What is a Value Added Reseller Contract?
A value added reseller contract is a type of agreement frequently found in conjunction with software and IT products. The reseller is not a typical retailer; it actually builds upon the original product (often in a significant way) and adds to it. These contracts tend to be issued for hardware/software combinations.
This type of contract is common because it allows businesses to use something that is already reliable , but revamping or revising the product so that it has additional functionality. This can help companies that may already have a product, but want to implement it with new technology and boost its capabilities. It can also be beneficial to those with already established equipment that now needs an upgrade.
These types of contracts usually state that the reseller is not just purchasing the product wholesale and then reselling it, but actually customizing it to improve it and make it more effective for the situation at hand.
Central Features of a Reseller Agreement
Essentially, a value added reseller contract needs to include the following:
a. The products or software to be redistributed;
b. The price for the software and how that price may vary from time to time;
c. The territory in which the reseller has rights ;
d. Payment terms;
e. If the reseller must prepay, how long it may before delivery of the software or product;
f. With regard to any updates or upgrades, whether a fee will be charged, and if so, what is that fee;
g. How support is to be provided and how often the reseller must provide updates or new versions of the software to end users;
h. The length of the agreement (term) which parties like to decide using an option to renew format;
i. Any performance standards regarding the product or services;
j. The rights and responsibilities of each party to the agreement. In most agreements, the reseller will agree to not compete with the manufacturer or any third parties, the reseller should also agree to provide duly qualified and trained staff to perform all aspects of the Project and use commercially reasonable efforts to act in good faith in the performance of all duties and responsibilities. The Manufacturer should agree to use all reasonable efforts to deliver the product on a timely basis and provide training and support as reasonably requested by the Reseller;
k. All issues regarding how to proceed in the event of a breach, repair or termination of the agreement; and
l. Any warranty or performance guarantees.
Legal Considerations in Reseller Agreements
From a legal standpoint, several critical elements should be addressed when drafting a value added reseller contract.
Intellectual Property Rights of the Parties
As is often the case when drafting licensing agreements, a value added reseller contract should identify and address the ownership of intellectual property rights (both copyright and patent) related to the goods being sold or resold. In many cases, the supplier of the goods will require the reseller to agree that the reseller has no claim to any such intellectual property rights, or to any modifications thereto, that the reseller may create. In this case, it is further recommended that the supplier of the goods keep in mind the work for hire doctrine and require the reseller to assign to the goods supplier any such rights as they may have created. In addition to copyright concerns, any applicable patents for the goods should be researched and addressed in the value added reseller contract. For example, consider the following language:
Ownership Rights. The parties understand and agree that: (i) all Work, and all Work Rights, derivative and/or associated rights in and to the Work, shall be owned by Company; (ii) each Employee shall be deemed to have assigned his, her or their right, title and interest in and to the Work Rights (including any and all Work Rights); and (iii) all rights granted and provided to Company under this Agreement shall be cumulative and in addition to any and all rights available to a party in equity or as a matter of law.
Dispute Resolution
In addition to requiring the parties to agree to certain rights and obligations, it may be appropriate from a business standpoint to include some language that requires the parties to arbitrate or mediate any disputes that may come up as a result of a disagreement. A dispute resolution provision generally takes the form of a mediation or arbitration clause. The cost breakdown of an arbitration clause for the parties should be considered when deciding whether to include such a language in the agreement. It may be helpful to meet with a legal advisor or negotiator to evaluate the cost of arbitration. Additionally, the distance that any parties to the agreement would need to travel in order to participate in the mandatory arbitration or mediation may be prohibitive and should be taken into account at the time that the agreement is drafted.
Termination
Both parties to the agreement should also agree to the terms of termination of the agreement. This adds a layer of protection for both parties to the contract from a legal standpoint in the event that either party should wish to terminate it. For example, consider the following portion worth of suggested language:
Termination for Cause: this Agreement may be terminated by TSMC immediately upon written notice to SMIC if: (a) SMIC commits any substantial violation of any material provision, covenant, representation or warranty hereunder; or (b) the other party files any petition or voluntary petition or petition for arrangement or order under any bankruptcy or insolvency laws, is unable to pay its debts as they become due, has a receiver or liquidator appointed for any part of its assets, has a writ of attachment or seizure issued against it, or if SMIC becomes or is likely to become incapable under any law of paying its debts as they come due.
Force Majeure
When considering business language for the value added reseller contract, language addressing force majeure clauses should also be taken into account. Businesses may wish to seek legal counsel when drafting this portion of the agreement to ensure that the drafted agreement conforms to applicable laws and serves the purpose for which it is drafted.
Antitrust/Anti-Monopoly Provisions
The agreement should include an antitrust/anti-monopoly provision requiring both parties to comply with all local antitrust laws. Such provisions may contain the following language:
Both parties hereto represent, warrant and agree that they shall at all times fully comply with the laws and regulations set forth in their respective countries, including laws and regulations relating to antitrust and monopolistic business practices.
None of the above language is comprehensive or intended to be. Rather, it is intended only to provide guidance for the reseller as to what a value added reseller contract entails from a legal standpoint.
Reasons for Using Value Added Reseller Agreements
Some of the key benefits of value added reseller contracts include:
For Vendors:
For Sellers:
The resellers can help vendors rapidly expand their customer and product base, which would be more difficult to achieve using the vendor’s internal sales force . By contracting with multiple value added resellers, the vendor can reach a much larger market than it could by using its own employed sales people. Further, the reseller can support the product after the sale, provide technical expertise, and upgrade existing customers on additional solutions offered by the vendor.
Common Issues and Their Solutions
One common challenge with value added reseller arrangements is ensuring that the reseller meets the desired quality standards when providing the products or services to end customers. In some cases, this may be the result of a lack of knowledge regarding the products or services or because the person providing customer support on behalf of the reseller does not fully understand the technology or the functionality. To overcome this, companies should include a provision in their value added reseller agreement requiring the reseller to provide training and support to its employees or contractors who will be utilizing or performing customer support on behalf of the company. Additionally, these agreements should provide for a requirement that any major changes or new products, services or upgrades be reviewed and approved by the company to ensure a consistent and uniform standard of quality.
Another potential challenge is defining the geographic territories in which the value added reseller can provide its services. As a rule of thumb, if two parties have overlapping territories, they may engage in competition that could dilute and weaken the brand. However, this can be exacerbated with technology-based products. For example, a customer may be located outside of the defined geographic territory, but it is impossible to prevent the customer from purchasing the product, unless the reseller is preventing customers in the territory from reaching out to the company directly. To address this, the value added reseller agreement may include clauses reserved for "one-time" purchases by a customer, permit customers to purchase products or services, without being considered in violation of the geographic territory restrictions, and include a requirement that resellers provide the company with a copy of all sales and support request reports or information regarding inquiries and consumer contacts, including the name, address and telephone number of the purchaser or potential buyer.
Best Practices for Reseller Agreements
Managing a value added reseller relationship requires ongoing attention and diligence. Best practices include maintaining clear channels of communication, developing performance evaluation criteria, and fostering a collaborative environment that improves product positioning and sales functionality. Communication in the relationship is vital. The reseller must have a firm understanding of the scope of the agreement and the provider’s expectations at the outset of the relationship and throughout its lifecycle. Regularly scheduled calls and face-to-face meetings should be used to ensure that both the reseller and the provider’s sales and marketing teams keep abreast of changing developments in the marketplace, and that they are implementing any necessary changes to the distributor or reseller relationship. These meetings should focus on evaluating business performance, discussing performance metrics, and identifying new opportunities and risks. Performance evaluation criteria should be developed at the outset of the agreement and then revisited at least annually. Key performance indicators ("KPIs") will greatly vary among industries and products. For example, some KPIs measure the value an entity creates for its customers and how well it meets their needs, while others gauge the benefits gained from utilizing a reseller. Typically, total cost of ownership (TCO) is typically the benchmark for evaluating whether the benefits of re-seller partnerships outweigh the costs. Factors such as the cost of distributor resources, size and growth potential of the reseller’s customer base, market position, capabilities, and track record are metrics frequently used to evaluate ongoing performance in the relationship. Moreover, the reseller should be evaluated on its ROI and margins for products sold . The distributor also must be kept apprised of the reseller’s efforts to engage the end-user to ensure that worthwhile targets are properly identified and pursued. The most successful reseller programs foster symbiotic relationships that take full advantage of both parties’ assets. It is important for the parties to encourage collaboration in order to maximize the success of value added re-seller programs. For example, in order to facilitate the sharing of ideas and mutual understanding between the parties, the provider should assist the reseller’s staff with the on-boarding process. During the on-boarding process, the provider’s experts should train the reseller’s staff on how to best utilize the provider’s products and their applications to the reseller’s customer base and prospects. In addition, the provider should periodically test the reseller’s knowledge of the provider’s products to determine the need for refresher courses or additional staff training to ensure the highest level of customer support. Parties may further benefit from developing end-user branding and marketing materials that utilize the provider’s and the reseller’s logos. To encourage a team effort, dominant branding (i.e., larger and more prominent logos) should be avoided. Pitches and proposals to end-users should also be jointly developed to further promote the idea that the value added reseller is a collaborative effort. The parties also should consider establishing a joint marketing fund that provides financial and other tangible resources to the reseller for marketing efforts. Resources in the joint marketing fund may be used for co-branded ads, joint television or radio spots, joint sponsorships of trade shows, and other promotional activities. By taking advantage of all resources available and working in concert with each other, the parties can ensure an enduring value added reseller partnership.