When is notice of termination of a distribution agreement allowed

If a distribution agreement does not contain any arrangements regarding its term or termination, it may still be terminated. However, on the grounds of reasonableness and fairness, it is quite possible that an agreement may only be terminated if there is a sufficiently compelling reason to do so. Therefore, the person to whom notice of termination has been given must prove that the notice is not valid. According to the Arnhem-Leeuwarden Court of Appeal the notice is valid if the distributor intends competing with his supplier.

On giving notice to terminate a distribution agreement account must be taken of:

• valid reason for termination;
• reasonable period of notice;
• payment of compensation.

Competing with supplier

Assessment must take place on a case by case basis as to whether notice of termination is indeed possible and whether compensation must be paid. The nature, content and duration of the agreement play an important role in this respect. The interests of both parties must be considered.
The Arnhem-Leeuwarden Court of Appeal deliberated on the termination of a distribution agreement at the beginning of this year. In its ruling of 4 February 2014, the Court of Appeal found that competing with a supplier was a valid reason for termination.
This case took place in the poultry industry. The manufacturer made and sold laying nests for dams. The distributor produced aviary systems for housing laying hens in which the laying nests were installed. They entered into an exclusive distribution agreement with effect from 2010 and the distributor supplied aviary systems with the supplier’s laying nests. The distributor developed competitive laying nests in 2012 and offered them for sale.

Derived from the supplier’s product

It goes without saying the laying-nest supplier was not happy that his distributor had become his competitor. As a result the supplier gave notice of termination of the distribution agreement observing a notice period of three months. The distributor, however, was of the opinion that he was contractually free to compete with the manufacturer. The distributor also claimed a compensation for the loss incurred as a result of the termination. His viewpoint was not followed.
The Court of Appeal found it implausible that a supplier would conclude an exclusive distribution agreement while the distributor was free to market competitive products. Certainly if the laying nests in question were derived from the supplier’s product.

Valid reason for termination

The Court of Appeal therefore ruled that competition is a valid reason to terminate the distribution agreement. The Court of Appeal also ruled that the three-month notice period was sufficient and that the manufacturer was not obliged to compensate any loss suffered by the distributor.
A termination of the distribution agreement is therefore upheld if there is a valid reason for termination and a reasonable notice period has been observed.
Has your distribution agreement been terminated? Or do you wish to have a distribution agreement drafted, reviewed or terminated? Then please contact nwong@flib.nl or telephone + 31(0)20-5210130 and ask for Nga Yau Wong.