Dealing With Dealers: International Distribution Agreements and Terminations

To gain traction in foreign markets, manufacturers often rely on independent sales intermediaries like distributors and sales representatives. These tend to be well connected in their territories and promise manufacturers a relatively easy road to entering or growing new markets without the risks of direct investment required by establishing their own local sales presence with employees, a subsidiary corporation and importation capabilities. But, relationships with independent dealers come with their own set of risks. Properly structuring dealer relationships is key to achieving a company’s business goals.

Choosing the Right Distribution Model

Manufacturers have a number of options with regard to structuring the engagement of a foreign dealer, including a true agency model (the foreign agent acts and contracts in the name of the manufacturer), a referral agent model (the foreign referral or promotion agent—often referred to as sales representative or broker—receives a commission for referring buyers but does not negotiate/conclude any contracts on behalf of the manufacturer), and a buy-sell model (involving sales to wholesale distributors, resellers, franchisees, and/or retailers).

The terminology, commercial practices, and laws vary from jurisdiction to jurisdiction and industry to industry and each distribution model has pros and cons with regard to risk, opportunities and the degree of control preserved by the principal. The trade-offs vary from jurisdiction to jurisdiction, subject to the following general principles:

• By appointing dependent agents in other jurisdictions, companies may establish a taxable presence with resulting tax reporting and remittance burdens (also known as a permanent establishment or “PE problem”).

• If a company engages an individual person as commission agent or other intermediary, employment laws and rules on misclassification must be considered.
• Buy-sell distributors typically bear product compliance obligations as a matter of local law when acting as importer of record and introducing products on the market in their home jurisdictions. Thus, a buy-sell distributor can help foreign manufacturers address local requirements relating to translation of warnings, labelling, recycling, registration requirements for medical devices, import bans or license requirements for encryption products and technical standards ¹L. Determann, WEEE & RoHS Catch On Globally - Compliance Obligations for Makers of Electrical Equipment Daily Journal (September 2006).. However, even if a distributor formally assumes local product compliance requirements under a contract, often only the manufacturer is in a position to efficiently apply labels, conform products to legal restrictions on material composition (including rules on hazardous substances such as RoHS and REACH in Europe) and ensure compliance with product safety rules.
• By selling products to buy-sell distributors abroad, companies can exhaust their intellectual property rights with respect to the sold items, which can weaken shrink-wrap license models, result in a loss of control over distribution activities, create channel conflicts, prompt undesired re-importation and favor price disruptions ²L. Determann / B. Allgrove / P. Church / G. Shapiro, International First Sales under U.S. and European IP Laws, 86 BNA Patent, Trademark & Copyright Journal 485 (2013); L. Determann, Importing Software and Copyrights, The Computer & Internet Lawyer, 5, 1 (2013)..
• While franchise laws are often much less developed outside the U.S., some countries have enacted disclosure requirements and termination protections. Companies must be careful to clarify to what extent a foreign reseller may use the manufacturer’s marks and brands in the reseller business, company name and domain URL in order maintain control over foreign trademark and product registrations.
• Under foreign competition laws, particularly in Europe, companies face prohibitions regarding resale price maintenance, territory and customer allocation and other restraints of trade ³L. Determann / B. Batchelor, Revised Competition Rules for Online and Offline Distribution in Europe, 15 BNA Electronic Commerce Law Report 39 (2010).. As a rule of thumb, companies are allowed to exercise more control in the context of commission agency arrangements than in buy-sell arrangements.
• Commission agents tend to involve greater risks of entanglement with foreign anti-corruption laws and the U.S. Foreign Corrupt Practices Act ⁴See, generally, R. Tarun, The Foreign Corrupt Practices Act Handbook, 2013 Edition., particularly in the context of sales to governments or government-owned businesses.

Planning Ahead—Termination

In addition to the considerations flagged above, companies should plan their exit strategy at an early stage. After having entered a particular market, a company may outgrow the local dealer’s capacities, develop different needs, or simply discover that a particular dealer was never effective in the first place.

Under mandatory dealer protection laws in many countries, particularly Latin America, Europe and the Middle East, commission agents—and in some countries also resellers and franchisees—are entitled to protection against termination and severance. Companies can in some cases mitigate risks arising under dealer termination laws with contractual disclaimers and alternative dispute resolution clauses, but in most cases, companies must either pick a distribution model that does not trigger the local dealer protection laws (e.g., appoint resellers in jurisdictions where only commission agents are protected) or budget for the exposure that typically manifests when the company attempts to terminate or modify an intermediary relationship. Additionally, resellers that are treated like agents (e.g., required to report their customer contact information), are often entitled to agent-like protections, even in jurisdictions like Germany where “plain resellers” are generally afforded far less protection.

Mandatory Dealer Protection Laws and Related Considerations in Different Jurisdictions

USA

The U.S. has not enacted any comprehensive dealer protection law. By default, manufacturers and their sales intermediaries are free to agree on termination periods, severance and other terms by contract. Nevertheless, companies must carefully assess their particular relationship in light of various state laws offering specific protections to sales representatives and resellers of certain types of equipment. Also, some arrangements can trigger requirements under U.S. federal and state franchise laws.

1. Commercial Agents and Sales Representatives in the USA.

Courts in California have decided that in the absence of a contractual provision regarding the payment of commissions after termination of a sales representative agreement, “one who procures an ongoing business relationship, as opposed to single order transactions, is entitled to compensation for a ‘reasonable’ time after termination.” ⁵Watson v. Wood Dimension, Inc., 209 Cal. App. 3d 1359, 1364 (1989). No formula for calculation of such post-termination compensation has been specified by California courts. It has merely been said that quantum meruit, i.e., the “reasonable value of the services plaintiff performed” is a fair measure of such post-termination compensation. Id. at 1365. In the Watson case, the court deemed such value to be reflected in the agreed commission percentage on all sales that occurred until the time when the representative “no longer had any influence over [the buyer’s] procurement policies and [the buyer’s] continued reordering, while set in motion by [the agent], would depend upon [the principal’s] product and service.” Id. at 1366-67. Also, the California Civil Code requires manufacturers doing business in California to enter into a written contract when using the services of a wholesale sales representative (defined as “any person who contracts with a manufacturer … for the purpose of soliciting wholesale orders [and] is compensated … by commission”) ⁶CAL. CIVIL CODE §§ 1738.12, 1738.13..

The written contract must contain certain mandatory information, namely:

• the rate and method by which the commission is computed;
• the time when commissions will be paid;
• the territory assigned to the sales representative;
• all exceptions to the assigned territory and customers therein; and
• what chargebacks will be made against the commissions, if any ⁷CAL. CIVIL CODE § 1738.13..

If the principal wilfully fails to pay commissions as provided in the written contract, the principal is liable for triple the damages proved by the sales representatives and, even in the absence of wilfulness, must bear the sales representative’s attorneys’ fees and costs if the sales representative prevails in a civil action against the principal ⁸CAL. CIVIL CODE §§ 1738.15, 1738.16.. These punitive provisions were enacted to protect California wholesale sales representatives. Ordinarily, these statutes apply only if the activities of the wholesale distributor take place at least partially within California
⁸See CAL. CIVIL CODE §§ 1738.10, 1738.13.. It is conceivable that the law might be applied even without a physical nexus if an express choice of California law in a sales representative agreement applies. A California court confirmed in 2009 in a case involving sales representation and employment relationship allegations that any right to receive post-termination payments or severance depends on whether such entitlements are expressly agreed in the plain language of the written sales representative agreement ⁹Nein v. HostPro, Inc., 174 Cal. App. 4th 833 (2009). The plaintiff in Nein was employed by the defendant as a sales representative, and, in the course of his employment, plaintiff had approached AT&T to offer the defendant’s web hosting services. The transaction was still being negotiated when plaintiff was terminated and therefore he sued defendant to recover commissions associated with the AT&T transaction. The appellate court affirmed the grant of summary judgment by the trial court in favor of the defendant because any rights to receive commission payments was cut off upon termination under the plain language of the written employment agreement..

2. Buy-Sell Distributors in the USA.

A number of states have enacted dealer protection laws precluding termination without good cause and/or requiring inventory repurchase for manufacturers or suppliers of agricultural equipment, industrial equipment, lawn maintenance equipment or construction equipment or any combination thereof depending on the state ¹⁰ABA Section of Antitrust Law., Antitrust Law and Economics of Product Distribution, (2006) at p. 34 and p. 365-70. See also, 2007 AED State Equipment Distributor Laws Book (6th edition) (formerly the AED State Dealer Protection Law Handbook); Robert W. Emerson, Franchising and the Collective Rights of Franchisees. 43 Vand. L. Rev. 1503 (1990); Thomas J. Collin, State Franchise Laws and the Small Business Franchise Act of 1999: Barrieres to Efficient Distribution, 55 BUS. LAW. 1699, 1705-26 (2000); James R. Sims III & Mary Beth Trice, The Inadvertent Franchise and How to Guard Against It, 18 Franchise L.J. 54 (1998).. In one case, a European dealer was able to successfully assert the California dealer protection statute for agricultural equipment dealers against a California-based manufacturer of general purpose GPS devices that were used also on tractors ¹¹Gravquick A/S v. Trimble Navigation International Limited, 323 F. 3d 1219 (9th Cir. 2003)..

3. U.S. Franchise Laws.

Under U.S. federal laws and the laws of many U.S. states, including California and New York ¹²N.Y. GEN’L BUS. L. § 680, et seq., buy-sell distributors are protected under franchise laws if they receive the right to distribute goods or services under the manufacturer’s trademark, if the supplier has significant control of the franchisee’s method of operation, and the distributor is required to pay a franchise fee under the applicable agreement. The term “franchise fee” has varying meanings under applicable law. Under federal and California law, for example, the term includes any fee or charge that a franchisee is required to pay, or agrees to pay, for the right to distribute including payments for products exceeding the bona fide wholesale price of such goods ¹³Given the budget provided to us for this memo, we did not have the opportunity to research certain aspects of the above-listed state laws, including for example, whether there is a “whole sale price exemption” under New York law., payments for advertising assistance (Comm. Op. Nos. 72/11F, 73/17F), bookkeeping (Comm. Op. No. 72/13F), training (Comm. Op. Nos. 71/60, 73/39F), sales kits, brochures, programs, forms decals, shirts, displays and announcements (Comm. Op. Nos. 71/49F, 73/29F, 82/1F), rentals or leases (Comm. Op. Nos. 73/26F, 73/50F), or services, such as consulting or management fees (Comm. Op. Nos. 73/25F, 73/41F, 77/1F, 79/2F). These requirements are easily satisfied even in the context of distribution agreements that manufacturers do not consider “franchises.”

Often companies make significant efforts to avoid triggering franchise laws, but must then also consider “Business Opportunity Laws” (or in California “Seller Assisted Marketing Plans”). The definition of a “business opportunity” or “seller assisted marketing plan” varies from state to state. In general, the relationship is one in which the “seller” sells or leases, or offers for sale or lease, any product, equipment, supplies or services sold or offered for sale to the “purchaser” for the purpose of enabling the purchaser to start (or operate a business) and where the seller makes one or more particular representations, including representations that the distributor can earn an amount in excess of the initial payment paid by the purchaser for participation in the seller assisted marketing plan or that there is a market for the product. If and to the extent franchise or business opportunity laws apply, the manufacturer must comply with various disclosure requirements and may not terminate the distribution agreement, except with good cause (e.g., material breach of contract by the distributor) or a mutual settlement, which will typically require the payment of severance.

Europe

In Europe, the two largest groups of commercial intermediaries are so-called “commercial agents” on the one hand and distributors on the other.

1. Commercial Agents in Europe.

Commercial agents include many sub-types, including a “true agent” as defined above, commission agent, referral agent, promotion agent and sales representative. With a few exceptions, any intermediary who negotiates and/or concludes contracts, either for the sale of goods or services, on behalf of a principal, and on a permanent basis (this is the difference with a one-time broker) is considered a commercial agent ¹⁴In only a few countries, for instance the United Kingdom and Finland, the protective provisions would apply only to commercial agents that negotiate/conclude contracts for the sale of goods (and not services).. The European Agency Directive ¹⁵Formally the Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents, Official Journal L 382 , 31/12/1986, p. 0017-0021. provides pan-European guidance on the minimum protections that should be afforded to commercial agents.

Most of these provisions concern termination issues, but the European Agency Directive also gives guidance on commission payments, right to “open book” verification of commission calculations, non-compete covenants, and a right to a written agreement. To avoid liability for violations or unenforceable contract terms, foreign manufacturers should adjust their sales representative agreement templates to mandatory contract requirements. The fact that the EU has enacted a directive on this subject matter ensures that the relevant legal regimes in all 31 members states of the European Economic Area ¹⁶28 EU member states plus Iceland, Liechtenstein and Norway are obligated to implement the European Agency Directive. are relatively “harmonized” (euro-speak for similar, but not identical). Companies and corporate counsel can refer to the text of the European Agency Directive to orient themselves about the general legal landscape, but they will ultimately have to look to national laws to confirm the precise legal requirements.

The termination protection that applies to such commercial agents is relatively straightforward. The agent is entitled to a notice period of one month per year that the relationship has lasted, with a maximum of three months (in some countries, six months) of notice. In addition, the agent has a claim for payment of a goodwill indemnity, which is his compensation for the fact that he has built up a sizable customer portfolio that the principal, following the termination, would otherwise take back for free. There are no formulas for the calculation of that goodwill indemnity, but its maximum amount is capped to one year averaged commission income (in some countries, other maxima apply). Under some specific conditions, the agent is also entitled to payment of a “pipeline commissions” and post-termination commissions. In exceptional circumstances, additional compensation may be available.

A final important note on commercial agents in Europe is that the European Court of Justice has ruled that provisions of the agency directive relating to termination are super-mandatory when the agent is active anywhere in the European Union. This means that although parties to a commercial agency contract are free to choose the law that will govern their contract, including a non-European Union law (such as a state law of the U.S.), such choice of law will not abrogate the agent’s rights to a notice period and goodwill indemnity upon termination ¹⁷ECJ, Judgment of the Court (Fifth Chamber) of 9 November 2000, Ingmar GB Ltd v Eaton Leonard Technologies Inc., Case C-381/98, European Court reports 2000, Page I-09305; also: German Federal Court of Justice (BGH, September 5, 2012, VII ZR 25/12) which confirmed the jurisdiction of German courts despite the choice of an exclusive jurisdiction of the courts of Virginia (USA) due to the risk of circumvention of the mandatory termination indemnity.. The courts of some member states have gone even further and ruled even when parties validly agreed on an arbitration clause, it is overruled if the effect of such clause is to apply a non-EU law to a contract and deprive the European commercial agent of its rights to a notice period and goodwill compensation ¹⁸(England) High Court of Justice Queen’s Bench Division, Accentuate Limited v. ASIGRA Inc., 30 October 2009, Case No : CC/2009/APP/0385, [2009] EWHC 2655 (QB), 2009 WL 3441737; (Belgium) Supreme Court, 3 November 2011, Air Transat A.T. Inc. / Air Agencies Belgium nv, C.10.0613.N, R.W. 2011-12, 1646 a.f.; (Germany) In 2006, the Appeals Court of Munich ruled that when “it is likely” that the arbitrators will not apply the European rules regarding compensation upon termination, the arbitration clause should be set aside. (OLG München, May 17, 2006, 7 U 1781/06; see also ERPL 2007, p. 891). This decision was, however, heavily criticized in legal doctrine..

2. Buy-Sell Distributors in the EU.

A second group of intermediaries may be called “distributors.” Distributors, too, include sub-types such as importer-distributors, resellers and “dealers.” The term “dealers” is not used in Europe as a general term that covers all types of commercial intermediaries (as the term is used throughout this article), but refers only to a (usually smaller) variation of distributor.

Contrary to what applies to commercial agents, there is no European directive on distributors and as a result the legal regimes in the different member states vary widely ¹⁹Also for franchise contracts, both for products and for services, there is no European-wide legal framework, but in a number of countries specific additional rules or disclosure requirements may apply that are unique to franchise agreements.. Still, it is possible to divide them roughly into three categories.

First are those countries that strictly adhere to the general principle that parties are free to establish the terms and conditions that govern the termination of their contractual relationship. In that category would sit, for instance, the United Kingdom and Denmark. Second are countries having no specific legislation addressing distribution contracts but which, under a given set of factual conditions, apply the termination protection rules that come into play for a commercial agent by analogy to the termination of a distributor relationship. Germany is the well-known example but other countries have also sought to extend a similar protection to terminated distributors as that enjoyed by commercial agents to terminated distributors. The third category are those countries that have enacted specific legislation for the protection of distributors in case of termination. That is the case only in Belgium where a specific distribution act, enacted in 1961, obliges manufacturers to grant their distributors, upon termination, a reasonable notice period and an equitable customer portfolio (or goodwill) compensation payment.

The act has no mathematical formulas and does not define reasonable or equitable, but when a relationship has lasted, for instance, for 20 years or more, courts have set the required notice period at 24 months or even longer and have awarded goodwill compensations as high as the equivalent of one year of gross profit. Fortunately, there are multiple strategies to avoid application of this act, but they must be deployed at the beginning of the contractual relationship, not at the end when it is terminated.

3. Franchise Laws in the EU.

Some EU member states have enacted national franchise laws with specific disclosure requirements ²⁰See, http://www.eff-franchise.com/spip.php?rubrique21 (accessed Nov. 15, 2014)., but regulations are relatively “light touch” compared to U.S. franchise laws, and the European Union has not yet harmonized franchise laws across the EU.

Latin America

Latin America has some of the most protectionist dealer laws in the world. These laws began appearing in various Latin American countries in the late nineteen-sixties ²¹The first one was Puerto Rico’s Act No. 75 of June 24, 1964. Many of the subsequent dealer laws, particularly in Central America, were modeled after Act. No. 75. and grew in scope throughout the seventies. Paraguay was the last country in the region to enact a dealer law ²²Paraguay’s dealer law was enacted by Decree Law No. 7 of March 7, 1991, and amended and restated through Law No. 194 of June 17, 1993. and by the early nineties there were a dozen countries in the region with dealer laws in effect ²³The original dealer law countries were Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica, Panama, Colombia, Brazil, Ecuador, Paraguay, the Dominican Republic, and Puerto Rico. Of course, Puerto Rico is a U.S. territory, not a separate country, but its legal system, base on civil law, is similar to that of many countries in Latin America.. Eventually, some countries repealed their dealer laws for constitutional reasons, like Panama, Ecuador and Nicaragua, or amended them to remove most of their protective provisions in order to comply with free trade agreement obligations, like most Central American countries and the Dominican Republic under the CAFTA-DR free trade agreement ²⁴Annex 11.13 of the Central America-Dominican Republic Free Trade Agreement among Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica, the Dominican Republic and the US contains specific commitments of the Central American countries and the Dominican Republic to repeal or amend their dealer law to remove many of their protection provisions, which were deemed to be non-tariff restrains on trade. Please note that Guatemala did not have any specific commitments even though it had certain provisions in its commercial code that amount to a dealer law. Such provisions continue to be in effect.. Today, the countries in Latin America that still have in effect dealer laws are Brazil, Colombia, Paraguay, Puerto Rico (a U.S. territory), and to a certain extent Guatemala, Honduras, El Salvador, Costa Rica and the Dominican Republic ²⁵The changes to the dealer law required by CAFTA-DR did not apply retroactively to relationships in place prior to the implementation of the agreement in each country, which happened between March 1, 2006 and January 1, 2009. With respect to relationship pre-dating such implementation, the dealer laws continue to be in full effect. In addition, with the exception of Costa Rica, the amendments to the dealer laws in the other countries only benefit US companies. Thus, with respect to principals from Europe or other parts of the world, these dealer laws continue to be in full effect..

In general, the dealer laws in Latin America share many similarities. Essentially, these dealer laws provide for the award of extra-contractual indemnification to a covered sales intermediary in the event of unilateral termination, modification or non-renewal of the relationship by the principal without “just cause,” even when such termination, modification or non-renewal is done strictly in accordance with the terms of the agreement between the parties. These dealer laws are of mandatory application as a matter of local public policy and cannot be waived contractually or as a result of a choice of foreign law. In general, any disputes under such dealer laws must be resolved by local courts.

The Latin American dealer laws generally apply to all types of sales intermediaries, including commission sales agents and buy-sell distributors. The Brazilian and Colombian commercial agency laws are an exception and generally apply only to commission sales representatives and not to true buy-sell distributors. In addition, the Puerto Rican dealer law applies only to buy-sell distributors, although Puerto Rico has a separate law providing essentially the same protection to exclusive sales representatives ²⁶This law is Act. No. 21 of Dec. 5, 1990..

As mentioned above, many of these dealer laws not only protect covered sales intermediaries from unjustified termination but also unjustified refusal to renew an expired relationship. Although some countries like Brazil and Guatemala do not go so far and provide that the expiration of a definitive term agreement is in fact a just cause for termination, this typically works only for the initial term of a definitive term agreement, as successive renewals of such term often result in the agreement being deemed to be of “indefinite duration.”

In order to avoid liability for statutory indemnification under these dealer laws, a principal who terminates a distributor must show “just cause’ for termination (or non-renewal). Just cause is usually defined as lack of due care by the dealer or a breach in performance of its contractual obligations. A breach by the principal of its obligations can also give the dealer the right to terminate the relationship with just cause and claim the statutory indemnification. Just cause for terminating a dealer is usually difficult to prove and local courts tend to favor the local dealer when in doubt regarding facts presented as just cause for termination.

Probably the most severe consequence of dealer laws in Latin America, and what distinguishes them most from dealer laws in other regions of the world, is the potential statutory indemnification to which a dealer is entitled upon termination or non-renewal of the relationship without just cause. In most Latin American countries with a dealer law, this indemnification is typically calculated based on a formula prescribed in the law that takes the average gross profits or revenue earned by the dealer and multiplies it by a factor based on the duration of the relationship ²⁷The other usual elements of the statutory indemnification include compensation for the “good will” created by the dealer and for investment made by the dealer in the relationship that it is unable to recoup. In addition, many of the dealer laws require the principal to repurchase inventory and also entitle the distributor to obtain an injunction prohibiting the importation of the products into the country while the dispute with the principal in pending.. For example, under the Paraguayan dealer law, the applicable formula provides that if the agreement has been in effect for less than two years, the indemnification is equal to the average annual profits earned by the dealer during the duration of the relationship. This factor can rise to six times the average annual profits of the dealer, depending on the duration of the relationship. These formulas can result in a terminated dealer with entitlement to a significant amount in compensation and said amount may have no connection to the actual damages incurred by the dealer.

On a more positive note for the principal, dealer laws in Latin America do not typically grant exclusivity rights to the dealer. This is generally a contractual matter, although it is not uncommon for a local dealer to claim implied exclusivity rights if they have been the only dealer in a territory and the contract is silent on the matter. The Brazilian dealer law is the only dealer law in the region that addresses exclusivity by presuming it in the absence of a provision to the contrary in the agreement. Maintaining non-exclusivity is important in the countries with dealer laws as it allows the principal to appoint another dealer in case there is a potential dispute with an existing dealer or such dealer is under performing.

It is clear from the above that terminating a sales intermediary in a Latin American country with a dealer law can be difficult and expensive. However, other countries that do not have dealer laws can still present risk of potential liability. In general, if a country does not have a dealer law, the termination of the relationship is governed by agreement between the parties and any provisions in the contract allowing unilateral termination by the principal (or either party), even with a relatively short period of notice (e.g., 30 days), will be enforceable.

However, in some countries, the courts have applied the civil law concept of “abuse of rights” to impose an obligation on a principal to provide a longer “reasonable” notice of termination depending on the circumstances. Examples of such countries include Argentina and Uruguay. The breach of such obligation generally entitles the dealer to proven damages, which are normally based on profits the dealer would have made had the principal given the reasonable period of notice of termination. In addition, in the absence of a written agreement with provisions addressing notice of termination, most countries in Latin America require a reasonable notice of termination, the length of which depends on the circumstances, including the duration of the relationship.

There are two main recommendations that can be made in the Latin American region to mitigate the impact of the region’s dealer laws.

First is always to enter into a written agreement with a local distributor or other sales intermediaries with detailed provisions and require the distributor to comply with specific obligations, including performance requirements such as minimum sales quotas, the breach of which could be used as a basis for just cause for termination. Preferably, such agreement should expressly provide for non-exclusivity. There is no advantage in not having a detailed written agreement with a local distributor since under most local laws a written agreement is not required to create a binding relationship and one can be created simply by the course of conduct between the parties ²⁸Please note, however, that Paraguay’s dealer law requires a written agreement in order to register a dealer relationship and without such registration the dealer is not entitled to protection under the dealer law..

The second recommendation is to include in the contract a choice of U.S. or other more favorable law as well as an arbitration clause providing for arbitration in the U.S. or other favorable jurisdiction and administered pursuant to the rules of a recognized international arbitration organization like the International Chamber of Commerce or the International Centre for Dispute Resolution of the American Arbitration Association. Under most of the dealer laws in Latin America such choice of U.S. law and arbitration clause will likely be unenforceable. However, these provisions can serve a defensive purpose in the U.S. in the event the dealer is able to obtain a local judgment against the principal under the local dealer law as U.S. courts will generally refuse to enforce a foreign judgment obtained in breach of a valid arbitration clause ²⁹Please note that with respect to Puerto Rico (a US territory where US federal law applies), the U.S. Supreme Court has held that the Federal Arbitration Act preempts the Puerto Rican dealer so that an arbitration clause would be enforceable notwithstanding the application of the dealer law. However, Puerto Rico subsequently amended the dealer law to essentially allow a Puerto Rican court, rather than the appointed arbitrators, to rule with respect to the validity of an arbitration clause. .

Middle East

Most countries in the Middle East have some type of commercial agency law. Notable examples include Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Oman, Egypt, and more recently Israel ³⁰Israel enacted a commercial agency law pursuant to Law 5772, which went into effect on April 27, 2012.. Like dealer laws in Latin America, the Middle East commercial agency laws are generally of mandatory application as a matter of local public policy, so cannot be waived contractually or avoided as a result of a choice of foreign law. In addition, local courts generally have mandatory jurisdiction over any disputes under these laws. The definition of a “commercial agent” under these laws is actually broader than the term may suggest and covers not only commission agents but also buy-sell distributors or any type of independent sales intermediaries. An exception to this is the commercial agency law of Israel, which based on the definition of a commercial agent should apply only to commission agents and not to true buy-sell distributors.

The basic protection under these laws is that a principal cannot terminate or refuse to renew a local commercial agent without “just cause.” Just cause is usually defined as a serious breach by the commercial agent of its contractual obligation and is often difficult to prove. A commercial agent terminated without just cause is entitled to damages from the principal but the commercial agency laws generally do not provide a specific formula for calculating such damages. Damages, which can include lost profits, must be proven by the commercial agent, based on the general rules on damages for breach of contract applicable under local law.

Registration and exclusivity (these two issues go hand in hand) are normally the most significant issues under the commercial agency laws in the Middle East. Most of the commercial agency laws in the Middle East require some form of registration of a commercial agency agreement ³¹Article 6 of the Implementing Regulations of the Commercial Agency Law of Saudi Arabia provide that no one shall assume the tasks of the commercial agent unless enrolled in the register prepared for that purpose in the Ministry of Commerce and Industry.. Generally it is only possible to register one commercial agent for a certain product in the same territory or express exclusivity is required to obtain the registration of an agreement ³²The Saudi Commercial Agency Law and its Implementing Regulations do not expressly require exclusivity but in practice exclusivity is required as it is the longstanding policy of the Ministry of Commerce and Industry to refuse to register non-exclusive agreements. On the other hand, the Commercial Agency Law of the United Arab Emirates expressly requires exclusivity for the applicable territory (this can be limited to a single emirate) and product line., so in effect a commercial agent will have exclusivity rights as a result of the registration. In the event of termination, it would be difficult and time consuming to cancel a registered agent and register a new one. This gives a registered commercial agent significant bargaining power in the event of a dispute because it may prevent the principal from being able to continue selling products into the country through another commercial agent.

Despite the above registration requirement and resulting exclusivity, it is still possible to appoint a local commercial agent on a non-exclusive basis. This will normally prevent registration of the agreement, which will in turn prevent the relationship being subject to the commercial agency law. In addition, this generally does not affect the enforceability of the agreement. However, registration does give a local commercial agent certain status that it would not otherwise have in dealing with local ministries and other government agencies, particularly in sales to the government. For this reason, local commercial agents usually prefer registration and insist on exclusivity. Registration will also assist the distributor in blocking parallel or gray market imports. Nevertheless, because registration does make it more difficult for a principal to terminate the relationship, it would normally be advisable to appoint commercial agents in the Middle East on a non-exclusive basis so as to prevent registration of the agreement where such registration applies.

Asia Pacific

Asia Pacific jurisdictions vary in their treatment of distribution agreements and other similar relationships. Civil law jurisdictions tend to favor the distributor/dealer, while common law jurisdictions place more emphasis on contracting parties’ right to terminate or not renew a distribution agreement or similar arrangement in accordance with the terms of the agreed contract.

1. Distribution Agreements.

In Hong Kong, Malaysia and Singapore, for example, parties to a distribution agreement are generally free to agree on the terms of the relationship, including a procedure for termination or non-renewal. Provided the parties terminate or choose not to renew in accordance with the terms of the contract, the court is unlikely to intervene. The ordinary rules of contract will apply, so that in cases where the contract is silent on the issue of a notice period for termination, the court will generally imply a term for “reasonable notice.” Similarly, under Chinese law distribution agreements do not trigger any particular regulation, but rather are governed by the principles of contract law.

In contrast, distribution and agency agreements are highly regulated in Indonesia, where distributor claims for unlawful termination by manufacturers are relatively common. In Indonesia, all distribution agreements and agency agreements must be registered and receive a registration certificate valid for two years or any shorter period specified in the agreement. If a supplier wishes to terminate a distribution agreement and appoint a new distributor before the registration certificate has expired must include evidence from the existing distributor that it does not object to the new distributor. Even in cases where the distributor is in default, the supplier usually cannot terminate a distribution agreement without judicial consent.

Japanese law, while generally respecting freedom of contract, contains certain protections for the distributor where the agreement is terminated or not renewed. As a result, even where the termination or non-renewal occurs in accordance with the terms of the contract, the distributor may be able to claim for unlawful termination or non-renewal. Various factors are considered in such cases, including the notice period given, the duration of the agreement, as well as the distributor’s opportunity to recover its investment.

2. Franchising.

Franchising agreements are generally subject to stricter regulations than distribution or agency relationships. For example, in China, franchise agreements are governed by the Regulation of Commercial Franchises 2007, which, among other obligations, requires a foreign company setting up a franchise to apply for approval from the Minister of Commerce. Under the regulation, all franchise agreements must have a term of at least three years.

In Australia, the Franchising Code of Conduct regulates the relationship between parties to a franchise agreement. The code has very broad application and may cover agreements regarded as distribution agreements in other jurisdictions. A supplier to a franchise agreement must comply with the code’s requirements, including providing a comprehensive “disclosure document” to the distributor/franchisee prior to signing the agreement. The agreement must include certain complaint handling procedures and provisions relating to the termination procedure, and is subject to a cooling-off period in which the distributor/franchisee has the right to terminate within seven days of entering the agreement.

Practical Recommendations

As takeaways, companies should consider the following measures to seize opportunities and protect against risks associated with engaging foreign dealers:

• Sign written agreements with clear rules on key terms such as (non-)exclusivity, sales goals, company names, territories, choice of law and forum, term, termination, termination notice periods, material breaches of agreement, and follow-up products (such as newer models, newer versions).

• Live by the contract from the beginning to avoid establishing different terms through a course of dealing. Typical examples of this would be implied exclusivity (where parties agree on a “non-exclusive” relationship in the contract, but no other dealer is ever appointed) or indefinite duration (where the contract had a fixed term that has expired, but the parties continued working together).

• Don’t mix models—if you entered into a buy-sell contract with a dealer, do not start occasionally paying commissions, as this could change the overall character of the relationship, create difficulty with respect to compliance with competition laws, and support the dealer’s claim that it should qualify for protection under dealer statutes as a sales agent or reseller, whichever is more favorable for the dealer.
• Consider carefully in which legal “forum” a possible dispute will need to be argued. In Europe for instance, the so-called Brussels Regulation ³³Formally the Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, Official Journal L 12/1, 16/01/2001, and as of January 2015 to be replaced by Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012, on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, Official Journal, L 351/1, 20/12/2012. makes it possible for contract parties to choose any mutually agreed upon court of the European Union and any other court within the EU must, and will, respect that choice. Thus, for example, there is no reason a Hungarian agency contract dispute should be settled in Hungarian courts. In other words, if carefully planned, there is significant potential to select courts of a “more liberal” country in Europe than the country that happens to be the home jurisdiction of the principal’s foreign dealer. This relates closely to choice of law. Although, again particularly in Europe, it is an established legal principle that contract parties are free to choose any applicable law they like ³⁴See “Rome I” or formally the Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations, Official Journal, L 177/6, 04/07/2008., it makes little sense to choose a law that is unknown to the chosen court. So a choice of court and a choice of law are, practically speaking, one and the same thing. And as mentioned above, choosing a non-EU law will not work to exclude termination protection in a commercial agency relationship and may, in some circumstances, not work in distributor relationships either.

• Choice of alternative dispute resolution arrangements must be carefully considered ³⁵T. Gamlen, G. Hanessian, C. Murray and D. Zaslowky, Dispute Resolution in International Business (2014).. As discussed above, a number of European jurisdictions are taking the view that disputes regarding the termination of commercial agency contracts are not “arbitrable,” at least not when arbiters are free to apply a legal regime that is less favorable to the terminated agent than what the Agency Directive would provide. If that happens, an arbitration clause in combination with a U.S. law could be considered invalid and as a result, a company would be worse off (because all default protections would apply) than if it had chosen the law and court of a more liberal European jurisdiction from the beginning. Courts in the U.S., Latin America and many Asian jurisdictions, on the other hand, do tend to uphold arbitration clauses and recognize and enforce arbitral awards.
• Don’t assume you are fine as long as there is no written document or if there is one but it is not formally signed. Outside common law jurisdictions, the formal signature of a written document is not a moment of import. In civil law jurisdictions, unsigned written contracts that have been lived by in practice are considered “executed.” The existence of a document is not required. If it can be demonstrated through other means, such as through e-mail, or even simply the parties’ behavior, that there was an agreement to set up a certain type of relationship, that will suffice, as certain facts can create evidence of binding agreements. This would be the worst of both worlds, because the legal relationship would be subject to all default provisions in the law in the absence of an agreed document that stipulates otherwise.

• Don’t “shoot first—talk later.” There is almost never a good reason to terminate the relationship first and then take legal advice. There are lots of mitigating actions to take just before the actual termination in order to ensure the possible severance payments are minimized. Almost none of said actions can be taken when the termination notice is already out of the door.