It is invariably when a relationship is not going well that lawyers are asked “what can be done?” It is at that point that lawyers try to be creative and look not only at the words written in the distributorship, agency, or other commercial agreement but also consider whether any terms can be implied which may help the client achieve its objectives.
In 2000 a UK supplier and a Turkish distributor entered into a distributorship agreement for the distribution of the supplier’s products in Turkey.
Some 10 years later the supplier requested that the distributor implement a strategic plan up to the end of 2013 (rather than for one year as anticipated in the agreement). This was followed in 2011/12, by the supplier requiring that the second claimant be set up as a subsidiary company specifically to replace the distributor or, at least, to improve the service offered by the distributor.
A further business plan was agreed which was to run for five years to 2015. This required the now two distributors to make long term investments in their business. They invested some €6.37m in implementing these plans. According to the distributors, these requirements amounted to an agreed variation of the distributorship agreement.
Despite the business plans, involvement of the second distributor, and investments made by the distributors, the supplier was still dissatisfied by the distributors’ performance. Accordingly in September 2012 the supplier gave notice of termination under the terms of the distributorship agreement to take effect in March 2013.
Before the court the distributors claimed that:
(i) the agreement to add the second claimant as a distributor and implement the business plan further impliedly varied the agreement by conduct so that notice to terminate could not be given to take effect before the end of 2015; and
(ii) the termination was in breach of an implied duty of good faith and fair dealing.
Specifically, the distributors argued that the following terms should be implied into the agreement:
that each party would provide the other with accurate appraisals on the chances of the relationship continuing and would not mislead each other on the chances of the relationship continuing;
that each party would warn the other party before terminating the agreement and provide the other party with an opportunity to alter its conduct and address concerns before giving notice to terminate.
The Court of Appeal dismissed each claim of the distributors.
The Court considered whether a term could be implied that notice to terminate could not take effect before the end of 2015. To establish if such a term could be implied, the Court looked at:
whether adding the second claimant as a distributor together with the business plans was inconsistent with the Supplier being able to terminate before the end of 2015; and
whether the parties’ conduct (that is varying the agreement) was consistent only with such an implied term. For example, if the parties would or might have acted in the same way without the implied term, then it is unlikely to be necessary to imply the term.
Following this, the Court concluded that it was not necessary to imply such a term.
Furthermore, because there had been no discussion about altering the termination provisions, the Court held that it would be impossible to know what the terms of any new termination provisions would have been.
On the good faith issue, the distributors sought to rely on the High Court decision in 2013 in Yam Seng v ITC. In this case the High Court decided that a duty of good faith could be implied into commercial agreements.
This general duty of good faith is more likely to be implied in the performance of “relational” contracts (that is longer-term contracts which involve a high degree of communication and cooperation between the parties). However, the Court of Appeal did not consider the Yam Seng judgment to be applicable as the present case concerned termination (where parties are generally in conflict), rather than the performance of the contract (where parties would be expected to co-operate for the agreement to operate effectively). The circumstances were different and the Court of Appeal accordingly rejected an implied term of good faith and fair dealing.
Take Home Points
It is possible that an implied variation may follow an express variation to an agreement, provided the implied variation is both consistent with and required by the express variation. This is, however, a high threshold to meet and the better course of action remains to have the agreement expressly varied and documented in writing, where possible.
Whilst parties to longer-term distributorship agreements should be aware of the possibility of broader implied duties of good faith being imposed pursuant to Yam Seng v ITC, it will only be imposed in limited circumstances.