22 January, 2016
“In fair weather prepare for foul,” Thomas Fuller advised. Exporters and distributors often sign distribution agreements with each other, but the terms of such agreements may not always be properly structured. The unintended problems created often do not become apparent until it is too late. This Alert will address three areas that merit attention in Singapore: effective termination, non-compete restrictions and possible abuse of a dominant position under the Singapore Competition Act.
Effective termination
If a distribution arrangement does not work as planned, a logical next step is to search the contract for ways to end it. In practice, efforts have been made to rely on breach of a specific contract term and termination for repeated slow payments and poor performance. These efforts failed in some cases as the breaches were either not serious enough or not proved.
Termination Example 1: Breach that was not serious enough – Sports Connection Pte Ltd v Deuter Sports GmbH [2009] 3 SLR(R) 883
Two parties had an exclusive distribution arrangement for Deuter sports products in Singapore, Brunei, Indonesia and Thailand. The exporter wanted to end the relationship as the distributor did not meet its purchase targets, but there was no specific contractual right to do so for this reason. The exporter tried instead to end the contract by using the distributor’s failure to get the exporter’s prior consent before selling products in competition with Deuter sports products. The court held that the distributor’s breach of its non-compete undertaking was not serious enough to allow the exporter to terminate the arrangement.
Termination Example 2: Slow payments and poor performance – Parfums Rochas SA and others v Davidson Singapore Pte. Ltd and another [2000] 1 SLR (R) 397
In a distribution arrangement for a brand of fragrances in Singapore and Malaysia, the distributor was habitually slow in paying for goods supplied by the exporter. The parties subsequently signed a settlement agreement for payment of outstanding arrears. The exporter was not satisfied with the distributor’s performance and wanted to end the distribution agreement. Both parties started proceedings against each other. The court held that the exporter was not entitled to terminate the distribution agreement as the distributor’s failures to meet its obligations under it were either not proved or not serious enough.
Success in ending a distribution relationship: Groundwork
Planning ahead allows exporters or distributors to end a relationship with minimum fuss if things do not work out. Two key approaches are “no-fault” termination rights and “for-cause” termination rights. Using either or both approaches can help avoid the problems presented in Termination Examples 1 and 2.
“No-fault” termination rights allow for termination by notice or when a fixed term ends. An appropriate clause to use in a distribution agreement might be: “This Agreement shall take effect on the Commencement Date and, unless terminated for cause under clause AA, shall continue in force for the Initial Term and indefinitely after that until terminated by either party giving at least BB months’ prior written notice to expire on or after the expiry date of the Initial Term.”
“For-cause” termination rights can be used in relation to specified events: for example, where the distributor does not spend contractually agreed amounts for advertising and promotion or does not meet annual purchase targets, or where the exporter or distributor become insolvent. An appropriate clause to use in a distribution agreement might be: “Without affecting any other rights or remedies to which it may be entitled, either party may give notice in writing to the other terminating this Agreement immediately if: (a) AAA; (b) BBB; (c) CCC.”
Parties can also emphasise in their agreements key obligations as being “of the essence of the contract,” the breach of which allows termination of the agreement.
Non-compete restrictions
Exporters often ask distributors to give non-compete undertakings. This is designed to avoid competing activities impeding the distribution of exporters’ products in the distributor’s market.
Breach 1: Selling competing sliding door systems in Malaysia and Brunei – Slide & Hide System (S) Pte Ltd v Chua Seng Guan [2009] SGHC 191
Two parties had a distribution arrangement for a sliding door system. The non-compete obligation in the distributorship agreement prevented the distributor from selling competing products in Malaysia and Brunei, both during the term of the agreement and for two years afterward. The distributor breached this obligation, both during the term of the agreement and afterward. The court held that the distributor was liable to pay damages to the exporter.
Breach 2: Selling competing water crafts in Malaysia – Gentali (M) Sdn Bhd v Kawasaki Sunrock Sdn Bhd (No 3) [1998] 5 MLJ 409
Two parties had a sole distribution arrangement for Kawasaki “completely built up” motor cycles and spare parts, as well as jet ski water crafts in Malaysia. The exporter discovered that the distributor was dealing in water crafts of another manufacturer, under the brand “Seadoo.” The exporter stopped using the distributor and appointed other distributors. In return, the distributor brought proceedings against the exporter. The court held that there was an express agreement by the distributor not to deal with rival brands.
The court also held that even without this express agreement, such a term could be implied based on the surrounding circumstances and presumed intention of the parties.
Success in using non-compete obligations: Designing effective restrictions
While non-compete undertakings act as useful legal protection for exporters, not properly structuring the obligation may make it void under Singapore law. A well-designed non-compete obligation should: protect an exporter’s legitimate interests (e.g., goodwill), be reasonable and not overly wide and not be contrary to public interest.
For example, a balanced non-compete clause may read: “The Distributor undertakes during the term of this Agreement (i) not to manufacture or sell in or import into Singapore any goods competitive with the Products; and (ii) not be interested, directly or indirectly, in any manufacture, sale or importation into Singapore of goods competitive with the Products. This provision shall not apply (i) where the Exporter has given its prior written consent; or (ii) to those goods listed in the Schedule to this Agreement.”
Also, exporters and distributors may want to consider at the outset if their arrangement should be non-exclusive or exclusive. For example, if a distributor is granted a non-exclusive licence and does not perform as planned, the exporter is free to appoint other distributors in the same market. Separately, exporters sometimes specify in distribution agreements that if a distributor with an exclusive licence does not meet pre-agreed targets, this will result in the licence becoming non-exclusive. The change can be automatic or by notice to the distributor.
We have considered legal disputes that have arisen in practice for distribution arrangements. We now turn to competition law requirements, which if not followed, will likely lead to regulatory proceedings.
Possible abuse of a dominant position under the Singapore Competition Act
The Singapore Competition Act may be infringed if distributors are required to purchase exclusively, or a substantial part of their requirements, from a single source. While exclusive distribution agreements are allowed in Singapore, the Singapore Competition Act prohibits the abuse of a dominant position in any market in Singapore.
The case of Re Abuse of a Dominant Position by SISTIC.com Pte Ltd [2010] SGCCS 3 is illustrative. Numerous parties had a distribution arrangement with SISTIC, a ticketing services provider in Singapore. SISTIC designed arrangements to contain restrictions requiring all events at specified venues to use SISTIC as the sole ticketing provider. The Competition Commission of Singapore determined that when key venues are required to exclusively use one ticketing provider, this is an abuse of a dominant position and in breach of the Singapore Competition Act.
A distribution arrangement can be structured such that it strikes an appropriate balance between protecting business interests and legal compliance. To do so, the relationship is designed in a way that does not prevent or severely restrict competition in a particular market (for example, where other exporters or distributors will be denied an outlet for their products). For complaints against exporters or distributors, the Competition Commission of Singapore will consider factors that include the scope of the exclusivity provisions, the duration of the exclusive arrangements and market conditions.
Preparing distribution contracts
When negotiating distribution contracts, it is prudent to plan ahead and endeavour to avoid the problems that have arisen in other arrangements. In this regard, the experience of legal counsel can be useful to both exporters and distributors
For further information, please contact:
Roshini Mohan Krishnan, Duane Morris & Selvam
rkrishnan@duanemorrisselvam.com
