Spring 2014 Business Law Bulletin

In today’s global economy, U.S. businesses are frequently trying to determine the most efficient method to access foreign markets. Increasingly, U.S. businesses seek access to customers in high-growth emerging markets such as South America and the Middle East, which contain wide ranging legal regimes. U.S. businesses that are accustomed to domestic business transactions in business-friendly environments where parties routinely enter into detailed contracts memorializing their agreement should be aware of various differences and uncertainties when foreign jurisdictions are involved. A notable example of uncertainty arises when one enters into international sales representative agreements or distributorship agreements.

When a U.S. business markets and sells its products to international customers, a distribution network consisting of foreign intermediaries is often the most efficient solution for accessing the desired foreign market. A primary consideration prior to engaging any foreign intermediary, however, should be the specific country’s domestic dealer protection laws, which are often surprisingly protective of local sales representatives, agents, distributors, and dealers. In negotiating a contractual agreement for this type of commercial arrangement, careful consideration should be paid to the particular statutory regime for each jurisdiction involved.

Dealer protection laws in regions such as South America and the Middle East first came about because of perceived abuses experienced by dealers in these regions during the period of rapid international expansion of U.S. business interests following World War II. Local dealers engaged by American businesses frequently discovered that, after providing valuable assistance while incurring substantial costs integrating the American enterprise into the culture of their local market, the American businesses would quickly terminate the dealer relationship and unjustly reap the benefit of the substantial contacts and knowledge of local business practices that had been provided by the unwitting local dealer.

Countries soon enacted laws requiring compensation to the local dealer if the relationship was terminated without cause by the foreign business. This was intended to curb the abuse of local dealers by offsetting the considerable capital and related costs incurred while assisting the foreign businesses in establishing their foreign operation.

Today in the Middle East, many jurisdictions view agency or distributorship agreements as conferring a set of statutory rights that cannot be waived by contract. Each of the twenty-two member states of the Arab League has adopted a Commercial Agencies Law that addresses the relationship of a principal to an agent or a distributor. The relationship is broadly defined to encompass any commercial relationship involving a local party appointed to act for, or distribute a product or service for, a foreign party, with compensation being provided to the local party for such services in the form of commissions or markups, or some combination of the two.

Local courts will look past the specific labeling of the relationship in the written agreement, and instead make the determination as to whether the Commercial Agencies Law governs the relationship. This frequently renders carefully drafted choice of law and forum selection provisions meaningless. The Commercial Agencies Law also protects the local dealer from termination or non-renewal by way of a registration procedure that requires dealer agreements to be registered with a local governmental agency, which creates an official government record of the dealer’s status.

Effective termination of the agreement may require de-registration of the dealer, and compliance with statutory criteria preventing termination under the agreement itself. If termination is attempted in a manner inconsistent with the statutory requirements of the Commercial Agencies Law, the dealer may have a claim for damages. Damages are measured under vague standards, such as the investment undertaken by the dealer in developing the business of a product or service and lost future profits, and no foreign principal should relish the prospect of litigating damages against the foreign dealer in the dealer’s home jurisdiction.

U.S. businesses seeking to establish or expand a foreign distribution network should carefully consider the legal regime of the specific country or countries where they intend to do business. Maynard can provide ready access to local counsel through its Lex Mundi network of 160 member law firms in more than 100 countries. A Lex Mundi affiliate in a specific applicable country or jurisdiction can provide quick guidance on contracting in dealer-friendly statutory regimes.

Harrison Bishop is a Shareholder in the firm’s International Corporate Transactions practice. He can be reached at 205-254-1162 or hbishop@maynardcooper.com.