Attorneys

• Bruce H. Chiu

Related Practices

• International Business

For companies interested in selling products or services in foreign markets, doing business through foreign sales representatives and/or distributors may be an attractive way of doing international business.

In general, whether you deal with a sales representative or a distributor in a foreign country, among the most important issues are those that deal with the scope and duration of the arrangements.

Be aware that many countries are protective of their local businesses and have passed strict laws for their protection.  These laws are aimed at foreign businesses which may seek to exploit local businesses in order to develop a local market for the foreign manufacturer's goods or services, only to dump the local business once the local market has been developed.  These laws often make it difficult to terminate or even change the scope of a relationship with a local sales representative once initiated.

Many countries have laws, for example, which state that a manufacturer may not terminate a sales representative or distributor unless it can show cause.  As a practical matter, a foreign court may not give much credence to a foreign manufacturer's reasons for terminating a local small business where the local business claims that it spent a lot of money and effort in developing the local market for the manufacturer.  Similarly, it may be difficult to terminate even a local representative which is not performing to agreed-upon standards.

For example, in Puerto Rico, it is notoriously difficult as a foreign manufacturer to terminate a Puerto Rican sales representative or distributor.  Even if you think you have "cause" for termination (e.g., you have a contractual clause stating that failure to achieve certain minimum performance standards constitutes a breach of the contract and is just cause), a Puerto Rican court has the power to find the quota unreasonable under the circumstances.  In such cases the foreign manufacturer may be liable for damages for wrongful termination.  

Puerto Rico is a prime example of a foreign jurisdiction in which you run the risk of becoming "wed for life" to the first representative with whom you sign a contract.  Depending on the law, you may find it difficult to enter into a relationship with a new representative, even if your contract expressly states that your arrangement is "non-exclusive."  You also may find yourself unable to sell a different product line through a different representative although your contract limits the scope of the first representative to a different product line.  Failure to renew a contract with an express expiration date may be deemed a wrongful termination if you cannot show good cause for refusing to renew.  In some circumstances, you may find yourself precluded from selling directly into the territory previously granted to your ex-representative.

Whether you are dealing with a sales representative or distributor in a foreign country, the bottom line is that you need to be aware of the country’s laws which, in order to protect the local entity's rights, may adversely affect your rights.  Carefully evaluate those with whom you are doing business in foreign countries and any proposed contracts.  If not, you may find yourself permanently wed to a mismatch and face a choice of either pulling out of the local market altogether or paying substantial sums to dissolve the relationship in order to pursue other local market options.  The importance of issues such as termination, exclusivity, reservation of house accounts, and scope of representation are all magnified in exporting.  

For more information, please contact bchiu@cohenlaw.com.