When negotiating distribution agreements, manufacturers sometimes overlook the importance of termination clauses. After all, if you’re in the process of making a deal with a new distributor, why bother worrying about what will happen if the deal ends? Yet, this error can often prove problematic for manufacturers. Often manufacturers later feel the need to terminate the agreement and have to rely on vague or unclear termination clauses.
Terminating a distributorship is never a pleasant process, but what if the distributor is not at fault? Sometimes the distributor has kept their end of the deal, but the manufacturer just wants to find greener pastures, either with another distributor or to distribute the product themselves. When this happens, it can leave a distributor feeling betrayed and unfriendly, and with a weak termination clause, it can lead to endless litigation that will cost manufacturers an inordinate amount of time and money, in addition to killing all chances of future collaboration. between the two sides. In summary, the consequences of a poorly drafted termination clause can put a builder in a very bad position.
What can a manufacturer do to sever a relationship with a successful distributor without creating animosity? Sometimes a termination for convenience clause will exist that will allow a manufacturer to exit immediately. Often, however, such a clause will not be present (especially with distributors that have high leverage) and the manufacturer must resort to requesting termination for cause and the prospect of prolonged hostile litigation. Lawyers who represent manufacturers often focus on the litigation aspects of these terminations by drafting long and drawn-out forum selection (i.e. where the lawsuit will take place) and dispute resolution (i.e. i.e. how the litigation will proceed). Of course, these clauses sometimes have no chance of being considered enforceable in the country concerned. Yet even if enforceable, these clauses rarely function as the be-all and end-all of termination disputes. Arbitration, which is often the preferred route in disputes between distributors, is expensive and rarely timely. Mediation, although slightly less adversarial, can have the same impact.
So what can be done to avoid litigation for termination of a distribution contract when the distributor is not at fault? The key to avoiding hostility and litigation with a distributor is to find ways to deter the distributor from taking legal action and to leave the door open for future relationships between the manufacturer and the distributor. This way of viewing termination as both a legal and business process will serve both to avoid the hostility that accompanies prolonged litigation and to expedite the termination process.
One method for expedited resolution is to draft a termination clause that the distributor will consider more ideal than pursuing protracted litigation. One possible avenue is to include payment of an expedited resolution fee to the distributor if termination without cause is contemplated. Such charges could be equal to compensation for all work performed by Distributor up to the date of termination, or they could be equal to the dollar amount of supplies sold up to the date of termination, or they could be of an entirely different number. The main point is that this fee would be used to reward the distributor for a job well done and to speed up the process of resolving the relationship between the manufacturer and the distributor. There are also other possible options – all designed to put the dispute on a defined path to early resolution.
Ultimately, if you can craft a termination clause that both expedites the termination process and is generous enough for a distributor to make its stipulations favorable to prolonged litigation, you can often end the resolution in a way seamlessly without the hostility and financial burden that often accompanies Termination.
This article was written by Andrew Howey, non-lawyer intern.
Copyright © 2022 Robinson & Cole LLP. All rights reserved.National Law Review, Volume XII, Number 227