Can suppliers avoid their contractual obligations to distributors after 29 March 2019?

“In light of the upcoming date of 29 March 2019, we write to you to inform you that we are continuing to monitor and review information regarding the impact of Brexit on our business and industry. We assure you that we are analysing such information to ensure that we are prepared as best as possible for any ‘no deal’ scenario.  However, there remains significant uncertainty as to the potential resulting impact. We would also like to take this opportunity to confirm that we reserve our rights to review at any time all goods provided to you, including the associated prices, during this uncertain time.”

Look familiar?

Have you received a similar email from a supplier?

What does this mean, and why have you, in your position as a distributor, been sent it?

There are three main reasons a supplier would look to send its customers a statement such as that above:

  1. to attempt to unilaterally vary its contractual terms of business (“Contractual Variation Aim”);
  2. to put customers on notice in order to attempt to avoid full accountability of potential later losses and call on a customer’s duty to mitigate its losses if a dispute came before the English courts (“On Notice Aim”); and/or
  3. to start to construct a backdrop against which a supplier may look to apply Brexit to a force majeure clause (“Force Majeure Aim”).

The effect of the three aims above depends on the specific terms of business between you and your supplier, as well as established case law.

Contractual Variation Aim

Covering off business risk and re-balancing responsibilities in response to such risks is a fundamental purpose of entering into a contract. But, what happens if a supplier is not granted rights within its contracts with its distributors to “review at any time goods […], including the associated prices”? Can the supplier unilaterally vary its contractual terms with customers by sending out this statement by email?

In the vast majority of circumstances, parties to a distributorship agreement must abide by the requirements set out in a variation clause in order to amend the contractual terms.  As such, if a variation clause dictates that parties are only permitted to amend a contractual term in writing and, each of supplier and distributor are to sign the amendment to demonstrate its consent, then this is what must be done in order to effectively amend the distributorship agreement.

But, what if you continue to perform the distributorship agreement?  Have you consented to the variation?  What if you acknowledge the above statement as incorporated as a term of your contract? Again, have you consented to the variations?

Further, if the statement does not amount to an effective contractual amendment, could there be an argument of anticipatory breach. Is the supplier expressing its intention to not fulfil its contractual obligations in the event of a ‘no deal’ Brexit?

On Notice Aim

A key component at the stage of assessing damages at court is whether ‘reasonable’ steps were taken by the claiming party to minimise its loss. However, there is no duty to mitigate loss prior to a breach occurring. Further, in such uncertain circumstances such as the impact of Brexit, what actions would be held to be ‘reasonable’? If the supplier breaches its distributorship agreement with you, are you expected to spread the risk by seeking out secondary suppliers? Is your contract with your supplier on an exclusive basis, which prevents you from freely doing so?

Force Majeure Aim

A force majeure provision in a distributorship agreement can vary greatly in content from long lists of non-exclusive events to broad drafting along the lines of “a delay or failure arising from events, circumstances or causes beyond such party’s reasonable control”. In the most recent of agreements, there may even be a direct reference to Brexit.

Whilst the broadest provisions may assist with using the resulting consequences of Brexit as a force majeure event, how will a supplier demonstrate that it is legally or physically impossible to perform its contractual obligations, and not simply unprofitable or more difficult to do so?

But despite the above, who would blame a supplier for trying?

Lucy Coffey
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