Could it be that Covid-19 provides distributors and suppliers with an opportunity?

From the distributor’s perspective thoughts are likely to be at three levels.

1. Does the distributor want the distributorship agreement to continue?

Is this a distributorship agreement which the distributor wants to continue? What was originally a market leading product may no longer be so. Separately the nature of the distributor’s market may have changed.

Either way if the distributorship agreement still has a number of years to run and contains:

  • minimum purchase obligations; or
  • non-compete provisions; or
  • both,

the distributor would be forgiven for considering a way out.

2. Conserving cash

Many businesses are currently looking to conserve cash.

The supplier may be unable to fulfil particular orders received from the distributor. If so, then depending on the amount owed by the distributor for goods already supplied, the distributor might claim that the supplier’s failure to fulfil a particular order amounts to a material breach of contract and claim that it has brought the agreement to an end and that the distributor is entitled to damages for the wrongful ending of the agreement.

But rather than pursue a claim for damages through the courts, the distributor may be able to exercise a right of set off – and set off the claimed damages against the monies owed by the distributor for the goods already supplied.

3. Does the law provide particular protection for distributors?

The laws of some countries provide particular protection for distributors when a distributorship agreement ends. In some cases the laws of these countries will override the choice of law stated in the distributorship agreement itself.

Certainly a number of European countries provide particular protection for distributors (for example, Belgium, Germany, and Spain). Similarly further afield (for example, Brazil, South Korea, and the UAE).

The protection extends to awarding damages for the loss of the distributorship in a way which is comparable to the statutory compensation or indemnity which commercial agents enjoy under English law when an agency agreement terminates (other than for a few specific exceptions). Indeed it is possible to point to a number of report judgments of the English courts concerning the termination of distributorship agreements where in awarding damages the judges appear to have been influenced by English commercial agency law.

The terms of the distributorship agreement

But to be able to pursue any of the above it is critical that the distributor is aware of the specific terms of the distributorship agreement. As such:

  • does it include a force majeure clause?
  • if so, does the force majeure clause apply in the current circumstances and to the supplier’s failure to fulfil order?
  • is there an express exclusion of the right of set off?
  • what constitutes material breach under the terms of the distributorship agreement?
  • what is the governing law of the distributorship agreement?
  • does that law provide particular protection for distributors?

So far as suppliers are concerned, the above points can be read largely in reverse.

As a consequence, for both distributors and suppliers being aware of the terms of the distributorship agreement is a must.

Articles and commentary by our legal experts on the impact of Covid-19 are all available here.

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