Appointing a reseller or distributor can be an effective way to grow your business, expand into new markets and increase sales without investing in a larger in-house sales team. The right commercial partner can help you reach new customers, strengthen your market presence and support long term growth.
To get the most from the relationship, it's important to put the right agreement in place from the outset. A well drafted reseller or distribution agreement helps both parties understand their rights and responsibilities and provides a clear framework for the relationship. Without one, issues such as pricing, sales targets, intellectual property rights, exclusivity and termination can become costly and time consuming disputes.
In this article, our commercial solicitors explain when you need a reseller or distribution agreement, the key terms it should include and the issues to consider before entering into one.
Jump to:
- When do you need a reseller or distribution agreement?
- What should a reseller or distribution agreement include?
- Should a reseller or distribution agreement be exclusive, sole or non exclusive?
- How should products, territories and sales channels be defined?
- What obligations should a supplier include?
- What obligations should a reseller or distributor have?
- How should pricing, payment terms and discounts be structured?
- How can you protect intellectual property in a reseller or distribution agreement?
- How should confidential information be protected?
- Should a reseller or distribution agreement include minimum sales targets?
- How should warranties and liability be dealt with?
- What are the most common mistakes when drafting a reseller or distribution agreement?
- What competition law issues should be considered?
- How can you terminate a reseller or distribution agreement?
- What happens when a reseller or distribution agreement ends?
- Summary
When do you need a reseller or distribution agreement?
You should have a reseller or distribution agreement in place before another business begins marketing, selling or distributing your products.
Many businesses start trading on the basis of emails, purchase orders or informal discussions. This may seem sufficient while the relationship is new. As sales increase, uncertainty can develop around pricing, exclusivity, territories, customer ownership or termination. A written agreement gives both parties certainty from the outset. It defines how the relationship will operate and reduces the likelihood of disagreements later.
It is particularly important where:
- the reseller or distributor will invest in promoting your products
- exclusive rights are being granted
- the relationship covers multiple territories
- your products incorporate valuable intellectual property
- pricing or discount structures are more complex
- minimum sales commitments are expected
- the arrangement is intended to be long term
Putting a comprehensive agreement in place at the beginning of the relationship is usually far simpler than renegotiating terms once commercial issues arise.
What should a reseller or distribution agreement include?
The provisions included in the agreement will depend on the nature of the relationship. Even so, there are several key clauses that most businesses should consider before entering into a reseller or distribution arrangement.
Should a reseller or distribution agreement be exclusive, sole or non exclusive?
One of the first issues to decide is whether the appointment should be exclusive, sole or non exclusive.
An exclusive arrangement gives the reseller or distributor the exclusive right to sell the products within a defined territory. Exclusivity can encourage a reseller or distributor to invest more time and resources in promoting the products because they know they will not be competing with another authorised seller. From the supplier's perspective, exclusivity can help build stronger relationships in key markets and support a more focused sales strategy.
Exclusivity also comes with risk. If the reseller does not actively promote the products or fails to achieve the expected level of sales, the supplier's ability to grow within that territory may be limited. If exclusivity is granted, the agreement should include clear performance obligations and appropriate termination rights if those expectations are not met.
A sole arrangement sits between an exclusive and a non exclusive appointment. The supplier agrees not to appoint any other resellers or distributors within the territory but retains the right to sell directly to customers. This gives the reseller or distributor a degree of market protection while allowing the supplier to maintain direct sales.
A non exclusive arrangement gives the supplier greater flexibility. It allows multiple resellers or distributors to operate within the same territory and enables the supplier to continue selling directly if it chooses. The right approach will depend on the products, the target market and the supplier's overall commercial strategy.
How should products, territories and sales channels be defined?
Clearly defining the scope of the appointment is one of the most important parts of the agreement. The agreement should identify exactly which products the reseller or distributor is authorised to sell. If new products are introduced in the future, the agreement should explain whether they are automatically included or whether they require a separate agreement.
The territory should also be described precisely. Broad or ambiguous descriptions can create uncertainty about where products may be sold and whether customers fall within the reseller's area of responsibility.
Sales channels should be considered as well. The supplier may wish to distinguish between online sales, retail outlets, wholesalers, marketplaces or direct business to business sales. The agreement can also address whether the reseller is permitted to make cross border sales or sell outside the agreed territory. Carefully defining these issues at the outset reduces the likelihood of disputes and gives both parties greater certainty about the scope of the relationship.
What obligations should a supplier include?
The agreement should clearly set out the supplier's responsibilities throughout the relationship. These obligations will vary depending on the products and the commercial arrangement. A supplier may agree to manufacture or supply products within agreed timescales, provide technical information, make marketing materials available or deliver product training. The supplier may also retain responsibility for product compliance, regulatory requirements and product recalls where appropriate.
If the supplier agrees to provide ongoing support, service levels should be realistic and clearly documented. Making commitments that cannot consistently be met can damage the relationship and increase the risk of disputes. The agreement should strike a balance between supporting the reseller and maintaining sufficient flexibility for the supplier to operate its business effectively.
What obligations should a reseller or distributor have?
The agreement should also define what is expected from the reseller or distributor. This often includes actively promoting the products, maintaining appropriate stock levels, using the supplier's branding correctly and complying with any marketing guidelines.
The reseller may also be required to submit regular sales reports, provide market feedback, maintain appropriate insurance and comply with all applicable laws and regulations.
Where customer support forms part of the arrangement, the agreement should clearly explain which party is responsible for handling enquiries, complaints and warranty claims. Clearly defined obligations make it easier to assess performance and help both parties understand their responsibilities throughout the relationship.
How should pricing, payment terms and discounts be structured?
The agreement should explain how products are priced, whether recommended resale prices apply and how discounts or rebates will be calculated. Payment provisions should cover invoicing procedures, payment deadlines, interest on late payments and the supplier's rights if invoices remain unpaid.
If pricing is likely to change during the life of the agreement, the supplier should reserve the right to review prices by giving appropriate notice. The agreement should explain how price changes affect existing orders and future purchases. Where discounts are linked to purchase volumes or sales performance, the qualifying criteria should be clearly defined so both parties understand how they will be applied.
How can you protect intellectual property in a reseller or distribution agreement?
A supplier's intellectual property is often one of its most valuable assets. The agreement should make it clear that ownership of trade marks, logos, product names, software, designs, copyright and other intellectual property remains with the supplier at all times.
The agreement should also explain how the reseller or distributor is permitted to use those rights. This may include requiring compliance with brand guidelines, limiting the use of logos to approved marketing materials and preventing changes to branding without the supplier's consent.
Many suppliers also prohibit resellers from registering trade marks that are identical or similar to the supplier's intellectual property. If the reseller creates marketing materials, translations or other content, the agreement should clarify who owns those materials and whether the supplier can continue using them after the agreement ends.
How should confidential information be protected?
Most reseller and distribution relationships involve sharing commercially sensitive information. This may include pricing, customer information, product specifications, business plans, technical information and sales forecasts. The agreement should define what information is confidential and explain how it can be used.
Confidential information should only be used for the purposes of performing the agreement. It should not be disclosed to third parties unless disclosure is required by law or authorised by the other party. The agreement should also require confidential information to be stored securely and returned or destroyed when the relationship comes to an end. Confidentiality obligations often continue after termination to protect both parties' commercial interests.
Should a reseller or distribution agreement include minimum sales targets?
Minimum sales targets are commonly used where a reseller or distributor has been granted exclusive rights. They encourage the reseller to invest in promoting the products and give the supplier a way of measuring whether the arrangement is delivering the expected commercial return.
Targets should be realistic, measurable and appropriate for the products and market. They may be based on purchase volumes, sales revenue or other agreed performance measures.
The agreement should also explain what happens if those targets are not achieved. This may include reviewing the arrangement, removing exclusivity or giving the supplier the right to terminate the agreement. Well drafted performance provisions encourage growth while giving suppliers greater protection if the relationship does not deliver the expected results.
How should warranties and liability be dealt with?
Warranty and liability clauses allocate risk between the parties and should reflect the nature of the products and the commercial arrangement. A supplier may warrant that it owns the products, has the right to supply them and that they comply with the agreed specification. A reseller may warrant that it has the authority to enter into the agreement and will comply with all applicable laws.
The agreement should also address how liability will be limited. Many commercial agreements exclude certain types of loss or place financial limits on the amount either party can recover. Any limitations should be reasonable and appropriate for the value and level of risk associated with the arrangement.
Indemnities may also be appropriate in some circumstances. For example, a supplier may indemnify the reseller against claims that the products infringe a third party's intellectual property rights. A reseller may indemnify the supplier where losses arise because the reseller has breached the agreement or marketed the products in an unauthorised way.
What are the most common mistakes when drafting a reseller or distribution agreement?
A reseller or distribution agreement should do more than record the commercial terms. It should provide a clear framework for managing the relationship throughout its lifetime. Many disputes arise because key issues have not been addressed or the agreement does not reflect how the parties actually intend to work together.
One common mistake is using a generic template without tailoring it to the arrangement. Every business has different products, sales channels and commercial objectives. An agreement that works for one business may leave another exposed to unnecessary risk.
Another common issue is failing to define the scope of the appointment clearly. If the products, territories or sales channels are not properly described, disagreements can arise over who has the right to sell where and to whom.
Granting exclusive rights without including meaningful performance obligations is another risk. If a reseller fails to actively promote the products or meet expected sales levels, the supplier may have limited options if the agreement does not include appropriate review or termination rights.
Businesses also overlook provisions dealing with intellectual property, confidentiality and customer relationships. These issues often become most important when the relationship comes to an end.
Termination clauses are another area where agreements often fall short. An agreement should explain when it can be terminated, how notice should be given and what each party must do once the relationship ends. Taking the time to negotiate and document these issues at the outset can reduce the likelihood of disputes and provide greater certainty throughout the relationship.
What competition law issues should be considered?
Many distribution arrangements include restrictions that are commercially sensible and legally permissible. Others may not be enforceable if they restrict competition more than is necessary. For example, suppliers should consider whether restrictions on territories, customer groups or online sales are appropriate. Exclusive arrangements, non compete clauses and restrictions on passive sales also require careful consideration.
Pricing provisions deserve particular attention. Suppliers can recommend resale prices but requiring resellers to sell at fixed or minimum prices may give rise to competition law concerns.
The application of competition law will depend on several factors, including the nature of the products, the structure of the distribution network and the market position of the parties. Businesses should consider competition law at the drafting stage rather than trying to address potential issues after the agreement has been signed.
How can you terminate a reseller or distribution agreement?
No commercial relationship lasts forever. A reseller or distribution agreement should include clear termination provisions so both parties understand when the relationship can come to an end.
Many agreements allow termination where there has been a material breach of the agreement that has not been remedied within a specified period. Other common grounds include repeated breaches, insolvency, failure to pay invoices, failure to meet minimum sales targets or serious damage to the supplier's brand or reputation. Some agreements also allow either party to terminate by giving notice after an initial fixed term or on a rolling basis.
The agreement should set out how notice must be given and when termination takes effect. A clear process reduces uncertainty and helps avoid disputes about whether the agreement has been terminated correctly. Well drafted termination provisions give both parties certainty while allowing the relationship to end in an orderly way if circumstances change.
What happens when a reseller or distribution agreement ends?
The reseller will usually be required to stop using the supplier's trade marks and branding, return or destroy confidential information and cease holding itself out as an authorised reseller or distributor.
The agreement should also deal with any outstanding customer orders, unpaid invoices and remaining stock. Depending on the commercial arrangement, the reseller may be allowed to sell existing stock for a limited period or may be required to return it to the supplier. Businesses should also consider who is responsible for ongoing customer support, warranty claims and servicing products that have already been sold.
Some contractual obligations continue after the agreement has ended. Confidentiality provisions, intellectual property protections, payment obligations and liability clauses often remain in force for a specified period or indefinitely. Planning for the end of the relationship at the outset helps reduce disruption and provides greater certainty if the arrangement comes to an end. For more information on this topic read our guide on contract termination.
Summary
A well drafted reseller or distribution agreement provides the foundation for a successful commercial relationship. It gives both parties clarity about their rights and responsibilities and creates a framework for managing the relationship as the business grows.
The agreement should be tailored to the products, markets and commercial objectives of the parties. Key issues such as exclusivity, territories, pricing, intellectual property, confidentiality, performance obligations, liability and termination should all be carefully considered.
Taking legal advice from a commercial solicitor before you enter into a reseller or distribution arrangement can help ensure the agreement reflects your commercial objectives, protects your business and reduces the risk of disputes. Investing time in getting the agreement right at from the outset is often more cost effective than resolving problems once the relationship is underway.
