In Japan, courts sometimes order compensation for distributors upon the termination of distributorship agreements, when the distributor had reasonable expectations of a continued relationship. If you plan to appoint Japanese distributors to market your products, it is essential to understand this aspect of Japanese case law.
General Principles of Termination
Typically, a distributorship agreement specifies its contract period. At first glance, it might seem that the appointing party (e.g., a manufacturer) has no obligation to continue the relationship once the contract period ends. However, in practice, Japanese courts sometimes consider the circumstances of termination and might order compensation for the distributor. This compensation often reflects the distributor’s expected profits over a six-month to one-year period.
Factors Courts Consider in Awarding Compensation
Whether compensation is awarded depends on the specific circumstances of the case. Courts generally evaluate the following factors:
1. History of Renewals
If the agreement has been renewed multiple times, the distributor may reasonably expect further renewals. Actions taken based on this expectation can result in significant losses if the contract is unexpectedly terminated.
2. Renewal Mechanism
Agreements with an automatic renewal clause might create an expectation of an indefinite relationship, as parties may pay less attention to the expiration date. In such cases, termination might lead to compensation claims.
3. Dependency on the Distributorship
Distributors who rely heavily on the relationship with the manufacturer for their business are more likely to suffer substantial losses upon termination.
4. Investments Made by the Distributor
If the distributor made significant investments at the manufacturer’s request, Japanese courts are more likely to protect the distributor’s expectation of recovering those investments.
Impact of Termination Causes
The cause of termination also affects the likelihood and amount of compensation. For instance:
– If the termination is due to the distributor’s breach of contract, compensation is less likely.
– If termination occurs due to unavoidable circumstances, courts are generally less inclined to award compensation.
Strategies to Mitigate the Risk of Compensation Claims
To reduce the risk of compensation claims, consider the following measures:
1. Document Distributor’s Awareness of Contractual Limits
Keep records, such as email correspondence, demonstrating that the distributor understood there was no guarantee of renewal.
2. Avoid Automatic Renewal Clauses
Instead of automatic renewal provisions, enter into a new agreement upon expiration. This allows performance evaluations to determine whether the relationship should continue, minimizing expectations of automatic renewal.
3. Address Breaches Promptly
If the distributor breaches the agreement, send a formal notice and demand corrective actions. Such documentation can be valuable evidence if termination occurs due to the distributor’s fault.
4. Provide Adequate Notice
Offer a sufficient notice period before termination to allow the distributor to find alternative partners. This demonstrates good faith and reduces the likelihood of disputes.
5. Offer Compensation or Alternative Arrangements
If the distributor faces unexpected losses due to termination, consider offering reasonable compensation or alternative solutions to mitigate the impact. Such actions can reduce the likelihood of legal challenges.
This column intends to provide a high-level summary of the subject matter, and it does not aim to provide exhaustive information. Also, this column is for informational purposes only and does not constitute legal advice. For specific issues, we recommend consulting an expert. If you have any query, please contact us via inquiry form in this homepage.