- A distribution agreement's territory clause should define, precisely, the geographic area (and sometimes the customer segment or sales channel) the distributor covers.
- Suppliers sometimes grant exclusivity to secure a distributor's serious investment — inventory, marketing spend, a dedicated sales team — that the distributor would be reluctant to make…
One of the first questions a manufacturer or supplier and a prospective distributor have to settle is territory: will the distributor be the only one selling the product in a defined area, or will the supplier be free to appoint others — or sell directly — in the same space? The answer shapes almost everything else in a distribution agreement, from pricing leverage to how hard the distributor is willing to work to build the market.
This article explains what "exclusive" and "non-exclusive" actually mean in practice, why a business might choose either, and where Canadian competition law puts limits on how far territorial restrictions can go.
What "Territory" Actually Means
A distribution agreement's territory clause should define, precisely, the geographic area (and sometimes the customer segment or sales channel) the distributor covers. Vague territory language — "the Greater Toronto Area" without a defined boundary, or "online sales" without saying which platforms — is a common source of disputes once the relationship is underway and money is on the line.
Exclusive vs. Non-Exclusive: A Side-by-Side Look
| Exclusive Territory | Non-Exclusive Territory | |
|---|---|---|
| Who else can sell there | No one else, including (usually) the supplier directly | Supplier can appoint other distributors, or sell directly |
| Distributor's incentive to invest | Generally higher — less risk of being undercut locally | Lower — investment can be captured by a competing distributor |
| Supplier's flexibility | Lower — locked into one distributor for the territory | Higher — can respond quickly to gaps in coverage |
| Typical use case | Established or high-investment markets | New, unproven, or fragmented markets |
| Risk to supplier | Underperforming exclusive distributor can block the whole market | Coordination and channel-conflict issues among multiple distributors |
Why a Supplier Might Choose Either
Suppliers sometimes grant exclusivity to secure a distributor's serious investment — inventory, marketing spend, a dedicated sales team — that the distributor would be reluctant to make if a competitor could free-ride on the same territory. In markets that are already well understood or lower-risk, a supplier may prefer to keep multiple distributors and let them compete, trading distributor loyalty for coverage and pricing flexibility.
Distributors, for their own part, generally push hard for exclusivity precisely because it protects the return on whatever they invest in building the market.
Competition Law Limits on Territorial Restrictions
Canada's federal Competition Act places some limits on how far a supplier can go in restricting where or to whom a distributor sells. Arrangements that meaningfully restrict competition in a market — for example, overly broad market-restriction or exclusive-dealing terms across an entire industry — can attract scrutiny from Canada's competition regulator in a way an ordinary, narrowly scoped exclusive-territory clause between two parties typically does not. This is a specialized area, and any distribution arrangement covering a significant share of a market, or involving multiple suppliers coordinating territories, is worth a specific competition-law review rather than assuming a standard-form clause is automatically fine.
What Happens If the Line Blurs
Disputes commonly arise from ambiguity rather than a deliberate breach:
- The supplier sells directly to an online customer physically located inside an exclusive territory.
- A non-exclusive distributor discovers the supplier appointed a second distributor covering an overlapping area.
- "Exclusive" was promised verbally during negotiations but never made it into the signed agreement.
A distribution agreement should address direct sales, online and marketplace sales, and any carve-outs (existing customer relationships, national accounts) explicitly — silence tends to get interpreted differently by each side once a dispute actually arises.
Frequently asked questions
Can a distribution agreement change from exclusive to non-exclusive over time?
Yes, if the agreement is drafted to allow it — for example, exclusivity conditional on the distributor hitting agreed sales targets, converting to non-exclusive if targets are missed. Without that kind of mechanism built in, either side generally needs the other's agreement to change the arrangement mid-term.
Does "exclusive" automatically mean the supplier can't sell directly to customers?
Not necessarily — it depends entirely on the wording. Some exclusive agreements carve out direct sales through the supplier's own website or certain existing accounts; others don't. This needs to be spelled out rather than assumed.
Is a verbal promise of exclusivity enforceable?
Verbal commercial agreements can be enforceable in Ontario, but proving what was actually promised is far harder without it in writing. Any exclusivity commitment that matters to your business should be in the signed agreement, not left to a sales conversation.
What should a distributor ask for if exclusivity isn't on the table?
Even without full exclusivity, a distributor can negotiate protections like a right of first refusal on new distributors in the same area, minimum notice before a competing distributor is appointed, or performance-based territory expansion.
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