What Is a Dealership Contract?
A dealership contract agreement is a legal document that clearly outlines the terms and conditions under which a dealer will sell or distribute the products or services of a manufacturer or supplier. These contracts serve as the foundation of the relationship between the dealer and the manufacturer/supplier, and are essential to defining the scope of the arrangement, rights of each party and the procedures that must be followed.
In short, a dealership contract establishes the rules of engagement between the parties. It is a contract that, among other things, sets forth pricing, territory rights, payment obligations, dispute resolution procedures, arbitration provisions and termination terms .
A dealership contract is used to prevent misunderstandings between the parties and to ensure that each party is committed to fulfilling its obligations. It also helps businesses structure their commercial relationships to afford them maximum protection in the event of a breach by another party. A properly formed dealership contract protects both dealers and manufacturers or suppliers by ensuring that each is well aware of its rights and obligations. By clearly establishing when and how the dealership relationship may be terminated in advance, goods and services are delivered without disruption and monetary damage awards for noncompliance are more likely to be issued.
Terms in a Dealership Agreement
The core of any dealership agreement is the clauses governing its basic functioning. All agreements share the same essential constituents, including exclusivity, territory rights, pricing, and termination events. The following sections detail how each clause affects the parties involved:
Exclusivity – The agreement should clearly stipulate whether a dealer has exclusive or non-exclusive right to distribute a manufacturer’s products. In general, an exclusive agreement provides an exclusive territory to the dealer. This means that the manufacturer can sell its products through as many dealers as it wishes, but the dealer may only sell the manufacturer’s products in its allotted territory. This is essential for a dealer to know because it significantly impacts its sales strategy.
Territory – The territory clause is essential because it dictates the dealer’s exclusive territory. For example, the territory may be a state or multiple states, like Virginia and North Carolina. Some agreements may distinguish different territories for different products. For instance, the territory for one line of products may be limited to only a single county. Some manufacturers choose to provide a dealer with a non-exclusive territory, meaning a dealer’s territory can be encroached upon by other dealers.
Pricing – A typical pricing clause binds a dealer with a specified markup from the MSRP. Manufacturers usually provide dealers with a suggested retail price (MSRP) for its products. The clause will then, depending on the manufacturer’s formulation, provide a specific percentage of that MSRP as the dealer’s minimum authorized retail price. For example, if the manufacturer sells a product for $1,000 and provides a suggested retail price of $1,500, a dealer may be approved to charge wholesalers or retailers $1,200. However, if the manufacturer requires a 25% markup from MSRP, then the clause would require the dealer to sell that product to its customers for at least $1,250. Some manufacturers provide the dealer with a "floor" price, e.g., $1,250, and a "ceiling" price, e.g., $1,500. In that case, the dealer could choose not to sell the product below $1,250, and is not required to sell it above $1,500.
Termination Events – The agreement should contain clear language on how the agreement can be terminated. It is essential for a dealer to know what events will result in the termination of its rights and duties under the agreement. For example, most agreements terminate in the event of bankruptcy, insolvency, or liquidation of either party. Some agreements require, upon termination, the dealer to stop using any of the marks, images, or other intellectual property of the manufacturer. The agreement may contain other conditions for automatic termination, such as:
Automatic termination clauses are often dictated by the manufacturer, not the dealer. In particular, a manufacturer may determine that it will automatically terminate in the event its manufacturer, distributor, or dealer is acquired by a direct competitor. But a dealer may want additional protection. While the statutes may provide automatic termination protections, it will take time before the dealer has recourse through a suit for a manufacturer’s wrongful termination.
Sample Form of a Dealership Contract
The initial step is to define the terms of the dealership contract. The Manufacturer and Dealer must agree on the length of the term, territory in which a dealer will sell its products, manner of sale, standards of performance, and how compensation will be handled. The prime step in creating any dealership contract is the joint determination of a concept that meets the expectations of both the Manufacturer and Dealer. Some of the elements that have been incorporated into dealership contracts include:
· Standards and criteria for determining the qualifications of prospective dealers;
· Requirements for Dealer’s staff size, training;
· Facilities’ appearance, land area, appearance, land area, parts and accessories inventories;
· Equipment inventories;
· Software issues;
· Internet and web site obligations;
· Pay, bonuses, commission, gross profit margins;
· Facility requirements;
· Maintenance;
· Franchisor requirements;
· Reporting requirements;
· Maintenance of records and reports;
· Insurance;
· Termination; and
· Miscellaneous provisions.
Each of the elements of a dealership contact are subject to change and realignment with other objectives of the Manufacturer. Over the years, the contents and terms of these dealership agreements have undergone some changes and realignments, in response to competitive factors and consumer preferences.
Common Mistakes in a Dealership Contract
A common pitfall that I’ve seen happen many times is people entering into a dealership agreement without really knowing what they’re getting into. Many are unaware of the consequences until it’s too late. This is often experienced when they start using the Dealer’s name, logo or other intellectual property and then receive a cease-and-desist letter. It is advisable to consult with legal counsel before running into issues in order to prevent any problems down the road.
In their haste to enter into a new dealership agreement , many parties fail to review or even request the contract. Sometimes the law firm that the company uses drafts up the form agreement for the company and may insert certain terms, but the company only gets a copy of the signed version, and thus never really knows if the final version matches the drafted version. Further, those contracts that limit the dealer’s right to market or distribute other similar products should be scrutinized as it may violate antitrust laws.
Legal Issues for a Dealership Contract
There are a variety of legal considerations to think about when entering into a dealership contract. Typically, dealerships will establish their agreements according to common business and commercial laws and provisions. However, because the relationships between the manufacturers and dealers can be complex, there are also several statutes at the federal and state levels that govern the formation of a dealership agreement.
Many provisions or topics commonly addressed in any dealership contract are also governed by law, including: A dealer has a duty to disclose material information about the vehicle to the consumer. Most dealerships simply handle these disclosure requirements in the agreement itself, so no other disclosures are typically required.
In addition, the agreement will usually have a provision regarding mediation, litigation, and arbitration in case of any breach of contract disputes. The parties can agree to settle any legal issues through mediation, and if unresolved a subsequent lawsuit can be filed. The agreement can also specify whether to pursue a lawsuit or file arbitration to resolve the dispute. It is best to get your attorney involved in these processes.
There are some essential provisions that are normally included in a dealership agreement, but typically each dealership will have its own preferences or requirements that will need to be discussed and identified in the contract. This is where an attorney will be essential to ensure your rights as the manufacturer are protected and understood when entering into a dealership contract.
Templates and Resources
Several online resources host dozens of examples of dealership contract agreements. Here are four examples: Companies can also hire consultants to craft their dealership contracts. Consultants have experience with other companies in their industry, and are typically expensive. These templates and samples offer a basic start to drafting a dealership contract agreement, but companies should consider making their own adjustments based on the review of these templates . The templates provide a good starting point but should not be copied exactly, as it is important to modify the template to fit the specific circumstances. When reviewing dealership contract agreements, companies should look out for the following: Without properly reviewing contract agreements, companies could miss out on important information. Companies should take into account the dealership contract agreement templates and samples available online, as those can help observe proper format and language.