For distributors, possession is nine-tenths of the law.
Distributors (unlike commercial agents) do not receive special protection under English law. So how can a distributor whose distributorship agreement is terminated protect itself?
The starting point is for the distributor to have awareness of the deterioration of its relationship with its supplier which could result in its distributorship agreement being terminated. Alternatively, the distributor may take the view that it is better that it sets up the termination by forcing the supplier to commit a material breach of the distributorship agreement.
In the run up to termination, it will be imperative for the distributor to ensure that the terms and conditions on which it buys goods from the supplier do not exclude the right of set-off which would otherwise be available to the distributor. Exclusion may occur as a result of an express provision to that effect in either the distributorship agreement itself or the supplier’s standard terms and conditions of sale.
However, if the right of set-off is not excluded then the following courses of action are open to the distributor:
- the distributor places orders with the supplier. If possible, these should be orders which are:
1.1. broadly in line with the existing trading pattern between the parties; and
1.2. to the maximum extent of the distributor’s credit limit with the supplier.
- The distributor then delays making payments against invoices received from the supplier. For example, the distributor could raise queries in respect of the goods supplier in order to buy more time.
- The distributorship agreement is then terminated by the supplier as anticipated by the distributor or the distributor forces the supplier to commit a material breach which the distributor then relies on to bring the distributorship agreement to an end.
- Following termination the distributor claims that:
4.1. the agreement was wrongly terminated by the supplier; or
4.2. that the supplier gave insufficient notice of termination; or
4.3. that the supplier’s material breach resulted in the distributor treating the agreement as at an end; and
that therefore the distributor has suffered damage entitling the distributor to set-off monies owed to the supplier in respect of goods delivered against the losses incurred by the distributor.
Given that the distributor has the goods and the money, the supplier may recognise that possession is nice-tenths of the law……and seek an early settlement with the distributor.
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