Dealer Agreements 101: The seller’s and the retailer’s perspectives

Written by MO.com Subject Matter Resource Paul Schroeder

What terms should I put in my dealer agreement with retailers? As a retailer, how can I avoid getting sued by my vendor?

If you sell goods to retailers which are then sold to the retailers’ customers, you need a good dealer agreement. The dealer agreement is a contract that defines your relationship with your customers. It sets forth what you will do for them, what they will do for you, how to terminate the relationship and the potential consequences of breaching the contract. An ideal dealer agreement makes your product the featured one in the retailer’s location, requires prompt payment and can be enforced in the courts of your home county.

The first topic to cover in your dealer agreement is your commitments to your customers. These will vary from product to product, but may include items such as advertising and promotion of the products (and potentially the customers’ businesses), product development, provision of in store advertising (displays, signs, etc…), availability of product, warranty obligations, intellectual property licensing and defense of the dealer in defective product lawsuits. You should start here because it shows a commitment to the retailer that you are there to support them and their businesses. Also, it shows the agreement is not a one sided contract solely aimed at ensuring payment.

The next item to cover is the commitments you are asking from the retailer. Again, this will vary from product to product. If you sell your product to retailers on credit, this section must include a commitment to pay amounts due when owed. If product is sold pre-paid or COD, this should be spelled out in this section also.

Retailers should also commit to make your product their number one or “go to” brand in their store for products of the type you sell. This is valuable not only to increase sales of your product, but also to give you an ability to terminate the contract in the event the retailer does not feature your product. Other potential commitments from the dealer may include agreements regarding business planning for the year with respect to your product, inventory, display, advertising, and warranty obligations.

There are other terms you should include in your dealer agreement. The agreement should provide an initial term, and then automatic renewal for subsequent terms in the absence of a written notice of cancellation from one of the parties. Depending on the business, sixty to ninety days notice should be sufficient. In some instances, thirty days may be enough, in others a longer period may be required (such as where there are long manufacturing lead times, or when it may be difficult for the retailer to replace the product, or for you to establish a new retailer). This section should include a provision that, following termination, the retailer is permitted to sell remaining stock (unless you agree to repurchase it), but is no longer permitted to hold itself out as an authorized retailer of your product and should terminate any limited license it has to use your intellectual property. Notice of termination should also terminate any right to purchase product on credit, to purchase product other than for the current model year, and should trigger an immediate obligation to pay all amounts due.

The dealer agreement should include conditions for immediate termination of the agreement. The most important of these is that you should be able to immediately terminate the agreement for non-payment. This encourages retailers to pay your bills promptly, and prevents you from extending too much credit to retailers who cannot or will not pay for the product. Other causes for immediate termination would be breach of any terms of the agreement, the retailer’s bankruptcy, death of the retailer, and possibly others, depending on the nature of the product and business.

Other terms that should be included are insurance obligations (each should agree to carry adequate insurance and list the other as a named insured on its policy), that the parties’ relationship is that of buyer and seller, not franchisor and franchisee or principal and agent. In addition, include a term that any litigation to enforce the agreement shall occur in your home county. This prevents you from having to litigate all over the country (or the world) when retailers fail to pay, or otherwise breach the dealer agreement. This will also allow you to retain one local attorney to handle these issues, rather than having to retain and manage attorneys on a national, and possibly international, basis.

As the distributor to retailers, you may also want to seek personal guaranties from your retailers. Personal guaranties give you someone to pursue for payment if the retailer’s corporation goes out of business. It also provides added pressure to pay if the retailer is still in business. Obtaining personal guaranties will largely be a function of power in the relationship. If you sell a well known, desirable product, a retailer may be willing to personally guaranty the corporation’s debts in order to get your product into his store. If you have a new product, or one that is less well known, you may have to mitigate your risk in other ways, such as refusing to extend credit to retailers, or strictly limiting retailers’ credit lines.

These agreements should be written by an attorney in close consultation with the client. This is important because an experienced attorney will know how to meld the needs of your business with the requirements of the law in your jurisdiction. He or she will know the intricacies of the law of your state so that the agreement is enforceable and does not omit important terms.

If you are a retailer, how do you avoid getting sued by the manufacturer or distributor of the product for breach of contract? If you are selling lots of product and paying your bills on time, most disputes can be worked out. However, the retailer should read the contract thoroughly and follow its terms. Any deviations permitted by the distributor or manufacturer should be confirmed in writing.

The retailer should carefully track inventory and payments. This serves two purposes. First, it ensures the retailer does not run out of anything and does not violate any contractual provision regarding stocking the distributor’s or manufacturer’s product. Second, in the event of contract termination, it allows the retailer to confirm what it owes the distributor or manufacturer and, in the event the distributor or manufacturer elects to pick up remaining product, to know what is picked up. In that event, the retailer should always review the list of what was picked up and compare it to his or her inventory for accuracy. It is also a good idea for the retailer and the representative performing the pickup to sign the list.

Staying in communication with the creditor (whether it is the manufacturer or the distributor is also critical. Creditors are oftentimes willing to offer extended terms to pay off a delinquent account, or offer a discount in exchange for a lump sum payment. Retailers are more likely to get sued when they stop communicating with the creditor, as the creditor then feels it has no other avenue to collect the account besides litigation. It is also a good idea to retain an attorney to help resolve payment disputes. Creditors often take them more seriously, and attorneys may be more accustomed to negotiating work out arrangements with creditors.

I regularly work with distributors and retailers on these issues on a nationwide basis. I would be happy to talk with manufacturers, distributors and retailers about their relationships with suppliers and customers.