If you are a supplier or manufacturer, you are likely to have a distribution agreement with a distributor. If so, it is important to know the key terms of your contract and what to do if your distributor has breached those terms. You will need to know exactly what your options are if this occurs. This article outlines what: 

  • you can do if your distributor has breached a key term of your contract; and 
  • damages you could be entitled to.

What Are the Key Terms?

The first step when something goes wrong is to figure out which part of the contract has been breached, as this will determine what you can do. There are three different types of terms in contracts. These terms are called:

  • essential terms (i.e. key terms. If your distributor breaches an essential term, you can terminate the contract and seek damages);
  • warranties (i.e. less important terms. If your distributor breaches a warranty, you cannot terminate the contract but you may seek damages); and 
  • intermediate terms (i.e. relatively important terms. If your distributor breaches an intermediate term, you may be able to terminate the contract and seek damages, but this will depend on the seriousness of the breach). 

The purpose of your distribution agreement will affect which terms are considered essential. Some common examples of essential terms include:

  • the length of the agreement; and
  • whether the distribution of the product is exclusive.

A ‘material breach’ (i.e. a significant breach) usually occurs when your distributor breaches one of the essential terms. In this case, you have the right to terminate the contract. You would also have the right to seek damages against the breaching party. Generally, the breach of a warranty or an intermediate term will not be enough to allow you to terminate the contract. You may need to deal with breaches of intermediate terms or warranties by issuing:

  • warnings;
  • notices; or
  • requests that the breaching party fix the breach. 

If these steps do not work, you may need to start formal legal proceedings. 

If you are unsure whether the term that your distributor has breached is essential or intermediate, you should seek legal advice before taking any action. You may be in the wrong if you terminate a contract for breach of an intermediate term.

Remedies for Breach

Dispute Resolution and Negotiation

Dispute resolution provisions are often included in distribution agreements. 

For example, a contract may state that in the event of a breach, the non-breaching party must serve a notice in writing before taking further action. 

Each dispute resolution clause is different. However, most require the parties to meet in good faith to attempt to resolve the dispute. The dispute resolution clause may also require you to refer the dispute to a mediator if negotiations fail.

Generally, trying to resolve the breach through negotiation is the most commercially sensible option. Court proceedings are expensive for both you and your distributor. Your distributor is also likely to want to maintain their relationships with potential suppliers for many reasons.

Damages for Breach of Contract

You may be entitled to damages if a distributor has breached one of the essential terms, such as the non-compete term. A court will award damages (i.e. compensation) to you in order to place you in the position that you would have been in had your distributor properly performed the contract. 

For example, consider an agreement between a sports shoe wholesaler and a shoe distributor. A non-compete term in the distribution agreement might state that the distributor is not to purchase or sell any similar shoe brands. The agreement may also prohibit the distributor from competing with the shoe wholesaler by acting as a shoe wholesaler themselves. If the shoe distributor breaches this term of the contract, they may need to pay damages to the shoe wholesaler for any loss of profits caused by the distributor’s competition.

Key Takeaways

Whenever you enter into a contract with a distributor, you should carefully consider:

  • the key terms of the agreement;
  • all important dates; and 
  • your options if things go wrong. 

If your distributor has breached their contract, it is always best to attempt to settle the matter out of court. Before taking the matter to court, you should first make sure that the amount of damages you can recover will be worth the costs of legal proceedings. If you need help with resolving a breach of contract, contact LegalVision’s dispute resolution lawyers on 1300 544 355 or fill out the form on this page.

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