Canada: What You Need To Know Before Terminating A Distribution Agreement

Last Updated: April 25 2012
Article by Steven F. Rosenhek

I. Introduction

As is the case for all contracts, distribution agreements may need to be terminated. This bulletin will provide an overview of the current law governing the termination of distribution agreements in Canada.  The provisions of Quebec Civil Code, which govern the termination of distribution agreements in that province, will be discussed separately.

II. How Difficult is it to Terminate for Cause?

Under Canadian law, in the absence of an express agreement between the parties regarding the termination of a distribution agreement, the parties must give reasonable notice before terminating the contract.  However, there are limited circumstances under which the parties will be able to terminate the distribution agreement for cause without notice.

Parties are free to negotiate express conditions which, if breached, provide one or both parties an excuse for non-performance of their obligations under the contract.  Thus, if a distribution agreement expressly provides that it can be terminated on the occurrence of certain events, a Canadian court will likely permit the termination of the contract without notice should those events occur.

Further, a distribution agreement can be terminated for cause without notice, even where the distribution agreement failed to expressly address this issue, if the cause amounts to a fundamental breach of the contract. The threshold for establishing a fundamental breach is high, given that such breach is considered a breach that "goes to the root of the contract". To determine whether a breach of contract amounts to a fundament breach, Canadian courts will consider the following factors:

  • the ratio of the party's obligation not performed to the obligation as a whole;
  • the seriousness of the breach to the innocent party;
  • the likelihood of repetition of the breach;
  • the seriousness of the consequence of the breach; and
  • the relationship of the part of the obligation performed to the whole obligation.

III. What Happens When the Agreement is Unwritten?

Canadian courts will recognize the validity of unwritten distribution agreements if there is some evidence that the parties intended to be bound by a distribution contract.  However, a failure to reduce the agreement to writing will affect the parties' ability to govern the terms upon which the agreement can be terminated and as such, a reasonable notice of termination period will likely be imposed on the parties. Nevertheless, if a party to the contract challenges the existence of an unwritten distribution agreement, the party seeking to enforce the agreement will have to submit evidence before the court to establish the existence of an oral contract.  A failure to prove that the parties had agreed to the essential terms of a distribution agreement is generally fatal to the plaintiff's claim for reasonable notice of termination.

IV. What Constitutes Reasonable Notice?

In cases where Canadian courts imply a term of reasonable notice to the termination of a distribution agreement, they will look to the circumstances of each case to determine what is "reasonable."  Factors to be considered in determining the appropriate amount of notice include:

  • the length of the association between the parties;
  • the dependency of the distributor on the principal's line of business;
  • the level of investment made by the distributor to distribute the principal's product, and the volume of business derived from the sale of the principal's product; and
  • the established practice, if any, in the trade or business.

The determination of what constitutes reasonable notice is highly dependant on the facts of each case, and as such, implied reasonable notice periods can vary widely. Nevertheless, a review of the jurisprudence reveals that Canadian courts most frequently imply a reasonable notice period in the order of twelve months, with 24 months generally being the upper limit.

V. Is there an Obligation of Good Faith?

Canadian courts have recognized the existence of a duty of good faith in a variety of contractual relationships, thus requiring the parties to exercise their contractual rights honestly and fairly. Two established categories where the courts have been willing to recognize a duty of good faith in the execution of contracts are:

  • when there is inherent vulnerability or a power imbalance in the contracting parties' relationship; and
  • in circumstances where the parameters of the parties' contractual relationship and conduct give rise to a duty of good faith.

Consequently, the termination of a distribution agreement on bad faith premises has the potential to attract judicial scrutiny in Canada.

However, Canadian courts have been hesitant to recognize a stand alone duty of good faith that operates independently from the express terms of the contract. Furthermore, the courts have emphasized that an implied duty of good faith should not be used to alter the express terms of a contract, including the right to terminate a distribution agreement on notice. In light of this, a manufacturer who terminates a distribution agreement in accordance with an express contractual provision that permits the termination of the agreement is likely to be protected from allegations that the contract was terminated on bad faith principles. However, given the courts' likely desire to protect the interests of distributors in the face of arbitrary or high-handed conduct by manufacturers, it is always prudent for a manufacturer to consider good faith principles when considering termination of a distribution agreement.

VI. When is an Injunction Available?

A distributor who disputes the circumstances under which a distribution agreement was terminated may seek an injunction to restrain the manufacturer from terminating the contract pending the determination of the dispute at trial. The availability of an interlocutory injunction will depend on whether the applicant can demonstrate the following:

  • there is a serious issue to be tried;
  • the party seeking the injunction will suffer irreparable harm if the injunction is not granted; and
  • the balance of convenience favours the granting of an injunction.

Under the first prong of the test, the threshold to establish a serious issue to be tried has been described as a low one.  However, subsequent cases have held that the standard to be applied will vary dependent on whether the injunction sought is characterized as a mandatory injunction or a prohibitory injunction. A mandatory injunction is an order that establishes a new right the parties had never agreed to, whereas a prohibitory order is simply an order requiring the parties to act in accordance with their agreement.  In circumstances where the injunction is characterized as a mandatory order, the applicant will be required to demonstrate a higher standard of a strong prima facie case under the first prong of the test.

In the context of distribution agreements, the jurisprudence regarding the standard to be applied under the first prong of the test has been divided. Some courts have held that an injunction preventing the termination of a distribution agreement was a mandatory order because it would have the effect of forcing the parties to continue to do business together. However, there is another line of decisions in which the courts have held that an order restraining the manufacturer from terminating the agreement pending trial was simply a continuation of the rights that had been agreed to under the existing agreement, and therefore, a prohibitive order. Evidently, a manufacturer who seeks to oppose an injunction will attempt to characterize the order as mandatory.

Under the second prong of the test, the party seeking the injunction must demonstrate that it will suffer irreparable harm if the injunction is not granted.  Irreparable harm is harm that cannot be quantified in monetary terms or which cannot be cured by damages, such as damage to a distributor's reputation or continued viability as a business.

Finally, the third prong of the test requires the court to determine which party will suffer the greater harm if the interlocutory injunction is either granted or denied pending a resolution at trial.  The factors considered at this stage of the analysis will vary. The courts have been reluctant to bind a manufacturer to a distribution contract when the relationship between the parties has clearly deteriorated, thus making it unlikely the distribution agreement would benefit either party.  However, in cases where the distributor's business relies almost entirely on the manufacturer's products and where the distribution agreement has been executed profitably over a number of years, it may be difficult for the manufacturer to tip the balance of convenience in its favour.

VII.  The Situation in the Province of Quebec

As Quebec is a civil law jurisdiction, there are therefore some important differences as a result of the provisions of Quebec Civil Code (CCQ) which govern distribution agreements.

As in the rest of Canada, parties in Quebec are free to negotiate express conditions which, if breached, provide one or both parties an excuse for non-performance of their obligations under the contract.

In Quebec, the right to terminate a distribution agreement is necessarily governed by the duty of good faith. Article 2805 of the CCQ assumes the existence of a duty of good faith. Furthermore, articles 6 and 7 of the CCQ state that "every person is bound to exercise his civil rights in good faith" and "no right may be exercised with the intent of injuring another or in an excessive and unreasonable manner which is contrary to the requirements of good faith."  Finally, article 1375 of the CCQ provides that the parties "shall conduct themselves in good faith both at the time the obligation is created and at the time it is performed or extinguished." (emphasis added).

Pursuant to this mandated duty of good faith, the courts will look for a material reason (a "serious reason" in the language of the CCQ) for termination, such as a fundamental breach of the contract by the distributor. Moreover, as in the rest of Canada, the parties must give reasonable notice of termination in Quebec. This too is derived from the obligation to exercise one's rights in good faith.

However, there are certain circumstances where the parties will be able to terminate the distribution agreement without notice, such as where specifically provided for by the parties.  Determining whether reasonable notice has to be given and what constitutes reasonable notice will depend on the facts and circumstances of each case. 

Consequently, the termination of a distribution agreement in bad faith, whether by the manufacturer or by the distributor, will attract judicial scrutiny in Quebec.  The party which has acted in bad faith will be liable as a result of the termination.

VIII. Conclusion

In the absence of an express provision in the distribution agreement that deals with the termination of the contract, Canadian courts will look to established contractual principles to govern the relationship between the parties. Examples of various tools that inform the analysis are the doctrine of fundamental breach, implied reasonable notice of termination, and an implied duty of good faith. Many of these doctrines will protect the distributor by preventing the manufacturer from terminating the distribution agreement on its terms. To avoid uncertainty and to maintain a greater degree of control over the contractual relationship, it is always preferable for manufacturers to clearly and expressly delineate the circumstances under which their distribution agreements can be terminated, entering into the relationship.

www.fasken.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions