A failure to get right the terms of a distribution agreement can be costly either to the brand owner or to the distributor and sometimes both. This was vividly illustrated by the facts of the recent Dekline skatewear case which stands as an example of how not to do it.
How not to do it
The managing director of Jackson Distribution Limited attended a US trade show in September 2004 and noted the Dekline range. Impressed by the brand, he spoke with representatives of the brand owner, Tum Yeto Inc, about the possibility of his company acting as Dekline’s sales distributor in the UK and Ireland. These discussions ultimately led to him sending an email to Tum Yeto which stated:
“Please could you provide us with confirmation, by email, that you agree Jackson Distribution Limited are your sole distributors for the UK and Ireland for all your products under the Dekline brand. Once we have this written agreement, Nick will be able to begin his sales effort in earnest. We shall be able to send you the final official distribution agreement next week for us all to agree on.”
The US brand manager responded the next day and stated:
“Our stance is that Jackson will be the sole distributor for UK and Ireland, however, we should both agree on terms.”
A few days later the first samples arrived in the UK. It was followed by a further email from Tum Yeto which stated:
“Sonia, we verbally confirm that Jackson Distribution will be the sole distributor for the Dekline brand in the UK and Ireland.”
The parties then exchanged further emails. These confirmed payment terms as 50% payable on invoice, which would be delivered on shipment and 50% 30 days thereafter.
Six months later in March 2005, the distributor forwarded a draft distribution agreement to Tum Yeto. The agreement contained 11 clauses. They included:
• the brand owner and distributor’s respective of obligations;
• prices and payment;
• duration (an initial 6 year term with provision to extend for a further 6 years at the distributor’s request);
• provisions dealing with trade marks and indemnity against infringement claims;
• product liability;
• provision for how the agreement could be terminated in the event of either party being in material breach.
Towards the end of September 2005, Tum Yeto’s chief executive confirmed by email that Jackson Distribution had been appointed as:
“Sole distributors of Dekline products in the United Kingdom and Ireland until such times as the Distribution Agreement had been finalised.”
Despite this a signed copy of the Distribution Agreement was not forthcoming. This led the distributor to chase for it. As a result, in early March 2006, Tum Yeto’s chief executive emailed the distributor’s managing director and stated:
“I have your agreement here and it’s pretty clean and straightforward. I feel like I should have to ask for more just being the nature of contracts but I don’t really think that is necessary or warranted. We are both working together for success, you are exclusive in region as stated. You will promote and sell. We will provide quality products in a timely manner. We have agreed pricing currently obviously. I just wanted to drop a note before I finalise.”
Two months later, a different draft Agreement was sent by Tum Yeto to the distributor. It imposed great obligations on the distributor. It included a minimum order schedule. However, the duration clause was similar albeit for an extension period of 3 years as opposed to 6. In addition, the termination clause was the same with the exception that the post-termination provisions were differently framed.
A further two months later in July 2006, the distributor’s managing director replied in an email which stated:
“I can get your contract looked at but although there are 5 or 6 major changes to make, there are loads of small changes to make which means it would only have to be totally re-written. If you would be happy I would like very much for you to look at the original contract that was 2 or 3 pages long that I sent to you and [the chief executive] said looked fine and just add to that any specifics that you want in. I think it would be easier (and cheaper) all round.”
This was followed a few days later by a further email from Tum Yeto. This stated:
“My understanding is that there are a number of challenges ahead including finalising the Jackson/Tum Yeto distribution agreement.”
Ironically there was further discussion in September 2006 at the trade show where Mr Jackson had originally seen the Dekline range. According to Mr Jackson, he had discussions with representatives of Tum Yeto at the show and they accepted his agreement but might propose some minor changes to it. Indeed following the show one of the representatives of Tum Yeto sent an email which stated:
“We will follow up from our side on the contract as things start to die down after ASR.”
However, as it turned out, there were no further discussions. Nor was a written agreement signed by both parties. Instead, in due course, the relationship broke down. Court action followed.
What was the agreement?
As the parties had failed to agree which draft should govern their relationship, the judge decided that there was no formal written agreement in place between them. He further decided that there was an implied term that the agreement was capable of being terminated on reasonable notice. This was not least because it had been accepted by both parties that, in the absence of breach, the agreement could not be terminated without any notice.
Tum Yeto claimed that it was entitled to terminate the agreement as a result of the distributor’s repudiatory (or serious) breach. In particular, it claimed that the distributor had failed to properly promote and sell Dekline. However, the evidence produced to support this argument was “embarrassingly thin”. It was helped by the fact that the distributor was able to demonstrate the substantial marketing steps that it had undertaken and the investment which it had made in the promotion of the Dekline brand.
The brand owner also claimed that the distributor had refused to provide a marketing plan. However, the judge accepted the distributor’s evidence that whilst there had been an initial request for a marketing plan, it had been discussed at meetings and on the telephone and, as a result, to claim that the distributor had refused to provide a marketing plan was a claim without substance.
Tum Yeto argued that the distributor had failed to advertise Dekline sufficiently. In contrast, the distributor produced evidence showing that Dekline was advertised by it in magazines appropriate for the brand every month. In the absence of evidence from Tum Yeto that the advertising was inadequate, the judge dismissed this allegation.
Tum Yeto claimed that the distributor had failed to appoint a dedicated team manager. This allegation also failed. The judge pointed out that there was no contractual term to this effect. Indeed, there was no request for a team manager to be appointed.
Tum Yeto also claimed that the distributor had failed to conduct trade show activity. However, again, the distributor was able to produce evidence that there was significant trade show activity and that the distributor had kept Tum Yeto informed of this activity.
It was argued by Tum Yeto that the distributor had refused to sell and promote certain product lines and styles. This claim too failed. Instead, the judge accepted the distributor’s evidence that it had never refused to sell shoes. More particularly, he found that the distributor had informed Tum Yeto of the difficulties with certain lines and that, in particular, a certain style did not fit with the brand.
Tum Yeto also complained about the distributor’s actions in respect of the Deuce style shoes. More than 6,000 pairs of Deuce shoes had been manufactured in China. However, they turned out too different from earlier samples and to be of poor quality. Tum Yeto apologised for the problems to the distributor. It agreed to remake the shoes and that the faulty shoes would be sold in non-UK markets. It then went back on this by wanting to sell the shoes in TK Maxx. The distributor objected as it feared that sale through TK Maxx would impact on sales of the perfect shoes which it had for that season.
Interestingly, Tum Yeto had still failed to find a buyer for the defective shoes some 6 months later. At that time, the distributor purchased the defective shoes from Tum Yeto and resold them to TK Maxx. It did so because, by then, the defective shoes would not be in competition with the perfect shoes. Unsurprisingly, the judge found that these dealings in the Deuce style did not amount to a failure to promote and sell Dekline or in any way constituted a breach of contract.
As a final argument, Tum Yeto claimed that there was a decline in orders between Spring/Summer 2006 and Spring/Summer 2007. With reference to this, the judge pointed out that up to the Spring/Summer 2006, there was evidence that Tum Yeto had been very pleased with the distributor’s performance. The distributor had pointed out that market demand meant that the design of the product needed to be continuously updated. However, Tum Yeto chose not to address this for 5 consecutive seasons. In addition, there was significant quality problems with the Dekline shoes.
The distributor stated that by Autumn/Winter 2007, Tum Yeto had begun to address a number of these issues. Design and quality were much better. As a result, forward orders for Autumn/Winter 2007 were much higher.
Ultimately, the judge preferred the distributor’s evidence to that of Tum Yeto on this point and found that there were no decline in sales attributable to any failure on the part of the distributor to properly promote Dekline. This lead the judge to decide that there was no repudiatory breach by the distributor which entitled Tum Yeto to terminate the agreement without notice.
What was reasonable notice?
In the circumstances, it was then necessary for the judge to consider what would have been reasonable notice of termination. Tum Yeto claimed that 4 to 6 months’ notice would have sufficed. In contrast, the distributor considered that 2 years’ notice would have been reasonable. In view of the difference between the litigants, the judge applied principles established in an earlier case.
The first of these was the formality in the relationship – the more relaxed a relationship, the less likely the law would imply a lengthy notice period. As a result, it was easy for the judge to decide that there was no great degree of formality as neither draft agreement had been signed.
The ability of a distributor to sell products of other suppliers (including competing products) was another important factor. This is because a lengthy notice period is less likely to be implied where the distributor was less dependent on the supplier’s products. Whilst there was no clause preventing the distributor from selling brands which competed with Dekline, the judge considered that the distributor did not take on any competing business interests and, more particularly, that neither party had envisaged that it would have done so.
It is often the case that a distributor may have to invest considerable capital at an early stage in order to build up the brand in the territory and that afterwards it may be possible to operate with more modest annual expenditure. As such, it could be expected that a lengthier notice period would be justified during the early years of a distributorship relationship reducing as the years passed. This was significant as the distributor was found by the judge to have invested a very considerable amount of time, effort and money in the 2½ years that it acted as distributor for the Dekline brand.
Certain additional factors were found by the judge to be relevant in determining the amount of notice of termination which was required:
• Sales had dropped by the time of termination. Although there were signs of improvement, a major improvement was unlikely to materialise in the next couple of years.
• The skatewear business was seasonal in nature.
• The distributor had engaged new employees and acquired vehicles. A new warehouse had been brought into operation in Autumn 2005. Further business premises were planned.
• Notably, it would take the distributor some time to find an alternative shoe brand. The judge also found that it would take the distributor 3 years after finding the new brand to establish its place in the market and achieve profitability.
The judge considered that taking into account all these factors, the proper notice period would have been 9 months. However, Tum Yeto’s failure to give such reasonable notice to the distributor meant that Tum Yeto was in breach of contract.
How to avoid how not to do it
It may be the case that the distributor felt hard done by by not being awarded a longer notice period by the judge. Undoubtedly, however, it is the brand owner, Tum Yeto, which lost out. It failed to:
• put in place a distribution agreement which would have enabled it to manage the distributor’s activities by, for example, providing for certain performance levels.
• put credible arguments before the courts that the distributor had failed to perform. The judge was able to find without difficulty that this was not the case.
• produce evidence to support its claims.
Tum Yeto therefore incurred significant management time and legal fees by defending what appears from the judgment to have been an untenable position from the outset.
For further information please contact Stephen Sidkin on 020 7614 2505 or email slsidkin@foxwilliams.com