What is a dealer agreement? Explanation and use

What is a dealer agreement: a contract in which a supplier and a dealer agree that the dealer purchases products from the supplier and subsequently resells them in their own name and for their own account and risk. The dealer is therefore an independent reseller, not an intermediary. This distinguishes the dealer agreement from the agency agreement (Art. 7:428 BW), in which the agent acts as an intermediary on behalf of the principal. This difference determines the rights, the risks, and the manner in which you can terminate the cooperation.

The short answer

• A dealer agreement stipulates that a dealer purchases products and resells them in their own name and at their own risk.
• The dealer is an independent reseller, not an agent or employee.
• The dealer agreement is not regulated separately by law; there is considerable contractual freedom.
• Unlike the commercial agent, the dealer has no statutory right to customer compensation.
• Competition law plays a role in agreements regarding exclusivity and prices.

What exactly is a dealer agreement?

A dealer agreement establishes the relationship between a supplier or manufacturer and a dealer, also known as a distributor. The dealer purchases the products and resells them to his own customers. The commercial risk lies with the dealer: he determines his selling prices, carries his own inventory, and collects payments from his buyers himself. The supplier benefits from a sales channel without having to serve the end customers himself.

Because the law does not have a separate chapter for dealer or distribution agreements, the parties determine the content themselves within the boundaries of general contract law and competition law. This offers a great deal of freedom, but it also means that you must properly regulate the important matters yourself, as there is no statutory safety net to fill the gaps.

Dealer, agent or franchise?

The dealer agreement is often confused with other forms of cooperation. The differences are legally important.

• Dealer or distributor: purchases and resells in its own name and for its own account. Bears the commercial risk.
• Commercial agent (Art. 7:428 BW): mediates in the conclusion of agreements on behalf of the principal and receives commission. Is entitled to a client compensation under certain conditions (Art. 7:442 BW).
• Franchisee: operates a formula of the franchisor for a fee, with its own legal framework in the Franchise Act.

The distinction is not merely theoretical. If you call something a dealer agreement, but the party actually acts as an agent, the court may still consider the agency provisions applicable, including the protection associated with them. Actual performance carries more weight than the label.

Exclusivity and competition law

Many dealer agreements contain provisions regarding exclusivity: an exclusive territory for the dealer, or exclusive purchasing from the supplier. Such vertical agreements are permitted, but competition law sets limits. The European block exemption for vertical agreements provides a safe haven when the market share of both parties remains below thirty percent.

Two agreements are sensitive. Vertical price fixing, whereby the supplier sets the dealer's resale price, is prohibited in principle. You may provide a recommended price or a maximum price, but you may not impose a fixed or minimum price. An absolute ban on passive sales outside the assigned territory is also problematic. Anyone who exceeds these limits risks void provisions and a fine from the regulator.

Termination of the collaboration

With an indefinite-term dealer agreement, you cannot simply terminate it from one day to the next. Case law regarding long-term agreements indicates that termination is possible in principle, but that the requirements of reasonableness and fairness may entail that a sufficiently weighty ground is required, or that you must observe a reasonable notice period. The longer and more intensive the cooperation, the longer that period generally needs to be.

Therefore, stipulate a clear notice period and the grounds for termination in the contract. Also regulate what happens to the dealer's remaining stock, ongoing warranties, and customer relationships. A practical example: a tool importer terminates the partnership with a regional dealer after eight years with notice of only one month. Because the contract did not regulate termination, the judge rules that this period is too short and that the importer owes compensation. A clear clause would have prevented this.

What else do you need to arrange?

• Products and territory: which products, in which territory, exclusive or not.
• Purchase obligation: minimum purchasing or turnover targets, and the consequences of failure to meet them.
• Prices and delivery: purchasing conditions, delivery times and payment terms.
• Use of the brand: how the dealer may use the brand and what happens at the end.
• Liability and warranty: who bears what towards the end customer.

Honest recommendation

For a simple, short-term collaboration with a small financial interest, you can easily draft a dealer agreement yourself using a good template. As long as you do not include special exclusivity or price agreements and include a clear notice period, you do not need a lawyer.

Be sure to have a review carried out as soon as exclusivity, territorial agreements, or price agreements are involved, as this touches upon competition law. Advice is also wise in the case of a long-term or large collaboration, because termination must be handled carefully and an insufficient notice period can lead to compensation claims. On those points, a mistake costs more than having the contract properly drafted.

You can read more about the structure under drafting a dealer agreement and about outsourcing under having a dealer agreement drafted. You can find a ready-made document on the dealer agreementpage.

Frequently Asked Questions