With U.S. Exports on the Rise, Distributor Terms Increase in Complexity: Some Things to Watch For

Part of a series on issues related to Manufacturers, Distributors and International Trade

Recent figures released by the U.S. Bureau of Economic Analysis show there was a 17% increase in U.S. exports of goods and services during the first ten months of 2010.

In an effort to increase their profitability and growth, many U.S. businesses are taking advantage of the export initiatives launched by the U.S. administration to achieve its goal to double U.S. exports by 2014—a goal that President Obama announced last year and reiterated in his State of the Union address last month.

There are numerous options for U.S. businesses to structure the export of their goods and services internationally.  One of them is the appointment of international distributors to market and sell their products.

 An essential ingredient for the successful distribution of U.S. products internationally is a well formulated distributor agreement that takes into account the laws of the country or region where the products are distributed.  Surprisingly, many businesses skip this step when appointing distributors to represent their products overseas.

 Some U.S. businesses choose to operate under oral agreements with their international distributors, mistakenly believing that termination of the distributor will be easier if the relationship does not work out or that they will not be subject to a foreign judgment. Other businesses, when entering into an international distributor agreement, use a standard distributor agreement that was written for their U.S. distributors. However, when establishing an international distributor agreement, U.S. businesses should be aware of foreign legislation that may protect distributors, competition laws of a country or region that may void standard distributor agreement provisions, and other foreign law and cross-border challenges.

 Below are a few of the key considerations and issues that apply to international distributor agreements.

Competition Laws and Regulations

U.S. businesses exporting their products overseas frequently want to limit an exclusive foreign distributor of their products from selling competing products.

 In drafting a provision restricting such competition, it is critical to establish whether and to what extent the laws of the country where the goods are being distributed limit or prevent such a restriction. For example, in the European Union, this type of non-competition clause violates European Commission (EC) competition laws and is void from the outset if the restriction from selling competing products is for an indefinite period or exceeds five years. A non-competition obligation that is tacitly renewable beyond a period of five years is considered of indefinite duration.

 Additionally, certain territorial restrictions contained in a distributor agreement that prevent a distributor from selling a supplier’s products outside of a territory may invalidate the entire agreement, if the restriction is not limited to active sales into territories appointed to other distributors or the territory reserved to the supplier. For example, EC regulations control the ability of a supplier to restrict a distributor from making passives sales of its goods to customers outside a distributor’s appointed territory.

Choice of Law

Some countries have mandatory provisions of law that govern distribution agreements.

 If a choice of law clause in a distribution agreement states that U.S. law (or a particular U.S. state’s law) exclusively applies to the agreement, a U.S. jurisdiction clause in the agreement may not be respected if an action is brought by the distributor in the foreign country where the product was distributed. In order to avoid this unwanted consequence, a better alternative is to draft the choice of law clause to state that U.S. law exclusively governs the agreement, except with respect to any issue involving application of such mandatory foreign law.

Termination Compensation

Some countries have protective legislation or principles established through case law that may make termination of the distributor relationship difficult and costly if the agreement is not structured properly.

 Upon termination or expiration of an exclusive distributor agreement, it is not uncommon for distributors outside of North America to make a claim for termination or goodwill compensation. The requirements for termination or goodwill compensation are country specific, as is the ability to contract out of this type of compensation through choice of law and other contract provisions.

Fixed Term Agreements

In most cases, agreements of fixed duration terminate automatically at the end of the period specified in the agreement. However, some countries have laws that protect distributors, and unless the agreement has been terminated with a requisite period of notice before the expiration of the agreed contract term, the agreement is automatically renewed. 

 Under Belgian law, this requisite period of notice is between three and six months. Additionally, Belgian distributor legislation provides that an agreement that is renewed more than twice becomes a contract of indefinite duration. A distributor agreement of indefinite duration may only be terminated with reasonable notice or payment of an indemnity in lieu of notice.  What constitutes reasonable notice may not be determined by the parties in the distributor agreement, but must be agreed upon by the parties after the agreement is terminated.

These are a few of the additional considerations for U.S. businesses seeking to export their goods through international distributors. One-size-fits-all distributor agreements simply won’t work.