Reseller and Distribution Agreement Red Flags: Six Clauses to Check Before You Sign
This page is general information, not legal advice.
A reseller or distribution agreement lets you buy a brand's products and sell them to your own customers. For a small seller it can look like a simple way to get stock and a recognized name. The supplier usually writes the contract, though, and it often has more lawyers, more leverage and more ways out than you do. This page covers six clauses that often move risk onto the small reseller. For each one you get an illustrative example, why it matters, and wording you can propose. Many of these terms can be negotiated. The rules on exclusivity, termination and post-contract restrictions vary a lot by jurisdiction.
The example clauses below are illustrative. They are not taken from any real company's agreement.
1. Minimum purchase targets with harsh consequences
A typical clause might read: "Reseller shall purchase no less than the Annual Minimum set out in Schedule A. If Reseller fails to meet the Annual Minimum, Supplier may terminate this Agreement, revoke any exclusivity, and invoice Reseller for the shortfall."
Why it works against you
A minimum turns a chance to sell into a promise to buy, whether or not your customers want the product. If demand drops, the supplier raises prices or ships late, you can still owe the shortfall. You may end up paying for stock you can't move, or losing the account after you've built a market for it. See liquidated damages clauses explained.
What to ask for instead
Sample wording to propose: "Failure to meet the Annual Minimum allows Supplier only to end exclusivity on 60 days' written notice. Reseller will not owe payment for any shortfall. The Annual Minimum is reduced pro rata for any period in which Supplier fails to fill orders on time."
2. Supplier can change prices and discounts at any time
A typical clause might read: "Supplier may amend its price list, reseller discounts and payment terms at any time, effective upon posting to the reseller portal."
Why it works against you
Your margin is the gap between your buying price and your selling price. If the supplier can cut your discount overnight, it can wipe out your profit on orders you've already promised to customers. Changes that take effect "upon posting" can catch you off guard. See automatic price increase clauses explained.
What to ask for instead
Sample wording to propose: "Supplier will give at least 60 days' written notice of any price, discount or payment term change. Orders accepted before the effective date will be filled at the prior price. Reseller may terminate without penalty if a change reduces its discount."
3. Exclusivity that only binds you
A typical clause might read: "During the Term, Reseller shall not sell, promote or distribute any product that competes with the Products. Supplier may appoint other resellers or sell directly in any territory or channel."
Why it works against you
You give up competing brands, but the supplier keeps the right to sell through anyone, including straight to your customers online. That puts all your eggs in one basket with no protection for it. If you're limited to one brand, you should get something back, such as a protected territory or channel.
What to ask for instead
Sample wording to propose: "Reseller may sell competing products unless Supplier grants Reseller exclusivity in the Territory. If exclusivity is granted, Supplier will not appoint another reseller or sell directly to customers in the Territory during the Term."
4. Termination on short notice with stock left on your shelves
A typical clause might read: "Either party may terminate this Agreement on 30 days' notice for any reason. Upon termination, Reseller shall immediately cease using Supplier's trademarks and selling the Products."
Why it works against you
Thirty days may sound mutual, but it hurts the side that has paid for inventory, marketing and listings. If you must stop selling at once, any unsold stock becomes dead money. There is no promise to buy it back or to pay for the customer base you built. See termination for convenience clauses explained.
What to ask for instead
Sample wording to propose: "Supplier may terminate for convenience only on 90 days' written notice. After termination, Reseller may sell remaining inventory for 6 months, or Supplier will repurchase unsold, undamaged stock at Reseller's purchase price plus shipping."
5. You cover the supplier's product problems
A typical clause might read: "Reseller shall indemnify and hold harmless Supplier from any claim arising out of the sale, marketing or use of the Products. Supplier's total liability shall not exceed the amount paid for the affected order."
Why it works against you
The supplier designs and makes the product, but this wording can make you pay when a defective item hurts someone or infringes another company's rights. Meanwhile the supplier caps its own liability at a single order. For a small seller, one claim can be far larger than any profit from the deal. See indemnification clauses explained.
What to ask for instead
Sample wording to propose: "Supplier will indemnify Reseller against claims arising from product defects, labeling, recalls or infringement of third-party rights by the Products. Reseller's indemnity is limited to claims caused by its own unauthorized statements or modifications."
6. Restrictions that follow you after the deal ends
A typical clause might read: "For two (2) years after termination, Reseller shall not sell competing products to any customer to whom it sold the Products, and all customer lists shall be the property of Supplier."
Why it works against you
You found those customers, and now the supplier may claim them and stop you from serving them with another brand. A broad post-term restriction can shut down the business you built. Whether these limits can be enforced varies by jurisdiction. See non-compete clauses explained.
What to ask for instead
Sample wording to propose: "Reseller's customer data remains Reseller's property. No post-termination restriction applies, except that Reseller will not use Supplier's trademarks or confidential information after the sell-off period."
Also worth a look
Watch for clauses that send disputes to private arbitration (see mandatory arbitration clauses explained) or to courts far from where you do business (see governing law and jurisdiction clauses explained). Also check online pricing and marketplace rules, who pays return shipping, warranty handling, audit rights and auto-renewal. If you buy at wholesale without a formal reseller program, see wholesale agreement red flags.
Scan your own agreement free
Every reseller program is different, and a single phrase can decide who keeps the customers and who eats the stock. Upload your agreement as a PDF, DOCX, TXT or MD file, or take a photo of it, in the ScanMyTerms contract review. In about a minute it lists clauses that work against you, with the risk level, exact wording, why it hurts and how to change it. The free preview needs no sign-up and shows the risk count and the first two findings. The full report is $5. ScanMyTerms does not use your documents to train AI models, and reports are deleted after 7 days.
This page is general information, not legal advice. Distribution and reseller rules vary by jurisdiction, so for decisions about a specific agreement, talk to a qualified business lawyer where you operate.
Sources
- All clause examples on this page are illustrative and written for this guide. They are not quoted from any real company's agreement.
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