In last month’s agentlaw news, we explored the steps that commercial agents should take to prepare for the end of their agency agreements. But what of distributors? How can they best prepare for termination or non-renewal of their distribution agreements?
As with agents, a proactive approach can help protect key rights, preserve commercial relationships, and mitigate exposure.
Keep complying during the notice period before termination
For distributors facing termination, to continue to comply with the terms of the agreement up to the termination date is critical. This applies whether the agreement is written or unwritten. But where the agreement is in writing, distributors should review the express terms of the agreement to be clear on what their obligations are.
A failure to abide by contractual terms, such as minimum purchase requirements or restrictions on dealing with competitors, can constitute a breach of contract and expose the distributor to the immediate termination of the distribution agreement and a claim for damages by the supplier. This can pose particular risk for distributors which are seeking a replacement supplier.
Check for ongoing obligations
The agreement may also include post-termination requirements which shall survive the end of the agreement. By way of example, even where the distribution agreement does not contain express requirements concerning confidential information, such requirements may be implied where the information has:
- commercial value; or
- personal sensitivity, and
- is disclosed in circumstances giving rise to an obligation of confidence.
A distributor which has received information in confidence cannot take unfair advantage of it and must not make use of it or disclose it to a third party to the prejudice of the discloser of the information without obtaining their prior consent.
Whether information can lose its confidential character by becoming out of date and ceasing to have any commercial value will be industry specific. But overall distributors should assume that confidential information remains protected even when the distribution agreement has ended, especially in the case of unwritten agreements, where the duration of confidentiality is rarely discussed, let alone agreed, by the parties.
Protecting customer relationships
The end of a distribution agreement can place customer relationships at risk, particularly where customers continue to expect to receive the products which have previously been supplied. Distributors should consider whether they can address the increased pressure on their relationships with customers – without infringing non-compete restrictions in the distribution agreement which is ending!
Where it is possible to do so, not least where the agreement permits or credit terms allow, distributors may wish to stockpile key products before termination. In some situations this can provide a short-term buffer and allow continued supply to customers. However, this strategy must be balanced with any sell-off periods set out in the agreement.
The distributor should be aware of the key requirements of the products they are distributing. Where products require ongoing servicing or the supply of spare parts, the distributor should clarify whether the supplier is contractually bound under the distribution agreement to continue providing these during the notice period. In most cases the answer is likely to be yes, as the agreement remains in force until expiry. However, this should not be assumed. The distributor ought to confirm the position in the distribution agreement, or, if the drafting is unclear, seek to negotiate written assurances during termination discussions to avoid any disruption to its ability to meet customer obligations.
A separate issue arises in relation to stock that remains in the distributor’s possession after the termination date. Once the agreement has ended, the supplier’s obligations to support that stock may no longer apply. The distributor should therefore establish in advance whether the supplier has any obligation to assist with unsold inventory, for example by continuing to provide parts or servicing support, or by agreeing to a stock buy-back or run-off arrangement. Where no such obligation exists, the distributor may wish to negotiate commercial terms to deal with leftover stock as part of the termination process.
TUPE
It is possible that the Transfer of Undertakings (Protection of Employment) Regulations (“TUPE”) may apply on the termination of the agreement, particularly if (briefly) the activities before or after the agreement terminates are essentially the same.
If TUPE applies, then the employment of staff who are assigned to the distribution arrangement may transfer automatically to either the new distributor, or alternatively the client if the services are being brought in-house. An application of TUPE also triggers a duty to inform and consult with staff representatives, and to provide employee-related information to the transferee prior to the transfer.
The agreement may set out certain arrangements in relation to the potential application of TUPE, which may include onerous indemnities on the part of the distributor, and therefore should be examined carefully.
Enforcing reasonable notice
Where an agreement is silent on duration or termination for convenience there may well be an implied term as to reasonable notice as was confirmed by the Court of Appeal in a judgment given in 2023.
“A contract which contains no express provision for its determination is generally (though not invariably) subject to an implied term that it is terminable by reasonable notice.”
What qualifies as ‘reasonable notice’ is fact-specific, but in the Court of Appeal judgment mentioned above, three months’ notice was deemed sufficient for a longstanding relationship taking account of the following factors:
- exclusive supply through the distributor for specific customers;
- stability of pricing;
- reasonable notice before termination; and
- supplier’s best endeavors to meet stock orders.
Jurisdiction and governing law – importance in unwritten agreements
For unwritten distribution agreements, it is critical to identify the governing law and whether it is the supplier’s courts or the distributor’s courts that will determine disputes (jurisdiction).
In the absence of election in the agreement, the governing law of a distribution agreement is generally that of the distributor’s habitual residence. In contrast, in an ordinary sales contract the governing law is that of the seller’s habitual residence.
In respect of jurisdiction, some years ago the European Court of Justice ruled that jurisdiction may depend on:
- the place of delivery of goods (in sales contracts); and
- the habitual residence of the distributor (in distribution contracts).
Despite the UK’s exit from the EU, this ruling still holds good.
Identifying the governing law and jurisdiction in advance can help avoid uncertainty and reduce the scope for costly preliminary disputes. It enables the parties to assess the potential legal risks and remedies available as a result of termination. This foresight can also assist in negotiating settlements more efficiently, as both sides will have clarity on the legal framework that would govern any proceedings.
Summary
The end of a distribution relationship is a vulnerable time for distributors, but also an opportunity to reinforce legal and commercial positioning. Whether by ensuring compliance, documenting confidential information, stocking smartly, navigating TUPE risks, enforcing reasonable notice, or leveraging jurisdictional advantages, distributors who prepare before the end are more likely to avoid disputes and maximise value.
How we can help
Fox Williams’ distribution law specialists are available to help you prepare and protect your interests.
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