Distribution agreements can offer food and drink businesses a low-risk way to reach profitable new markets. Many distribution agreements become long-standing and successful arrangements for supplier and distributor alike. But when it becomes necessary or desirable to end a distribution relationship, it is vital to ensure that is done validly and efficiently.
The key practical considerations
- When drafting a distribution agreement, it is essential to consider how it may be terminated. Clear and express provision for termination should be made in the agreement. Provision is often made for termination upon a party’s serious breach of the agreement, or upon their insolvency. But consider also including provision allowing termination upon a reasonable notice period or, for example, in the event of declining orders (especially if the distribution agreement is exclusive).
- When considering termination, carefully check the terms of the termination clause for the grounds on which the agreement may be terminated.
- Consider whether the termination clause applies in the circumstances. Are any of the grounds for termination met? Check that termination would not be a breach of the agreement.
- Check the governing law of the agreement. By their nature, many distribution agreements are between parties in different countries or territories. That can give rise to complex issues of governing law and jurisdiction. Jurisdictions differ in their approach to the termination of distribution agreements. Some jurisdictions, like the United Kingdom, will generally give effect to the provisions of an agreement. Others – especially civil law jurisdictions – tend to favour the distributor upon termination, and will afford protections to a distributor even if the supplier has otherwise complied with the terms of the agreement.
- What’s the process for termination? If the agreement can be validly terminated, make sure to comply with any provisions governing the process of termination, such as the requirements of giving notice. Where an agreement can be terminated by giving notice, consider giving as much notice as possible, not just what is required by the agreement.
- If there is any doubt about whether termination will be valid, consider the possible response of the distributor to termination. Might they go to court to enforce the agreement and ensure supply, or to claim damages for breach or wrongful termination of the agreement? The risk of litigation may be greater if the distribution arrangement is particularly important to the distributor’s business.
- Consider whether to offer reasonable compensation to the distributor, especially if that might avoid the risks of potentially costly litigation about the validity of termination.
- Consider how to deal with post-termination matters. Does the distributor possess intellectual property, such as trade marks, that needs to be recovered? What is to happen to any inventory remaining at termination? Is the distributor entitled to sell it, or is it to be repurchased (and at what price)? Consider how termination of the agreement affects any agreement with a new distributor. Can the new distributor start during the notice period of termination?
- Above all, obtain legal advice before seeking to terminate a distribution agreement. That is especially important where there are issues of governing law and jurisdiction, where local legal advice may be necessary.