Distribution Agreement: Exclusive vs Non-Exclusive, A Drafting Guide for Hong Kong and Cross-Border Trade

A distribution agreement is a contract under which a supplier (or manufacturer) appoints a distributor to purchase goods from the supplier and resell them to end customers within a defined territory, on terms agreed between the parties. The distributor takes title to the goods, bears inventory risk, and earns its margin on the difference between the wholesale and retail prices.

The distributor acts in its own name and for its own account. This is the key feature that distinguishes a distributorship from an agency or sales representative arrangement.

Channel arrangements come in several forms, each with a distinct legal and commercial character.

Five structural variants dominate. The right choice depends on the supplier’s market strategy, the distributor’s investment profile and the regulatory environment.

The supplier grants the distributor exclusive rights to sell the products in a defined territory or to a defined customer group. The supplier agrees not to appoint other distributors in the territory and, often, not to sell directly to customers in the territory. The distributor in turn commits to specific performance obligations and to refrain from selling competing products.

The supplier appoints the distributor without granting exclusivity. Multiple distributors may operate in parallel in the same territory, with or without overlapping customer focus. Suitable for high-volume mass-market products and for markets where the supplier wishes to maintain pricing pressure across multiple channels.

An intermediate position. The supplier agrees not to appoint other distributors in the territory but reserves the right to sell directly to customers in the territory itself. The distributor is the sole appointed reseller but does not enjoy a monopoly on the channel.

The supplier appoints distributors who meet defined qualitative criteria (technical capability, after-sales service, retail format, brand presentation). Common for premium, luxury and technically complex products. Selective distribution requires careful drafting to remain compliant with competition law.

Distribution rights may be allocated by geographic territory (country, region, city), by customer segment (B2B, B2C, government), or in a multi-tier structure where the primary distributor is permitted to appoint sub-distributors for sub-territories. Each layer creates additional drafting and competition law considerations.

A robust distribution agreement covers the commercial substance and the operational mechanics. The following clauses are the load-bearing elements.

The structural choice has commercial, operational and legal consequences. The summary below captures the main considerations.

Hong Kong’s commercial environment is generally permissive of distribution arrangements, but four legal frameworks shape the drafting and operation of distribution agreements.

The First Conduct Rule prohibits agreements that have the object or effect of preventing, restricting or distorting competition in Hong Kong. The rule applies to both horizontal agreements (between competitors) and vertical agreements (between parties at different levels of the supply chain, including supplier-distributor arrangements). The Competition Commission’s stated focus is primarily on hardcore horizontal conduct (price fixing, market sharing, bid rigging) rather than typical vertical agreements, but distribution arrangements containing resale price maintenance, territorial restrictions or absolute customer restrictions can still come within scope. Exclusive distribution agreements with significant market effect should be reviewed for competition law compliance.

Hong Kong common law treats unreasonable restraints of trade as unenforceable. Post-termination non-compete and non-solicitation clauses are enforceable only if they go no further than reasonably necessary to protect a legitimate interest of the supplier (typically goodwill, confidential information or IP), are limited in scope, duration and geography, and are not contrary to public policy.

Where the distribution agreement involves the sale of goods between supplier and distributor, the Sale of Goods Ordinance implies terms as to title, description, quality, fitness for purpose and sample. These statutory implied terms can be modified or excluded subject to the reasonableness controls in the Control of Exemption Clauses Ordinance (Cap. 71). See our commercial agreements pillar for the consolidated HK statutory framework.

Distribution arrangements involving the Mainland, sanctioned jurisdictions or controlled goods (dual-use, defence, technology) attract additional export control and sanctions considerations. Suppliers should retain audit rights and obtain compliance representations from distributors.

• Channel conflict. Overlapping territories or customer groups, ambiguous online sales policies, supplier direct sales eroding distributor margins. Mitigate with clear scope clauses, dispute escalation and supplier carve-outs.
• IP leakage. Distributor accessing trade secrets, customer lists or product specifications. Mitigate with strict confidentiality, return-or-destroy obligations and audit rights.
• Distributor under-performance. Failure to meet minimum sales targets or marketing commitments. Mitigate with clear performance metrics, periodic review meetings and tiered termination rights.
• Grey market and parallel imports. Products sold outside the agreed territory through unauthorised channels. Mitigate with traceability requirements, geographic restrictions to the extent permitted by competition law and rapid termination triggers.
• Regulatory non-compliance. Distributor breach of import, customs, product safety or anti-corruption rules can expose the supplier. Mitigate with compliance representations, training requirements and indemnification.
• Termination disputes. Distributor claims for compensation on termination, particularly in some civil law jurisdictions. Mitigate with clear termination clauses, governing law selection and entire-agreement provisions.