Supplier and distributor: when things turn sour

Even successful and productive distributorship relationships may well run their course at some stage. Certainly a breakup can be messy at the best of times and the situation can become even murkier should there not be a written agreement between the parties.

So, in such circumstances, what should be on the forefront of a distributor’s mind?
First of all, is there a written agreement between the supplier and distributor? If not, what are the laws which govern the unwritten agreement? Also, which courts will determine any dispute – those of the territory of the distributor or the supplier? It can be expected that in a cross-border situation, it may suit the distributor to have its own country’s laws apply. A supplier’s reluctance to become embroiled in arguments based on the laws of the distributor’s territory could put the distributor in a strong starting position for negotiating a favourable settlement. 

A distributorship agreement may be ended in a number of ways. Even if the distributor is not in breach of a term which would allow the supplier to end the relationship, the supplier may provide reasonable notice to such end. 

If the supplier is to bring an agreement to an end by reasonable notice, positive action is required. The distributor should consider whether the supplier has taken such action – for example, has it written clearly stating that it wishes to terminate the relationship? If not and the supplier simply stops fulfilling order requests, it may be in repudiatory breach of the agreement.

If notice has been given and English law governs the relationship, such notice must nonetheless be “reasonable” notice. What will be considered as reasonable notice will depend on the facts when the notice was given such as the formality and length of the relationship. This is important as If notice has been given but is nonetheless not sufficient to constitute reasonable notice, the supplier will have wrongfully terminated the agreement. As this is a breach which goes to the root of the contract, the distributor will be able to choose whether to terminate the agreement and receive damages or affirm the agreement and continue the relationship as normal. 

The distributor may consider that the relationship is not worth saving or have plans to move on with another supplier. As such, it may not want to become embroiled in legal proceedings. However, these arguments can still be utilised to put pressure on the supplier and put the distributor in a strong position to negotiate the terms of the break up. As well as negotiating standard issues such as the buy-back of outstanding stock, it may be able to negotiate a compensation payment for the loss of the distributorship which will make the break up somewhat easier to bear. 
 

 

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.