Interpreting a distributorship agreement

Interpretation is a key aspect of humanity. Incorrect interpretation of words, speech, actions, and reactions can have fatal consequences. On a lesser scale, the same is true of distributorship agreements in respect of the use defined terms. Put another way for a supplier the key to a successful distributorship agreement is often found in the definitions and interpretation clause.

A couple of examples serve to highlight the issue. For the purpose of a distributorship agreement:

Q. what are “Products”?

A. The products which are the subject of the distributorship agreement.

But there is a difference between Products:

  1. being defined as the “products of the type and specification manufactured and sold under the Trade Marks and listed in Schedule 1 from time to time”; and
  2. a weaker definition such as “the products supplied by the supplier”.

The weaker definition can work against the interests of both the supplier and the distributor.

However, the stronger definition works to the advantage of the supplier. As such if it should turn out that during the continuance of the distributorship agreement that the supplier develops other products which the supplier chooses not to allow the distributor to distribute, the distributor will have to argue that:

  1. the discretion given to the supplier was subject to an objective test of reasonableness; and
  2. the supplier acted unreasonably in not allowing the distributor to distribute the product in question.

Having said that, if the distributor is putting forward such an argument, there is a reasonable chance that the relationship between supplier and distributor has broken down!

Other definitions of products may give rise to questions as to whether a modification of an existing product, the rework of an old product, or an enhancement of another existing product come within the definition of “Products”.

A lack of clarity over the definition of the Territory for which the distributor is appointed can also lead to disagreement. Drawing lines on large scale maps rarely works. Imprecision in the use of regional names can have the same effect. And this is before political considerations come in to play (think the break up of Yugoslavia, the fall of the Berlin wall, and the handover of Hong Kong to China).

As a rule of thumb the greater the clarity used and thought given to defined terms, the less room there is likely to be for dispute.

Meanwhile how many disputes, fights, and wars have started simply as a result of misinterpretation?


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