A recent case, in which a dispute arose over the right to terminate a distribution agreement, has illustrated the risks of not having formal written contracts in place governing business transactions.
Jackson Distribution Ltd. entered into an arrangement with Tum Yeto Inc. in which Jackson Distribution would be the sole distributor in the UK and Ireland of certain Tum Yeto products. A number of emails were exchanged between the two companies, after which Jackson Distribution sent a draft agreement to Tum Yeto. Receipt of this agreement was acknowledged by Tum Yeto’s CEO, but it was never signed. Some time later, Tum Yeto sought to terminate the arrangement and, predictably, the matter ended up in court.
The court had to consider what terms actually applied, as well as whether or not Tum Yeto was entitled to terminate the relationship and whether Jackson Distribution had suffered any loss as a result.
The court found that there was no evidence that Tum Yeto and Jackson Distribution had ever agreed that the contractual relationship between them should be governed by the draft agreement. However, it found that the emails exchanged did constitute an agreement that Jackson Distribution should be Tum Yeto’s sole distributor and that either of them could terminate the agreement by giving ‘reasonable notice’. The court decided that, in the absence of a breach of contract by Jackson Distribution that would entitle Tum Yeto to terminate the agreement, a period of nine months constituted reasonable notice. In reaching this conclusion, the court considered various factors, including the length of the relationship, the initial investment and the percentage of Jackson Distribution’s turnover represented by the agreement.
“This case shows how a dispute can arise as a result of the absence of a formal agreement,”. “Had the two companies ensured that a signed contract was in place, detailing the circumstances in which the relationship could be terminated and the position of each party if this happened, the expense of bringing the case to court would almost certainly have been avoided.”