This article is written by Sayantani Chakraborty, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
In today’s cut-throat market competition, a primary distinction between an average and a high performing company is the entity’s capacity to generate impressive turnover numbers in their quarterly and annual reports. However, it is easier said than done to achieve a perpetual upward sloping marginal revenue. Especially manufacturers of products and services have limited reach to a broader array of end customer base. Therefore, to increase the sales figure it is appropriate for the manufacturer to appoint an individual who has greater end-customer reach in a particular territory, and act as a reseller of the goods and services.
Although in an apparent setting the arrangement of reselling of goods and services are usually agreed between manufacturer and wholesaler who acts as a reseller to the end customer, yet there can be instances when similar arrangement is agreed between the wholesaler and another reseller who resells the product to end customers. From the organization’s perspective who is creating the product or service and is willing to enter into an agreement with a reseller should tailor a decisive plan to safeguard their best interests; thus, a consequential agreement becomes the necessity of the hour wherein both the parties in discussion may devise the clauses of the agreement to accomplish a win-win outcome.
A reseller agreement is an arrangement between the supplier and the reseller of goods or services that is ultimately sold to the end customer. The supplier in discussion can be a manufacturer or a wholesaler; the reseller on the other hand sells the solution to the end customer on behalf of the supplier. The objective of a reseller is to make commission by selling the product to the end consumer at a suggested price. Even though the supplier of a product provides a suggested resale price, the reseller would try to incentivize his or her effort by selling at a higher rate. Therefore, to cut down the fierce price competition the supplier must draft the reseller agreement clauses minutely after negotiating with the reseller so that ultimately a fair deal is offered to the end consumer.
A business that has a growth plan and actively expanding their product’s geographical reach must devise a constructive plan to reach out for legal counsel to draft a reseller’s agreement. It is a quintessential step to define the nature of legal relationship between the vendor or supplier of the product and the reseller of the item to the end consumer. The supplier must analyze if the reseller should act on behalf of the supplier or have a limited responsibility only. Sometimes the nature of the relationship is defined according to the characteristics of the product. For example, a real-estate seller trying to make a one-time sell will be looking for a reseller who will act on his behalf while taking decisions to the former’s best interest; thus, in this case the reseller agreement will be drafted defining the relationship between the real-estate owner and the reseller and the nature of obligations that both the parties agree to adhere.
On the contrary, a seller of low-priced product who is looking to sell through a distributor for an indefinite period of time will be interested to draft the reseller agreement differently when compared to the above example. Resellers can be labeled either as distributors or agents based on their relationship with suppliers as explicitly stated in the agreement. Hence a reseller’s agreement will be different based on the objectives that the business is trying to accomplish. In the paragraph below we will deep dive into a few different types of contractual agreements that are agreed between supplier and reseller of goods or services.
A reseller agreement refers broadly to an agreement between a supplier of a product who can be a wholesaler and a reseller who resell the item to final consumers. The primary objective of resellers is to get a percentage on the volume of total sales made by them while acting on behalf of the supplier. A note-worthy difference between reseller agreement and any other closely similar type of agreement is that the transfer of ownership of goods does not occur in a reseller’s agreement; basically, a reseller does not purchase the commodity from the supplier unless any clause otherwise mentioned in the agreement that obligates the reseller to purchase the product from the supplier so that same could be sold to the end consumer. A reseller usually does not stock the goods in his or her own warehouse, rather creates a market and channels the goods from the supplier to the consumers. A wholesaler or a supplier usually does not have exclusivity with the reseller which means a business supplying the goods or services may have multiple resellers at a given point in time.
Agency agreement is a contractual agreement that occurs between the principal (owner of the goods) and the agent who is selling on the principal’s behalf. Unlike any other reseller agreement, the agency agreement lays down the agent’s obligations that emphasizes that the agent will act to serve the best purposes of the principal or vendor, hence the vendor and the agent shares a close relationship which can also be termed as fiduciary relationship. By virtue of fiduciary relationship an agent must work with utmost loyalty, abide by the clauses mentioned in the agreement, and must not enter into a separate deal with the consumer that is not authorized by the principal. Agency agreement typically takes place in case of specific product offering such as between real-estate agents and homeowners who want to sell property; while agency agreement is agreed upon by involved parties for a one-time transaction like real estate, there may be instances where the arrangement is agreed for an unspecified timespan as well. Validity of a time bound agreement ceases when the contractual agreement date expires, thus the contract automatically gets terminated once the set time period is reached.
Unlike other reseller agreements, agency agreement requires the principal and the agent maintain exclusivity in their relationship i.e., the principal appoints only one agent for the product which the business intends to sell through the agent. While the agent has the objective to get a percentage on the total sales volume made, the business and the agent must decide the degree of obligations that the agent is responsible to perform. Sometimes the agent’s job is limited only to introducing the customer to the principal, in other cases the agent is responsible to provide both pre-sale and post-sale services. Perhaps one of the drawbacks of agency agreement is that the agent can legally bind the principal with other parties (customers) while the principal being completely unaware, hence the agent must obey the instructions of the principal and must not deal separately with the customer that is unauthorized by the principal.
Thereby, as an intermediary, the agent is required to take a high degree of obligations on behalf of the principal. These obligations include safeguarding principal best interest, avoid potential conflicts, not acquiring personal profit, provide accounting records, decide upon payments terms and mode of payment from the customers, carry out instructions as provided by the principal, and the agent must not delegate the power that is bestowed upon him to anyone else unless the principal agrees to such a notion. In an agency agreement the principal may claim loss or damage as a direct result of breach of contract that the agent has committed. As a part of principal’s obligation towards the agent, the former must reimburse any expenses as a result of agency functions, pay fees if any, and pay agent’s commission in time. In the agency agreement one or both the parties can renounce the agreement anytime, but the other party involved in the withdrawal has to comply to any loss thereof for the breach of contract.
Distributor’s Agreement is an arrangement that is agreed between the manufacturer or supplier of a particular commodity and the business or entity who acts as a distributor and distributes the same product to the end consumer. The vendor in a distributor’s agreement does not have any direct contract with the end customer because the distributor works independently with the customers. A distributor purchases the product from the supplier, stock it in his or her warehouse and ultimately sells the product to the end consumer. Therefore, there is a change of ownership of the product. A distributor purchases and sells the commodity with an objective to make a profit margin unlike an agent who works on commission basis.
Thus, the responsibility is upon the distributor to manage the customer’s invoice and following payment receipt. Although a distributor is not contractually obligated to act on behalf of the supplier, he, or she is still under obligation to follow and comply with the clauses stated in the agreement and must not misrepresent the original manufacturer or product. As per business requirements there can be Value Addition Resellers (VAR) who enhance the utility of the product by making modifications (such as packaging) before selling, however such clauses should be clearly stated in the agreement and in no way misrepresent the brand of the product or the manufacturer. A distributor has to abide by the guidelines stated in the distributor’s agreement where there are terms and conditions related to the nature of relationship between the manufacturer and the distributor, the product that will be distributed including the geographical area where the product will be distributed, exclusivity of the sales target, sales price, and the marketing strategy of the product.
A distributor agreement can be drafted on the basis of an agreed length of time or an open-ended, indefinite period of time. In case of expiration of the contract the parties may renew the contract or go separate ways based on business needs or on the nature of relationship. If one of the parties involved in the agreement commits a breach of contract or unlawful termination of contract must bear the loss or damage caused to the other party due to the former’s action.
Drafting a reseller’s agreement requires a lot of careful meticulous analysis so as to avoid any legal disputes that may harm business’s reputation, financial stability and loss or damage of the reseller’s business. Therefore, drafting the clauses of an agreement is critical to all the parties involved in the contract. Although an agreement may not cover exhaustively all the factors because in a complex business environment challenges are ever-changing hence not all the factors could be foreseen in advance; there has to be a degree of “good faith” within the parties involved. A well thought out reseller’s agreement broadly includes:
- Terms of payment– a sound payment terms help the business to mitigate any unnecessary risk that occurs following non-payment for goods or services delivered.
- Minimum Requirement of Orders– refers to the clause wherein a reseller requires to order a minimum volume of product per month so that supplier can cover the fixed expenses required to dispatch the goods and the product receives a continuous public exposure.
- Delays in the Delivery– it is common that due to unforeseen circumstances there are delays in the production schedule that affects the delivery of the goods. In such a case the agreement must specify the delivery date is an estimated one and may vary under certain circumstances.
- Guarantee to consumers– It should be clearly stated in the agreement how consumers will be served whenever a faulty or damaged item is delivered; usually the product is repaired, replaced or the money paid is refunded. However, in cases when the reseller purchases the goods for reselling purpose then the obligation is on the reseller to replace the product. Although the above-mentioned points are few of the most important clauses that are included in a reseller’s agreement, there is an exhaustive list of points that should be incorporated in the document after involved parties have negotiated and agreed on the terms. Below are those few clauses that should be included:
- Reseller’s Appointment- In this section of the agreement the name of the reseller who is authorized to resell the company’s goods or services is stated along with the list of products that is authorized to resell. It is also mentioned here if there are any revisions of the product list then that amended list will be reflected in this section along with the authorization to resell.
- Purchase Orders- In this section it is agreed with the reseller that the he or she will have to provide the Purchase Order in writing in an agreed format to the company with all the details such as- each product that is ordered identifying by their item number, total quantity of the item ordered, unit price for each item, location where the product needs to be delivered, date of delivery. After receiving the purchase order, the company should send a written intimation to the reseller within a specified number of days if the company accepts the order or proposes for any modification or rejects the order based on a certain ground.
- Delivery of Products– In this clause it is stated that the goods will be delivered at the location as stated in the purchase order within agreed business days at the company’s expenses. The risk of damages or loss during transport is covered by the Company until it reaches the reseller. If the reseller is acting as a distributor, then once the reseller receives the delivery the risk of any loss or damages to the product shifts to the reseller. The company is still liable for any damages if the reseller is acting as an agent.
- Materials related to the Product- In this section of the agreement it is stated that any materials related to product that could be used as brand awareness, marketing and promotion will be provided by the company to the reseller. The company will also be liable to provide any documentation that the reseller requires to comply with the government regulations.
- Inspection and Rejection- After the reseller receives the deliverables, the reseller has to inspect the deliverable and check if it can be accepted on the basis of acceptance criteria otherwise rejected. The acceptance criteria state the factors that satisfy the customer to accept the product. If the reseller fails to intimate the same before a specified time it is usually deemed as accepted. If the deliverables are rejected by the reseller, then the Company gets a time period to rectify the error that was made in the last shipment and send a fresh batch.
- Changes made in Product- This section states that the company may modify or discontinue a particular product, based on the decision of business and other market parameters. This clause will not be applicable on the current purchase orders though.
- Price- This section will contain the list price for the product that will be marketed by the reseller. The company provides a suggested retail price in this clause. The discount percentages that are offered on the list price will be also mentioned here.
- Payment Invoices– The payment invoice clause contains the information about the number of days within which the company will release the invoice for the delivered goods to the reseller or the customers. The clause should state the invoicing details and the details of the recipient of the invoice.
- Terms of Payments– This clause will define the deadline in the number of business days on which the payment is due. This section should also state account number, routing number to which the actual payment will be made.
- Taxes- In this section the name of the party is stated who is involved in the transaction and liable to pay the taxes.
- Interest on Late Payments- This section will contain the information on the interest that is chargeable on the amount that is owed to the company after the due date has passed. The percentage rate is stated on the basis of each day passed after the due date.
- Term of the Agreement- This section of the agreement contains the information on the initial term of the agreement i.e., the length of time the agreement will stay valid; the clause should also state if the agreement will automatically renew after the end of the initial term and thereafter. If any one of the parties is willing to terminate the agreement before the end of the term, then he or she is liable to provide a notice in advance; failure to do so will attract claims for loss or damage due to termination of the agreement.
- Representation- This section provides a declaration of the information that the parties involved have the capacity and authorizations to work without any foreseeable disputes. Each of the parties are financially sound and does not have any insolvency. Both of the parties will work to avoid any conflicts that could lead to breach of contract.
- Intellectual Properties- In this section of the agreement it should be clearly stated how the intellectual property rights are managed. For example- ownership of any Intellectual property right of any party that is developed before this agreement or outside the scope of this agreement is not transferable to other parties involved in the agreement.
- Limited Warranties- In this section it should be clearly stated that all the products offered by the company are covered by limited warranty. There will be no other warranty obligation unless mentioned specifically.
- Reseller’s Responsibilities- This section of the clause lays down the resellers responsibilities which may include duties such as marketing efforts, training employees so that their skills enable them to spread brand awareness among potential customers, maintaining bookkeeping records and reports and providing the same to the company upon request. The reseller will not tamper with any labels, remove anything that refers to the trademark which may be attached to the packaging of the product. The reseller should ensure that in case of software products there is no reverse engineering to alter the product, does not change the internal configuration or modify the source code.
- License Grants- This clause explains that the company grants non-transferable, non-exclusive license to market, sell, and distribute the product. The reseller can be allowed to use the company’s trademark, logos and any symbols that are identifiable with the company but only after written approval from the company.
- Compliance with Laws- In this section it will be stated that the parties involved in the agreement will comply with all the applicable laws and policies that are relevant to the agreement.
- Confidentiality Agreement- This section of the clause must contain that the parties involved in the agreement are entering into a non-disclosure agreement; thus, the parties are obligated to maintain confidentiality regarding all the information related to the company, product, marketing efforts, consumer behaviors etc.
- Publicity- In this clause of the agreement the parties agree to not use other party’s trademarks, logos, or publish press releases without the consent of the other party unless required by law or the agreement. Similarly, the parties will cooperate with each in matters of drafting press releases, the subject matter of which revolves around the agreement itself.
- Audit and Inspection- In this section of the agreement it is stated that after the term of the agreement expires until an agreed number of years the company will have the right to inspect and audit the reseller’s books of account and records upon prior notice in advance.
- Termination- This section of the agreement states the conditions based on which a party may terminate the agreement; the reasons may include breach of contract or failure to comply with relevant responsibilities.
- Effect of Termination- In this section it is stated that any relevant obligations of the parties involved ceases to exist after the termination of the agreement. Any amount owed by one party to the other still needs to be paid; any advance amount paid for which service is not rendered or goods not yet delivered needs to be refunded after the termination.
- Indemnification- In this section of the agreement the indemnity clause should state each party’s (the company and the reseller) obligation when an indemnification is brought upon by any third party or any of the parties involved in the agreement.
- Limitation on Liability- In this section of the agreement it should be clearly stated the limitation of liability for both the parties and the limitation of liability of the company. In the event of loss due to breach of contract neither party is liable for the damages that are speculative in nature. Moreover, the company’s total liability will be limited only to the fees paid by the reseller to the company.
- Definitions- In this section of the agreement contains the definitions of different terms that are used in the agreement and required in detailed explanations.
- General Provision- This section of the agreement contains all the provisions that bind parties to the agreement so that there are no loose ends that might create any legal disputes in the future.
As a manufacturing entity, the business would focus on production, operations, and logistics. Therefore, to increase sales and reach a broader target market the business needs to appoint a reseller who can market the product and increase the brand awareness in a territory. Hence it can be easily concluded how crucial a reseller’s agreement is to evade inevitable business risks. However, an in-depth analysis is required before drafting a reseller’s agreement. A business needs to weigh the pros and cons before choosing the appropriate relationship with the reseller that could be critical to the success of the business. Once the relationship is defined whether the reseller will act as an agent or a distributor, the business decides how the agreement has to be drafted so that the company can protect itself from any future legal disputes.
As both the parties involved in the agreement need to safeguard their best interest it is quite obvious that an ideal agreement will be accomplished through negotiations between the parties. While drafting the reseller’s agreement, the business and the reseller must focus on few of the most important clauses which effectively reduces business risks such as risk arising undefined terms of payments, and risks of economies of scale for defining minimum requirement of orders etc. The agreement should also contain guarantees to the consumers in the event of damages of products in transit.
- Resellers Law and Legal Definition. https://definitions.uslegal.com/r/resellers
- What Is an Agency Relationship? https://legalvision.com.au/agency-relationship/
- Distributor Agreement Vs. Agency Agreement. https://bhwsolicitors.com/news/distribution-agreement-vs-agency-agreement-key-differences/
- Limited Agency Agreement. https://smallbusiness.chron.com/liability-resident-agent-llc-company-3752.html
- Terminating distribution agreements – know where you stand. https://www.lexology.com/library/detail.aspx?g=16176486-7f65-4724-9e2b-f99ab10b776e
- Reseller Agreement: Everything You Need to Know. https://www.upcounsel.com/reseller-agreement#tips-for-creating-a-reseller-agreement
- Contract Standards. https://www.contractstandards.com/public/contracts/reseller-agreement
- Technology’s Legal Edge. https://www.technologyslegaledge.com/2015/01/what-exactly-do-you-mean-by-reseller-agreement/
- 5 Key Terms in a Reseller Agreement. https://legalvision.com.au/reseller-agreement-terms/
- Reseller Agreement – Agent or Distributor? https://www.michalsons.com/blog/reseller-agreement-agent-distributor/8676
- The Key Differences Between Reseller Agreements and Agency Agreements. https://legalvision.com.au/difference-resellers-agreement-agency-agreement/#:~:text=A%20reseller%20agreement%20typically%20refers,on%20behalf%20of%20the%20wholesaler
- I Am a Supplier. What Are the Benefits of Using a Reseller Arrangement? https://legalvision.com.au/reseller-arrangement-benefits/
- What is the difference between an Agency Agreement and a Distribution Agreement? https://contractcompany.com.au/blog/what-is-the-difference-between-an-agency-agreement-and-a-distribution-agreement/
- Distribution Agreement vs Agency Agreement – The Key Differences. https://bhwsolicitors.com/news/distribution-agreement-vs-agency-agreement-key-differences/
- Indemnification: Everything You Need to Know. https://www.upcounsel.com/indemnification
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