What Wine Importers need to protect themselves against
The following case studies are all drawn from real life cases we have handled recently.
Case #1 – Importer A: Producer terminates distributor without warning, sets up on his own, takes distributor’s key sales staff – and completely gets away with it
Importer A was UK distributor for an Old World producer (P) for 20 years, helping to make P a leading player. P’s products were a major part of A’s portfolio. P became convinced it would make more profit in the UK by taking charge of its own distribution, cutting out A – and A’s margin. Better still, if P could take one or two of A’s main account handlers along to ensure the success of its new operation.
There was no written agreement:
- stipulating the minimum notice of termination P had to give to A;
- restricting P from poaching A’s staff;
- requiring P to compensate A for the goodwill that it had generated for P;
- stipulating which country’s law should be applied, and which courts would have jurisdiction.
P gave A immediate notice of termination and simultaneously started up its new distribution operation, employing two of A’s key staff who’d jumped ship beforehand (neither was subject to any restrictive covenants preventing them from doing so). Because A was a distributor, not a commercial agent, and there was no contractual provision for goodwill compensation, A’s only possible claims were (a) against P for failing to give reasonable notice of termination, and (b) against P and the ex-employees for plotting the coup. A had suffered a substantial – and immediate – drop in sales, and now had a huge gap in its portfolio. Faced with protracted and costly legal wrangling about applicable law and jurisdiction, just for starters, A made no claims against P and concentrated on trying to recover from this blow. P took a calculated risk, knowing it could have a cost, but got away with it completely.
Case #2 – Importer B: Producer cuts out commercial agent who developed hugely successful UK brand
Importer B was UK agent for a New World producer (P). B conceived a brand for P, exclusive to a major UK supermarket. Within a few years it had become hugely successful. P decided it could do without B, and ended the contract with minimal notice. B was arguably a commercial agent, and entitled to claim goodwill compensation. But that would mean commencing proceedings in the UK, which would start a costly ball rolling: P would be able to dispute jurisdiction, B’s agency status, and the amount of any compensation. The loss of the brand had taken away a large chunk of B’s income, and it was in no position to pursue seriously contested litigation. All B could do was try to negotiate the best deal it could without actually embarking on legal proceedings.
Case #3 – Importer C: Producer terminates distributor with little warning – damage aggravated by loss of unprotected trade mark and brand rights
Importer C was UK distributor for an Old World producer (P) for over 25 years, helping it to become a category leader. P’s wines represented 33% of C’s sales turnover in the best years, and were at the centre of its offering. Very similar to Case #1. No contractual protections in place: exposure to termination at short notice; uncertainty and scope for costly and prolonged arguments about what would be reasonable notice, applicable law and jurisdiction; no provision for goodwill compensation. In addition, although C considered it owned trade marks and/or brand rights for some of P’s products, it had inadequate contractual control over them. They proved to be worthless to C once P had terminated. All C could do was hold on to what it owed P for wine supplied pre-termination, and try to negotiate the best deal it could without commencing proceedings.
Case #4 – Importer D: Defection of importer’s sales director to a competitor – several producers follow him – nothing D can do
Importer D represented several producers who were looked after by a sales director (S), with whom they had a close relationship. S became dissatisfied. He decided to join another importer and take the producers with him if he could. D had the same exposures as in Case #1, because there were no contractual protections in place. Moreover:
- there was no written agreement preventing any producer from terminating at any time and following S to his new employer
- D had not got S to sign any restrictive covenants preventing him from doing as he did.
D was left having to negotiate as best it could with the producers who had decided to follow S.
Case #5 – Importer E: Oddbins collapse – absence of ROT clause means supplier cannot recover wine that hasn't been paid for
Importer E was one of many who supplied the UK retailer Oddbins until it went bump in 2011. E had Conditions of Sale, but they did not include an effective Retention of Title (ROT) clause. E could prove that Oddbins had bought a substantial amount of wine that it hadn’t paid for when administrators were appointed. A stock check confirmed that most of that wine was still in Oddbins’ warehouse. But E could not claim ROT, because it could not show that the supply contracts incorporated an ROT clause. The list of Oddbins’ creditors included a host of wine suppliers, some of whom were owed six figure sums and are also understood to have recovered nothing.
Case #6 – Importer F: Producer terminates – importer left with a large quantity of unsaleable stock – P has no obligation to buy it back
Importer F was UK distributor for a New World producer (P) who terminated after becoming unhappy with F’s performance. There was a written agreement stipulating what notice P had to give, and he gave it. However, the agreement was silent on the question of stock. On termination F would be left with a large quantity of stock that he couldn’t sell because customers would switch to P’s new distributor, or P himself, for future supplies. F could threaten to bin end the remaining stock, to spoil the market for P. But that would mean making a substantial loss on it, which he could only hope to recover by suing P – and he would struggle to find a legal basis for doing so. P’s best offer in respect of the stock was unattractive. An the absence of any contractual protection on this point, F had no alternative but to accept.
What difference could contracts have made?
In every one of these cases, the damage to the importer was significantly increased by the absence of protections that contracts could have provided.
- Applicable law and jurisdiction
Often considered legal mumbo jumbo, but actually critically important. If it had been agreed that the English courts would have jurisdiction, and that English law would apply, the prospect of having to embark on a lengthy and costly preliminary battle, eating up large amounts of time and money, could have been eliminated.
- Notice of termination
If the notice P was required to give had been stipulated, the prospect of further lengthy and costly battling on that issue could have been eliminated.
- Staff poaching
There are two essential protections: firstly getting P to agree what he can’t do, and secondly getting the relevant staff to agree what they can’t do it. Had those protections been in place, the producers and staff mentioned in these cases would have thought very carefully about doing what they did, and might well have ruled it out.
- Goodwill compensation
An importer who operates as a commercial agent will be entitled to goodwill compensation under the Commercial Agents Regulations. A distributor will not be entitled to any goodwill compensation unless the producer agrees to pay it. It is therefore essential to get this agreed at the outset – you’ll be surprised how many producers will agree to it if you ask them. A producer who has no, or very little, UK distribution may well think that agreeing to give you X% of something that will only exist if you do well is a win-win. Moreover, in many wine-producing countries payment of goodwill compensation on termination is the norm and won’t seem like an unusual requirement.
The less that can be disputed, the stronger your hand
If the producer is advised that there is a good chance of your being able to pursue substantial claims and obtain judgment in the UK courts, even if he attempts to contest, and that any attempt to poach your staff could land him – and them – in hot water, he is more likely to decide:
- that he cannot risk terminating in the way he would like to, and
- that it would be much safer to try to negotiate an orderly termination with you on agreed terms.
In other words, your relative bargaining positions will be completely different – and yours will be far stronger than it would otherwise be.
The bottom line
The presence or absence of a written agreement could be the difference between a manageable situation and a financial disaster when an importer/producer relationship is terminated. An importer who has a system for putting a satisfactory written agency and/or distribution agreement in place with every producer he represents will maximise his security, stability and value in the long term.
Want to make your position stronger?
Our Wine Importers Contract Package is designed to help UK wine importers gain improved security and protection from their relationships with wine producers. It will enable you to implement a strategic approach that will maximise your chances of concluding satisfactory agreements with the producers you represent. For further information, click below, complete the request form, and we'll email you a link to download an Information Pack.
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