In this Article we will discuss the principle types distribution contracts, specifically the contracts by which one company (the principal employer or grantor) sells to another (the company distributor or dealer) its products for distribution in the market.
This is a widespread commercial formula used to facilitate the entry and placement of products in international markets, the distributor usually being a local business that is familiar with the market in question. In difficult economic times like the ones we are currently experiencing, the distribution contract allows businesses access to other markets at a lower investment risk.
Agency and Franchising Contracts are also widely used in the context of distribution of products; however, this article will focus on distribution contracts.
In Spain the distribution contract is an atypical contract, with no specific rules for what it contains and also be a source of much discussion in existing case law and doctrine. However, it is necessary to take into account certain rules applicable to other types of contracts, which particularly those concerning competition.
Drafting the Agreement
The development or drafting of an international distribution agreement is not particularly different from a nationwide distribution contract, except for the following issues of vital importance:
- First, it is advisable to check if there are any specific regulations in those countries where the goods are to be distributed
- Secondly, the competent courts and applicable law should be agreed in the contract. Given the importance of this issue in international contracts, the rest of this article is dedicated to this subject
Competent Courts and Applicable Law
Proper regulation of this issue would remove many practical problems currently experienced involved in providing greater legal certainty to the parties to distribution contracts. This issue often poses considerable difficulties during negotiations, since both parties will usually insist in applying the law of its own country and will want any dispute to be resolved in their own domestic courts. It is therefore recommended that, despite any difficulties they may have during the negotiations, the parties should agree on an applicable law with a connection to the contract. Likewise, and for practical reasons, it is also advisable that the competent courts are those located in the country whose law is chosen.
Another alternative for dispute resolution instead of making application to the courts is to provide for submission to International Arbitration. This formula presents the following advantages: firstly, speed of conflict resolution, secondly, it allows the parties submit to a body outside their respective countries and allows them to choose a neutral language, such as English for resolving any dispute. However, in our experience, the main disadvantage of this method is that it is not possible to appeal the result of an Arbitration even if it is possible to achieve a faster response. Arbitration may, therefore, pose a greater risk for both parties, especially when the decision is made by a single arbitrator.
Another disadvantage posed by arbitration is if one party doesn’t follow the decision made by the arbitrator, the other party may have to have to resort to the courts to enforce the decision. There may then subsequently be a risk that decision is not recognized by the courts which may cause long delays.
If there is no provision for the submission to the courts or the applicable law does not, the regulations on this issue should be taken into account. Let us first examine the applicable law in relation to international jurisdiction.
International Judicial Competence within the European Union
The rules of international jurisdiction vary depending on the defendant’s domicile. If the defendant is domiciled in a state of the European Union the Regulation 44/2001 (Brussels I ) will apply. If the defendant is domicile outside the EU shall the Organic Law of Judicial Power will apply.
First, we need to examine the jurisdiction clauses of Article 23 of Brussels I: the parties can determine in advance the competence of a court, provided the subject matter of the contract does not deal with any of the areas which are within the categories of the exceptions to the regulation.
Article 2 establishes a general rule that in the absence of the agreement of the parties, jurisdiction will be based on the domicile of the defendant.
Article 5 (1) of the Regulation also provides for determination of special jurisdiction as where in matters relating to a contract, jurisdiction can be determined in the place of performance of the contractual obligation. To make use of this provision what is meant by place of performance of the obligation must be defined. To facilitate the interpretation of this question, the regulation specifies the place of performance of the obligation in two areas that are often the core of the distribution contracts, these are contracts for the sale of goods and for the provisions of services. Thus, it is established that the place of performance of the contract of sale of goods is the state in which the goods were or should have been delivered and, likewise, the place of performance of the contract of service is the state in which the services should have been provided. It is worthy of note that, as it is sometimes difficult to determine whether an international distribution agreement can be classified as a contract for the sale of goods or provision of services, the type of contract must be specified in the agreement.
If it is not possible to determine this, Article 5 (1)a), as general rule without referring to any specific contract, provides that a person domiciled in one state may be sued in another state if that state is where there was an obligation underlying demand. The Court of Justice of the European Union further distinguishes obligations in two categories:
- The primary or replacement obligation: the obligation underlying demand is one whose breach is invoked to justify the claims of the lawsuit
- Obligations that must be met in different states: the Court will be determined by the importance of each obligation
Organic Law of Judicial Power (LOPJ)
If the defendant is domiciled in a third state, jurisdiction is governed by the principle of the autonomy of will (Article 22.2). There is an alternative approach which attributes international jurisdiction to the Spanish courts when the defendants is domiciled in Spain, or when the contractual obligations were created or had to be performed in Spain.
Contracts Signed after the 17 December 2009 are governed by the Rome I Regulation 593/2008. Article 3(1) provides for the general principle of the autonomy of will, that is, the applicable law is that which is chosen by the parties. Further, it is possible to choose a distinct applicable law for each part of the contract, and to change the applicable law during the life of the contract. Therefore, the parties to distribution agreements are free to insert valid clauses which elect the applicable law and jurisdiction for resolution of any issues.
If the parties have not agreed the law governing the contract, they can resort to the special rule for distribution agreements under Article 4 (1)(f), whereby the applicable law is the country where the distributor has habitual residence, to be determined at the time of the contract and is determined by the subject:
- For legal entities: the place of central administration
- For individuals: the place where it carries out its principal professional activity.
However, the regulation provides exceptionally in Article 4 (4) that the provision of habitual residence shall not apply to the distributor when the contract has clear and manifest closer ties with other law. In any case, whatever the law applicable to the contract under the general rules, the application cannot go against the mandatory rules (Article 9), which are provisions considered as fundamental to a country for safeguarding its public or individual interests.
We see therefore that the question of the competent courts and applicable law, in the absence of express agreement by the parties, can be a complex and nuanced interpretation. This brings us again to the conclusion that it is essential to establish a forum and applicable law in the contract. In this way, legal uncertainty or any uncertainty in assessing the potential legal consequences of the conflict in question and future questions of jurisdiction are avoided.
This article is not considered as legal advice