It is when a relationship is not going well that lawyers are asked, “What can be done?” It is at that point that lawyers try to be creative and look at the words written in the distributorship, agency, or other commercial agreement and consider whether any terms can be implied which may help the client achieve its objectives. But a recent Court of Appeal case concerning a dispute between a distributor and a supplier shows the risk that parties run when trying to rely on implied terms in their agreements. It is when a relationship is not going well that lawyers are asked, “What can be done?” It is at that point that lawyers try to be creative and look at the words written in the distributorship, agency, or other commercial agreement and consider whether any terms can be implied which may help the client achieve its objectives. But a recent Court of Appeal case concerning a dispute between a distributor and a supplier shows the risk that parties run when trying to rely on implied terms in their agreements.
In 2000 the supplier and distributor entered into a distributorship agreement for the distribution of the supplier’s products. Some 10 years later the supplier requested that the distributor implement a strategic plan up to the end of 2013 (rather than for one year as anticipated in the agreement). This was followed in 2011/12 by the supplier requiring that the second claimant be set up as a subsidiary company specifically to replace the distributor or, at least, to improve the service offered by the distributor.
A further business plan was agreed which was to run for five years to 2015. This required the now two distributors to make long term investments in their business. They invested some £6.37m in implementing these plans. According to the distributors, these requirements amounted to an agreed variation of the distributorship agreement. Despite the business plans, involvement of the second distributor, and investments made by the distributors, the supplier was still dissatisfied by the distributors’ performance. Accordingly in September 2012 the supplier gave notice of termination under the terms of the distributorship agreement to take effect in March 2013.
Before the court the distributors claimed that:
(i) the agreement to add the second claimant as a distributor and implement the business plan further impliedly varied the agreement by conduct so that notice to terminate could not be given to take effect before the end of 2015; and
(ii) the termination was in breach of an implied duty of good faith and fair dealing.
The Appeal Court dismissed each claim of the distributors.
The Court considered whether a term could be implied that notice to terminate could not take effect before the end of 2015.
The Court looked at:
(i) whether adding the second distributor together with the business plans was inconsistent with the Supplier being able to terminate before the end of 2015; and
(ii) whether the parties’ conduct (that is varying the agreement) was consistent only with such an implied term. For example, if the parties would or might have acted in the same way without the implied term, then it is unlikely to be necessary to imply the term.
Following this, the Court concluded that it was not necessary to imply such a term. Furthermore, because there had been no discussion about altering the termination provisions, the Court held that it would be impossible to know what the terms of any new termination provisions would have been. On the good faith issue, the distributors sought to rely on an earlier High Court decision where it was decided that a duty of good faith could be implied into commercial agreements. However, the Appeal Court did not consider the earlier High Court judgment to be applicable as the present case concerned termination (where parties are generally in conflict), rather than the performance of the contract (where parties would be expected to co-operate for the agreement to operate effectively).
As economic, if not political, uncertainty is likely to be with us for at least some time to come, the answers are clear:
• Consider what it is you need the other party to the agreement to do and make sure that it is stated.
• Consider what might go wrong during the performance of the agreement by the other party and the effect which it could have.
• Work on the basis that it is usually the case that the more that is included in an agreement, the better.
• Ensure changes are properly documented.