At the outset of a distribution agreement, what is to happen when the supplier–distributor relationship comes to an end is often the furthest thing from the parties’ minds. Initial arrangements can be informal and the minutiae of the agreement between the parties can be overlooked.
In a surprisingly large number of instances, the agreement can fail to be committed to paper at all! But even when a formal distribution agreement is signed by the parties, practical arrangements for dealing with what happens on termination may often not be included. These will be of vital importance at the conclusion of the parties’ relationship and consideration of them at the outset will save you time, and more importantly, expense in the later stages.
At the end of a distribution agreement, the distributor will be concerned predominantly with ensuring that it can continue to provide alternative supplies for its customers. On the other hand, regardless of the reason for termination, the supplier will wish to bring an end to the commercial relationship as soon as possible to enable it to pursue its future commercial objectives either through the appointment of a new supplier for the products in question or to move on to new ventures. Written distributorship agreements, where they exist, will ordinarily deal with the position in relation to payments due from the distributor to the supplier on termination. However, they can fail to address other practical matters. This could mean that far from obtaining a clean break and being able to concentrate on the future, you become embroiled in ongoing wrangling with the ex-distributor and are unable to access information held by the distributor which is vital to moving your business forward.
At the outset, therefore, the supplier (“you”) should consider what practical steps will need to be taken at the conclusion of the relationship and ensure that provision is made for these in a formal distributorship agreement. If included in an agreement, the failure of the distributor to comply will give rise to a simple action for damages in breach of contract alongside your other legal remedies.
The following factors should be considered by the supplier:
- What do you want to happen to the stock held by the distributor? Will the distributor sell back the stock to you and will you agree to purchase it? Alternatively, will the distributor simply agree to return the stock to you, or to destroy it, or allow you to collect it? If the stock is to be returned, collected or destroyed, who will be responsible for the cost of this?
- What will happen to orders which have been placed but where delivery falls after the termination date? Will these be honoured? Will you have direct access to the customer and, if so what payments will be made to the distributor in this regard?
- What steps will the distributor need to take to cease marketing itself as a distributor of your products? Where have they placed adverts for the stock? What agreements, licences or permissions does the distributor have for such advertisements, are they transferable and what termination provisions do they contain? On which websites does your stock appear listed and how will you ensure that references to you and your products are removed?
- What rights will the distributor have to use your trade mark after termination? You should specify that the distributor has no right to use the trade mark on letterhead, packaging or anywhere else and that if it does retain stock which is not being disposed of, the distributor is not entitled to sell it in packaging which bears the trade mark or your name.
- What will happen to the distributor’s customers on termination of your relationship? You should include a provision for the distributor to provide you with a list of its customers for the products and their contact details.
- What will happen to your documentation which is held by the distributor? You should include a provision that all documentation is returned upon request. It is very unlikely that you will be able to ensure that the distributor has fully complied with such a provision but if there is likely to be certain documentation within the distributor’s possession which you know about and will want to be returned, this clause will be very helpful.
- What time periods do you require the above steps to have been completed by?
At a time when the relationship is likely to be frayed, if these practical matters are addressed upfront in the distribution agreement, on termination the parties will have a clear checklist of what needs to be concluded, how they are going to be dealt with, and the timescale in which they are going to be completed, minimising the potential for further dispute (and therefore, the further involvement of lawyers) and providing both parties with as swift and as clean a break from the relationship as possible.
Siân Barr is an associate in the Commerce and Technology department and a member of the agentlaw team. Sian can be contacted on firstname.lastname@example.org.