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Suppliers supply and distributors distribute - a regular blog
“Take a look at my distributorship agreement.
It’s the only one I got.
Not much of an agreement.
Never seem to get a lot.
Take a jumbo across the water.
Like to see my [favourite overseas country]."
(with apologies to Supertramp and Breakfast in America)
Following on from last month’s blog, the supplier now needs to consider exiting the distributorship agreement.
As established, the distributor is playing cute - but not in a Disney like sense.
So what are the supplier’s exit routes?
The supplier may consider giving immediate notice of termination. The virtue of an immediate clean break is clear. The disadvantages are also startling in terms of:
- A claim for damages by the distributor for failure to give proper notice.
- Possibly a claim for compensation for the loss of the distributorship if the governing law of the distributorship agreement (likely to be that of the country in which the distributor performs the distributorship agreement) so provides.
- A disgruntled market for the supplier’s products unless the supplier has already appointed a successor distributor.
- A distributor which is so upset that it may decide to engage in a so-called scorched earth policy by putting on to the market the supplier’s products at cost or near cost price.
Alternatively the supplier may provide term notice (usually somewhere between three to twelve months). The virtue of doing so is that the supplier can avoid some of the problems identified when notice having immediate effect is given.
But some of the vices may remain. Not least the distributor may have a reduced incentive to devote time and attention to the supplier’s products.
It is also the case that the giving of a term notice may not overcome the liability of the supplier to pay compensation to the distributor for the loss of the distributorship under the governing law of the distributorship agreement.
As such, the supplier may look to performance manage the distributor. The objective of doing so is that the distributor can be manoeuvred into a position of the law which allows the supplier to terminate the distributorship agreement with immediate effect and avoid a claim for damages.
If the need for local advice was not already apparent, performance management should be the spark which lights the torch.
There are, however, other ways of proceeding which may prove less contentious.
In the last few months various suppliers (and in particular watch brands) have announced that they have acquired their UK distributors. Alternatively the taking of a minority equity stake in the distributor or forming a joint venture with the distributor may also be attractive.
In such circumstances, Supertramp’s ‘It’s The Only One I Got’ may very well be words that ring true.