Terminating a distribution agreement: where it usually goes wrong

A supplier who wants to part ways with a distributor after years of working together will usually start by reaching for the contract. If it provides for three months' notice, the matter seems straightforward: send a letter, let the notice period run and that is that. In practice, it is exactly this assumption that regularly ends up in court. Below are the points where, in our experience, things most often go wrong.

1. The contractual notice period is not always the final word

A distribution agreement for an indefinite term is a continuing contract. Under Dutch law, such an agreement can in principle be terminated, but the court will examine whether the termination was reasonable in the circumstances of the case. Relevant factors may include how long the relationship has lasted, how dependent the distributor has become and what investments it has made with a view to the cooperation. Even a notice period stated in the contract may then prove too short. The usual consequence is not that the termination is invalid, but that the terminating party may owe damages.

2. Which law actually applies?

In international distribution, the governing law is often unclear. If the parties have not made a choice of law, the European Rome I Regulation in principle designates, for distribution agreements, the law of the country where the distributor has its habitual residence. A Dutch supplier with a German distributor may therefore unexpectedly find itself subject to German law. That law has rules of its own, for example on notice periods determined by analogy with the rules for commercial agents and, in certain cases, compensation for the customer base the distributor has built up.

3. Distributor or commercial agent?

On termination, a commercial agent is, subject to certain conditions, entitled by law to a goodwill indemnity. A distributor, which buys and resells for its own account, in principle has no such right under Dutch law. In practice, the line between the two is less clear than the contract suggests. How the cooperation was actually carried out may carry more weight than the label on the agreement.

4. The practical wind-down is overlooked

What happens to stock, to pending orders, to customer data and to the use of the brand and marketing materials? If you do not settle this in advance, you will have the discussion afterwards. A non-compete clause or exclusivity arrangement may also continue to have effect after termination, and must moreover comply with the European competition rules for vertical agreements.

5. Oral arrangements and established practice

Many distribution relationships have evolved over the years in ways that differ from what is on paper. Additional territories, new product lines or agreed bonuses are sometimes recorded only by email or orally. When notice is given, all of that history becomes relevant.

How can you avoid problems?

Before giving notice, establish which law applies, how the relationship has actually developed and what investments the other party has made. On that basis, choose a notice period you can defend and record the wind-down in writing. If you are the distributor receiving notice, have the reasonableness of the notice period assessed in good time, before you set the wind-down in motion.

This article contains general information and does not constitute legal advice. Legislation and case law may change, and the outcome always depends on the circumstances of your situation. For advice on your matter, please get in touch with us.