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Suppliers supply and distributors distribute - a regular blog, August 2019

The opportunities presented by Brexit

Could there be opportunities for suppliers and distributors as a result of the UK leaving the EU, as is expected, on 31 October 2019 without a withdrawal agreement being in place?

The question may seem counterintuitive. But where a supplier is looking to exit a distributor, Brexit could well turn out to provide an opportunity to do so. However, the same may also be the case for the distributor which is acting for the supplier!

Why is this important?

Distributorship agreements exist (as do all contracts) to regulate the relationship between two parties in respect of a particular issue.

But unlike other commercial contracts, the law of many countries provides specific protection for distributors in the event of termination of the distributorship agreement.

As a result, if the supplier gave notice to the distributor in accordance with the terms of the distributorship agreement, the supplier may be presented with a claim for compensation by the distributor for the loss of the distributorship agreement.

Why then the possibility of Brexit opportunities?

Many distributorship agreements will contain force majeure clauses. The literal meaning of force majeure is an unforeseen circumstance that prevents the fulfilment of a contract.

So far, so good. But:

  • experience shows that many force majeure clauses are poorly drafted in terms of when they operate and what are the consequences of the occurrence of an event of force majeure.
  • Can it really be said that the occurrence of a hard Brexit and its consequences is an unforeseen event?

It has also been recently argued by the European Medicines Agency that the consequences of the UK leaving the EU meant that a lease of its offices had been frustrated – resulting in the EMA not being liable for its continuing lease obligations. However, this argument was rejected by the English High Court.

The upshot of this is that as the distributorship agreement cannot as a matter of English law be ended as a result of Brexit occurring, then it must be the case that both parties are required to continue to perform it.

As a result, it will not be possible for distributor to claim that it has been unable to do this or that as a result of Brexit. Non-performance is likely to provide an opportunity for the termination of the agreement.

Following on from this, supplier should consider the provisions in its agreement that deal with the distributor’s performance obligations. Non-performance of a particular obligation may provide the opportunity to claim that the distributor has committed a breach so allowing the agreement to be terminated for cause – and putting the supplier in the position where they can avoid a claim for compensation!

Be careful what you wish for

Given that such an agreement cannot be ended on the basis that Brexit has resulted in the agreement being frustrated or that Brexit amounts to an event of force majeure, it is the case that the distributor can look to supplier to continue to perform their contractual obligations.

It will not be enough for supplier to claim Brexit this or Brexit that. Non-performance of the agreement by them may enable the distributor to claim breach and immediate termination of the distributorship agreement. In this event, the distributor is likely to claim damages for the supplier’s failure to give proper notice and, if the law of the agreement permits, also claim for compensation.

And finally

It is possible that the distributorship agreement will be governed by law other than English law. Indeed, in the case of agreements where one party is in the EU and there is no express reference to the law of a particular company, EU law will determine which country’s law (that of supplier or distributor) will apply.

This is important as the laws of many member states of the EU may take a different view as to the effect of Brexit – so resulting in termination of the distributorship agreement or a claim for damages by distributor in any event.