Terminating a Distribution Agreement Akin to “Dependent Contractor” Arrangement and Requires Reasonable Notice

Facts

This was a summary trial application brought by the plaintiff, Meridian Distribution Ltd. (“Meridian”) seeking judgment against the defendant for breach of contract.  Meridian was a distributor of sporting goods and other accessories. The defendant, Endeavor Design Inc. (“Endeavor”) was a company that made snowboards and snowboarding accessories.

From 2003 to 2012, Meridian and Endeavor were in a business relationship. It was Meridian’s position that in 2003, the parties entered an oral agreement where Meridian was to be the exclusive distributor for Endeavor items for an indefinite period of time. Endeavor terminated the business relationship in 2012, and Meridian argued that it was entitled to reasonable notice. Endeavor’s position was that the parties entered into a written distribution agreement in 2003, which expired after one year and was renewed annually.  Endeavor argued that in 2012, they chose not to renew the agreement and therefore did not owe any notice to Meridian.

It was found that in November 2012, Endeavor told Meridian that they wished to start handling their own distribution in Canada and proposed an alternate arrangement. As part of this arrangement, Endeavor would take over the Canadian distribution of products and offer financial incentives to Meridian.  Meridian did not accept this proposal and the business relationship was terminated.  While there was some evidence that the initial contract between Meridian and Endeavor was an annual contract, it evolved over time.

Issues

The issues in the case were as follows:

  • was the agreement between Meridian and Endeavor for a fixed or indefinite term?;
  • should any notice be awarded to Meridian?; and if so
  • did Meridian mitigate its damages?

Legal Test/Analysis

The Court analyzed whether the relationship would fit into the category of more permanent contracts (dependent contractors) as described in Marbry Distributors Ltd v Avrecan Int Inc., 1999 BCCA 172.  If so, while not an employment contract, the contract would give rise to a requirement of reasonable notice.  To assess whether the contract fell into the category of dependent contractor relationships, the Court looked at the following factors:

  • Meridian was the exclusive distributor for Endeavor in Canada for nine years;
  • Meridian had staff whose sole job was to market Endeavor’s products;
  • Meridian took on risk by purchasing Endeavor inventory before it was purchased by retailers;
  • networks for Endeavor were established by Meridian; and
  • Meridian was the exclusive Canadian distributor for Endeavor from 2003 to 2012.

Considering all these factors and the permanency of the relationship, it was determined that this contract did fall within the category of dependent contractor and required reasonable notice of termination.   Meridian was entitled to nine months’ notice.

Regarding mitigation, it was held that Meridian had a duty to take all reasonable steps to mitigate the loss of the breach of contract.  Endeavor argued that Meridian should have accepted the alternate arrangement in order to mitigate their damages. It was found that while the alternate arrangement was not as attractive as the previous arrangement between Meridian and Endeavor, Meridian had a duty to mitigate its losses by accepting the offer. It was held that 5% of the Endeavor Canada sales from January 1, 2013 to December 31, 2013 should be deducted from Meridian’s award for failure to mitigate. 

Implications for Businesses

Where businesses have relationships with other businesses or individuals who are not considered to be employees, they should confirm the terms of their agreement in a written contract.  The contract should include a specific provision addressing the amount of notice required if either party decides to terminate the agreement where there is no “cause” or material breach of contract.   If the parties start with a fixed term contract, and the contract is going to continue past the end of the original term, the parties should confirm the renewal and termination terms in writing for the future.  These contracts and termination provisions will be especially important when the other business or individual is heavily dependent on the company for work and the relationship persists over years.    The link to the full decision is found here

This update was authored by Deanna Froese. Questions? Comments? Concerns? Contact Deanna at dfroese@harpergrey.com or anyone else listed on the authors page.