Set Your Own Terms: Implied Reasonable Notice in Open Distribution Arrangements

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A recent British Columbia decision highlights the risk of having long-term, unwritten arrangements in place with exclusive sales agents and distributors.

In Meridian Distribution Ltd. v. Endeavor Design Inc.[1], a supplier terminated a long term exclusive distribution relationship without providing advance notice. There was no written agreement that defined the term of the relationship and the Court found that the common law required a reasonable period of notice given the “more permanent character” of the relationship.[2] The distributor was awarded damages which represented the nine month period that the Court found was the required “reasonable notice”.  

Facts

The dispute arose when a supplier of snowboards and snowboard accessories terminated a nine year exclusive agreement with a sporting goods distributor.[3]

The parties had initially signed a formal, written one year exclusive distribution agreement. After the written contract expired, no renewal agreement was signed, but the business affairs of the companies became more intertwined and evolved into an agreement that was found to have an indefinite term.[4]

Decision

The Court rejected the position of the supplier that the arrangement was simply an auto-renewing one year contract. Instead, the Court found that it fell into an intermediate category of relationships of a more permanent character with some of the characteristics of an employment contract.[5] In this case, the factors that led the Court to find that the relationship had a more permanent character included:

  • the exclusivity and length of the distributorship;
  • the distributor having an exclusive staff member to market the supplier’s products;
  • the financial risk borne by the distributor, who purchased inventory from the supplier for resale to retailers;
  • the distributor establishing new distribution networks for the supplier; and
  • the lack of annual reconsideration of the exclusivity issue.[6]

Contracts like this, which do not have a defined term, require reasonable notice before termination.[7] The Court found that a nine month notice period was reasonable in the circumstances,[8] and awarded damages on that basis.[9]

The Court also found that the distributor had a duty to mitigate its losses by taking a less attractive proposal from the supplier, and damages were discounted by the expected revenue from the rejected agreement.[10]

Practical Considerations  

This case highlights the risks of failing to define, in a formal written agreement, the duration or “term” of commercial relationships with distributors and exclusive sales agents. While it may be tempting to avoid discussions around duration and related topics, such as renewal, in the initial stages of the relationship, those discussions become all but impossible once the decision is made to terminate. It is often best to address these issues early on, whether at the outset of the relationship or at key milestones (such as annually).

 

[1] Meridian Distribution Ltd. v Endeavor Design Inc., 2019 BCSC 2406 [“Meridian”].

[2] Meridian at para. 23.

[3] Meridian at paras. 2-3.

[4] Though the facts of the agreement were disputed, Francis J. found at para. 20 that “these two companies had an indefinite term and would continue until one of the parties stopped either purchasing from or selling to the other”.

[5] Francis J. cited the British Columbia Court of Appeal in Marbry Distributors Ltd. v. Avrecan Int. Inc., 1999 BCCA 172 [“Marbry”] at paras. 14-26 for the presence of an intermediate category. Both decisions say explicitly that these are not employment contracts, but are business arrangements that are “more akin to employee/employer” relationships.

[6] Meridian at para. 23.

[7] Meridian at para. 21.

[8] Marbry at para. 53; Meridian at para. 26: “I am satisfied that nine months is a reasonable notice period in these circumstances. It is the notice that the Court of Appeal held in Marbry to be reasonable on a business relationship of similar duration and terms to the one in this case.”

[9] Francis J. cited TCF Ventures Corp. v. The Cambie Malone’s Corporation, 2017 BCCA 129 at para. 25 for the method of determining damages.

[10] Meridian at para. 36. Pre-mitigation damages were set at $212,987.71, to be mitigated by 5% of the total supplier sales for the year of 2013, as assessed by the registrar.

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