In a supplier / distributor relationship the timing of the performance of a party’s contractual obligations can be critical.
Often there will be included in a distributorship a provision stating either that:
- “time is of the essence” in relation to, say, delivery of goods; or
- alternatively (and more likely if the supplier has drafted the agreement), that “time shall not be of the essence” regarding that obligation.
What is the significance of the inclusion of either provision?
If the supplier fails to deliver the goods in accordance with a particular date or time specified in the agreement, the distributor will be entitled to claim damages against the supplier. However, where time is expressly stated to be of the essence for delivery of the goods, the failure by the supplier amounts to a fundamental breach of contract with the result that the distributor may also rely on that provision to terminate the agreement.
It is possible to envisage a situation where a manufacturer is late in delivering goods to the supplier, which in turn results in the supplier’s failure to deliver the goods on time to the distributor. Even where the delay is due to the fault of a third party, if the distributorship agreement provides that time is of the essence in relation to delivery of goods the distributor may terminate the agreement and claim damages against the supplier. Suppliers will therefore want to include an express provision that time shall not be of the essence for delivery of goods.
In contrast, suppliers are likely to want to include a provision that time for payment for the goods shall be of the essence. This is because the supplier will have the right to terminate the agreement if the customer fails to pay on time. In particular, a distributor should be aware that a supplier may provide that time is of the essence in performing a more trivial obligation. This enables the supplier to rely on a breach by the distributor of that obligation as a “get out” option in order to claim damages and terminate the agreement.
It is possible for a term to be implied that the time of performance of a particular obligation is of the essence if the agreement does not expressly state that time shall not be of the essence. Such a term will be implied where:
(i) circumstances of the situation such as the actions of the parties or the subject matter of the agreement indicate that a particular date or time must be complied with; or
(ii) one party serves reasonable notice on the other requiring performance of a particular obligation by a specific date or time.
How does the agreement interact with the supplier’s terms and conditions of sale?
Alongside the terms of the distributorship agreement between the parties, suppliers will often sell their goods on their standard terms and conditions of sale. Even if the agreement is silent as to whether time is of the essence in relation to, for example, delivery of the goods, it is possible for terms and conditions of sale to expressly state that time shall not be of the essence regarding delivery.
But whether or not the terms and conditions of sale apply will depend on whether such terms are incorporated into the sale of the goods under the distributorship agreement. Where they have been incorporated, the agreement will usually state which terms (those contained in the agreement or those in the supplier’s standard terms and conditions of sale) will apply in the event of a dispute. Distributors should be particularly alert when the terms and conditions of sale are stated to prevail and they should ensure that they have obtained and read a copy of such terms.
And why does it all matter?
Because if the relationship between supplier and distributor is breaking down, a time of the essence provision used to justify termination of a distributorship agreement can mean:
- the supplier avoiding having to give notice to bring the distributorship agreement to an end; or
- the distributor being able to claim that it is entitled to damages as it did not receive notice in accordance with the terms of the agreement; or
- where the law of the distributor’s country provides for the distributor to be compensated on termination, the supplier avoiding having to pay such compensation to the distributor.