As a business owner developing products, you may benefit from the assistance of another business to sell these goods to consumers directly. This might be applicable if you lack a storefront, serve as the product manufacturer, or want your products to be available to more consumers. The critical question is whether you want to engage other businesses as a reseller or your agent. It is important to understand this from the outset, as this will determine the actions the other business must take when selling your products. This article will examine the critical differences between reseller and agency agreements to help you understand what may be best for your business.
What is a Reseller Agreement?
A reseller agreement is an arrangement between someone supplying goods (often known as the wholesaler) and another party selling the goods to a third party or the general public (the reseller). Under a reseller agreement, the reseller agrees to sell the products on behalf of the wholesaler.
A few essential characteristics of a reseller are that they:
- generally do not purchase the stock of the wholesaler;
- often will not have anywhere to hold the stock;
- find buyers interested in purchasing your products; and
- will take a cut or commission from any sales they make.
A reseller agreement is common for software products. For example, you may have a software as a service product, and you engage another software business to resell your product. The reseller will source your end users and enter into end-user agreements with them, potentially including the provision of support services to such consumers.
What is an Agency Agreement?
An agency agreement is an agreement between a principal (you, the owner of the goods) and an agent (the business selling the goods on your behalf). An agency relationship grants the agent the authority to act on the principal’s behalf.
There are several well-known types of agency agreements, such as between real estate agents and homeowners looking to sell their properties.
This relationship is more intimate, with a closer connection between the principal and agent than between a wholesaler and reseller. Under an agency agreement, the agent is obligated to act in the best interests of the principal.
Continue reading this article below the formThe Key Differences
There are several key differences between these two types of agreements.
A primary distinction is how the parties interact. In an agency relationship, the agent can enter into contracts on behalf of the principal. However, a reseller cannot do so for a wholesaler. Further, the agent generally has greater obligations to the principal than the reseller has to the wholesaler.
Usually, an agency agreement will be exclusive, meaning that the principal will only have one agent. This differs from a reseller-type arrangement, where a wholesaler might have several resellers.
In the event of disputes regarding the true nature of the relationship, courts will examine how the relationship functions in practice. This is different to how each party perceives the relationship. Therefore, accuracy in drafting your agreement is crucial to reflect your relationship, ensure certainty and mutual understanding, and prevent unnecessary disputes.
For example, a court may not accept someone as an agent simply because the other party calls that person their agent. A court can disregard the terms of a particular agreement if it believes the actual relationship differs from what is written in the agreement.
Accordingly, if you manufacture goods and give your reseller authority to enter into contracts with your consumers, a court might consider that your ‘reseller’ is acting as your agent.
Key Considerations of Each Agreement
Agency Agreements
Under an agency agreement, if an agent enters into a contract with a third party, the principal, whether they like it or not, will be bound by the actions of the agent. This is unless the agent has stepped outside the defined scope of their authority. It is, therefore, important to ensure your agent is someone you trust and have a good working relationship with.
This could pose problems if, for example, your agent enters into a contract to sell one of your products, but you are out of stock. If you cannot fulfil your contractual obligations, you may be legally responsible for compensating the third party.
Reseller Agreements
On the other hand, a wholesaler is generally not contractually bound by the actions of the reseller. This is because the contract for purchasing the goods is between the reseller and the customer. It is not between you and the customer. Effectively, a reseller agreement means that there is a degree of separation between you and the customer.
However, this is not to say that you will not have obligations to the reseller under the agreement. Using the example above, suppose you have an obligation to notify the reseller of the unavailability of your products, and you failed to notify them. In this case, you may be in breach of the reseller agreement and need to pay compensation.
Whether you’re a small business owner or the Chief Financial Officer of an ASX-listed company, one fact remains: your customers need to pay you.
This manual aims to help business owners, financial controllers and credit managers best manage and recover their debt.
Key Takeaways
Agency and reseller agreements are both a kind of legal contract but there are several key differences to note. Under an agency agreement, on behalf of the principal, the agent enters into a contract with the customer. Whereas, under a reseller agreement, the contract is between the reseller and the customer. If you wish to have several people reselling your products, you will likely require a reseller agreement rather than an agency agreement. However, an agency agreement may be more beneficial for you if you want someone to make decisions on your behalf. Additionally, you will have the assurance that the agent is obligated to act in your best interests, providing you with protection.
These agreements can be technical, and it is important to get the details correct. If you are looking to enter into a reseller agreement or an agency agreement, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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