Reseller agreements and distribution agreements govern relationships between manufacturers or suppliers and their distributors or resellers. The two types of agreement are similar in nature. In this guide we explain the differences and the main commercial considerations when entering into a reseller or a distribution agreement.
If you’re about to enter into a commercial distribution relationship and would like advice on drafting and structuring the terms, negotiating or reviewing an agreement before signing then our friendly team can help. Our expert commercial solicitors will help you protect your position and create a fruitful commercial relationship.
- What is a distributor?
- What is a reseller?
- What is the difference between distributors and resellers?
- Types of distribution
- What is a distribution agreement?
- The key terms in a distribution agreement
- Distribution agreements and competition law
- How Harper James Solicitors could support you when drafting an agreement
What is a distributor?
A distributor purchases goods or products from a manufacturer or supplier and sells them to their customers who could either be trade buyers or end users. Ownership of the products (and consequently any risk) passes at each stage, from the manufacturer or supplier to the distributor and then from the distributor to their customer. A distributor can either purchase goods from their supplier and sell them or add value by providing after-sales support to their customers.
What is a reseller?
A reseller purchases goods from one party (who could be a manufacturer or a distributor) and then sells the goods to another party, often the end user. Ownership of the products (and consequently any risk) passes at each stage.
What is the difference between distributors and resellers?
From a legal perspective, there is no distinction between a distributor and a reseller. Any differences between the two are commercial in nature and are reflected in the drafting of the reseller or distributor agreement. For example:
- Distributors are perceived as being closer to the manufacturing stage than a reseller but not from a legal point of view
- International businesses may refer to a distributor as a party who has a country or region as their territory and resellers as those appointed by the distributor to sell in sub-regions of the distributor’s territory
- Distributors may be under more arduous obligations than resellers but they may also have greater flexibility. For example, in the use of intellectual property (IP) rights relating to the products
- ‘Value-added resellers’ are specific to the IT sector and refer to a requirement by the supplier for the reseller to add technical value to the product before resale
This guide covers distribution agreements, which can be tweaked as required if a ‘reseller agreement’ is needed.
Types of distribution
There are four main types of distribution relationships, each requiring its own specific considerations and negotiation points:
- Exclusive distribution where there is only one distributor in a territory and they have exclusive rights to sell the products in that territory
- Sole distribution where there is only one distributor in a territory but the supplier can also sell their products to final customers in the territory
- Non-exclusive distribution where there are multiple distributors in a territory and where the supplier can also sell their products in the territory
- Selective distribution where distributors are appointed if they meet specific criteria
The terms of a distribution agreement depend on the type of relationship the parties agree on as this affects the risk and obligations that each party is willing to take on.
What is a distribution agreement?
A distribution agreement is a written commercial contract setting out the terms and conditions and the relationship between the manufacturer or supplier and the distributor. Whilst the distribution agreement governs the relationship between the supplier and the distributor, the supplier’s standard terms and conditions govern the terms under which the products are sold to the distributor. Therefore, the two documents need to interact.
The use of distribution agreements can be a cost-effective way to scale up a supplier business either nationally or when branching into an overseas market. However, suppliers need to be aware that whilst a distribution agreement poses less financial risk than an agency agreement, it potentially can create a risk of reputational damage by association as the distributor has more scope than an agent. That is why a distribution agreement needs to be carefully drafted to protect both the supplier and distributor.
Top tip: Any commercial contract needs regular review and it is just as important to ensure distribution agreements are reviewed. For further commercial contract reading have a look at:
- Contract lifecycle management process
- Top tips for updating your commercial contracts
- How to change your terms of business | Updating your T&Cs
The key terms in a distribution agreement
The terms of a distribution agreement must be clear and comprehensive to avoid potential disputes and reduce the risk of commercial litigation.
In a reseller agreement, the supplier (the distributor) needs to ensure that the terms reflect those contained in its own distribution agreement with the supplier or manufacturer higher up the chain. For example, if the manufacturer can increase the product price, then the distributor also needs the flexibility to do this in their reseller agreement.
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If the arrangement is a reseller agreement in the commercial context, the supplier (the distributor) will need to ensure that the terms reflect those in its own distribution agreement with the supplier or manufacturer higher up the chain. For example, if the manufacturer is able to increase the product price, then the distributor will also need the flexibility to do this in the reseller agreement. As a result, a reseller may find that it does not have the bargaining power to negotiate the terms of the arrangement.
The products to be covered by the agreement must be clearly set out. The description will depend on the product but can include the identification number, trademark number, or product specifications contained in an annex to the agreement. A supplier is likely to want the flexibility to change the product. For example, because of innovation, changing product regulation, or withdrawal from the product range. The distributor will want to ensure that any exclusivity rights they have to a discontinued product continue in respect of the replacement product.
In addition to the product description, the number of units to be supplied to the distributor and the timing of deliveries also need to be covered in the agreement, with it being made clear if the numbers are forecasted figures provided by the distributor or a commitment to buy.
Territory or customer type
The agreement must clearly define the territory area or the customers covered by the arrangement. If the agreement provides for exclusive distribution, the position regarding additional territories not covered by the distribution arrangements should also be set out. For example, will the distributor have the option to acquire exclusivity in the additional territories in the future? Not only do these questions need to reflect the agreement between the parties but they also need to comply with competition law.
The term of the agreement is a commercial consideration for the parties but there are various alternatives. For example, a probationary period, a fixed term, or a rolling contract. If the agreement rolls on for successive fixed-term periods, the parties need to check that no amendments to the agreement are required before the new period commences.
Details of payments and timing of payments
he specific payment terms must be included in any agreement otherwise the contract may be void for uncertainty. For example, the currency, method, and timing of payment must all be clearly set out. A supplier may also require some form of security, such as a letter of credit, or the supplier may insist on the retention of title to the products until payment is made. Parties should bear in mind that retention of title clauses can be unenforceable if not drafted carefully.
With overhead cost rises and inflationary pressures, a supplier will want to be able to increase their prices. This is likely to be resisted by the distributor but often a minimum notice period for a price increase or an agreed price increase formula is the best that the distributor can achieve. For more reading on commercial contracts and pricing clauses take a look at Commercial contract price increase clauses.
Suppliers need to be careful about price restrictions as these could be considered anti-competitive. However, setting a maximum resale price for ongoing sales by the distributor to their customers is permitted.
Minimum purchase requirements
A supplier is likely to require the inclusion of minimum purchase obligations or targets in the contract. Consideration needs to be given to whether these will be determined by reference to the number of products purchased by the distributor (likely to be preferred by the distributor) or the number or value of sales by the distributor to its customers (which provides more accurate sales information).
The parties also need to agree on whether the minimum purchase requirements are subject to periodic increases or how they will be reviewed on an annual or regular basis and whether failure to meet minimum purchase requirements constitutes a contract termination event. An alternative and the less draconian measure could be the loss of the distributor’s exclusivity in their specified territory. If loss of exclusivity is applied, the agreement will need to be reviewed to ensure that it remains competition law compliant.
A supplier will want to retain control of IP rights, such as trademarks, design rights, and copyright. From the supplier’s point of view, it is imperative that sufficient protections and comfort are given in the contract and there are effective remedies for breach.
The parties need to agree on when the agreement can be terminated. For example, can either party terminate the agreement on notice and how long should that notice period be? Does one party need to be in breach of contract to enable the other party to terminate? If the distributor fails to meet minimum purchase targets can the supplier terminate the agreement?
The agreement also needs to be clear about what happens to stock and pending orders if the agreement is terminated. As the 1993 Commercial Agents Regulations do not apply to distribution agreements, a distributor is not entitled to compensation on termination of the contract. This should be factored into the termination clause negotiations.
For a more detailed look at contract termination read our article on Can you terminate a commercial contract?
It is normal to include a specific provision in the agreement about distributors complying with any general or sector-specific relevant legislation to protect the supplier. For example, The Bribery Act 2010 provides that where an associated person (such as a distributor) engages in bribery, failure to stop the bribery is a corporate offence. Failure to prevent the facilitation of tax evasion by an associated person is another corporate offence. Suppliers, therefore, need to choose their distributors carefully and have mechanisms for monitoring compliance. In some distribution arrangements, there is the potential for the Transfer of Undertakings (Protection of Employment) Regulations 2006 to apply as the supplier’s employees who are engaged in distribution activities may transfer across to the distributor at the start of the distribution agreement or return to the employment of the supplier following the termination of the distribution contract. This will depend, for example, on whether the employees were principally engaged in the activities and how closely the activities mirror those governed by the relevant agreement.
Specific obligations on the distributor and the supplier should be set out. For example:
- Advertising and promotion obligations
- Provision of information
- Maintenance of stock levels
- Agreement not to alter the products
- Insurance requirements
An additional provision to consider is a force majeure clause to govern what happens if a force majeure event arises, that is an event that no one could foresee.
Online selling and marketplace portals are now commonplace and there are specific laws and potential issues which apply in this context. Competition law also differs depending on whether the sales are online or not. Our IT law specialists offer expert advice.
Where distribution agreements cross international boundaries, legal advice for the relevant jurisdiction(s) must be obtained. Local taxes, import, and distribution, and insurance laws may apply.
If an overseas-based supplier is appointing a UK-based distributor the distributor must comply with UK import and customs requirements and ensure the goods they distribute meet UK trading standards. A distributor is treated as an importer if they are the business that first brings the goods into the UK and markets them to either trade or end consumers. The distribution agreement should set out the distributor's obligations as an importer.
If the imported goods are defective then under The Consumer Protection Act 1987 the distributor or importer is liable for the goods despite not being responsible for their manufacture.
Distribution agreements and competition law
A distribution agreement can potentially fall foul of UK competition laws or, where relevant, the competition laws and regulations of other jurisdictions so careful legal advice needs to be taken because there can be serious consequences for supplier and distributor of a breach of competition law.
A distribution agreement is normally viewed as a vertical agreement as it is entered into between two businesses operating at different levels of the supply chain. UK competition law provides for automatic or block exemption to vertical agreements under The Competition Act 1998 (Vertical Agreements Block Exemption) Order 2022. Provided a distribution agreement meets the criteria of the VABEO it will not be within the scope of the UK legislation on anti-competitive agreements. However, despite the exemption, some clauses in a distribution agreement can create competition law issues. The prime example is price fixing.
Care also needs to be taken to check if the agreement could fall foul of competition law in other jurisdictions, depending on the location of the parties and the territories the agreement relates to.
Further information regarding competition law and distribution agreements can be found here: Horizontal and Vertical Agreements.
How Harper James Solicitors could support you when drafting an agreement
Our team of commercial solicitors provides comprehensive commercial law advice on all aspects of the distribution agreement process including:
- Due diligence inquiries
- Advice on scale-up options including joint ventures and agency agreements
- Distribution agreement negotiations and terms
- Reviewing standard distribution agreements prepared by suppliers
- Competition law considerations
- Employment law aspects of distribution agreements
- Regulatory and compliance issues
- IP protection and rights
- Data protection and GDPR
- Breach of contract disputes and termination
- Distribution agreement reviews
At Harper James, we aim to meet all your business law needs with joined up commercially astute legal advice and transparent pricing.