Local distributors and commercial agentsDistribution relationships
What alternative distribution relationships are available to a supplier?
There are a number of options available to suppliers for establishing a distribution structure. The most common structures and their principal features are outlined below.
- Direct distribution: the foreign supplier uses a Canadian subsidiary or its own employees to sell goods in Canada.
- Independent agents and representatives: the supplier relies on an agent or representative to originate sales of goods in Canada and pays them a commission on the goods sold to customers in Canada.
- Trademark licensing: the supplier gives a Canadian entity a licence entitling it to use its intellectual property rights to manufacture and distribute goods for the Canadian market.
- Franchises: this gives rise to special considerations given that several Canadian provinces (namely, Ontario, British Columbia, Alberta, Prince Edward Island, New Brunswick and Manitoba) have enacted franchise-specific legislation (the Franchise Acts), under which the term ‘franchise’ is broadly defined. As a result, a variety of other contractual relationships, including distribution, agency and trademark licensing agreements, may possibly be encompassed. Prior to formalising any particular distribution, agency or trademark licensing arrangement for Canada, parties should carefully examine provincial legislation and consider whether they would be subject to franchise legislation, which entails a duty of disclosure and fair dealing and may give rise to additional requirements for a supplier that are not generally intended in the context of a distribution, agency or trademark licensing arrangement.
- Private label: a Canadian distributor sells the foreign supplier’s products under its own name and trademark. This allows the foreign supplier to sell products in Canada while having the benefit of being recognised under local brand name. However, it generally provides very little control by the supplier.
- Joint ventures: the supplier relies on a local distribution partner that is owned in part by the supplier.
Each of the above can be established by a contractual arrangement, and the parties are generally free to determine their respective rights and obligations under the agreement, subject to certain restrictions.Legislation and regulators
What laws and government agencies regulate the relationship between a supplier and its distributor, agent or other representative? Are there industry self-regulatory constraints or other restrictions that may govern the distribution relationship?
In general, parties to a distribution or agency agreement are free to establish the terms of their relationship by contract, subject to the expansive definition of a franchise under the Franchise Acts. In addition, certain industries are specifically regulated by federal or provincial law. As a result, care should be exercised when structuring an arrangement that may fall within the ambit of the Franchise Acts or that, by its nature, may be subject to restrictions in a regulated industry.
Additional restrictions arise as a result of competition laws.Contract termination
Are there any restrictions on a supplier’s right to terminate a distribution relationship without cause if permitted by contract? Is any specific cause required to terminate a distribution relationship? Do the answers differ for a decision not to renew the distribution relationship when the contract term expires?
The parties to a distribution or agency agreement can provide for termination without cause in the contract. If the contract stipulates that this termination can occur without notice and with immediate effect, the stipulation will generally be enforced as long as it is provided for in express and unequivocal terms. If the contract is silent as to the requirement to provide notice in the event of a termination without cause, the length of the notice period will vary according to certain factors.
No specific cause is required to terminate a distribution or agency contract. If the contract is silent as to the possibility of terminating without cause, it is generally possible to terminate the arrangement upon reasonable notice. (What constitutes reasonable notice will be determined according to certain factors.)
As for termination with cause, the parties may establish, by contract, occurrences that constitute events of default giving rise to termination. Where the contract is silent, Canadian courts have generally required evidence of a fundamental breach (or, in Quebec, a serious or material breach) to find cause for termination. Short of establishing a cause, the provision of reasonable notice would be necessary to lawfully terminate the relationship. In addition, Quebec law requires that termination rights always be exercised in good faith.
If the contract is for a fixed term, it would naturally expire at the end of the term, and there would not generally be any compensation payable at that time. However, if the parties choose to continue their relationship after the end of the term, it may constitute an implicit renewal or an extension of the contract for an indeterminate term.
Is any mandatory compensation or indemnity required to be paid in the event of a termination without cause or otherwise?
There are no statutory provisions governing compensation upon termination for distribution or agency agreements. In general, courts have found that no compensation is due if reasonable notice has been given, and compensation equivalent to reasonable notice is typically granted where a contract is terminated without notice. The amount of the indemnity, which effectively replaces the notice period, would be estimated based on past profits, and would take into account factors such as the length of the relationship, the nature of the relationship (including whether it was exclusive), industry practice, investments made by the distributor for purposes of the agreement and the time it would take the distributor to obtain a similar source of income from an alternative supplier.
Parties can agree to pre-establish a liquidated damages clause or, pursuant to the Civil Code of Quebec, a termination penalty, and the contractual provision will be enforceable unless it is deemed unreasonable by the courts.Transfer of rights or ownership
Will your jurisdiction enforce a distribution contract provision prohibiting or restricting the transfer of the distribution rights to the supplier’s products, all or part of the ownership of the distributor or agent, or the distributor or agent’s business to a third party?
Generally, yes. If the contract is silent with respect to transfers or changes of control, then it is generally assumed that such an operation is permitted without the supplier’s consent unless the arrangement constitutes an intuitu personae contract.
However, in Quebec, if the contract does not provide whether an assignment or transfer may occur without the other party’s consent, their consent would generally be required.
Law stated dateCorrect as of
Give the date on which the information above is accurate.
1 December 2019