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This article is written by Bibhanshu Verma who is pursuing a Certificate Course in Introduction to Legal Drafting: Contracts, Petitions, Opinions & Articles from LawSikho.

Introduction

A Channel Partner agreement contains commercial and contractual terms between a software, product and technology provider and its distribution or channel and hence the name Channel Partner Agreement. This agreement like any other agreement sets out the exceptions for the parties, jurisdiction and distribution network which the channel partner has the access to. Importantly a Channel Partner Agreement protects the Intellectual Property of the product, technology or service owner and dictates the rules in which the Intellectual Property can be sold, exploited, modified or transferred.

A Channel Partner Agreement provides parties to the agreement with an enforceable and binding agreement in order to ensure all parties are aware of their rights and obligations to each other and importantly it offers protections to both parties in the event of breach or non-compliance. The most important question still remains who are these channels that we are talking about in the Channel Partner Agreement. The Channel Partners are any kind of third-party businesses or individuals that help the market and sell the products and the services of other companies. There are 5 main types of channels which are-

  1. Retailers;
  2. Wholesalers;
  3. Distributors;
  4. Brokers;
  5. Affiliates.

Retailers

Some retail companies like Walmart, EasyDay etc. depend on selling products from third-party companies for a profit. A company might have more success if they partner with retailers located in other parts of the world. 

Wholesalers

These kinds of partners are approached when someone is looking to purchase huge amounts of goods. Retailers have limitations on how much they can purchase but this is not the case with the wholesalers. These types of resellers prefer to buy the goods in huge quantities and sell them to their own network of buyers.

Distributors

They are another essential part of business partnership. Unlike the wholesaler, they purchase fewer quantities of goods. But they are an essential part of the partnership because these retailers contact the distributors to help them determine what ends up on the store shelves.

Brokers

This channel is used when the partner does not want to sell and purchase from the company directly. At times, a partner may be working on behalf of another company wanting to purchase goods from a third-party. To achieve the said goal, certain companies will hire brokers or agents to find and establish partnerships with other businesses.

Affiliates

With the current era of globalisation and digitalization, there is an increasing demand for companies that depend on affiliates as valuable business partners. In this program what they do is that they send a person or a company that is qualified for your business and in return the company pays them a commission (after the completion of the deal).

Importance of the Channel Partner Agreements

The purpose of these agreements is to protect the owner’s investment in the company, govern the management of the company and also to define the rights and obligations of the partners, and to determine the rules of engagement should a dispute arise among the parties to the agreement. Furthermore, these are some important reasons why we need an agreement among the partners or channels-

  1. To avoid a state’s default rules- an agreement allows the partners to dictate the terms of the business and it helps them to work for their own profit.
  2. To agree on important issues in advance- the agreement that will be signed among the partners, will discuss the important things like the mode of purchase and the quantity and most importantly the cost of the goods. Making these agreements helps the partners to stay clear on the terms and conditions.

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Important clauses of a Channel Partner Agreement

Moving on after discussing the meaning of the Channel Partner agreement and importance for the same, we move on to how to draft such an agreement and what are the essentials of the Channel Partner Agreement. Like any other agreement this agreement is drafted in the same way. Few of the major sections the have to a part of a good Channel Partner Agreement are as follows-

  • Definitions- Some parts of the Channel Partner Agreement could be a little difficult to understand by people as this type of agreement requires words from the legal and the marketing world. This is when this section of the definitions comes into play and explains the terms which are too technical for the business partners to understand. For example- In these agreements, we often see a term called ‘hereunder’. This term is generally used in the legal documents which means something that occurs further in the document.
  • Confidentiality obligations- Majority of the successful partnerships require a strong degree of collaboration. When this type of relationship happens, some type of confidential information gets exchanged along the way. To protect your company against trade secrets getting out, your partner agreement needs to include confidentiality obligations. Having a confidentiality obligation protects your company’s trade names, trade secrets, and other types of valuable intellectual property.

It also protects your company in the event of a partner trying to reverse engineer your company’s processes. Non-Disclosure Agreements have the same purpose, it forbids the people to share the information mentioned in the agreement till the completion of the contract or the deal. If someone fails to comply with the confidentiality obligation, they can be sued for damages and also the breach of the said contract or any other alternative decided in the agreement by the partners.

  • Payment terms-  This is one of the most important clauses of any agreement which involves payment. This clause should clearly mention the amount for the goods and the services offered by the partners. Moreover, it should include the method of the payment and the date of the payment if the payment has to be made in instalments. It should also include any additional charges that may incur during the process and who is going to be charged for the same.
  • Incentivisation- There are other ways to incentivize companies to sell your product besides money. Sometimes, companies will combine several types of channel partner incentives. These other types of incentives include discounted or free products, vacations, and much more. In this clause of your partner agreement, you’ll need to cover exactly what types of incentive rewards are available for business partners and how they can achieve them.
  • Indemnification section- Throughout a partnership with another business, a lot of costs will be incurred. To indemnify a business partner means that a business partner will take care of costs incurred by the other party. The exact terms of this section entirely depend on what a business partner is and isn’t comfortable paying. For example, you own a company that manufactures baseball gloves. In time, you partner with a retailer. Another company sues your retail partner because it believes that your company’s product is a direct copy of the product that they are selling. If your partner agreement has an indemnification clause, your company is on the hook for the retailer’s legal expenses from this lawsuit.
  • List partners as independent contractors- It’s important to note in your company’s channel partner agreement that they are not employees of your business. Instead, make sure the agreement states your partners as independent contractors because this will protect your company from having to pay for a partner company’s benefits or tax costs
  • Marketing efforts and terms- It is important to remember that most industries have  to follow strict advertising guidelines protect consumers. If these applicable laws aren’t followed, it can have negative consequences for both your company and its partners in the agreement.  No one wants a partner making third-party claims that your company can’t verify. So to prevent these situations from happening, the channel partner agreement needs to have a section that defines the marketing strategy that is going to be used by the partner. This section should include both the DOs and the DON’Ts of the ways how they are going to market the product. Furthermore, it should also include how to change the marketing strategy, if needed.
  • Termination of the agreement- This section of the agreement is one of the most important section because there is no certainty on how the agreement is going to end. For example, if a partner infringes the terms of the agreement, there should be a way to get you out of the agreement before it damages your goods or services. This section should state how the shares will be split and who will bear the damage in a case of an early termination which makes this section an important one.

Important guidelines to follow while drafting a Channel Partner Agreement

There are certain guidelines that should be followed while drafting this agreement. As this channel partner agreement is a legally-binding document we have to careful while we draft the same because avoid certain points can land us in a puddle. So to begin with while drafting such an agreement nothing should be left to chance which basically means that everything should be mentioned in the agreement clearly, for example, the mode and the date of payment, the marketing strategy and most importantly the termination clause.

Secondly, one should try to minimize the use of the industry terms, which basically means that we should use the language that could be easily understood by the partners so that they don’t get confused. If there are certain terms that have to put in the agreement, then we can easily define them in the definition clause. Thirdly, one should include charts and graphs in the agreement which will show the how the values will differ when they sign the agreement because the agreement can sometimes become very monotonous and including these will help retain the attention of the reader.

Drafting

An agreement is basically the terms and conditions between two or more parties for the exchange of goods and services. This stands true for the Channel Partner Agreement as well. So while drafting the same, one has to define the Parties to the contract well enough. For example if the party to the contract is a PQR company then the first clause of the agreement should define the work of the company, place of the registration and the place of the head office. All these things should be stated clearly in the beginning of the agreement and this stands true for all the parties in the agreement.

The other clauses that have to be included in the agreement have already been defined above in the article. Agreements being legally binding have to be dealt with at most care. In the end of the agreement, one should also mention the jurisdiction this agreement falls in, in case any dispute arises.

In conclusion, our business needs to be protected at all costs. Before someone enters into the next partnership with a distributor, retailer, wholesaler, or something similar, make sure that they have a channel partner agreement in place. This type of agreement ensures that the company stays protected and you enjoy peace of mind

References

  1. https://www.lawsquared.co/commercial-law/channel-partner-agreement
  2. https://referralrock.com/blog/channel-partner-agreement/
  3. https://www.lexology.com/library/detail.aspx?g=a5055dd7-3814-4e7b-a53b-c63beeaafeb2

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