What is ‘reasonable’?

Posted on 17 Sep 2010 by The Manufacturer

Shaw Stapely of legal firm Thomas Eggar LLP looks at the legal implications of breaking distribution agreements

With that in mind, it is worth looking back to last summer and reminding ourselves of a landmark judgement in the High Court that gave manufacturers some useful guidance on factors to consider when looking at exiting a distribution agreement. The decision in Jackson Distribution Ltd v Tum Yeto Inc considered what constitutes a reasonable period of notice when terminating a distribution agreement, other than for breach.

This is likely to be an issue where there is no formal written agreement or the contract itself is silent on the issue (which means a ‘reasonable period’ of notice will usually be implied by law).

In this case, the parties agreed that Jackson Distribution would be the sole distributor for certain goods of Tum Yeto (the owner of a clothing brand) via a series of emails, and each sent their own form of draft agreement to the other, neither of which were signed.

Two and a half years later, Tum Yeto attempted to terminate the agreement without notice, which Jackson contested. The court considered what the agreed terms of the arrangement were and on what basis Tum Yeto could terminate it.

In the absence of a written agreement, the court ruled that the distribution arrangement should be terminable on reasonable notice. It then had to decide what was “reasonable notice” in the circumstances? The court considered various factors including:

  • the length of the relationship between the parties;
  • the lack of formal arrangement between the parties;
  • the extent of Jackson’s early investment;
  • the percentage of Jackson’s turnover made up of Tum Yeto’s supplies;
  • that Jackson had agreed not to sell competing products;
  • the seasonal nature of the business;
  • and how long it would take to find a new brand to distribute and achieve profitability.

The court concluded that a reasonable notice period in this case would be nine months and Jackson was entitled to damages for the nine month period from when Tum Yeto had attempted to terminate the agreement.

What does this mean for manufacturers? Termination of distribution agreements can be tricky for manufacturers and the bullet points above serve as a useful checklist of facts to consider when deciding what is reasonable notice.

However, each case will depend on its facts and periods of six and three months have been held to be “reasonable” in the circumstances. For the distributor, a period of notice needs to be sufficient to allow the manufacturer the ability to find alternative business.

As Jackson Distribution and Tum Yeto found out to their considerable cost, there is no substitute for having a written contract with defined termination provisions and express notice periods.

The question for you, the manufacturer, is do informal agreements with suppliers play a significant role in your business operations? If the answer is yes then you should seriously consider formalising those arrangements and entering into written contracts that offer you sufficient protection if things go wrong.