Wholesale Contract Agreements: Provisions and Best Practices

Overview of Wholesale Contracts

A wholesale contract agreement is a legally binding document that traces the terms and conditions between two entities who wish to partner for the purpose of distributing goods. The terms may vary from one agreement to another, but they typically cover various key points, such as what products are involved, how they will be distributed, and how the profits and costs will be divided among those involved. These agreements typically lay out the specific distribution channels that will be utilized, such as whether the wholesaler will be responsible for stocking shelves or if the retailer will be responsible for covering the costs. The wholesaler will offer the products to its clients at a set rate , which is usually discounted from the manufacturer’s suggested retail price (MSRP), and the retailer will sell the goods at the MSRP in the hopes of making a profit. Generally, a wholesale contract agreement is designed to cover the relationship between a manufacturer and a retailer. This is different than a retail agreement, which covers the distribution process between a wholesaler and a retailer. Regardless of the exact terms of the agreement, any contracted relationships are meant to be mutually beneficial for all parties involved. When drafting a wholesale contract agreement, it’s important to make certain all parties fully understand their roles and responsibilities.

What Should a Wholesale Contract Contain?

The essential components that must be included in a wholesale contract will vary by industry and state. But, as a general matter a wholesale contract should include: (1) pricing; (2) delivery terms; (3) payment terms; (4) order requirements; and (5) termination clauses.
A wholesale contract should always include the pricing for the wholesale goods. Pricing may include additional information such as delivery fees, carrying costs, packaging costs, fees for late payments, interest on overdue accounts, percentage of interest or other charges for overdue accounts, and discounts for prompt payments. The parties may also want to address the pricing if a particular dollar threshold is met. For example, the parties may agree that if the distributor meets a particular dollar amount sales threshold each year, the supplier will reduce its price for the following year.
The delivery terms for the wholesale goods can be particularly important. In some cases, the parties may want to make the orders subject to the supplier’s ability to provide availability at the time of the order. This may be important in industries where the availability of the goods may fluctuate. For example, the parties may want to include a clause that addresses the potential for shortages of products. Some suppliers may have an issue with shortages if they sell to a high number of retailers and cannot predict demand. Under this clause, the parties would agree that if there are shortages, the suppliers must allocate available goods among its customers in a fair manner that is consistent with their past practices.
It is not unusual for a supplier to require that the order be made on particular forms. Sometimes the suppliers may also require the distributor to order a certain amount of goods. In return, the supplier will provide the distributor with various allowances and promotional programs. The distributor may then commit to achieving an agreed upon volume. If the distributor does not reach the agreed upon volume, the supplier may require the distributor to pay back the allowances that it provided.
A wholesale contract will typically include a payment term. A payment term may require payment on delivery, in advance, within a certain period after delivery or some other time period for payment. It is important that both parties ensure that the parties can comply with the agreed upon payment term.
Some contracts will require new distributors to provide the supplier with a guarantee of payment from someone else, such as their parent company or another affiliated company. If the distributor is a retail chain, it may have a parent company that would be required to guarantee its performance. Both parties should think carefully before agreeing to provide a guarantee of payment. Ultimately, a guarantee of payment may only move the burden of liability to another entity, but there may not be any value in providing the guarantee.
Finally, termination clauses are particularly important to both parties. While an unlimited term with no termination rights may be ideal in some cases, this type of clause may be impracticable in certain cases. Most wholesalers do not want a long-term contract without a termination option because of the uncertainty that it creates if something changes in the future. Neither party may want to be tied to a contract indefinitely as business needs change. Because of this, most contracts will include a termination provision.

The Role of Law in Wholesale Contracts

A wholesale contract agreement must be written to ensure that a wholesale business complies with all relevant trade laws, such as the Federal Trade Commission, the Department of Labor, and any department or agency within any state where the wholesaler does business. The most important considerations include:
Intellectual Property
When a business enters into an agreement with another company, it is important that legal protections for intellectual property are maintained and enforced. Intellectual property includes all types of patents, copyrights, trademarks and any other type of confidential or proprietary information. It must be specific in the contract that this information cannot be disclosed or used without the written consent of ownership. Because the owner of the property may not be the business, it is critical that the contract makes the protections fully enforceable.
Termination
If the wholesale or retail business enters into an agreement with another company or supplier, it is important that there is a clear understanding about how the contract may be terminated. Whether it is for breach, performance or some other basis, each party must understand fully what the possibilities are once it has been terminated. Whether there is a list of permissive breach possibilities it is equally important to make clear what happens if there is a breach – restitution of property, forwarding any sales or orders, payment of a fee, etc. Again, because most wholesale businesses or retailers enter into these agreements with larger suppliers, a plan must be in place if one of the parties to the contract ceases to exist.
Sales and Payment
None of the contract will be effective without the details of how the sales and payments will be processed. This includes shipping, tracking, invoicing and what happens upon default. No wholesaler wants to end up thousands of dollars in debt because a client failed to pay invoices on time or a supplier reneged on a deal.
Legal Representation
It is important that the contract between the wholesaler and a supplier or retailer be reviewed by a qualified business or contract attorney. Laws vary from state to state, and there may be nuances in your industry that must be spelled out in the document.

How to Negotiate the Terms of a Wholesale Agreement

Effective and thorough contract negotiations are key to ensuring that the rights obtained in a wholesale contract will be protected throughout the duration of the agreement. For consumers, negotiations may take the form of telephone conversations, face-to-face meetings, and/or conferences such as mediation and arbitration. While these forums may vary, the goal should be the same. Negotiation strategies and tactics should include:

• Effective communication that takes into account sufficient time to consider the legal ramifications of any potential or actual given outcome. For example, a protective feature such as an escape clause might be helpful. The manner, method, and form of communication should be mutually explored and agreed upon by the parties and enumerated in the wholesale contract.
• Sufficient time to review and consider terms. Best practices support having the wholesale contract premised on a known and limited range of products. This approach provides the parties with sufficient time to review the contract and develop a thorough understanding of the scope of the agreement.
• Creating a list of questions based upon the terms and conditions discussed and outlined in the draft wholesale contract. The questions prepared or presented should be utilized to develop additional questions and responses, some of which may be unknown prior to reviewing the wholesale contract terms.
• Developing a list of preferred provisions to be incorporated into the contract agreement as statutes of limitations, release provisions and indemnification provisions. These are merely a few examples of standard contract language to be included in a wholesale contract between the manufacturer and the wholesaler or distributor. Inclusion of these provisions is vital; however, the drafted language must not be unique and specific to one particular contract arrangement.

Common Mistakes in Wholesale Contracts

Even the most seasoned businesses can encounter pitfalls when it comes to wholesale contract agreements. There are three errors that are especially prevalent. They include:
Ambiguous Terms
Too often, wholesale contracts contain terms that are so broadly defined that they leave too much room for interpretation. Such ambiguity can disadvantage one or both of the parties. However, all is not lost. The courts have a general guideline for minimizing such vagueness.
According to the ruling in In re Howard (Immersive Techs., Inc. v. Exent Technologies, Inc. (In re Howard)), No. 13-32423-RLD, 2014 WL 2934928, at *13 (Bankr. D. Or. June 30, 2014), "if the language in a contract has a meaning that is clear and certain upon its face, the court must give effect to that plain meaning regardless of the existence of an ambiguity."
This means in order for the courts to establish that a contract’s terms are ambiguous, the ambiguity must be on the face of the contract itself. In other words, ambiguity is only proposed before the courts if the parties to a wholesale contract disagree on the interpretation of one or several of the contract’s terms. To limit ambiguity in your own wholesale contract, all of the terms must be explicitly defined.
Lack of Clarity
Closely related to ambiguity is the lack of clarity. When either party fails to clearly identify its expectations, the risk of misunderstanding increases . The desire to negotiate a contract quickly can be a contributing factor to a lack of clarity. In some cases, the lack of clarity will benefit the one with less bargaining power. More often than not, however, it puts both parties at a disadvantage from the beginning.
To avoid lack of clarity, get ahead of the potential problem before entering into a wholesale contract. Look for contracts that include the following:
Once you can achieve this, you and the other involved parties are ahead of the potential pitfalls that can come with a lack of clarity.
Failure to Update
A wholesale contract is not written on stone. All parties are advised to avoid situations wherein the terms are so static that the same contract will be used time and again for years. Situations like these set the stage for competitive disadvantages.
The best solution is to schedule annual contract reviews. While you may use the same contract with minimal tweaks, circumstances can change them beyond recognition. Failure to update a contract could mean you’re no longer getting the most out of your wholesale contract. If a product is obsolete, so should its contract.
Whether you’re looking to minimize ambiguity, eliminate causes for lack of clarity, or sign contracts that reflect current markets, it’s important to stay ahead of the competition on all fronts.

Amending and Updating Wholesale Contracts

One step of managing wholesale contracts is reviewing, updating, and amending such agreements to reflect changed circumstances or internal business needs. For example, contracts should be periodically reviewed, especially when changes are made to product lines or service offerings, when there are modified terms for pricing and margins, or when there are interactions among different parties for the same or similar products and services. It is not unusual that parties negotiating agreements for one product line do not have further visibility into agreements negotiated for other product lines, and as a result, potential overlaps or other contractual conflicts may arise. Moreover, organizational changes such as mergers or acquisitions, divestures or similar restructuring, often require revising existing agreements to accommodate expanded or new relationships with new entities. In addition, marketing programs or promotions resulting in discounts, coupons, rebates, allowances, or promotions affect margins and pricing and often require appropriate notice and termination provisions in wholesale supplier agreements to reduce the chance of disputes over returned product, termination of credits, etc.
Amendments or updates to wholesale agreements are negotiations and often require changes to relationships (i) between wholesaler and supplier by correcting or updating billing, accounts payable, and account numbers, addresses and other key contact information, (ii) between a wholesaler and supplier to clarify or update order terms and conditions, rights of inspection, warranty and indemnification obligations, and (iii) between wholesaler and affiliated entities to update products within product lines, update price points to reflect market conditions, or expand product offerings.
Frequently, wholesalers will bundle amendments to multiple agreements into a common template agreement document with schedules or addenda for each agreement. Such templates are best used with attention to detail to allow a wholesaler to identify and specifically confirm which products, agreements, or relationships are being addressed. Such templated agreements may also work with respect to multiple locations or business units for the wholesalers, provided such refinements or details are made to ensure accurate application throughout the entire supply chain.

Conclusion and Final Thoughts on Wholesale Contracts

In the prior sections of this article we have reviewed the general characteristics of wholesale contract agreements, what to include in a mandatory disclosure form, and additional considerations to take into account when using a mandatory disclosure form. We have also reviewed the contents of the wholesale contract agreement itself that should be considered and how to review the contract to ensure that it works for your unique business needs. When drafting or negotiating a wholesale contract agreement, it is always important to keep the following tips in mind to aid with the process:

• Define key terms that are specific to your industry and relationship. As we discussed, specific terminology may have a specific meaning for companies in a niche industry, and it is important that the contract clearly define those terms and the parties’ intent.
• Get everything in writing – even regarding the mandatory form and other additional documents. A supplier may include a mandatory form that you must sign. If this document contains any changes to the proposed wholesale contract agreement, confirm that those changes appear in the wholesale contract agreement before you sign it.
• Include an integration clause. Inclusion of an integration clause may be required under state law in order for the wholesale contract agreement to be enforceable, but more importantly, it will ensure that the wholesale contract agreement represents the complete and final form of the contract between the parties. Keep in mind that this does not mean that you cannot negotiate future amendments or modifications to a wholesale contract agreement , but instead, changes will be made via an amended agreement or written codification of the changes/added provisions.
• Do not sign until you have a fully executed agreement. Have all parties involved sign the applicable documents and obtain the original signed copies for your records. Again, this includes the mandatory form, proposed wholesale contract agreement, and any additional documents that are part of the contract.
• Maintain and store contract documents properly. Keep the signed documents in a safe and secure location at the premises of your business. If your business is such that you do not have a physical location for contracts to be maintained, contact your accountant or attorney for proper storage and maintenance recommendations.
• Confirm that your contract is up-to-date. Once the contract is signed, ensure that you and your staff collectively understand how to read the contract in the event that a question arises regarding the interpretation or meaning of a term contained in the wholesale contract agreement.
• Do not enter a contract if you do not know how to comply with the terms contained in the contract. Failure to comply with the terms and conditions of the contract can result in damages or other penalties against your company. If there are terms that you cannot comply with immediately, work out a compliance plan during the negotiation process so that you have time to implement the necessary protocols and procedures for full compliance.