Procuring through a distributor: Set expectations early!
When procuring goods our clients are sometimes faced with purchasing a good through a third party distributor rather than directly from the manufacturer of the good. An indirect purchase through a distributor can be problematic from a contractual perspective if the distributor is not willing to take full responsibility for all aspects of providing the relevant good (e.g., the delivery, performance, installation, and maintenance of the good, as applicable). Distributors sometimes attempt to avoid providing all of the product representations and warranties that would routinely be provided by a manufacturer of goods. A distributor may be hesitant to provide warranties on a good that it has neither manufactured nor tested itself.
In some such situations, a distributor may seek to share the risks related to the supply of a good by requesting that the purchaser enter into separate agreements with each of the distributor and manufacturer. The agreement with the distributor would identify such things as the products being purchased, pricing, and delivery terms, while the agreement with the manufacturer would address such things as product warranties, specifications, and service or maintenance terms. In our experience one of the primary difficulties of a two contract approach in this type of arrangement is that, unless the risk allocation terms of the two contracts are very carefully drafted and responsibilities are clearly delineated, the result could be that the purchaser is unclear as to which party is responsible for which obligations and risks. If something goes wrong, a purchaser could find itself in a situation in which all parties are pointing fingers at each other because the relevant contracts do not provide sufficient clarity as to which party bears responsibility for a particular type of damage.
The best case scenario from a purchaser’s perspective is for the purchaser to enter into only an agreement with the distributor, rather than agreements with both the distributor and manufacturer. This agreement with the distributor will require the distributor to take full responsibility for all risks related to the good and its supply to the purchaser. If the distributor wants the manufacturer to share responsibility for the good, then the distributor can enter into a separate agreement with the manufacturer to allocate risk between the distributor and manufacturer. This agreement would be separate and apart from the purchase agreement between the purchaser and distributor.
One solution that DDO has used to help avoid debate about what contractual arrangements will be utilized when purchasing through a distributor is to address this issue at the request stage of a procurement. If a purchaser requires, as a condition of participation in its RFP (or other requesting document, as applicable), the distributor to agree that it will be directly accountable to the purchaser for all risks and obligations related to the provision of the required good, then the purchaser can avoid having to negotiate this aspect of the contractual arrangements at a later stage in the procurement process. In this way we find that we can avoid some headaches related to a purchase through a distributor.