China distributor exclusivity: what to give, and what to keep

Give a China distributor exclusivity one region and one channel at a time. Tie each grant to a yearly purchase target and a review date. Keep your online stores out of it, along with the right to take the grant back. Chinese courts hold both sides to an exclusive deal, so write it narrowly and end it in writing.

Court filings and the rules quoted here checked October 12, 2026.

In our experience, the first contract a Chinese distributor sends over asks for the lot: the whole country, every channel, every product, for five years or more. That’s an opening position. Treat it as one.

Exclusivity is a fair thing to give. A distributor that buys your stock and spends a year getting it onto shelves wants to know you won’t hand the same market to a rival once the work is done. The work is deciding how much of it to give, and what you want back for it.

This is an operator’s guide. The rules quoted here were checked against the official texts in October 2026, and the contract itself should be drafted and read by a lawyer qualified in China before you sign.

Why distributors ask for everything

They carry the money. A distributor buys your goods and holds the stock until it sells. When the market softens, the distributor feels it first.

One distributor put a year in numbers: four to five million RMB spent on stock, for less than 300,000 RMB of actual profit. Source: Jiemian (界面新闻), carrying Kuaidao Caijing (快刀财经), July 2025. https://www.jiemian.com/article/13003026.html

Margins that thin leave no room for a second distributor in the same city cutting price. So the ask for national, all-channel exclusivity is partly defense. Part of it is a land grab, too. A distributor that holds the whole country can appoint its own sub-distributors in the provinces it doesn’t reach, and sell to them at a markup.

What the brand gives up is harder to see on signing day. Every region and channel inside the grant is one you can’t sell into yourself, or hand to anyone else, until the contract ends or you end it properly. A Beijing case shows what “properly” means.

Courts enforce exclusivity both ways

In March 2008 Dirui, a urinalysis equipment maker from Changchun, made Beijing Cheng’antang its exclusive distributor for the city. Targets were to be agreed every January.

The grant covered all Dirui urinalysis products in Beijing for five years. The 2008 target was 32,000 tubes of test strips and 8 H800 analyzers; the 2009 target was 34,000 tubes and 10 analyzers. After two straight years of missed targets, Dirui canceled the exclusivity from 2010, treated Cheng’antang as an ordinary distributor and began supplying other Beijing distributors and hospitals. Source: Dirui Medical (迪瑞医疗), IPO prospectus, August 2014. http://static.cninfo.com.cn/finalpage/2014-08-28/1200180236.PDF

The missed targets were real. What Dirui’s filings don’t show is a written termination. Dirui only went to court to end the contract in July 2012, after two years of supplying other distributors in Beijing.

Cheng’antang claimed 7,508,040 RMB in damages through the end of 2012. On appeal, the Beijing No. 1 Intermediate People’s Court ordered Dirui to pay it 5,864,950 RMB in liquidated damages and dismissed Dirui’s counterclaim. The judgment was final. Source: Dirui Medical (迪瑞医疗), announcement on litigation progress, April 2016. http://static.cninfo.com.cn/finalpage/2016-04-16/1202187573.PDF

Dirui paid about 78% of what Cheng’antang asked for, to a distributor that had missed its targets two years running.

The judgment’s full reasoning isn’t public outside China’s court database, so read the lesson from the facts. A missed target gave Dirui a reason to act, and the grant stood until Dirui ended it properly, which the filings never show it doing. Our guide to replacing a China distributor walks through the switch Dirui should have run.

The same logic protects brands. A Shanghai court held a distributor to the channel limits in its own exclusive grant.

In February 2024 a Chinese cosmetics brand gave a company exclusive regional sales rights, limited it and its retailers to named offline stores, and set a 200,000 RMB penalty for selling across channels. The goods turned up in online shops with their traceability codes scratched off. In June 2025 the Fengxian court ruled that buying from other channels and selling online was diversion under the contract. Fourteen similar cases then closed through mediation, with more than 6 million RMB at stake. Source: People’s Court Daily (人民法院报), via the Supreme People’s Court (最高人民法院), August 2026. https://www.court.gov.cn/zixun/xiangqing/507751.html

The judge in the Shanghai case named loose wording on what counts as diversion as one cause of the dispute. Both cases point the same way. An exclusive grant is enforced as written, against whichever side breaks it.

Five ways to grant China distributor exclusivity

Split the grant into pieces and price each piece on its own. Here is what each one costs you, and what to ask for it.

Sources: Dirui IPO prospectus (August 2014), Civil Code Art. 564, People’s Court Daily (August 2026), Tmall entry standard (revised June 2025), Douyin shop help center (observed October 2026). Full citations in the sections around the table.

Targets and take-or-pay

A target is what turns exclusivity into a trade. Write it in units or in purchase value, for a calendar year, and agree the next year’s number before the year starts. Build the first one from the sales plan the distributor pitched to win the deal; it’s hard for them to call their own forecast unrealistic. Dirui’s contract left each year’s target to a January meeting. When Dirui stopped signing yearly targets in 2010, the exclusive contract kept running anyway.

Then decide what a miss does. The most useful clause converts the grant instead of ending the contract: below target, exclusivity falls away on written notice and the distributor stays on as an ordinary one. That’s roughly what Dirui did in practice. Written into the contract as a right, and sent on paper, the same move stands on firmer ground.

Take-or-pay goes a step further. The distributor commits to a floor volume and pays a shortfall fee if it buys less. Price that fee from your lost margin, because a Chinese court can trim it.

A party can ask a court to cut a contract penalty that is excessively above the loss. A penalty more than 30% above the actual loss is generally treated as excessive, and a clause saying the penalty can’t be adjusted doesn’t stop the court. A party in bad-faith breach generally can’t get its penalty reduced. Source: Supreme People’s Court (最高人民法院), interpretation on the Civil Code’s general contract rules, Arts. 64 and 65, December 2023. https://www.court.gov.cn/fabu/xiangqing/419382.html

The Civil Code also lets the parties agree a formula in place of a lump sum. A formula tied to the shortfall (the margin you’d have earned on the cartons it didn’t buy) is easier to defend than a round number picked at the signing table.

Parties can agree a fixed penalty or a method for calculating damages, and a court can raise a penalty below the loss or reduce one excessively above it (Art. 585). A deposit (定金) can’t exceed 20% of the contract’s value; anything above that doesn’t count as a deposit (Art. 586). Source: National People’s Congress, Civil Code (中华人民共和国民法典), via the Ministry of Commerce (商务部) policy database, in force January 2021. https://policy.mofcom.gov.cn/claw/clawContent.shtml?id=70524

Some brands also take a deposit against the first year’s orders. Keep it under that 20% line.

One thing stays out of the target clause entirely: the distributor’s selling price.

A supplier may not agree with a distributor to fix the price it resells at, or to set a minimum resale price, unless the supplier can prove the deal doesn’t restrict competition or that its market share sits below the regulator’s threshold. Source: Anti-Monopoly Law (中华人民共和国反垄断法), Art. 18, in force August 2022, via the Ministry of Commerce (商务部) policy database. https://policy.mofcom.gov.cn/claw/clawContent.shtml?id=97047

Set the target in volume and leave the resale price alone.

Online carve-outs: keep the flagship

Online is where a regional grant leaks. A shopper in Chengdu can buy from a store run out of Shanghai, and the platforms’ own rules don’t split stores by region.

A Tmall flagship store sells the brand owner’s own brand, or a brand held under the trademark owner’s exclusive authorization. A specialty store sells under an ordinary authorization, which may not carry a regional limit (some categories excepted) and must run at least six months. Source: Tmall (天猫), entry standard (天猫入驻标准), revised June 2025. https://rulechannel.tmall.com/?type=detail&ruleId=9257&cId=378#/rule/detail?ruleId=9257&cId=378

On Douyin, a flagship that sells a brand the store’s owner doesn’t own also needs an exclusive authorization. Source: Douyin shop help center (抖店官网), store types, observed October 2026. https://fxg.jinritemai.com/question/type

Two things follow. An exclusive authorization can only go to one party, so a distributor with online rights may ask for the letter that opens your flagship. And a regional distributor with a Tmall specialty store sells to the whole country, because its authorization can’t be drawn around a province.

So keep online as its own grant. The cleanest version leaves the flagship with you, run by your own team or a Tmall Partner, while the distributor supplies offline. If a distributor really is your best online partner, give online rights separately, with their own target and an authorization letter that ends with the grant.

Running both side by side takes price discipline. When we took over DaVinci Gourmet’s China e-commerce, its Tmall and JD flagships sat alongside a distributor network. Once pricing was aligned between Tmall and the distributors, cross-channel pricing disputes were resolved within three months, as the DaVinci Gourmet case records.

Splitting the grant by channel in the first year is how we set up distribution in China, with national exclusivity held back until a distributor has hit hard volume numbers.

How to take a grant back: notice and a review date

Put a review date in the contract, once a year, a month or two after the year’s sales are counted. At the review the brand can narrow the grant if the target was missed: take a region or a channel out of it, or turn it non-exclusive.

Then do it on paper.

A party ending a contract must notify the other side, and the contract ends when the notice arrives. Where no deadline is set, the right to terminate lapses if it isn’t used within one year of the day the holder knew, or should have known, the grounds. An open-ended contract for continuing supply can be ended at any time, on reasonable prior notice. Source: National People’s Congress, Civil Code (中华人民共和国民法典), Arts. 563 to 565, via the Ministry of Commerce (商务部) policy database. https://policy.mofcom.gov.cn/claw/clawContent.shtml?id=70524

The one-year clock is the trap. A brand that lets a missed target ride for eighteen months may find its right to act on that miss has gone. Write a deadline you can live with into the contract, and act inside it.

Send the notice to the address the contract names and keep proof that it arrived. Cite the clause you rely on, and the target that was missed. Appoint the next distributor only after the notice has landed. Dirui did it the other way around.

The strongest position at the table is a real alternative. A brand with two or three credible candidates can price exclusivity properly. Our guide to finding a distributor in China shows how Compass builds that list.

Questions on China distributor exclusivity

Is exclusive distribution legal in China? Yes, as a contract term, and courts enforce it, as the Beijing and Shanghai cases show. The Anti-Monopoly Law’s rule on supplier and distributor deals names resale prices (fixing them or setting a floor) and lets the regulator add others. Keep price out of the exclusivity clause, and have a China-qualified lawyer check the rest against your market position.

Can I end exclusivity if the distributor misses its target? Only the way the contract allows, and in writing. A missed target gives you grounds to act, and the grant stands until you do. Dirui stopped treating its Beijing distributor as exclusive after two missed years, with no written termination on the record, and paid 5,864,950 RMB on appeal.

Should my distributor run my Tmall flagship? Only under a separate grant. Tmall and Douyin let a partner open a flagship for a brand it doesn’t own only with an exclusive authorization, so whoever holds that letter holds your official store. Give it with its own target and an end date, or keep the flagship with your own team or a Tmall Partner.

How long should an exclusive grant run? As long as the targets are met. A shorter first term, or a yearly review with the right to narrow the grant, protects a distributor that performs just as well as a long one. It also gives you a way out if it doesn’t. Renewal can be automatic in any year the targets are hit.

Get a Compass shortlist of China distributors before you sign an exclusive grant