before the time of such supply and is specifically linked to relevant invoices, and the input tax credit attributable to the discount has been reversed by the recipient.
Central Goods and Services Tax Act, 2017 — Section 15(3).
The practical consequence is that a volume rebate, a year-end incentive or a target bonus agreed in March for a year that has already run does not meet the statutory test. The scheme has to exist in writing, in advance, and it has to be capable of being traced to invoices. So the discount and incentive structure belongs in the agreement or in a scheme document expressly incorporated by it, with the periods, slabs, conditions and settlement mechanics written out. Rates and procedural requirements change, so we confirm the current position at the time of drafting rather than printing figures.
Targets are the mechanism by which a supplier makes exclusivity worth granting, and they should be drafted as a trigger rather than as a debt.
A clause that turns a missed target into a payment obligation — the distributor to pay the value of the shortfall, or a stated sum per unit not purchased — is a stipulation by way of penalty in substance. Section 74 of the Contract Act limits the party complaining of breach to reasonable compensation not exceeding the amount named, whether or not actual damage is proved, so a large figure in the agreement does not become recoverable merely because it was agreed.
What works is a consequence proportionate to the purpose. Failure to achieve an agreed volume over a stated period entitles the supplier to convert exclusivity into non-exclusivity, to reduce the territory, to withdraw a preferential price tier, or to terminate on notice. Each of those is enforceable, each is what the supplier actually wants, and none of them invites a penalty argument.
A distribution agreement almost always contains a trade mark licence, and it is almost always too thin.
It should identify the marks by registration number where registered, state the permitted uses — resale, advertising, signage, digital — and the forms in which the mark may appear, and require adherence to brand guidelines. It should reserve quality control to the proprietor, which is not merely commercial but supports the licence itself. It should state that all goodwill from use accrues to the proprietor, that the distributor acquires no rights in the marks, and that he will not register or attempt to register the marks or anything confusingly similar in any jurisdiction — a clause that has saved suppliers a great deal of trouble in markets where a local partner registered the brand first.
Digital assets need naming individually, because this is where most brand exits go wrong. Domain names containing the brand, social media handles and pages, marketplace seller accounts, app store listings and advertising accounts should each be dealt with: who may create them, who owns them, and what happens to them on termination. An outgoing distributor sitting on a domain and a well-followed page is a negotiating position nobody intended to give him.
The licence should end when the agreement ends, subject only to a stated sell-off period, with a clear obligation to de-brand premises and vehicles, remove signage, and confirm compliance in writing.
This is the clause whose absence causes more distribution litigation than any other, and it takes a paragraph to fix.
When a distributorship ends, somebody is holding inventory that was bought to be resold under an arrangement that no longer exists. Without a clause, the position is simply that the distributor bought the goods and owns them. The supplier is under no obligation to take them back, the distributor cannot sell them without the brand licence he has just lost, and the value evaporates between the two of them.
A workable clause answers four questions. Is there a buy-back, and is it an obligation or an option — and whose option? At what price: invoice value, invoice less a stated percentage, or the current price, and what happens if prices have moved? In what condition must the stock be, in original packaging and within what remaining shelf life, and who bears freight and insurance on the return? And is there a sell-off period instead of or in addition to the buy-back, during which the distributor may continue to sell existing stock under the brand on the existing terms?
India has no dealer-protection statute. There is no minimum term, no statutory compensation for termination, no requirement of good cause, and no automatic right to renewal. A distributor’s protection is whatever he negotiated, and nothing else.
For a supplier, it means the agreement governs almost entirely, and a clear notice period stated in days is far better than leaving “reasonable notice” to be argued about later. It also means that a long course of dealing, assurances given in meetings, and investment encouraged by the supplier can all be pointed at if the exit is abrupt, so the drafting should be matched by conduct that is consistent with it.
For a distributor, it means the term, the notice period and the exit terms are the whole of his protection, and they are worth more than an extra point of margin. A distributor who has taken premises, hired people, carried stock and built a customer base should be negotiating for a term long enough to recover that investment, a notice period long enough to liquidate stock and receivables, a buy-back, a sell-off period, and a clear statement of what happens to accounts he developed.
Termination itself should distinguish cause from convenience. Termination for cause — insolvency, breach not cured within a stated period, loss of a licence, a change of control — should be immediate and defined. Termination for convenience should be on the stated notice, and the post- termination obligations should be listed in one place: stock, brand, records, customer data, service obligations and final accounts.
Where the goods come from abroad, several obligations attach to the Indian party and they should be allocated in the agreement rather than discovered at the port.
Somebody has to be the importer of record and hold the import code, and that party carries the customs and compliance consequences. Product approvals differ entirely by category, applicability turns on precise classification, and the foreign supplier almost never knows the Indian position.
Labelling is a recurring failure point. Pre-packed goods sold in India carry declarations under the legal metrology packaging rules, including the name and address of the importer, the common name of the commodity, net quantity, the month and year of import, the retail sale price as a maximum inclusive of all taxes, and consumer care details. Those declarations are the importer’s obligation, not the foreign manufacturer’s, and the agreement should require the supplier to supply artwork, ingredient and composition data and any technical documentation needed to make them — and should say who pays for relabelling if what arrives is not compliant. Our trade licence page covers the wider registration landscape.
Finally, governing law and dispute resolution matter more here than anywhere else in the document. A foreign law with a foreign seat means that a dispute about unpaid invoices or defective stock is fought where the cost exceeds the claim. Where the supplier will not concede Indian law for everything, the position worth pressing for is Indian law and an Indian seat for the supply of goods, quality and product liability, with a carve-out permitting either party to seek urgent interim relief from a court.
This is the working list we draft against, arranged by the question each clause answers.
Drafting starts at ₹2,999 and ordinarily takes 1 – 3 days. We draft for either side and say at the outset which side we are drafting for, because a distribution agreement written neutrally protects nobody.
The work begins with the structural question, because the most expensive mistakes are made before a word is written. Does this person take title? If not, you need an agency agreement, and everything on this page is the wrong law.
| What is included | Why it matters |
|---|---|
| Confirming the structure is a distributorship | The wrong choice contradicts every clause that follows |
| Title, risk and retention-of-title terms | Section 26 otherwise decides it for you |
| Quality, inspection and rejection with real periods | Section 42 makes inaction into acceptance |
| Product liability allocation and a workable indemnity | Section 86 puts the seller in the frame |
| Territory, exclusivity and targets | Drafted as triggers, within Section 3(4) |
| Pricing, discounts and the Section 15(3) condition | So the rebate is actually deductible |
| Trade mark and digital-asset terms | The brand exit is decided here, not later |
| Termination, stock buy-back and sell-off | The clause whose absence causes most disputes |
| One revision after you have read it | The most useful comments arrive after the first read |
Stamp duty and any government charges are at actuals. Nothing is payable in advance.
If you cannot answer the first and the ninth, those are the two to bring to us. They are the two that decide what this relationship costs you when it ends.
When title passes, and what happens to unsold stock on the last day. Send us the draft you have been given, or just tell us how the arrangement is meant to work — who buys, who invoices the customer, what credit is given and who carries the warranty. We will tell you whether you need a distribution agreement, an agency agreement or something simpler, say plainly which side we are drafting for, and write the title, risk, product liability and exit terms for your facts rather than lifting them from a template.
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