The Ever Given: Agency & Distributorship Contracts

09/04/2021

The Ever Given and the consequences for agency and distributorship contracts

It is a given that timely delivery of goods is important for the performance of many contracts. But how often do contracting parties ever give enough thought to the consequences of delivery being delayed? This question is pertinent for many contracts – not least, agency and distributorship contracts – following the Ever Given blockage of the Suez Canal.

Suppliers and distributors

The contractual relationship between many suppliers and distributors will be documented in a formal contract. This should set out the terms on which the distributor will seek to develop and service a particular market, be it:

geographical; or
particular goods; or
pecific customers; or
any one or more of the above.

It should also set out – either directly in the distributorship contract or by ensuring that the supplier’s terms and conditions of sale are incorporated into contracts entered into by the supplier and the distributor – the terms on which the supplier will sell, and the distributor will buy the goods which are the subject of the distributorship contract. Failure to do so will, at best, result in the supplier selling on the basis of the Sale of Goods Act.

But where the supplier sells on the basis of the Act the supplier will have missed a trick in failing to:

limit (if not exclude) its liability for late or non-delivery of the goods; and
provide for force majeure. Although the extent to which force majeure may assist the supplier will depend on how well (or otherwise) the force majeure provision is written. In the absence of an adequate provision, the supplier may be forced to try to argue that the contract for the sale of the goods has been frustrated which can be expected to be a difficult argument to make out.

For the distributor, late or non-delivery of the goods invariably will place it in a difficult position. First, it has contracted to buy the goods in question to resell them to its customers. No goods, no resale!

But in failing to supply its customers, the distributor may find itself in breach of contracts entered into with those customers and exposed to claims for damages from them.

Second, to what extent does the distributor look – and, indeed, can it look under the terms of the distributorship contract – to the supplier to address the distributor’s liability to its customers? For some distributors, the answer will depend on the commercial relationships which they have with their suppliers.

Where that relationship is poor, late or non-delivery of the contracted goods may allow the distributor to assert that the distributorship contract is at an end. This may well be of interest to a distributor:

faced with a declining market for the supplier’s goods; or
wanting to exit from contractual commitments to purchase minimum quantities of goods from the supplier going forward; or
where the law of the country in which the distributor is located or performing its activities provides the distributor with mandatory rights to compensation on the ending of the distributorship contract.

Principals and agents

Whilst the contractual relationship between many principals and agents will be documented in a formal agency contract, it is often the case that there will be overarching legal protection given to the agent. In the UK, this is by means of the Commercial Agents Regulations (both the British and Northern Irish variants).

In the EU, such protection is found in the national laws of the 27 member states implementing the EU Agents Directive. Further afield, the protection of agents and their entitlement to be compensated for the loss of the agency can be found in the laws of many countries in Africa, Asia, the Gulf, and South America.

But, for this protection to arise, the agency contract must be ended either by:

the principal; or
the agent, on the basis that such termination is justified by circumstances attributable to the principal.

In an Ever Given type situation, the late or non-delivery of goods by the principal to a customer in respect of an order obtained by the agent is of itself unlikely to justify the agent terminating the agency contract by circumstances attributable to the principal.

But such late or non-delivery may find the customer either only prepared to accept delivery if the price is reduced or simply refusing to accept delivery. In this situation, is the principal able to reduce the commission payable to the agent or pay no commission to the agent?

As contractual certainty is a good vaccine against conflict, it is to be hoped that the agency contract expressly allows the principal to reduce the commission in this type of situation. If it does not, where the principal has agreed a reduction in the price of the goods payable by the customer, a disproportionate reduction in commission may entitle the agent to claim that termination of the agency contract is justified by circumstances attributable to the principal.

Where such termination of the agency contract occurs, it is to be expected that the agent will also claim:

damages for failure to give proper notice;
commission accrued but unpaid at the time of termination;
commission in respect of orders received by the principal after the agency contract terminated where those orders were as a result of the activities of the agent before termination; and
(if it should be the case) commission in respect of other orders accepted by the principal but where the principal has failed to fulfil such orders for a reason for which the principal is responsible. The fact that the principal was not paid by the customer would not avoid the principal being liable to pay commission to the agent!

Further in an Ever Given type situation, if the goods have still to be dispatched from their place of manufacture, a possible claim might arise if it was open to the principal to avoid the transportation of the goods being delayed and, the principal failed to do so.