International Distributor Agreements: Which Country's Laws Apply?

International distribution agreements are legal contracts between two parties, which authorise one party to sell or distribute the other's products. These agreements are important when doing international business as they outline the rights and responsibilities of both the supplier and the distributor. When entering into an international distribution agreement, it is crucial to determine which country's law will apply to the contract. This is known as the 'applicable law' or 'governing law'. The choice of the applicable law can have significant implications for the rights and obligations of the parties involved, as well as the enforcement of the agreement. While the parties can agree on the applicable law, if no choice is made, the law of the distributor's country will generally apply within the EU, as stated in Article 4 of EU Regulation 593/2008. In other cases, the applicable law may be determined by international civil procedure law.

Exclusivity provisions

Exclusive distribution agreements can have significant implications for competition. They may be subject to EU and UK competition law rules, particularly when they confer absolute protection within a territory. To assess whether an exclusive distribution agreement violates competition rules, it is necessary to examine the market shares of the supplier and buyer, the nature of the agreement, and the presence of any hardcore restrictions. Hardcore restrictions include setting resale prices and restricting sales to end users or authorised dealers.

In some cases, a distributor may seek to register or use the trademarks connected to the product in their territory. This can be advantageous for the distributor, as it allows them to market and sell the product more effectively. However, it is important to make clear arrangements between the manufacturer and distributor regarding the rights to use trademarks and intellectual property.

When drafting an exclusive distribution agreement, it is crucial to specify the territory where the distributor can sell the product. This can be a region, a country, or multiple countries, depending on the agreement between the parties. It is also important to consider whether the agreement is exclusive or non-exclusive, as this will determine whether the manufacturer can enter into distribution agreements with other parties in the same territory.

In addition to exclusivity provisions, international distributor agreements typically include provisions on products and territory, obligations of the parties, renewal/termination, and dispute resolution. These agreements are complex and vary depending on the unique needs of each party. It is essential to seek professional guidance when drafting or entering into such agreements.

Territory

The territory clause in an international distribution agreement specifies the region or country where the distributor can sell the product. This is a critical aspect of the contract, as it outlines the geographical boundaries within which the distributor has the right to sell the products. The territory can be exclusive or non-exclusive, depending on the agreement between the manufacturer and the distributor.

In an exclusive distribution agreement, the manufacturer grants the distributor the sole right to sell the product within a defined territory. This means that the manufacturer cannot enter into a similar agreement with another distributor for the same territory. On the other hand, a non-exclusive distribution agreement allows the manufacturer to appoint multiple distributors for the same territory.

When determining the territory, it is essential to consider the specific needs and capabilities of both parties. The distributor's capacity to sell and promote the product in the designated region should be evaluated. Additionally, the manufacturer may have specific markets or regions they want to target, which should be reflected in the agreement.

The territory clause should also address any restrictions on the distributor's activities outside the designated territory. This includes refraining from establishing distribution facilities, engaging in advertising or promotional activities, or soliciting orders from prospective purchasers outside the territory.

It is worth noting that even within an exclusive territory, there may be instances of parallel import, where a third party obtains the product from another source and sells it within the same territory. In such cases, the third party does not have the same rights to use the manufacturer's trademarks and intellectual property as the exclusive distributor.

The territory clause plays a crucial role in defining the scope and boundaries of the distributor's sales activities. It ensures that the distributor's efforts are focused on the agreed-upon region and protects their rights within that territory.

To illustrate with an example, consider the following excerpt from an international distribution agreement between Conor Medsystems, Inc. and Interventional Technologies Pvt., Ltd.:

> "Conor is appointing Distributor hereunder with respect to the resale of Products to any purchasers whose principal place of business is located in India, Pakistan, Bangladesh, Sri Lanka, Kenya, and Tanzania (the "Territory").

> Distributor shall refrain from establishing or maintaining any branch, warehouse or distribution facility for the Products outside of the Territory. Distributor shall not engage in any advertising or promotional activities relating to the Products directed primarily to customers outside the Territory."

This example demonstrates how the territory clause outlines the specific countries included in the distributor's territory and sets restrictions on the distributor's activities outside that territory.

Obligations of the parties

An international distributor agreement is a commercial contract between a supplier of goods and a distributor of goods. The supplier may be a manufacturer or a reseller of the products. The distributor, as a local partner, helps the foreign supplier look for new customers in the local market.

The obligations of the parties in an international distributor agreement should clearly outline the responsibilities of each party. Here are some key points to consider:

Obligations of the Supplier:

• The supplier should provide adequate sales, service, and repair training to the distributor's personnel.
• The supplier should provide marketing and technical information, brochures, instructional materials, advertising literature, and other product data to the distributor.
• The supplier should provide timely notifications about new products, services, and price changes.
• The supplier should send inquiries from customers within the distributor's territory.
• The supplier should provide adequate product and sales support to the distributor.
• The supplier should ensure timely delivery of ordered products and promptly notify the distributor of any manufacturing delays.
• The supplier should maintain the confidentiality of proprietary information and protect their intellectual property rights.
• The supplier should comply with all applicable laws, rules, and regulations, including those related to packaging, shipping, and distribution specifications.

Obligations of the Distributor:

• The distributor should vigorously promote and market the products within the agreed-upon territory.
• The distributor should maintain a sufficient inventory of products to support existing customers and forecasted demand.
• The distributor should provide trained and knowledgeable staff to maintain, demonstrate, and support customers and sales staff regarding the products.
• The distributor should provide regular sales and inventory reports to the supplier.
• The distributor should establish and maintain clinical specialists and a competent sales organization to effectively sell the products.
• The distributor should comply with the supplier's packaging, shipping, and distribution specifications and ensure that products are stored and handled according to the provided guidelines.
• The distributor should not sell any products with an expired shelf life and dispose of expired products as per the supplier's instructions.
• The distributor should refrain from adulterating or misbranding products and ensure compliance with all relevant laws, rules, and regulations.
• The distributor should maintain records as required by applicable laws and regulations.
• The distributor should assist the supplier in obtaining any necessary licenses or permits and provide support for regulatory compliance.
• The distributor should refrain from establishing distribution facilities outside of the agreed-upon territory and should not engage in advertising or promotional activities directed at customers outside the territory.
• The distributor should refer orders from prospective purchasers outside the territory to the supplier and refrain from accepting such orders directly.
• The distributor should employ competent and experienced service personnel and provide appropriate facilities and resources to render prompt and adequate service to customers.
• The distributor should use sales and technical literature, promotional materials, and artwork provided by the supplier and obtain approval for any alterations or additional materials developed.
• The distributor should provide timely customer service, including order taking, responding to inquiries, providing quotes, and forwarding product complaints to the supplier as required.
• The distributor should not employ or contract any person who is debarred or disqualified from performing services related to the sale of medical devices or similar regulated products.
• The distributor should translate user manuals, technical manuals, and marketing materials into the languages of their customers and obtain approval from the supplier for such translations.

These are some key points outlining the obligations of the parties in an international distributor agreement. The specific details and requirements may vary depending on the nature of the products, the territories involved, and the unique needs of each party. It is essential to seek legal advice when drafting an international distributor agreement to ensure that the obligations of both parties are clearly defined and enforceable.

Dispute resolution

Choice of Law

The choice of law clause, also known as the governing law clause, determines which country's laws will govern the interpretation and enforcement of the agreement. This is an important consideration as the laws of different countries can vary significantly, and the chosen law can impact the outcome of a dispute. For example, in the case of an international distributor agreement between an Irish company and an Indian company, they may choose to specify that the laws of California will govern their agreement.

Jurisdiction Clause

The jurisdiction clause, also known as the forum clause, specifies which courts will have the authority to settle disputes arising from the agreement. It is important to carefully select the jurisdiction, as the court system and laws can differ even within the same country, such as in the United Kingdom, where England and Wales share a court system, while Scotland has its own. An exclusive jurisdiction clause grants authority to a specific court or set of courts, while a non-exclusive clause acknowledges that other courts may also have jurisdiction.

Arbitration

Arbitration is often preferred over litigation in international business contracts as it offers a more flexible and efficient dispute resolution process. It is a contractually agreed-upon method of dispute resolution, where an impartial third party, such as the International Chamber of Commerce, is chosen to hear and decide on the dispute. Arbitration can help avoid the complexities and costs associated with serving legal proceedings outside of the jurisdiction.

Dispute Settlement Body

In the context of international trade, organisations like the World Trade Organization (WTO) play a crucial role in settling disputes between member countries. The WTO's dispute settlement procedure is based on clearly defined rules and timetables, with an emphasis on prompt settlement to ensure the stability and predictability of the global trading system. The process involves consultations between the disputing countries, followed by the establishment of a panel of experts to consider the case and make recommendations.

Indemnification and Insurance

International distributor agreements may include indemnification clauses, where one party agrees to compensate the other for any losses, damages, or claims arising from their operations under the agreement. Additionally, the distributor may be required to maintain insurance coverage to protect against potential liabilities.

Termination and Compensation

The agreement should outline the terms for termination, including the consequences of a breach of contract and any compensation that may be owed. In some jurisdictions, distributors may have the right to receive compensation for the loss of goodwill or customer base built during the term of the agreement. However, this may depend on the specific terms of the contract and the applicable laws in the relevant country.

Applicable law

International distribution agreements are an increasingly common feature of the modern business world, with international trade accounting for nearly one-third of US gross domestic product in 2017. These agreements are legal contracts between two parties, authorising one party to sell or distribute the other's products.

When it comes to the applicable law for an international distribution agreement, it is important to include a clear and legally effective provision in the contract regarding the law that will apply. This is referred to as a 'choice of law clause' or a 'governing law clause'. This clause is usually found near the end of the agreement.

If no effective provision is made in the agreement regarding the applicable law, the default law to be applied will generally be determined by the Rome I Regulation. According to this regulation, service contracts are governed by the law of the country in which the service provider has their habitual residence. Sales activities, such as brokering the conclusion of contracts and advising customers in a certain territory, are generally considered services. Therefore, the habitual residence of the service provider is crucial in determining the applicable law.

In the case of authorised dealer agreements, the Rome I Regulation states that these are subject to the law of the country in which the distributor has their habitual residence. However, this requires that the distributor's activity corresponds to that of an authorised dealer, which must be examined separately.

It is worth noting that the governing law and the chosen forum for dispute resolution (known as the 'forum clause') do not need to correspond. For example, the law of Aruba could be chosen to govern the agreement, while granting exclusive jurisdiction to the courts of Germany. However, it is important to consider that legal procedures may take longer if the designated court is not familiar with the governing law.

When entering into an international distribution agreement, it is advisable to seek guidance from a legal professional with expertise in international business law to ensure that the agreement is properly structured and tailored to meet the unique needs of each party.

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