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What if I Can’t Deliver on my Contract?

When you sign a contract, one of the most worrisome questions is “What if I simply can’t deliver? What happens if I physically cannot perform my contractual obligations through no fault of my own?”

Although they apply in only the most strictly interpreted, limited situations, the doctrine of frustration and force majeure clauses can come to the rescue. The first relies primarily on the courts, while the second relies on careful contract drafting.

But what exactly are the doctrine of frustration and force majeure clauses?

1. The Doctrine of Frustration

As a general rule, contracts require “perfect performance”. In other words, performance must conform fully to the obligations as they are stated in the contract. But what about situations that you either did not or could not anticipate? Under such circumstances, the doctrine of frustration might apply. This doctrine states that an (i) unforeseen, supervening event that (ii) renders performance of the contract impossible will set the contract aside, so long as (iii) neither party is responsible for the event.

Let’s break this down:

  • The event must be unforeseen and supervening. This means that the event must occur after the agreement has been entered into and must not have been known or knowable.
  • The event must render performance impossible. This requires actual impossibility – expense, inconvenience, etc. are insufficient.
  • Neither party may be responsible for the event. This includes indirect responsibility.

For this doctrine to apply, the frustrating event must defeat the purpose of the contract. To determine whether the purpose has been frustrated, the purpose must first be identified. As such, it is important to include a statement outlining the purpose of the agreement, or else risk the court coming to its own conclusion. This is often found in the background or recitals of an agreement.

What’s the result?

Under Ontario’s Frustrated Contracts Act, if you can establish frustration, you’re (a) entitled to recover any payments made and (b) cleared from any existing debt under the contract. This is applicable to most commercial contexts.

It is important to remember that the common law holds that this doctrine will not be easily invoked and will require truly exceptional circumstances in order to apply. As well, this will only help if you are already in court and the court agrees with you that the contract has been frustrated. It is important to add the protection of a force majeure clause to your contract.



2. Force Majeure Clause

A Force Majeure Clause, may be easier to invoke than the doctrine of frustration. For a force majeure clause to be applicable, the party must typically show that:

  • the event is within the scope of the clause, and the event occurred;
  • the event was outside the control of the party;
  • the event prevented or delayed the party’s performance of its contractual obligations;
  • the party did its best to mitigate (i.e. minimize) the effects of the event; and
  • the affected party gave timely notice according to the terms of the contract.


It is important to include a force majeure clause in any agreement, as it can demonstrate concrete evidence of an intention for a party to be relieved of its contractual obligations under a listed set of circumstances. A legal document service, such as Clausehound, can provide you with examples of  force majeure clauses. It is important to include the types of events that will most likely affect your contract, and to understand how these clauses work.

This article describes how a force majeure clause functions and provides some further elaboration on the types of events often listed in such a clause. The effect of invoking a force majeure clause can be described in the clause itself.

 

3. Conclusion

“What if I simply can’t deliver? What happens if I physically cannot perform my contractual obligations?” The answer may depend on why you can’t perform your obligations.

If the purpose of the contract has been frustrated, a judge may side with you and find that you can’t deliver. Alternatively, a force majeure clause can help if a superseding, catastrophic event occurs that prevents you from fulfilling your contractual promises.


Key Takeaways: Try to come to an agreed upon contract “purpose” and negotiate the inclusion of a force majeure clause. It’s critical that you consider the promises you’re making and all potential events that could occur. In most situations, the law will hold you to your promises because, as they say, “your word is your bond!”

 

This blog was co-written by Samita Pachai.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Overview of Distribution Agreements

Overview of Distribution Agreements

 

What is this document?

A Distribution Agreement is an agreement between a supplier of goods and distributor of goods where the distributor sells the supplier’s product.

 

When would I use this document?

This document can be used when a supplier wishes to use a distributor to distribute product throughout a defined territory. Distribution Agreements can be exclusive or nonexclusive, depending on whether the distributor will be given the exclusive right to distribute the product(s) in the territory. This document includes the obligations of the supplier and distributor, as well as a compensation scheme and who bears liability for shipping insuring and delivering the product. The agreement can also deal with marketing of the product.

 

Who signs this document?

Distribution Agreements are signed by the supplier (usually an Officer or Director of the corporation) and the distributor (usually an Officer or Director of the corporation).

 

More details about this document

Distribution Agreements can range in length depending on the complexity of the relationship and the services that are being provided. Some Distribution Agreements last for a short period of time and cover a small territory, others can last for years and cover distribution to a wide territory that can include multiple regions or countries. Distributors will try to negotiate to be exclusive distributors so other distributors do not compete to sell the supplier’s product in their territory..

Distributor Agreements may contain minimum quotas that have to be achieved by the distributor in order to keep the contract in effect. Distribution Agreements may also contain detailed compensation schemes that can include royalty payments to the distributor or additional compensation for selling a specified quantity of the product.

 

What are the core elements of this document?

The core elements include: parties, territory, reporting obligations (who the distributor reports to and how often), exclusive/non exclusive distributor, compensation, reimbursements, work hours/schedule, warranties, termination clause, relationship and intellectual property and confidentiality clauses.

Some examples of additional clauses include non-solicitation, non-competition, sub-contracting, limitation of liability, audits, marketing materials, and indemnification.

 

Related Documents

Nondisclosure/Confidentiality Agreement – an agreement that protects confidential information

Contractor/Consulting/Services Agreement – this type of agreement can have various names, and is used when a person is paid to provide services but is not hired as an employee. Payment can be flexible eg. money, shares or some other form of compensation.

Intellectual Property Transfer, Assignment and Release – an agreement that transfers the intellectual property from one person to another eg. from a consultant/contractor or employee to the person who ‘hired’ the consultant/contractor or employee

Commission Agreement – an agreement setting out the terms of a sales relationship with a payment structure based on commissions

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Exorbitant Fees Leads to Demise of Distributor

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This article is about a lawsuit alleging fraud by the supplier, who controlled the distributor, in the form of exorbitant distribution fees. “The effect of Weinstein’s (the supplier) scheme was to utilize the Distribution Agreement to transfer to Weinstein, as a result of Weinstein’s ownership of the Debtor, the Debtor’s cash by charging the Debtor above-market rates in the Distribution Agreement instead of the net revenues that could be obtained if the Distribution Agreement reflected market terms and industry norms.”

Agreements which are overly-biased in favour of one of the parties are more likely to be terminated early, or result in financial difficulties for the ‘junior’ party.

Read the article here.

Take away:

  • One sided distribution agreements are less likely to succeed.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Termination Clauses in Distribution Agreements

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When drafting a distribution agreement, the parties should ensure that each party has the right to terminate the agreement under certain circumstances. These may be broad and general in nature such as termination upon the material breach of the agreement or upon default of the parties. The provisions may also be specific to the agreement and the parties to it.

The article describes a supplier that was given the right to terminate the distribution agreement if the distributor’s current chairman of the board died, suffered from a permanent incapacity, or ceased to be involved in the business of the distributor. This type of clause is inserted for the benefit of the supplier so that if the distributor incurs a change of control which the supplier does not endorse, the supplier is not required to continue the agreement with such new change of control. Although it may be important to incorporate some language specific to the parties’ needs, generally, broad termination provisions should also be included.

Read article here

Read the article here.

Take away:

  • Parties should include termination provisions which are tailored to their needs.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Distribution Agreements and App Stores

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Distributing an app in the Google or Apple app stores? It would be wise to carefully review the distribution agreements that come along with these two stores. Google and Apple both include their default end user licensing agreement (“EULA”) into the application before sending it out to the market. This includes a limitation of liability provision which protects the developer, but it does not appear to include an indemnity provision that operates in favour of the supplier. However, it states that if you have your own EULA, you can replace their default one. Often, after signing their distribution agreements, you have granted the app store a perpetual, royalty-free licence to use your application… so be careful to read the agreement before you sign away your hard work!

Read the article here.

Take away:

  • If you are planning to market an app through Apple or Google, read the licensing agreement to understand your options.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Common Mistakes in Drafting a Distribution Agreement

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This article discusses ten common mistakes in the drafting of a distribution agreement. One of these is having an inflexible agreement that is difficult to amend, specifically in the areas of pricing and freedom to make changes to the product in response to changing market and economic parameters.

Parties to a distribution agreement may want to consider making the agreement flexible in regards to pricing and product changes, among other things. Business relationships and the market can change drastically and the ability to amend your distribution agreement to meet those changes is very valuable.

Read the article here.

Take away:

  • Building in flexibility to deal with changing market conditions while maintaining the distribution relationship is very important.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

What you don't know can hurt you! Subscribe to stay informed.

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Protecting Intellectual Property can be Essential in a Distribution Agreement

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This article points out that when parties enter a distribution agreement, it is prudent to take extra precautions to protect intellectual property. It is vital to understand that while a distribution agreement may be explicit about the retention or ownership of intellectual property embedded in the distributed product, it should also specify the length of any licenses to exploit intellectual property granted under the distribution agreement. Furthermore, when granting distribution rights, owners of intellectual property should consider requiring distributor’s end users to sign an end user’s terms of service agreement to protect against any claims the end user may assert against any associated intellectual property.

Read the article here.

Take away:

  • Protect the supplier’s IP from distributor’s end users and customers as well as from the distributor.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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