The termination of a long term distributor or licensing agreement is a serious step for any distributer or supplier. When termination is not by agreement, the terminated party may consider seeking an injunction to continue the contract for a period whilst the court considers the issues between the parties.
The injunction is intended to preserve the supply of a product where a party relies on the terminated contract to service/supply its own customers and cannot source an equivalent product; where customers are forced to go to another supplier the terminated party could lose its market share entirely and its business may be destroyed.
The claimant licensee and defendant licensor entered a licensing agreement for the provision of an internet based service for buying and selling goods in October 2005. In June 2013 the licensor gave the licensee notice that it was terminating the agreement in accordance with its termination clause. The licensee rejected the licensor’s entitlement to terminate making a request for arbitration and applying for an injunction to restrain the termination.
The licensee claimed:
- Termination of the licensing agreement would result in the loss of its sole customer which would make it impossible for its business to continue trading. As a result the remedy it would receive in damage in pursing its claim would not be adequate.
- If the business was terminated it would not have access to damages at all because it might not be able to fund the cost of the arbitration.
- A limitation clause in the licensing agreement could potentially exclude the licensee from pursuing loss of profits as a head of claim. The licensee submitted that, as its main head of claim will be for loss of profits, if the limitation clause was allowed the damages it would receive pursuing the proceedings would be entirely inadequate.
The court was not compelled to grant the injunction by any of these arguments. Force of supply injunctions are notoriously difficult to obtain and the present case demonstrates that it will take very serious misbehaviour on the part of the terminating party to affect the conscience of the court.
In the recent case of AB v CD the court considered the issues to be assessed generally when refusing such an injunction.
Points to Consider
It is clear that terminating a contract has the potential for very serious consequences, not only for the potential loss of business of the party that has been terminated but also for the extent of damages that may be payable by the terminating party if that termination is found to be wrongful. It is therefore essential that a party ensures that its position is robust before making any moves to terminate a contract.
Parties should consider termination provisions carefully when negotiating a contract. The grounds for termination should be clearly laid out and parties should be in agreement as to how the provisions operate. When looking to terminate a contract the terminating party should take care to ensure that there is no obvious breach of contract in doing so. It is rare that a contract will exist in isolation and so termination may cause difficulty for the party that is terminated. This could lead to that termination being disputed where there is opportunity. However, if parties take time to consider their contractual rights of termination and act appropriately such disputes may be avoided.