What does your distributorship agreement say? And are you exposed?

A distributorship agreement often allows a distributor a certain period of time, following termination of the agreement, in which to sell-off the remaining stock which it has been distributing. At the end of the sell-off period, unsold stock may be required by the agreement to be returned to the supplier. Sometimes the obligation to return stock can be without repayment by the supplier.

What then are the issues for both supplier and distributor to bear in mind?

Option to buy-back

On or prior to termination of a distributorship agreement, a supplier may have the contractual option to buy-back from the distributor any remaining stock. A supplier should consider whether it wishes to exercise this option. Often the timeframe in which to do so is short. The reasons for wanting to do so can include:

  • If the supplier is moving into the same territory it may make good sense to have stock in place without the need for fresh stock to be transported.
  • If a new distributor is being appointed, the same is true.

  • Often the major consideration for the supplier is what will happen to the remaining stock if the supplier does not exercise its option to buy-back.

If a supplier suspects that a distributor is going to offload the stock to a discount reseller (which could potentially damage the supplier’s image or brand), the supplier may wish to exercise this option. But care is needed. This is because EU competition law can impact on the ability of the supplier to impose criteria on a distributor in order to control the distribution of goods in this situation. This could be, for example, by determining to whom the remaining goods can be sold or the price at which they can be sold. Exercising the option to buy-back the stock may therefore, be the best and only chance that a supplier has to take control of the stock legitimately and prevent the goods from entering into a particular market or otherwise prejudicing the brand.

From the distributor’s perspective, the exercise by the supplier of the option can represent a straightforward and cost-effective opportunity to shift the remainder stock. Once the timeframe in which the supplier can exercise the option has lapsed, the agreement may provide for the distributor to have a further time period in which it can sell off the stock. But when this further period has itself lapsed, the distributor may become obliged to return the then remaining goods to the supplier – but without payment.

Sell-off period

Distributorship agreements usually contain a number of time periods. Distributors need to be aware of all the deadlines in an agreement but, in particular, with regard to the sell-off period. This will ensure that its sales of the remaining stock are completed – and deliveries have taken place to customers – well within the sell-off period. Selling-off the stock after the sell-off period has lapsed will constitute a breach of the distributorship agreement and possibly give rise to a claim for damages by the supplier.

The right of set-off

Unlike the laws of many other countries, English law does not provide special protection for distributors when the distributorship agreement has come to an end. Whilst there have been a number of reported Court judgments where it can be seen that attempts are being made by the judges to protect distributors that is comparable to that in which the Commercial Agents Regulations protects agents, there is still a way to go. As such, the situation can arise that at the time of the termination of the distributorship agreement, the supplier has supplied stock to the distributor in respect of which payment has not yet been made by the distributor.

It is at this point that supplier and distributor need to look to the distributorship agreement to see whether it excludes a right of set-off. If it does not, the supplier can be faced with a situation where:

  • the distributor claims (rightly or wrongly) that termination of the distributorship agreement by the supplier was itself a breach of the agreement and that the distributor has suffered loss; and

  • the distributor then sells-off the stock remaining at termination in accordance with the sell-off provisions; but

  • does not make payment to the supplier in respect of outstanding invoices and instead exercises a right of set-off against the damages it claims it has suffered as a result of wrongful termination of the distributorship agreement by the supplier!

The end of a distributorship agreement

Few suppliers and distributors think to turn back to the original contract when it comes to an end. But re-reading the terms that were agreed (most probably a number of years earlier) could well benefit both supplier and distributor by saving time or earning extra profits. Alternatively (and importantly) it could also prevent a distributor from later finding itself in breach of the agreement and even facing legal proceedings.

Four top tips

  1. Remind yourself of your rights and obligations on termination.
  2. Diarise any deadlines for buying-back, returning, or selling-off the goods.
  3. Distributors – ensure all sales and deliveries are completed well within the sell-off period.
  4. Check whether your distributorship agreements exclude a right of set-off.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.
Veronique Bergau
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