How not to renegotiate the terms of a distributorship or supply agreement

Introduction

From time to time suppliers will be faced with their distributors or customers failing to pay for goods supplied in accordance with the terms of the distributorship or supply agreement. As a recent High Court judgment makes clear, following the terms of the distributorship or supply agreement is critical in seeking to obtain payment.

Conversely, failing to follow the terms of the agreement is likely to be fatal.

The facts

In September 2018 Medina Dairy, a supplier of fresh milk and dairy products to supermarkets, entered into a supply agreement with Nampak, a producer of plastic bottles, for the supply of bottles. However, by the end of 2019 Medina Dairy owed around £800,000 in overdue sums (and £4.3 million in total) to Nampak despite the parties corresponding for a year regarding the outstanding sums.

The supply agreement provided that:

• payment was to be made by Medina Dairy within 120 days of the date of the invoice (and invoices to be submitted at any time of the delivery);
• if payment by Medina Dairy was overdue:
  • Nampak was required to give Medina Dairy written notice of the overdue payment;
  • Medina Dairy was required either (i) to dispute the invoice, or (ii) to pay the invoice within 14 days; and
  • if no action was taken by Medina Dairy within the 14-day period, Nampak had the right to suspend all deliveries of bottles until all undisputed overdue amounts had been paid in full.
• Nampak had the right to terminate the supply agreement if Medina failed to pay an invoice within 14 days of due date, except where there was a genuine dispute relating to the payment.

On 23 and 24 January 2020, Nampak gave Medina Dairy 28 days’ notice to source alternative supply of bottles and requested payment in full of the outstanding debt. Nampak went on to say that further stock would only be supplied if payments were made in advance of delivery, and that new prices would be applied on deliveries from 1 February 2020.

Injunction

Medina Dairy applied for and obtained an injunction. The court granted the injunction, ordering Nampak:

1. not to refuse to supply goods ordered by Medina Dairy in accordance with the terms of the supply agreement;
2. not to increase the price of its goods other than in accordance with the terms of the supply agreement; and
3. not to change payment terms in respect of orders placed by Medina Dairy.

Further hearing

Within 2 weeks the matter than came back to the court as to whether the injunction should be continued.

The judge decided that Nampak had not sought to terminate the supply agreement in its communications of 23 and 24 January 2020. Rather, what Nampak had sought to do was:

• to suspend supply on 28 days’ notice if the outstanding amount was not paid by Medina Dairy; and
• (more significantly), to amend the terms of the supply agreement to require payment for deliveries in advance and to impose a price increase in respect of the goods from 1 February 2020.

In summary, the court found that Nampak sought to amend the terms of the supply agreement unilaterally, failing which it would refuse to supply to Medina Dairy.

The judge made clear that the existence of the outstanding debt was not a justification for threatening to ignore the terms of the supply agreement. With reference to this the court found that:

• although Nampak may have had a right to terminate the supply agreement due to Medina Dairy’s non-payment, it had not exercised such a right; and
• although Nampak had a contractual right to suspend deliveries if payment was not made by Medina Dairy of invoices, it could only do so in accordance with the terms of the supply agreement (which, as mentioned, provided for Nampak to give notice of the overdue invoice and then give Medina Dairy 14 days to pay or dispute the relevant invoice).

The judge said that Nampak was not entitled to act in disregard of the terms of the supply agreement whilst that agreement remained ongoing.

Unsurprisingly the judge decided to continue the injunction to trial or further order, making it clear however that the injunction did not:

• prevent Nampak from terminating the supply agreement in accordance with its terms; or
• prevent Nampak from suspending deliveries in accordance with its terms.

The judge made it clear that Nampak had a right to receive the outstanding payments and interest from Medina Dairy and it could exercise its right to suspend deliveries in accordance with the terms of the supply agreement. What it could not do, however (and what the injunction prevented it from doing) was to suspend deliveries without complying with the contractual procedure, or to unilaterally vary the terms of the supply agreement.

Take home points

• The first step (which is critical) is to establish the terms of the contract. These may be included within a distributorship or supply agreement or, more commonly, in the terms and conditions of sale or purchase which apply to the supply of goods under the agreement. The contractual terms will set the parameters of what the supplier can do when faced with non-payment of invoices.
• When the supplier has established its rights under the agreement, it must ensure that it exercises its rights strictly in accordance with the contractual terms. This includes ensuring that:
  • any required notices are sent to the customer; and
  • such notices are sent in accordance with the notice provisions set out in the agreement.
• In the Medina Dairy case, the supplier had both a right to terminate for non-payment and a right to suspend deliveries following non-payment. However, it had not exercised either right in compliance with the terms of the supply agreement, seeking instead to override the terms of the supply agreement. It was not permitted to do this, and this was its downfall in the injunction application.