The liability of distributors, minimum purchase requirements

When drafting a distributorship agreement it is common to include minimum purchase requirements on the distributor. Such requirements bolster the other performance obligations on the distributor. As a supplier it would be entirely unsatisfactory to appoint a distributor for a particular territory or product and then face a situation where the distributor’s casual approach meant that the supplier was not achieving the very purpose for which the distributor had been appointed!

In addition, if properly drafted minimum purchase requirements can provide a clear yardstick enabling the supplier to take action if it considers that the distributor is unlikely to fulfil the above purpose.

But a recent case before the Copenhagen High Court raise another interesting possibility. 

In this case the distributorship agreement provided for a specific period of notice if the supplier wished to terminate the relationship. The agreement also contained minimum purchase requirements. However, it went on to provide that the supplier could terminate the agreement on a shorter period of notice if the distributor failed to achieve the specified minimum purchase requirements.

The distributor failed to make the minimum purchase requirements. However, the supplier did not exercise its right to terminate the distributorship agreement. Instead when the agreement expired the supplier claimed Euro 700,000 by way of damages by reference to the gross margin on the aggregate under purchasing by the distributor.

On the construction of the agreement the court decided that the supplier’s claim could not be made out. However, as a matter of English law it should be possible for a supplier to claim damages in such a situation unless the distributor is able to argue that the supplier has waived its right to claim. 

Take home points   

Before agreeing to a minimum purchase requirements, a distributor should take an objective as possible look at the market and ask itself whether the requirement is reasonable or not. 

For a supplier, the facts of the Danish case call into question why it waited for the agreement to expire – Euro 700,000 was a considerable underperformance. But putting this to one side:

  • minimum purchase requirements are important; as is
  • the inclusion of a no waiver provision in the distributorship agreement.

Duncan Jones  

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.