Jackson Distribution Limited (“Jackson”) was the sole distributor of Tum Yeto Inc’s (“TYI”) range of “Dekline” products in the United Kingdom and the Republic of Ireland from March 2005. The distribution agreement came to an end in August 2007 and Jackson sought to recover damages from TYI for its alleged breach of contract in bringing the distribution agreement to an end.
The main issues to be decided in court were:
- What were the terms of the agreement between Jackson and TYI?
- Whether TYI was entitled to terminate the agreement and if so on what basis?
- If TYI was in breach of contract in terminating the agreement, what loss was suffered by Jackson as a result?
Discussions about Jackson’s appointment and written agreements
Between September 2004 and March 2005, there were various discussions leading up to the appointment of Jackson as TYI’s distributor. On 14 March 2005, the first samples of Dekline products were delivered to Jackson. Subsequently, TYI confirmed by email that Jackson was to be the sole distributor for the Dekline brand in the United Kingdom and Ireland and there was an exchange of emails confirming payment terms.
In September 2005, Jackson presented a draft distribution agreement to TYI (“the Jackson Draft”). The Jackson Draft stated that it was to be for an initial 6 year period with provision for extension for a further 6 years at the request of Jackson and provided for the agreement to be terminated if either party was in material breach. Following receipt of the Jackson Draft, TYI confirmed by email that Jackson had been appointed as sole distributors of Dekline products in the United Kingdom and Ireland “until such time as the distribution agreement has been finalised.”
However, in May 2006, TYI presented a different draft agreement to Jackson (“the TYI Draft”). The duration clause provided for an initial of period of 6 years with provision for a 3 year extension. The termination clause was the same as in the Jackson Draft, save that the provisions dealing with what was to happen post termination were differently framed. In July 2006, Jackson stated in an email to TYI that the TYI Draft was not acceptable.
There were further discussions between the parties as to the terms of the agreements but no written agreement was ever signed.
What were the terms of the agreement between Jackson and TYI?
Jackson contended that the conduct of the parties showed that they were acting on the terms of the Jackson Draft. It was established in the decision of Brogden v the Metropolitan Railway Company that terms of an agreement can be accepted by conduct. That decision made it clear that the burden of showing that parties acted on the terms of a written agreement which has not been executed lies on the party so contending.
The judge considered that this burden had not been discharged in this case for a number of reasons, including the following:
- The business relationship between the parties was conducted satisfactorily on the basis of what was agreed in March 2005 without the terms of the Jackson draft having been agreed.
- The correspondence between the parties dealing with the terms of the proposed written agreement made it clear that there were ongoing negotiations as to what the precise terms should be. Neither party fully accepted the others’ terms and recognised that this was something that needed to be resolved.
- Upon receipt of the TYI Draft, there was no response from Jackson to the effect that there was already a binding contract in existence (namely, the Jackson Draft).
In view of the above, the judge concluded that there was no formal written agreement in place between the parties because Jackson and TYI never agreed that either the Jackson Draft nor the TYI Draft should govern their contractual relationship.
On what basis could the agreement be terminated?
Jackson argued that, even if the Jackson Draft did not govern the contractual relationship, the termination provisions set out in the Jackson Draft, which were in substantially similar terms to the termination provisions in the TYI Draft, should govern the position. However, the judge decided that, in the circumstances, the parties had not agreed that the terms in each of the Jackson Draft or the TYI Draft for duration and termination should apply divorced from the other terms of the agreements.
It was accepted by both parties that the agreement between them could not simply be terminated without any notice (in the absence of breach). Accordingly the judge concluded that there was an implied term that the distribution agreement should be terminable on reasonable notice.
Was TYI entitled to terminate for repudiatory breach?
TYI alleged that Jackson failed properly to promote and sell Dekline. The judge examined the various specific allegations in this context but found all of them to be without substance. For example, TYI sought to rely upon the decline in orders between Spring/Summer 2006 and Spring/Summer 2007 as indicating Jackson’s poor promotion of the products. Jackson attributed this decline to the lack of new designs by TYI and the poor quality of product production.
The judge took the view that the evidence which TYI relied upon in support of this alleged breach was thin. In contrast, the judge accepted Jackson’s evidence of the substantial investment made and marketing steps taken in the promotion of Dekline and did not accept that any decline in sales was attributable to any failure by Jackson to promote Dekline.
Accordingly, the judge concluded that there were no repudiatory breaches of contract by Jackson entitling the Defendant to terminate the agreement with immediate effect.
What would have been reasonable notice of termination?
Jackson’s position was that 2 years’ notice of termination would have been reasonable notice. In contrast, TYI contended that 4 to 6 months’ notice would have sufficed.
In the leading case of Alpha Lettings Limited and Neptune Research and Development Inc., the following principles were established:
- In the absence of any express term, the question of what notice of termination is reasonable must be determined as at the time of termination.
- One very important consideration is the degree of formality in the relationship. The more relaxed the relationship, the less likely it will be that the law would imply a lengthy notice period.
- Another important factor is the ability of the distributor to sell products of other suppliers, including competing products. The less dependent the distributor’s business is on the supplier’s products, the less likely it will be that a lengthy notice period should be implied.
- The duration of the relationship was considered as a potential factor. Whilst arguments had been put forward to the effect that, as with employment relationships, the longer the period of time which the parties' relationship has lasted, the longer the notice period should be, the judge took the view that a contract of employment was not sufficiently analogous to a distributorship contract to be helpful. This was on the basis that a distributor may have to invest considerable capital at an early stage of the relationship to build up the business which may thereafter run with moderate annual expenditure. This would militate in favour of a lengthier notice period in the earlier years of the relationship and a lesser period once the business is up and running. On this basis, initial capital investment and business expenses out of the ordinary run of things are likely to be relevant to the amount of notice but ordinary and recurring expenditure is unlikely to have much relevance.
- An obligation on the distributor to use his best endeavours to promote the products of the supplier after notice of termination has been given by either party is an indication in favour of a shorter rather than a longer period of notice.
The judge applied the above factors to the present case in the following way:
Degree of formality:
Although both parties put forward their respective drafts for a more formal arrangement neither draft was agreed. There was in consequence no great degree of formality.
Selling products in competition:
There was no clause preventing Jackson from selling a product in competition with Dekline. However, in practice Jackson did not take on any competing business interests and neither party envisaged that it would have done so.
The length of the relationship and the extent of the early investment:
The relationship lasted only 2 and a half years and Jackson had invested a very considerable amount of time, effort and money in these early years.
The judge considered that the following additional factors were relevant to determining the amount of notice of termination which was required:
- By the time of termination, sales had dropped and, whilst there were signs of improvement, a major improvement was unlikely to materialise in the next couple of years.
- The business was seasonal in nature.
- Jackson had taken on new employees and vehicles, had brought into operation a new warehouse in Autumn 2005 and further business premises were planned.
- It would take time for Jackson to find an alternative shoe brand and it would take 3 years to establish the new brand and achieve profitability.
Taking all of the above factors into account, the judge considered that the proper period of notice in this case would have been 9 months.
Was TYI was in breach of contract in terminating the agreement?
TYI purported to terminate the distribution agreement by letter headed “Notice of Termination of Distribution” dated 27 July 2007 and email of 2 August 2007. The letter set out some unfounded alleged breaches of the distribution agreement by Jackson. In the letter and email, TYI purported to make it a condition that:
“Jackson Distribution provides a full and final release of any and all claims associated with the distribution relationship, and acknowledges and consents to Tum Yeto obtaining a new distributor for the territory immediately marketing the brand Dekline and to immediately begin to pre-book orders for spring 2008 delivery.”
This proposal was not accepted by Jackson. The effect of TYI’s letter and email was to terminate the distribution agreement between TYI and Jackson without notice from the beginning of August 2005. Accordingly, in not giving Jackson reasonable notice of termination, TYI acted in breach of the distribution agreement.
The loss suffered by Jackson
The judge considered that Jackson had a claim for damages for the loss of a 9 month notice period.
Written by Jane Elliot