Tariffs, distributors, and agents – what are we facing?

Tariffs are in the news. But what if incoming President Trump imposes tariffs on the type of goods which are purchased by your US customers, so far as your distributors and agents in the US are concerned? What is your position so far as your distributors and agents in the EU or other countries, should retaliatory tariffs be imposed?

Tariffs

The nature of most industries is such that agreements for the sale of goods are entered into some considerable time before the goods in question are shipped. The price of goods will often be subject to add-ons such as shipping costs or customs duties. Rarely, however, is mention made of tariffs.

Contracts under distributorship agreements

The situation is further complicated insofar as in most industries the distributorship agreement will be an ‘umbrella’ agreement under which supplier and distributor will enter into a series of contracts for the sale and purchase of the goods which are the subject of the distributorship agreement. It can be expected that the imposition of a tariff on these goods will result in the distributor either wanting to renegotiate the price specified in the sale contract with the supplier or, alternatively, looking for a way out of the distributorship agreement itself.

Whether it is open to the distributor to claim force majeure as a way out will depend on the terms and conditions which apply to sale contracts under the distributorship agreement. The supplier’s terms and conditions of sale will need to be reviewed.

A force majeure clause usually sets out the specific types of events or circumstances which will constitute force majeure. For example, the outbreak of war. In contrast, the imposition of tariffs is rarely stated to be an event of force majeure. But is not the imposition of tariffs the occurrence of an event beyond the control of the parties which is often stated as an event of force majeure? But whether or not it can be relied on will depend on how the relevant court or arbitrator assess the tariffs in question.
Consideration will also need to be given to the consequences of the occurrence of the event of force majeure. Is the contract for the sale and purchase of the goods simply suspended for a period of time? Or if the force majeure event continues beyond that period, can the contract be terminated?

The distributorship agreement itself

But even if the distributor can avoid having to purchase the contacted goods following the imposition of tariffs, the distributor may still have obligations to fulfil under the terms of the distributorship agreement itself. In particular the requirement to fulfil minimum purchase requirements.

Whether following the imposition of tariffs these obligations are still effective will in turn depend on:
1. the force majeure provision in the distributorship agreement itself; or
2. the link between one or more sale contracts not being performed (having regard to the supplier’s terms and conditions of sale) and the distributorship agreement itself; or
3. both.

While it may appear harsh, it is not certain that the ability to terminate a contract for the sale of goods as a result of the occurrence of an event of force majeure will in turn be an event of force majeure for the purpose of the distributorship agreement itself.

Even if it is, there will then need to be considered what is stated in the distributorship agreement to be the consequences of the occurrence of an event of force majeure.

Termination

If force majeure does not provide a way out for the distributor, it may find itself faced with a supplier looking to claim that the distributorship agreement has been breached. In turn this requires consideration to be given to the provisions of the distributorship agreement concerned with events of termination and the consequences of termination.

It can be anticipated that, for many distributorship agreements, termination for breach will enable the supplier to claim damages.

The position of agents

Agents can also be expected to feel the consequences of tariffs being imposed. In particular with regards to the agent’s claim for commission if a contract for the sale of goods is not fulfilled.

Under the Commercial Agents Regulations, where a contract for the sale of goods has been entered into with a customer for which the agent is responsible, commission will become due as soon as:
1. the principal has performed the contract (usually by delivering the goods); or
2. the principal should have performed the contract according to the terms of the contract; or
3. the customer has performed the contract (usually by paying for the goods).

The Regulations go on to provide that, at the latest, commission shall become due to the agent when the customer has performed his part of the contract or should have done so if the principal had executed his part of the contract as required by the contract.

Although often overlooked by principals, the Regulations make it clear that it is not possible under the terms of the agency agreement for principal and agent to agree other terms as to when commission shall become due if to do so would be to the agent’s detriment.

The Regulations do provide for the right of the agent to be paid commission to be extinguished. However, for this to happen it must be the case that:
1. it has been established that the sale contract between principal and customer will not be fulfilled; and
2. non-fulfilment is due to a reason for which the principal is not to blame.

As before, the Regulations make it clear that it is not possible under the terms of the agency agreement for principal and agent to agree other terms as to when commission shall be extinguished if to do so would be to the agent’s detriment.

The duty to inform

Given the above, it may seem to a principal that its obligation to pay commission to an agent will be extinguished if a contract for the sale of goods is not fulfilled as a result of the imposition of tariffs.

While this is likely to be the case, what must not be overlooked is the duty under the Regulations on the principal to inform the agent within a reasonable period of time once the principal anticipates that the volume of commercial transactions will be significantly lower than that which the agent could normally have expected – for example, as a result of the imposition of tariffs.

A failure by the principal to give such notice could result in a claim for damages by the agent and, possibly, the agent claiming that such a failure means that the principal is in serious breach of the agency agreement. This could result in its termination and give rise to a claim by the agent for compensation or indemnity under the Regulations.


Stephen Sidkin is a commercial law partner at Fox Williams LLP (www.distributorlaw.co.uk; www.foxwilliams.com)
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