This article first featured in Cabinet Maker
Can the rights given by the Commercial Agents Regulations to agents also apply to distributors? The textbook says no. But this has not stopped a number of distributors in the English courts from seeking the statutory protections enjoyed by their agent cousins.
Irrespective of this, a recent judgment suggests that distributors may achieve their objective by the back door.
Jackson Distribution Limited was the sole distributor of “Dekline” products in the UK and Ireland from March 2005. “Dekline” is the brand name of California corporation, Tum Yeto Inc. The distribution agreement came to an end in August 2007. Jackson sought to recover damages from Tum Yeto for alleged breach of contract in bringing the distribution agreement to an end.
Discussions about Jackson’s appointment and written agreements
Between September 2004 and March 2005, there were various discussions between Tum Yeto and Jackson leading up Jackson’s appointment as distributor. On 14 March 2005, the first samples of Dekline products were delivered to Jackson. Subsequently, Tum Yeto confirmed by email that Jackson was to be the sole distributor for Dekline in the UK and Ireland and there was an exchange of emails confirming payment terms.
In September 2005 (about a year after discussions first started), Jackson presented a draft distribution agreement to Tum Yeto (“the Jackson Draft”). The Jackson Draft stated that it was to be for an initial 6 year period with provision for extension for a further 6 years at the request of Jackson and provided for the agreement to be terminated if either party was in material breach. Following receipt of the Jackson Draft, Tum Yeto confirmed by email that Jackson had been appointed as sole distributor of Dekline in the UK and Ireland “until such time as the distribution agreement has been finalised”.
However, in May 2006, Tum Yeto presented a different draft agreement to Jackson (“the Tum Yeto Draft”). The duration clause provided for an initial period of 6 years with provision for a 3 year extension. The termination clause was the same as in the Jackson Draft, except that the provisions dealing with what was to happen post termination were differently framed.
In July 2006, Jackson stated in an email to Tum Yeto that the Tum Yeto Draft was not acceptable.
There were further discussions between the parties as to the terms of the agreements but no written agreement was ever signed.
So what were the terms of the agreement between Jackson and Tum Yeto?
Before the court Jackson claimed that the parties’ conduct showed that they were acting on the terms of the Jackson Draft. It is well established law that the terms of an agreement can be accepted by conduct. But the party arguing that the parties acted on the terms of an unsigned written agreement must be able to show that to be the case.
The judge considered that Jackson had failed to show this to be the position because:
- The business relationship between the parties was conducted satisfactorily on the basis of what was discussed in March 2005 without the terms of the Jackson draft having been agreed.
- The correspondence between the parties dealing with the terms of the proposed written agreement made it clear that there were ongoing negotiations as to what the precise terms should be. Neither party fully accepted the others’ terms and recognised that this was something that needed to be resolved.
- Upon receipt of the Tum Yeto Draft, there was no response from Jackson to the effect that there was already a binding contract in existence (namely, the Jackson Draft).
The judge therefore concluded that there was no formal written agreement in place between the parties because Jackson and Tum Yeto never agreed that either the Jackson Draft nor the Tum Yeto Draft should govern their contractual relationship.
Given that there was an unwritten agreement between the parties, on what basis could the agreement be terminated?
For the purposes of the litigation it had been accepted by both parties that the agreement between them could not simply be terminated without any notice (in the absence of breach). Accordingly the judge concluded that there was an implied term that the distribution agreement should be terminable on reasonable notice.
Was Tum Yeto entitled to terminate for serious breach?
Tum Yeto alleged that Jackson failed properly to promote and sell Dekline. The judge examined the various specific allegations but found all of them to be without substance. For example, Tum Yeto sought to rely upon the decline in orders between Spring/Summer 2006 and Spring/Summer 2007 as indicating Jackson’s poor promotion of the products. Jackson attributed this decline to the lack of new designs by Tum Yeto and the poor quality of product production.
The judge took the view that the evidence which Tum Yeto relied upon in support of this alleged breach was thin. In contrast, the judge accepted Jackson’s evidence of the substantial investment made and marketing steps taken in the promotion of Dekline. He did not accept that any decline in sales was attributable to any failure by Jackson to promote Dekline.
Accordingly, the judge concluded that there were no repudiatory breaches of contract by Jackson entitling Tum Yeto to terminate the agreement with immediate effect.
Given that Tum Yeto was wrong in terminating the agreement for serious breach, what would have been reasonable notice of termination?
Jackson’s position was that 2 years’ notice of termination would have been reasonable notice. In contrast, Tum Yeto contended that 4 to 6 months’ notice would have sufficed.
In 2003 the High Court had established the following principles:
- In the absence of any express term, the question of what is reasonable notice of termination must be determined as at the time of termination.
- One very important consideration is the degree of formality in the relationship. The more relaxed the relationship, the less likely it will be that the law would imply a lengthy notice period.
- Another important factor is the ability of the distributor to sell products of other suppliers, including competing products. The less dependent the distributor’s business is on the supplier’s products, the less likely it will be that a lengthy notice period should be implied.
- The duration of the relationship was considered as a potential factor. This was on the basis that a distributor may have to invest considerable capital at an early stage of the relationship to build up the business which may thereafter run with moderate annual expenditure. This would militate in favour of a lengthier notice period in the earlier years of the relationship and a lesser period once the business is up and running. On this basis, initial capital investment and business expenses out of the ordinary run of things are likely to be relevant to the amount of notice but ordinary and recurring expenditure is unlikely to have much relevance.
- An obligation on the distributor to use his best endeavours to promote the supplier’s products after notice of termination has been given by either party is an indication in favour of a shorter rather than a longer period of notice.
The judge in Jackson applied the above factors.
Was Tum Yeto in breach of contract in the way it terminated the agreement?
Tum Yeto purported to terminate the distribution agreement by letter headed “Notice of Termination of Distribution” dated 27 July 2007 and email of 2 August 2007. The letter set out some unfounded alleged breaches of the distribution agreement by Jackson. In the letter and email, Tum Yeto purported to make it a condition that:
Jackson Distribution provides a full and final release of any and all claims associated with the distribution relationship, and acknowledges and consents to Tum Yeto obtaining a new distributor for the territory immediately marketing the brand Dekline and to immediately begin to pre-book orders for spring 2008 delivery.
This proposal was not accepted by Jackson. The effect of Tum Yeto’s letter and email was to terminate the distribution agreement between Tum Yeto and Jackson without notice from the beginning of August 2005. Accordingly, in not giving Jackson reasonable notice of termination, Tum Yeto acted in breach of the distribution agreement.
The end result
The judge considers that Jackson had a claim for damages for the loss of a nine month notice period. This can be compared to the maximum of a year’s payment to a commercial agent entitled to an indemnity under the Regulations.
But irrespective of this, the Jackson case is a text book example of how not to enter into a distribution agreement!