(re)Selling your soul - contracting with ICT resellers
By Nick Topfer• 07 December 2020 • 10 min read
Resellers are a prominent feature of ICT transactions. But despite this, Commonwealth agencies dealing with a reseller often have limited visibility of that reseller’s arrangements. There are multiple reseller models, and each model can have different implications for agencies.
It is important for agencies purchasing hardware, software or cloud services from a reseller to be aware of these different ways of doing business, and what they mean for contracts with resellers. We explore how resellers operate and how Commonwealth agencies can protect themselves when purchasing through a reseller.
What is a reseller?
A reseller is an organisation that sells a product or service it did not create. Resellers are often used by suppliers to leverage third party distribution channels for their product to access new markets or customers. Resellers operate under agreements with the original supplier. Those agreements will define the relationship between the reseller and the original supplier and set the boundaries for how the reseller can operate.
There are many ways in which resellers and the original supplier can structure their relationship, and each has different implications for agencies purchasing from a reseller. Common examples are:
- Reseller (wholesaler) providing pass-through warranties: the idea here is that the reseller passes on rights and obligations to the agency that reflect its arrangements with the original supplier. A reseller might offer the agency a ‘back-to-back’ warranty (i.e. a warranty with terms that mirror the warranty provided by the original supplier). Or they might assign to the agency the benefit of the warranty they receive from the original supplier.
- Reseller as facilitator: this is a different model, where the reseller procures orders for the original supplier. Under this model, the reseller acts as a ‘match maker’ between the original supplier and potential customers. Once a customer agrees to purchase the product or service, the reseller or the agency will place the order with the original supplier and the original supplier will then provide the products or services under a direct contract with the agency.
- Bundled arrangements: a reseller may also supply bundles of products from different original suppliers. Alternatively, it might offer its own products or services on top of the product or services they are reselling. One example of this would be an IT consultancy company reselling a particular software tool and also offering its own professional services (e.g. to customise that tool for the agency, or manage the integration of the tool into the agency’s environment).
How do you know when you’re dealing with a reseller?
In our experience, agencies will commonly encounter resellers when conducting procurements for ICT services. For example, it is common for respondents to an approach-to-market to propose to deliver the required services using third party software. The respondent might propose to supply that software itself (meaning it has a ‘back-to-back’ arrangement with the original supplier). Alternatively the respondent might propose that the agency orders the software directly from the original supplier.
Is the reseller an agent of the original supplier?
An agency relationship is a type of fiduciary relationship, under which one party (the agent) is allowed to act on behalf of another party (the principal) within a pre-defined scope. The agent may be entitled to negotiate on the principal’s behalf or bind the principal to a contract.
It is uncommon for resellers to act as agents for the original supplier. This means that, in most cases, a reseller will not be entitled to make representations, or enter into a contract, on behalf of the original supplier. In most cases the agreement between reseller and supplier will specifically disclaim any agency relationship. However, some whole-of-Government arrangements do include options for resellers to act as agents of the supplier.
Who are you contracting with?
The different models of reseller arrangements can create uncertainty for agencies. Depending on the model described above, an agency could be required to contract with the reseller, the original supplier or both! Because the different arrangements present different issues for agencies, it is important to know what you are dealing with.
For example, if a reseller provides pass-through warranties, the agency is usually contracting with the reseller. This means that any warranty claims would be made against the reseller (and the reseller would then recover any losses from the original supplier). This approach is more common where the reseller is bundling several different products or services. It allows the reseller to act as a single point of contact for the agency.
Using this model, a reseller might also seek to limit its liability to the agency based on its rights against the original supplier. This ensures the reseller does not take any additional risk in the performance of the product.
Alternatively, if you are dealing with a reseller who is acting as a facilitator, your contract might be with the original supplier only, unless the reseller is also providing products or services in its own right.
In addition, even when you are contracting with a reseller, you might also have related contracts with the original supplier. For example, if you are purchasing hardware or software from a reseller and contracting directly with that reseller, you might also need to enter into a separate contract with the original supplier for support services for that hardware or software. In addition, a reseller may require you to agree to licence terms that create obligations owed directly to the original supplier.
So a good first step when dealing with a reseller is to clarify which entity you have a contractual relationship with, and who you should go to if something goes wrong.
Tips and tricks for dealing with Resellers
Here are some further things to consider when dealing with resellers:
Dealing with a reseller if you are a Commonwealth agency adds yet another layer of complexity. Many major technology suppliers have Whole-of-Government (WofG) arrangements with the Commonwealth. Similarly the Commonwealth has established a number of multi-vendor panels for certain products and services (some of which are mandatory for certain agencies).
These WofG arrangements and panels sometimes dictate a process for buying from a reseller, or include separate terms that apply to reseller contracts. When purchasing under a WofG arrangement or panel, agencies should confirm whether there is a process that needs to be followed, or specific terms that apply, for reseller contracts.
Agencies need to be aware of any end user licence agreement (EULA) terms that the original supplier may seek to impose, before entering into an arrangement with a reseller. It is often necessary to address these types of terms in contracts with resellers (e.g. to indicate to what extent they will apply).
When purchasing software, regardless of the reseller’s arrangements with the original supplier, it is common for agencies to be asked to sign or accept the original supplier’s EULA. This might be done formally in an ordering document, or otherwise (e.g. agency personnel might be required to tick a box when using the product to accept the EULA terms). Some of these terms will be relevant to the technical specifications or operation of the product or service, for example they might set out what a user can and cannot do with the product or how it operates. However, as with all software, cloud and hardware arrangements, EULA terms (if they are enforceable) can create legal or commercial risks.
Understanding applicable EULA terms is especially important for Commonwealth agencies, because EULAs commonly contain terms that are inconsistent with a number of Commonwealth policies (e.g. indemnities by the agency).
Agencies also need to remember that the reseller and original supplier are separate legal entities. So, any terms included in a contract with a reseller may not override the original supplier’s EULA. Agencies need to be careful to ensure that the right terms are included in the right contract.
Representations and obligations
The original supplier will not necessarily be bound by the reseller’s statements and representations about the product or service. So, when contracting directly with the original supplier, agencies should ensure that the contract for the product or service properly reflects all of the reseller’s representations. The reseller contract also needs to clearly set out all of the reseller’s obligations to the agency (which might include assisting the agency to manage any issues with the resold products or services).
Remember that the entity you are dealing with and the entity that actually delivers or provides access to a product (or performs warranty services) might not be the same. Agencies should try to clarify the process for delivery – and who will be ‘on the hook’ if there are delivery issues or a warranty claim.
This will be particularly important if the original supplier is a large, global entity, because they may have rigid processes and rules about (e.g.) warranty claims.
Follow the money
Payment arrangements under reseller contracts can be complex. You may be required to make your payments to the reseller only, or to both the reseller and the original supplier. Make sure your contract or ordering document is clear about the total amounts payable, to whom and when.
If you are only making payments to the reseller, make sure your contract or ordering document states those payments are in full satisfaction of obligations to the original supplier as well.
If you are making payments to both the reseller and the original supplier, make sure you understand what products or services each payment relates to – to ensure you are not being double charged.
Bundling products and services
If you are purchasing a bundle of products or services from a reseller, make sure your contract or ordering document sets out what terms apply to each product or service and which party is responsible for them. Take the time to understand what terms apply. While this may be laborious, it is important to understand whether your contract has appropriate terms in it to protect against key risks.
Questions to ask
We have highlighted in this article a number of risks that arise when purchasing a third party product via a reseller. To help address these risks, agencies should consider asking the following types of questions before entering into a contract with a reseller:
- Who is the contracting party for the product?
- How will the product be supplied and supported?
- Are there any additional licence terms that apply to the product?
- How do the additional licence terms (if any) relate to the contract with the reseller (e.g. do they override any of the contract terms)?
- What responsibility does the reseller take if a product they have supplied or recommended does not work as described?
- Does the original supplier ‘stand behind’ the representations about the product that have been made by the reseller?
- What support will the reseller/original supplier provide if there is an issue with the product?
- Does the original supplier have a WofG arrangement with the Commonwealth?
- Which entity are the payments made to? What products or Services do the payments cover?
Contacting with ICT resellers often involves complex contractual arrangements, and the exact obligations of the reseller and the original supplier might not initially be clear. As a result, it is always important, when dealing with a reseller, to understand who you are contracting with, what terms apply to the products/services, and how any issues with the product or service would be addressed.
*This article was prepared with assistance from Angus Vos (Summer Clerk).
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