Written by Steve Sidkin
16 September 04
Although it is often found surprising, and it is clearly different to the position of commercial agency agreements, the fact is that there is no statutory requirement for the length of notice required in order to terminate a distributorship agreement. If an agreement is silent as to notice, the common law requires that reasonable notice is given.
The starting point for understanding what might be reasonable notice is Martin-Baker Aircraft v Murison. Martin-Baker manufactured ejector seats for aircraft which Murison distributed in North America. The agreement was capable of being summarily terminated on breach or non-observance of its terms, but was silent as to termination for any other reason. When Martin-Baker wanted to end the agreement, it sought a declaration on the length of notice required.
The court declared that the contract was capable of being terminated by reasonable notice, and that the length of reasonable notice was to be decided with regard to the facts existing at the time when notice was given, not at the time that the contract was made. Therefore, neither party can determine what is reasonable notice until it comes to give the notice. At such a time, the party wanting to give notice must look at the existing situation between the parties in order to determine the reasonable notice period.
It was noted that, as sole distributor, Murison had to expend much time and money and that, under the agreement, Murison was subject to an express non-compete clause. The court held that, on these facts, the agreement was terminable on twelve months’ notice given at any time.
More than fifteen years later, the case of Decro-Wall v Practitioners in Marketing Ltd came before the courts. A distributorship agreement between Decro-Wall, a French manufacturer of tiles, and an English distributor was terminable by reasonable notice on either side. In order to develop the bathroom tile market in the UK, the English company spent a considerable amount of money on a national advertising campaign, increasing its warehouse capacity, and training new sales staff. The net profits were expected to be low in the first few years owing to the substantial start-up costs, with greater rewards anticipated subsequent to this. Within three years the French tile business constituted 83% of the distributor’s turnover. The agreement was terminated by Decro-Wall before the distributor could gain any real reward for its initial expenditure. The court held that, in view of the expenditure and work which the distributor had put into carrying out the agreement, reasonable notice to terminate was twelve months.
Alpha Lettings v Neptune is the most recent case to look at this issue. Neptune manufactured specialist medical and scientific valves which Alpha distributed exclusively in the UK. Alpha also distributed similar products for other manufacturers. An association between Neptune and Alpha began prior to 1983 but in November 1983 letters came into existence which brought more formality to the agreement. Their agreement, however, was silent as to the requisite notice period. Neptune terminated it by giving one month’s notice.
At first instance it was held that reasonable notice should have been given, and a reasonable notice period would have been one year. Neptune appealed to the Court of Appeal on the basis that the notice period awarded by the trial judge was excessive.
The Court of Appeal found that the twelve month notice period awarded by the judge was, in the circumstances, outside the range of notice periods reasonably open to him to award. The right range was between three and six months. Since there was not a non-compete covenant on Alpha either during or after the agreement, four months’ notice was sufficient time for the parties to bring the business to an end and for Alpha to find another supplier. Had the agreement placed greater restrictions on the distributor, it is likely that the court would have decided that a longer notice period would have been reasonable in the circumstances.
The position of notice periods and commercial agents is clearly set out in the Commercial Agents (Council Directive) Regulations 1993 (as amended). The Regulations contain prescribed minimum notice periods. In contrast, there is no statutory definition of what constitutes reasonable notice for the termination of a distributorship agreement.
Where the parties have not included detailed termination provisions in their distributorship agreements, it is necessary to look to case law for guidance. The decisions in Martin-Baker, Decro-Wall and Alpha Lettings indicate that the courts will look at the particular circumstances when deciding what is reasonable notice. These cases also indicate that the courts are seeking to protect the distributor and will dictate the length of reasonable notice to be in the distributor’s best interests. Such an approach would follow that of legislation and the courts towards commercial agency disputes. In such disputes, the courts seek to protect the agent, David, against its principal, Goliath. A judge in the case of Page v Combined Shipping and Trading spoke in terms of agents being a “down-trodden race” and said that they “need and should be afforded protection against their principals”. It would appear, from recent case law, that the courts are beginning to adopt a similar approach in relation to distributors.
Interestingly, the Court of Appeal in Alpha stated that the means of terminating the agreement is irrelevant when determining the length of the notice period. A termination with no notice or with less than due notice will be a breach of contract and damages must be appropriately assessed. However, it is irrelevant if the breach of contract was deliberate, or whether the termination is accompanied by untrue allegations: these will not affect the question of how long reasonable notice is.
In order to protect themselves, suppliers or distributors should consider the following when determining the reasonable length of any notice period:
- Is there a formal written agreement in place?
- How long has the arrangement been in existence?
- What percentage of the distributor’s turnover was the supplier responsible for
- Did the distributor have an exclusive distributorship agreement?
- How long will it take to bring the business to an end and how difficult will it be for the distributor to obtain another supplier, or the supplier to find another distributor?
There is an exception to the above where the parties have entered into a rolling contract. In the very recent case of G&A Limited v HN Jewellery, a distributor entered into an exclusive distributorship agreement to sell jewellery in the UK, Ireland and Gibraltar for three years rolling. The contract was silent as to termination. The distributor claimed that a three year rolling contract was only terminable on three years’ notice. However, the Court of Appeal decided that “rolling” meant that as at 1 January each year, the contract would become one for a further three years unless reasonable notice had been given. The Court of Appeal held that in any year the parties were free to give reasonable notice before the end of that year, bringing the contract to an end two years after the 1st January of the following year. It was decided that six weeks before the end of the year would be reasonable notice to terminate the contract two years later. This is an interesting decision and we await further case law to see how the courts treat this issue.
The decision in Alpha Lettings means that there is no definite answer as to what constitutes a period of reasonable notice when terminating a distributorship agreement. The court will look at a number of factors before deciding whether the notice period given was reasonable in the circumstances. In the absence of any clear guidance, further case law is required to enable parties to more accurately decide what notice period is reasonable to terminate the agreement. For the time being the only way for suppliers and distributors to avoid any confusion is to ensure that a clause fixing the notice period is inserted into their distributorship agreements.
Finally, as further evidence of the necessity to enter into a well drafted distributorship agreement, we should consider the Court of Appeal decision in Baird Textiles v Marks & Spencer. Baird had supplied garments to M&S for thirty years when, without warning, in October 1999, M&S terminated all supply arrangements between itself and Baird with effect from the end of the then current production season. Baird claimed that this cessation of business had caused it loss amounting to £50 million. However, there was no written agreement between the parties. The lack of certainty caused by the absence of a written agreement meant that the Court of Appeal could not find an intention to create legal relations. Baird’s claim for loss of future sales was unsuccessful since the Court of Appeal decided that there was not a supply agreement as opposed to a series of individual sales agreements.
This demonstrates that distributors operating without any formal written agreement may be unable to prove that they have a distributorship agreement, in which case they would not be entitled to any notice or compensation should the manufacturer decide not to make any further supplies.
This briefing note is for general information. For advice in applying this general information to your specific circumstances, please contact Stephen Sidkin or any members of the Fox Williams’ agentlaw team. (www.foxwilliams.com; Written by Steve Sidkin
16 September 04
Although it is often found surprising, and it is clearly different to the position of commercial agency agreements, the fact is that there is no statutory requirement for the length of notice required in order to terminate a distributorship agreement. If an agreement is silent as to notice, the common law requires that reasonable notice is given.
The starting point for understanding what might be reasonable notice is Martin-Baker Aircraft v Murison. Martin-Baker manufactured ejector seats for aircraft which Murison distributed in North America. The agreement was capable of being summarily terminated on breach or non-observance of its terms, but was silent as to termination for any other reason. When Martin-Baker wanted to end the agreement, it sought a declaration on the length of notice required.
The court declared that the contract was capable of being terminated by reasonable notice, and that the length of reasonable notice was to be decided with regard to the facts existing at the time when notice was given, not at the time that the contract was made. Therefore, neither party can determine what is reasonable notice until it comes to give the notice. At such a time, the party wanting to give notice must look at the existing situation between the parties in order to determine the reasonable notice period.
It was noted that, as sole distributor, Murison had to expend much time and money and that, under the agreement, Murison was subject to an express non-compete clause. The court held that, on these facts, the agreement was terminable on twelve months’ notice given at any time.
More than fifteen years later, the case of Decro-Wall v Practitioners in Marketing Ltd came before the courts. A distributorship agreement between Decro-Wall, a French manufacturer of tiles, and an English distributor was terminable by reasonable notice on either side. In order to develop the bathroom tile market in the UK, the English company spent a considerable amount of money on a national advertising campaign, increasing its warehouse capacity, and training new sales staff. The net profits were expected to be low in the first few years owing to the substantial start-up costs, with greater rewards anticipated subsequent to this. Within three years the French tile business constituted 83% of the distributor’s turnover. The agreement was terminated by Decro-Wall before the distributor could gain any real reward for its initial expenditure. The court held that, in view of the expenditure and work which the distributor had put into carrying out the agreement, reasonable notice to terminate was twelve months.
Alpha Lettings v Neptune is the most recent case to look at this issue. Neptune manufactured specialist medical and scientific valves which Alpha distributed exclusively in the UK. Alpha also distributed similar products for other manufacturers. An association between Neptune and Alpha began prior to 1983 but in November 1983 letters came into existence which brought more formality to the agreement. Their agreement, however, was silent as to the requisite notice period. Neptune terminated it by giving one month’s notice.
At first instance it was held that reasonable notice should have been given, and a reasonable notice period would have been one year. Neptune appealed to the Court of Appeal on the basis that the notice period awarded by the trial judge was excessive.
The Court of Appeal found that the twelve month notice period awarded by the judge was, in the circumstances, outside the range of notice periods reasonably open to him to award. The right range was between three and six months. Since there was not a non-compete covenant on Alpha either during or after the agreement, four months’ notice was sufficient time for the parties to bring the business to an end and for Alpha to find another supplier. Had the agreement placed greater restrictions on the distributor, it is likely that the court would have decided that a longer notice period would have been reasonable in the circumstances.
The position of notice periods and commercial agents is clearly set out in the Commercial Agents (Council Directive) Regulations 1993 (as amended). The Regulations contain prescribed minimum notice periods. In contrast, there is no statutory definition of what constitutes reasonable notice for the termination of a distributorship agreement.
Where the parties have not included detailed termination provisions in their distributorship agreements, it is necessary to look to case law for guidance. The decisions in Martin-Baker, Decro-Wall and Alpha Lettings indicate that the courts will look at the particular circumstances when deciding what is reasonable notice. These cases also indicate that the courts are seeking to protect the distributor and will dictate the length of reasonable notice to be in the distributor’s best interests. Such an approach would follow that of legislation and the courts towards commercial agency disputes. In such disputes, the courts seek to protect the agent, David, against its principal, Goliath. A judge in the case of Page v Combined Shipping and Trading spoke in terms of agents being a “down-trodden race” and said that they “need and should be afforded protection against their principals”. It would appear, from recent case law, that the courts are beginning to adopt a similar approach in relation to distributors.
Interestingly, the Court of Appeal in Alpha stated that the means of terminating the agreement is irrelevant when determining the length of the notice period. A termination with no notice or with less than due notice will be a breach of contract and damages must be appropriately assessed. However, it is irrelevant if the breach of contract was deliberate, or whether the termination is accompanied by untrue allegations: these will not affect the question of how long reasonable notice is.
In order to protect themselves, suppliers or distributors should consider the following when determining the reasonable length of any notice period:
- Is there a formal written agreement in place?
- How long has the arrangement been in existence?
- What percentage of the distributor’s turnover was the supplier responsible for
- Did the distributor have an exclusive distributorship agreement?
- How long will it take to bring the business to an end and how difficult will it be for the distributor to obtain another supplier, or the supplier to find another distributor?
There is an exception to the above where the parties have entered into a rolling contract. In the very recent case of G&A Limited v HN Jewellery, a distributor entered into an exclusive distributorship agreement to sell jewellery in the UK, Ireland and Gibraltar for three years rolling. The contract was silent as to termination. The distributor claimed that a three year rolling contract was only terminable on three years’ notice. However, the Court of Appeal decided that “rolling” meant that as at 1 January each year, the contract would become one for a further three years unless reasonable notice had been given. The Court of Appeal held that in any year the parties were free to give reasonable notice before the end of that year, bringing the contract to an end two years after the 1st January of the following year. It was decided that six weeks before the end of the year would be reasonable notice to terminate the contract two years later. This is an interesting decision and we await further case law to see how the courts treat this issue.
The decision in Alpha Lettings means that there is no definite answer as to what constitutes a period of reasonable notice when terminating a distributorship agreement. The court will look at a number of factors before deciding whether the notice period given was reasonable in the circumstances. In the absence of any clear guidance, further case law is required to enable parties to more accurately decide what notice period is reasonable to terminate the agreement. For the time being the only way for suppliers and distributors to avoid any confusion is to ensure that a clause fixing the notice period is inserted into their distributorship agreements.
Finally, as further evidence of the necessity to enter into a well drafted distributorship agreement, we should consider the Court of Appeal decision in Baird Textiles v Marks & Spencer. Baird had supplied garments to M&S for thirty years when, without warning, in October 1999, M&S terminated all supply arrangements between itself and Baird with effect from the end of the then current production season. Baird claimed that this cessation of business had caused it loss amounting to £50 million. However, there was no written agreement between the parties. The lack of certainty caused by the absence of a written agreement meant that the Court of Appeal could not find an intention to create legal relations. Baird’s claim for loss of future sales was unsuccessful since the Court of Appeal decided that there was not a supply agreement as opposed to a series of individual sales agreements.
This demonstrates that distributors operating without any formal written agreement may be unable to prove that they have a distributorship agreement, in which case they would not be entitled to any notice or compensation should the manufacturer decide not to make any further supplies.
This briefing note is for general information. For advice in applying this general information to your specific circumstances, please contact Stephen Sidkin or any members of the Fox Williams’ agentlaw team. (www.foxwilliams.com; Written by Steve Sidkin
16 September 04
Although it is often found surprising, and it is clearly different to the position of commercial agency agreements, the fact is that there is no statutory requirement for the length of notice required in order to terminate a distributorship agreement. If an agreement is silent as to notice, the common law requires that reasonable notice is given.
The starting point for understanding what might be reasonable notice is Martin-Baker Aircraft v Murison. Martin-Baker manufactured ejector seats for aircraft which Murison distributed in North America. The agreement was capable of being summarily terminated on breach or non-observance of its terms, but was silent as to termination for any other reason. When Martin-Baker wanted to end the agreement, it sought a declaration on the length of notice required.
The court declared that the contract was capable of being terminated by reasonable notice, and that the length of reasonable notice was to be decided with regard to the facts existing at the time when notice was given, not at the time that the contract was made. Therefore, neither party can determine what is reasonable notice until it comes to give the notice. At such a time, the party wanting to give notice must look at the existing situation between the parties in order to determine the reasonable notice period.
It was noted that, as sole distributor, Murison had to expend much time and money and that, under the agreement, Murison was subject to an express non-compete clause. The court held that, on these facts, the agreement was terminable on twelve months’ notice given at any time.
More than fifteen years later, the case of Decro-Wall v Practitioners in Marketing Ltd came before the courts. A distributorship agreement between Decro-Wall, a French manufacturer of tiles, and an English distributor was terminable by reasonable notice on either side. In order to develop the bathroom tile market in the UK, the English company spent a considerable amount of money on a national advertising campaign, increasing its warehouse capacity, and training new sales staff. The net profits were expected to be low in the first few years owing to the substantial start-up costs, with greater rewards anticipated subsequent to this. Within three years the French tile business constituted 83% of the distributor’s turnover. The agreement was terminated by Decro-Wall before the distributor could gain any real reward for its initial expenditure. The court held that, in view of the expenditure and work which the distributor had put into carrying out the agreement, reasonable notice to terminate was twelve months.
Alpha Lettings v Neptune is the most recent case to look at this issue. Neptune manufactured specialist medical and scientific valves which Alpha distributed exclusively in the UK. Alpha also distributed similar products for other manufacturers. An association between Neptune and Alpha began prior to 1983 but in November 1983 letters came into existence which brought more formality to the agreement. Their agreement, however, was silent as to the requisite notice period. Neptune terminated it by giving one month’s notice.
At first instance it was held that reasonable notice should have been given, and a reasonable notice period would have been one year. Neptune appealed to the Court of Appeal on the basis that the notice period awarded by the trial judge was excessive.
The Court of Appeal found that the twelve month notice period awarded by the judge was, in the circumstances, outside the range of notice periods reasonably open to him to award. The right range was between three and six months. Since there was not a non-compete covenant on Alpha either during or after the agreement, four months’ notice was sufficient time for the parties to bring the business to an end and for Alpha to find another supplier. Had the agreement placed greater restrictions on the distributor, it is likely that the court would have decided that a longer notice period would have been reasonable in the circumstances.
The position of notice periods and commercial agents is clearly set out in the Commercial Agents (Council Directive) Regulations 1993 (as amended). The Regulations contain prescribed minimum notice periods. In contrast, there is no statutory definition of what constitutes reasonable notice for the termination of a distributorship agreement.
Where the parties have not included detailed termination provisions in their distributorship agreements, it is necessary to look to case law for guidance. The decisions in Martin-Baker, Decro-Wall and Alpha Lettings indicate that the courts will look at the particular circumstances when deciding what is reasonable notice. These cases also indicate that the courts are seeking to protect the distributor and will dictate the length of reasonable notice to be in the distributor’s best interests. Such an approach would follow that of legislation and the courts towards commercial agency disputes. In such disputes, the courts seek to protect the agent, David, against its principal, Goliath. A judge in the case of Page v Combined Shipping and Trading spoke in terms of agents being a “down-trodden race” and said that they “need and should be afforded protection against their principals”. It would appear, from recent case law, that the courts are beginning to adopt a similar approach in relation to distributors.
Interestingly, the Court of Appeal in Alpha stated that the means of terminating the agreement is irrelevant when determining the length of the notice period. A termination with no notice or with less than due notice will be a breach of contract and damages must be appropriately assessed. However, it is irrelevant if the breach of contract was deliberate, or whether the termination is accompanied by untrue allegations: these will not affect the question of how long reasonable notice is.
In order to protect themselves, suppliers or distributors should consider the following when determining the reasonable length of any notice period:
- Is there a formal written agreement in place?
- How long has the arrangement been in existence?
- What percentage of the distributor’s turnover was the supplier responsible for
- Did the distributor have an exclusive distributorship agreement?
- How long will it take to bring the business to an end and how difficult will it be for the distributor to obtain another supplier, or the supplier to find another distributor?
There is an exception to the above where the parties have entered into a rolling contract. In the very recent case of G&A Limited v HN Jewellery, a distributor entered into an exclusive distributorship agreement to sell jewellery in the UK, Ireland and Gibraltar for three years rolling. The contract was silent as to termination. The distributor claimed that a three year rolling contract was only terminable on three years’ notice. However, the Court of Appeal decided that “rolling” meant that as at 1 January each year, the contract would become one for a further three years unless reasonable notice had been given. The Court of Appeal held that in any year the parties were free to give reasonable notice before the end of that year, bringing the contract to an end two years after the 1st January of the following year. It was decided that six weeks before the end of the year would be reasonable notice to terminate the contract two years later. This is an interesting decision and we await further case law to see how the courts treat this issue.
The decision in Alpha Lettings means that there is no definite answer as to what constitutes a period of reasonable notice when terminating a distributorship agreement. The court will look at a number of factors before deciding whether the notice period given was reasonable in the circumstances. In the absence of any clear guidance, further case law is required to enable parties to more accurately decide what notice period is reasonable to terminate the agreement. For the time being the only way for suppliers and distributors to avoid any confusion is to ensure that a clause fixing the notice period is inserted into their distributorship agreements.
Finally, as further evidence of the necessity to enter into a well drafted distributorship agreement, we should consider the Court of Appeal decision in Baird Textiles v Marks & Spencer. Baird had supplied garments to M&S for thirty years when, without warning, in October 1999, M&S terminated all supply arrangements between itself and Baird with effect from the end of the then current production season. Baird claimed that this cessation of business had caused it loss amounting to £50 million. However, there was no written agreement between the parties. The lack of certainty caused by the absence of a written agreement meant that the Court of Appeal could not find an intention to create legal relations. Baird’s claim for loss of future sales was unsuccessful since the Court of Appeal decided that there was not a supply agreement as opposed to a series of individual sales agreements.
This demonstrates that distributors operating without any formal written agreement may be unable to prove that they have a distributorship agreement, in which case they would not be entitled to any notice or compensation should the manufacturer decide not to make any further supplies.
This briefing note is for general information. For advice in applying this general information to your specific circumstances, please contact Stephen Sidkin or any members of the Fox Williams’ agentlaw team. (www.foxwilliams.com; www.agentlaw.co.uk).
