Exclusive Distribution Agreement, Can it be Terminated? Legal Issues and Response Strategies.
Article posted in 2025-02-17 18:19:54 | VEAT
Law firm Veat received a request from A Company, a medical AI platform, to review the termination of a distribution agreement.
Recently, with the advancement of artificial intelligence (AI) technology, the number of startups developing medical AI platforms is increasing. These companies enter into various forms of distribution and supply agreements to expand their product market, in addition to technology development. Among these, exclusive distribution agreements are a contract type that can cause significant legal issues.
Exclusive Distribution Agreement
An exclusive distribution agreement
is a contract in which a manufacturer (or supplier) grants a specific distributor (exclusive distributor) the exclusive right to sell products or services in a specific region or market.
Through this contract, the exclusive distributor has the right to be the sole seller of the product in that region or channel, and the manufacturer can expand the market and efficiently manage distribution through the exclusive distributor.
Exclusive Distribution Agreement
Non-Exclusive Distribution Agreement
Sole Distribution Agreement
Legal advice from Law firm Veat for termination of distribution agreements
Interpretation of distribution agreements: Whether exclusive and exclusive rights exist
The existence of a distribution agreement does not necessarily mean that exclusive and exclusive rights are granted to the exclusive distributor. This is because interpreting the contract solely based on its name or formal wording may lead to a different assessment of its actual content.
According to a Supreme Court ruling (July 14, 2011, Case No. 2011Da31645, etc.), in interpreting contracts, the actual content of the contract should be emphasized more than the name or formal wording of the contract, and the judgment should be made considering the actual intention of the contracting parties. Therefore, whether the distribution agreement entered into by the client grants exclusive and exclusive rights must be determined based on the interpretation of the contract provisions and the actual transactional relationship.
Even the courts do not apply uniform standards in relation to distribution agreements, and determine whether exclusive rights have been granted on a case-by-case basis. That is, when analyzing and interpreting the exclusive distribution agreement, the actual intention of the parties and the manner of performing the contract are important criteria for judgment.
Legal procedures and response measures for termination of distribution agreements
When terminating a distribution agreement, it is necessary to thoroughly review the termination reasons and procedures specified in the distribution agreement. Generally, the contract termination can proceed as follows:
- Termination by mutual agreement
First, it is the most amicable solution to proceed with the contract termination through consultation between the company and the exclusive distributor. To this end, the company can attempt consultation with the exclusive distributor through email or an official letter. If a mutual agreement is reached, the contractual relationship can be terminated without additional legal disputes, which is the most desirable method.
- Termination based on termination reasons
If mutual agreement is impossible, it is necessary to review whether termination reasons exist by analyzing the provisions of the distribution agreement. If a termination reason is recognized, the company can officially notify the contract termination and proceed with the necessary legal procedures. It is important to deliver the intention to terminate using a certified letter during this process.
Sending a certified letter to notify the contract termination can be used as important evidence in the future if a legal dispute arises. It is necessary to clearly state the termination reason based on the provisions of the exclusive distribution agreement, especially if there is a possibility that the contract violation will be recognized as a termination reason.
- Termination through legal action
If a mutual agreement is impossible and the termination reason is unclear, seeking a judgment from the court is also an option. Legal action can take time, but has the advantage of securing clear legal grounds. The issue of whether exclusive and exclusive rights exist is likely to be a point of contention in this process, so thorough legal review in advance is necessary.
Like the courts, distribution agreements are judged based on the actual content rather than the name or wording. Therefore, companies need to approach the interpretation of distribution agreements with caution. Also, contract termination should be considered in stages, prioritizing mutual agreement and reviewing legal termination reasons if that is impossible.
Law firm Veat specializes in contract advice for startups and IT companies, and provides legal interpretation and strategic advice tailored to the needs of the client. We provide professional legal advice to help clients resolve various contract issues, including drafting distribution agreements, and recommend seeking expert advice to reduce legal risks and find effective solutions when going through the process of terminating distribution agreements.
This case study can also be found on the Law firm Veat blog below.
Thank you.
Law firm Veat