A recent decision of the High Court has given some useful guidance on factors to consider when looking at exiting a distribution contract and in particular, what length of time constitutes a 'reasonable period' of notice for the purposes of no-fault termination or termination 'at convenience'.
This is likely to be an issue where there is no formal written agreement or the contract itself is silent on the issue (which means a 'reasonable period' of notice will usually be implied by law) or in some cases where an agreement actually refers to a reasonable period of notice.
The case in question, Jackson Distribution Limited v Tom Yetto Inc. related to a distribution arrangement between J and T whereby J (on the basis of discussions at a trade show) agreed to be appointed as T's distributor of skating boots and shoe products in the UK and Ireland.
Rather than being contained in a signed written document, the alleged contract was based on an exchange of emails and discussions between T and J. In this case, T had confirmed by email that J should act as its distributor and they should agree terms. J forwarded a draft distribution agreement to T, which contained terms relating to issues such as parties' obligations, price and payment but this was never signed (although T did confirm receipt). T also forwarded its own draft contract, which again was never signed.
T subsequently sought to terminate the arrangement and gave J six-months notice. However, T also simultaneously claimed that J had in fact breached the agreement between the parties and this effectively terminated the arrangements without notice.
The distributor J then claimed damages against T for wrongful termination of the contract. In his judgement, Justice Royce ruled that:
- Neither draft agreements submitted by each party was shown to have been acted on, so neither of them applied (and the termination provisions in those drafts could not be relied upon).
- There was a contract however, which was based on the verbal confirmation that J should be sole distributor and subsequent exchange of emails. There were certain terms implied by law such as 'to supply products in a timely manner' and to use 'good workmanship'.
- Looking at the facts, there had been no breach of contract by J in this case justifying T's immediate termination of the contract.
- It was an implied term that the contract could be terminated 'on reasonable notice' to the other party.
- The Judge looked at the circumstances of the distribution arrangement to determine what a reasonable period should be including: whether the distributor was prevented from selling competing products (which could be inferred in this case); length of relationship (2.5 years); extent of early investment by distributor (which was significant) and the percentage of distributor's overall turnover made up by supplier's products (which was less than 50%). The Court also considered specific facts in this case such as the seasonal nature of skating products; plans to open new business premises; and the time it would take J to find an alternative brand. In conclusion, the Court considered that nine months' would have been a reasonable notice period.
Termination of distributors/resellers can be a tricky issue for manufacturers and the case gives a useful checklist of facts to consider when deciding what's reasonable notice. That said, each case is likely to turn on its facts and previously periods of 6 and 3 months have been held to be "reasonable" in the circumstances.
For the distributor or reseller (that does not benefit from regulatory protection offered to commercial agents), a period of notice needs to be sufficiently long to offer them the ability to find alternative business.
At the end of the day, there is clearly no substitute for having a written contract with defined termination provisions and express notice periods.