UK and EU suppliers and distributors are shouldering additional costs and burdens as a result of the new trading arrangements between the UK and the EU. As businesses come to terms with the new norm, previously profitable distributorship agreements may need to be varied or even terminated. We consider both, together with the consequences for customer contracts and other actions which might be taken by distributors.
Costs and burdens for suppliers and distributors
A few weeks ago, in our article regarding the EU-UK Trade and Cooperation Agreement (“the TCA”) here, we highlighted that UK distributors of EU suppliers were likely to have to shoulder additional costs and burdens as a result of the new trading arrangements with the EU.
As many UK suppliers and distributors dealing with EU distributors and suppliers have discovered over the last few weeks, there are plenty of headaches and nasty surprises in the new regime. These range from struggling with the new customs paperwork, to finding that goods supplied to the EU which do not originate in the UK are subject to hefty tariffs because of rules of origin.
Most UK distributors for EU suppliers will be responsible for importing the supplier’s products into the UK. The supplier’s written terms are likely to provide for the distributor to assume most of the costs as well as responsibilities and risks involved in the supply of goods. For example, if a supplier supplies goods on an EXW or FOB basis, this will mean that the distributor will be responsible for import clearance on the importation of the goods into the UK. An EU distributor is likely to be in the same position when contracting with a UK supplier. To compound the problems for EU distributors of UK suppliers, there may also be tariffs on the importation of goods into the EU if the goods are treated as originating outside the UK.
For suppliers and distributors alike in these situations, there will be additional costs and burdens. Some may feel that the additional costs erode their margins to such an extent that it is no longer profitable to continue to act as the supplier or distributor (as the case may be). As a result, some parties may want to vary or else end their distributorship agreements.
Can the distributorship agreement be varied?
Whether variation of the terms of the agreement is possible – and what the conditions are for variation – will depend upon the terms of the agreement. It is very likely that there will need to be the agreement of the supplier and the distributor to a proposed change to the terms of the distributorship agreement.
In addition, many agreements will contain a no oral modification clause, which requires that any changes to the agreement be in writing and signed by both parties. A change discussed by Zoom or mobile is unlikely to be capable of being relied upon!
From a commercial perspective, the chances of persuading the supplier / distributor to vary the agreement will depend upon commercial factors such as the volume of purchases, the importance of the market, and the length of the relationship. But also to be borne in mind is how long it will take:
- the supplier to find a replacement distributor; or
- the distributor to obtain a new supplier,
at a time when travelling between the UK and the EU is not easy.
Until then both suppliers and distributors would do well to be on guard against attempts to vary the terms of their distributorship agreement by stealth. For example, by an order being given or accepted by reference to an Incoterm different to that provided for in the distributorship agreement.
Are there knock-on effects for customer contracts?
Thought should also be given to whether the additional time taken to import or export the supplier’s goods could have a knock-on effect on the distributor’s ability to meet its obligations to its customer in terms of delivery times. If delivery is not made in time, will the distributor be liable to its customer? Can the customer also claim against the supplier? Or will the distributor simply seek to pass on damages to the supplier?
Therefore, at the same time as looking at agreements with suppliers, distributors should be reviewing and, if necessary, seeking to renegotiate agreements with customers.
How can the distributorship agreement be terminated?
The question then is – can you get out of your distributorship agreement? The answer to that question will depend upon the terms of the agreement. Does the distributorship agreement include any of the following:
- A clause allowing either party to terminate the agreement “without cause” by giving a relatively short period of notice. If so, does it require a particular process to be followed?
- A material adverse change clause. Such a clause may allow a party to require the other party to renegotiate the agreement to alleviate the effect of a material adverse change and, if renegotiation fails, to terminate the agreement. Whilst unusual in distributorship agreements which are governed by English law, the issue of material adverse change is recognised by the laws of several EU member states.
- A hardship clause which addresses which party should bear the burden of increases in the costs of supply. This too is unusual for English law-governed distributorship agreements. In addition, hardship and material adverse change are considered to be synonymous under the laws of certain EU member states.
- A force majeure clause –a change in circumstances which makes the agreement less profitable for one party or makes it more difficult and costly to perform is not usually accepted as being a force majeure event. But if the agreement has a force majeure clause it is worth looking at it because whether it can be relied upon to terminate the agreement will be a question of the interpretation of the words used in the clause.
- Other termination rights – it is always worth seeing whether you have or may have a right to terminate the agreement for a non-Brexit related reason (for example, for the other party’s serious breach)!
And what else might distributors try to do?
Depending on where the distributor is based, which party terminates the distributorship agreement and on what basis such termination comes about, it may be open for distributors to claim compensation on the ending of the agreement. The laws of some EU member states offer distributors certain protective rights that are not offered under English law. In very broad terms, this is comparable to the protection granted to commercial agents. UK suppliers should be alive to the risk that distributors in certain countries may be lining up such a claim for compensation.
Finally, rather than pursue a claim for damages through the courts, the distributor may be able to exercise a right of set off – and set off claimed damages against monies owed by the distributor for the goods already supplied. This and other issues were considered by us in the context of Covid-19 here.