For a fashion brand to use an overseas distributor is commonplace. For a brand to think that its distributor is underperforming is equally commonplace. But underperformance itself must be by reference to a quantitative or qualitative criterion. The criterion might, for example, be the brand’s expectation of how the distributorship is to be performed, or a specific criterion that it has agreed with the distributor.
Where a formal written distributorship agreement is in place, it is easier for the brand to monitor the distributor’s performance and then, where necessary, prove that it is underperforming compared to specific obligations, duties or restrictions set out in the agreement. If, however, the distributor has been appointed on an unwritten basis, it is less likely that there will be agreed benchmarks against which the distributor’s performance is to be compared.
This matters if the brand wishes to terminate the distributorship due to the distributor’s poor performance. If there is no written agreement in place then it will need to either:
- terminate the agreement by giving reasonable notice; or
- prove that the distributor is in breach of specific obligations and that it is justified in terminating the agreement with immediate effect.
Where a distributor has acted for many years, it is possible that the reasonable notice to which it is entitled could be more than 12 months. Having an underperforming distributor acting for such a notice period is likely to be damaging to the brand’s business, particularly if the distributor was appointed on an exclusive basis and is the only distributor acting in that territory.
How then can a brand avoid the reasonable notice pitfall?
- It should establish a paper trail of communications with the distributor in which it sets out particular obligations with which it requires the distributor to comply. Written evidence such as this is likely to assist the brand in claiming that the obligations form part of the contract between the parties.
- From time to time it should meet with the distributor or have telephone conversations to discuss how the distributor is performing and what is expected from the distributor. Again, contemporaneous records should be kept of these conversations.
- Enter into a formal written agreement and actively monitor the distributor’s performance as compared to the obligations set out in the agreement.
Further where the distributor is based overseas the agreement can (and should) specify that it is governed by English law and with the English courts determining disputes. Where no written agreement is in place, the parties are unlikely to have discussed which law will govern the terms of the unwritten contract or in which courts any claims arising out of the agreement will be brought. These points will be crucial in the event of a subsequent dispute.
Whilst the above may be obvious to some brands and a usual habit, others are likely to benefit from following this approach. Entering into a formal agreement with a distributor, particularly with one which has previously acted without any written agreement in place, will undoubtedly take time and effort. However, putting in the time at the start of the relationship to establish the benchmarks against which the distributor is to act is likely to be invaluable to the brand in the future.