When distribution agreements require reasonable notice

Corporations may be considered “employees” if they depend on distributing your product

One of the most basic rules of employment law and wrongful dismissal is that in order to be entitled to reasonable notice of dismissal, one must first establish that an employer-employee relationship exists. Typically, employees have been actual human beings. However, the common law has recognized certain exceptions, allowing reasonable notice or damages akin to reasonable notice in situations that involve not people, but corporations as “employees.”
At common law, a corporation can be entitled to reasonable notice of the ending of a relationship that is similar to an employer-employee relationship. In the case of Bird v. Warnock, Hersey Professional Services Ltd., a 1980 decision of the Supreme Court of British Columbia, the employee Bird was an individual who during the course of the relationship incorporated and provided essentially the same services to the employer via the incorporated entity. The employer, seeing the intervening incorporation as an opportunity to consider Bird to be an independent contractor, defended itself in the wrongful dismissal action on that basis. The employer argued in effect that since the service provider was a company and not a person, that it didn’t owe reasonable notice.

The court found that incorporation was really irrelevant to the nature of the true relationship between the parties, and found that the true nature of the relationship was akin to employer-employee. The court awarded Bird reasonable-notice damages.

Similar cases hold that the court doesn’t care whether the plaintiff was an employee for all purposes, but only for wrongful dismissal purposes. In performing its analysis, the court will not necessarily be unduly concerned or bound by, for instance, what the Canada Revenue Agency, or the Employment Insurance Commission’s opinion of the relationship is.

Here is where things get interesting. The courts have allowed claims for reasonable notice upon termination in arrangements strictly between corporations. Typically, exclusive distribution arrangements between manufacturer and distributor attract reasonable notice. The relationship must be of sufficiently long duration, and can’t include express contractual language to the contrary.

Western Equipment Ltd. v. A.W. Chesterton Co. was a 1982 decision of the Supreme Court of British Columbia, which involved two corporations that had a relatively long-term business relationship. The plaintiff, Western Equipment, was the exclusive distributor of A.W. Chesterton’s products in B.C. and Alberta, and its business relied heavily on the sale of Chesterton’s products. The court specifically recognized that the relationship was not one of master-servant, but was a business relationship between a manufacturer and a distributor. The court ruled that such relationships, although they are between corporations, can only be terminated without just cause upon providing reasonable notice (unless there is an enforceable written clause otherwise).

Marbry v. Avrecan International Inc., a 1997 decision of the Supreme Court of British Columbia that was substantially upheld by the Court of Appeal for British Columbia, builds on the principles set out in Western Equipment. In Marbry, the Court of Appeal established a number of factors the courts should follow in analyzing whether one corporation owes another corporation reasonable notice of termination of the business arrangement:

The duration of the relationship: the more permanent the relationship, the more likely reasonable notice will be required;
The degree of reliance in the relationship: for instance, if the sale of the manufacturer’s products amounted to a significant percentage of the distributor’s overall revenues, this would sway the court toward requiring reasonable notice; and
The degree of exclusivity: similar to reliance, exclusivity pre-supposes reliance, and the greater exclusivity there is, the more likely that reasonable notice will be required upon termination.
In my November 2-8, 2004 column on independent contractors, I explained that there is a continuum, or spectrum, flowing from pure independent contractor on one end to employee on the other end. The courts have appllied the principles defining independent contractor and employee relationships to business relationships between corporations that bear similarities to employment in general.

Where the relationship between the corporations falls far enough away from the independent contractor end of the spectrum, the courts may treat that relationship not as a purely commercial one between companies, but rather as an employment-type relationship, at least for the purpose of implying into the relationship that reasonable notice of termination is required.

This means that commercial relationships such as those between manufacturer and distribution agent – even where both parties are actually corporations and not human beings – can attract reasonable notice when the manufacturer (in the position of employer) terminates the arrangement

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