Distributors and suppliers – how can you terminate an unwritten contract?

As a distributor, you may have distributed a supplier’s products for many years without there ever being a written contract in place which sets out the terms of that distributorship relationship.

Even if you buy the products from the supplier on the supplier’s written terms and conditions of sale, usually those terms will apply only to the product purchases you make, and not to the overarching distribution arrangement itself.

But the absence of a written contract does not mean that there is no contract at all – distributorship agreements do not need to be in written form.

Many commercial contracts are unwritten. Sometimes, as in the case of commercial agency contracts, there is legislation (the Commercial Agents Regulations) which “fills in the gaps” in terms of the parties’ rights and obligations, how the contract can be ended, and what happens when it ends.

Whilst there is no English legislation which does the same job for distribution contracts, the gaps in unwritten distribution contracts will to a significant extent be filled by terms implied into the contracts by English law.

The obvious gap which will not be addressed in an unwritten distribution contract is how the contract can be terminated.

How do you end an unwritten distribution contract?

Under English law, either party has a right to terminate a contract immediately if the other party has committed a breach of the contract which is so serious that it undermines the whole contract (a repudiatory breach).

But what if there is no serious breach, but the supplier or distributor wants to bring the distribution contract to an end anyway?

In a written distribution contract, there will usually be a right for either party to terminate the contract “for convenience” by giving a period of notice (such as six or 12 months’ notice).

In unwritten distribution contracts which are not fixed term contracts, the starting point will usually be that at the time that the parties entered into the contract they cannot have intended that it would go on forever, with neither party having the right to exit the contract unless there was a serious (repudiatory) breach of it by one party.

As such the law will usually imply a term into the unwritten distribution contract that either party can terminate it by giving the other “reasonable notice”.

What constitutes reasonable notice of termination?

The answer will depend on the nature of the distribution arrangement in question, and the circumstances in play when the notice of termination is given.

In a series of judgments the English courts have provided a number of pointers as follows:

• If the distribution relationship has a high degree of formality and predictable performance, that will suggest that a longer period of notice is appropriate than if the distribution relationship is very relaxed and unpredictable.
• If the supplier’s business accounts for a high proportion of the distributor’s overall turnover, the distributor will have a stronger argument that a longer notice period is appropriate. If the distributor is not permitted to sell products which compete with the supplier’s products (or if it is implicitly accepted by the parties that the distributor will not sell competing products), then that would suggest a longer notice period would be appropriate.
• If the distributor has put a lot of (what was called by a court) “expensive spadework” into establishing or developing a market for the supplier’s products (as will often be the case in the first few years of the distribution relationship) without having had the chance to recoup that initial investment, then that would suggest a longer period of notice would be appropriate.
• If the business of the supplier is seasonal in nature, this might indicate that the period of notice should be calculated in seasons rather than in months.
• Other factors may also come into play, depending on the industry in which the supplier and distributor operate and the particular circumstances of the distribution relationship.

Take home points

• If you are a supplier with a distributor and there is no written distribution contract you should not assume you can simply end the distribution relationship without giving notice – it is likely that the distributor will be entitled to some notice, even if it is not a lengthy period.
• If you are a distributor facing termination by your supplier, remember that even though you may not have a written contract, you may have a right to reasonable notice of termination, or a claim in damages against your supplier if the supplier ends the relationship without notice.