The International Distribution Agreement

A Practical Approach to Transnational Contracting across the European Union, the United States and Latin America (2nd edition)

Marco Mastracci

• Publisher: Universal-Publishers
• Year: 2020
• ISBN:
  9781627343299
• Topic: Law
• Subtopic: International Trade Law
• Index: Law

With the ever-increasing interconnection between markets, businesses and individuals from all over the globe, professionals are asked to develop a greater interest in the international implications of contracts. This book focuses attention on the distribu

CHAPTER ONE

Introduction

1.1	The Distribution Agreement in a cross-border context

The following pages will examine the different sources of law that affect—or may affect—the regulation of cross-border distribution contracts.

The ever-increasing interconnection between markets, businesses and individuals from all over the globe has reduced the barriers to the international exchange of goods, capital and services: this has led to the emergence of an ever-increasing series of international and transnational transactions, which, being based on contractual arrangements, need adequate regulatory coverage.

The subject will be examined in light of some preliminary considerations, according to which the international distribution contract should not only be considered as a mere legal phenomenon but as an instrument that implements and regulates economic transactions, whose extent and quantity allow to describe this contractual scheme as particularly relevant in cross-border transactions.

The different legal sources that will be dealt with in this introductory overview will be then contextualized by referring to the functionality that they show, both from a strictly legal point of view and with reference to the legal system to which they belong, and from a functional point of view, i.e. evaluating their ability to provide an adequate response to the needs of international markets.

The problem of the adequacy of the regulatory sources arises in particular when referring to commercial contracts: the specific nature of the commercial discipline is given by the fact that this matter is influenced by many factors such as, among others, contract laws, market regulation, and competition. Furthermore, international transactions require specific rules to deal with events that typically occur in international trade, such as the need to obtain a license for the import or export of goods.

The specificity of the subject is one of the reasons why legislative coordination of international commercial law would be desirable. In addition, another factor to be considered when dealing with a transaction on the transnational level is the fact that several countries (and different municipal legal systems) may be involved in one international commercial transaction: rising the problem of the so-called “conflict of laws”, i.e. the problem of establishing which set of laws is actually applicable to the transaction.

In the lack of a general, international discipline for the international distribution agreement, the identification of the applicable law consists in the identification of the municipal laws that will govern the contract. Such identification may either be carried out by the parties during the negotiation or, by the interpreter, through the application of the criteria established by “private international law”. In both cases, it represents an essential passage to achieve the correct interpretation and execution of the contract, because the parties’ agreement needs to be coordinated with a set of laws, in order to achieve enforceability.

Once the conflict of laws is solved, the contract results definitively regulated by one national legal system. It follows that the enforceability or otherwise of the contract, as well as more generally its validity and ability to guarantee the fulfillment of the obligations contained in it, will be regulated by the national law of a certain State: this represents an element that requires particular attention, not only because it is necessary to have a good knowledge of the discipline set by the national system with reference to contracts and more generally to all the elements that will be involved in the transaction, but also because it is necessary to analyze the possibility of obtaining—and effectively enforcing—a sentence (or, if applicable, an arbitration award) in the event of default.

An alternative to the application of laws aimed at solving the conflict of laws, and more generally to the need to identify a national legal system as a law governing the contract, would be the possibility to refer to a system of trans-national laws, applicable indifferently in all States as a reference discipline for a certain type of transaction. In other words, an adequate response to the needs that arise together with the increasing international transactions would be the unification of commercial law.

This unification could take place through procedures aimed at integrating the national legal systems, i.e. through the preparation, by means of instruments of cooperation among the States, of common principles or rules: this mechanism, which operates at the level of public international law, has led in fact to the unification of individual sectors or individual types of transactions related to the international trade, that are now regulated by international conventions.

In this way, the principles established uniformly at the international level are applied to the international contracts regulated by the convention, being the international laws incorporated into the (municipal) regulatory system governing the contract.

Unification by means of international treaties for the coordination of legal systems, however, is a fragmentary process, capable of providing for uniform rules which are limited to certain types of transactions; moreover, international conventions have shown a limited ability to adapt to the continuous development of international trade: in a context such as that of globalized markets, which is characterized by rapid and continuous changes, the need to update the rules would emerge continuously, not aligning with the amount of time required by international law for the amendment of the conventions.

Another method to achieve the unification of international commercial law is to follow an a-legislative way, that is to say by resorting to common principles generally applied in commercial operations: parallel to what happens on the level of public and private international law, international trade operators have started to develop their own uniform rules applicable to international transactions.

This led to the elaboration of general contract conditions, codes of conduct, contractual models adopted globally by the various professional and business associations on the basis of current commercial customs and concerning specific types of commercial transactions.

In summary, the system of sources that regulate international commercial contracts is particularly complex, involving international rules, municipal laws and a-legislative systems (that include general principles, collections of uniformly accepted collection of terms and particularly widespread contractual standards): in each of these ways, the objective to be achieved is to foster a greater level of legal certainty in order to facilitate the conduct of cross-border business relations.

Applying what has been said so far to the case of the international distribution contract, it is possible to outline the system of sources that regulate—or can regulate—its provisions. Being the distribution agreement a contractual scheme that in most legal systems is not directly regulated by a statutory discipline, the application of the municipal law of a State requires a very accurate analysis of such legal system. The task of the drafter—or interpreter—of the international contract is made even more complicated by the lack of a uniform discipline of international commercial law that can be applied to this matter.

For this reason, as long as it is not possible to achieve a complete unification of international commercial law, it is essential to achieve a good familiarity with the multiple instruments that are available during the negotiation and interpretation of the international distribution contract. Knowledge of the aims limits of each type of regulatory source involved allows in fact to make better choices regarding the applicable law, which will have effects on all the fundamental aspects of the agreement, due to the necessary coordination between the clauses and the normative frame in which they are set.

1.1.AThe distribution agreement

Generally speaking, the distribution contract can be defined as an agreement under which the supplier, or the manufacturer, or even another distributor undertakes to sell certain goods to a distributor, and the distributor undertakes to market such goods within a certain territory, in order to sell them to his clients.

Therefore, it is evident that through the distribution agreement the parties agree on the conditions and modalities of the future sales of the goods that will be supplied by the supplier to the distributor.

However, the distribution agreement is not simply an agreement on future sales: it instead constitutes a long-term relationship between the parties, aimed at placing the supplier’s goods on the market. In fact, the purpose of distribution is not simply the purchase of goods by the distributor, but the subsequent distribution of these within a market, normally corresponding to a certain territory.

The distribution contract must therefore regulate all those aspects that are closely linked to the distribution process and which may include, for example, the use of a certain brand, the training of the distributor’s employees, after-sales assistance and advertising. of the supplier’s products and/or brand within the target market.

In addition to these essential operational matters, the parties may agree on several other clauses that will tend to characterize the relationship in more detail, such as an exclusivity clause, or a non-competition clause, or any other clauses the parties may agree on. In some cases, the law itself requires the inclusion of certain contents in the contract.

Looking at the supplier’s obligation individually, we note that the supplier undertakes to sell certain products to the distributor; this means that with the distribution contract the parties set in advance some of the most important elements concerning the purchase and sale contracts that will take place subsequently between supplier and distributor. In this sense, the distribution contract is often defined as a “framework agreement”, which constitutes the basis on which the parties will carry out the individual sales among themselves through the order procedure, which in subsequent sales will have the function of an offer, and the order confirmation, which will instead represent acceptance.

As far as the obligations of the distributor are concerned, these consist overall in placing the supplier’s products on a certain market. This obligation may include several specific agreements regarding the methods, times and limitations of the placing of products, as well as, for example, the provision of after-sales assistance services, agreements relating to advertising campaigns, or even staff training.

1.1.BThe cross-border context

Like any other agreement, the distribution contract is classified as “international” when there are elements of some importance that involve the jurisdiction of a State other than that of the other elements: this occurs, for example, when the parties are established in different States, or even when the parties agree that the distribution of the products shall take place within a State other than that in which the parties are established.

The transnational character of a relationship produces a series of not negligible effects on the contract that regulates it. The most important of these effects concerns the identification of the sources that govern the international contract. In fact, while domestic law contracts are governed by the national law of the state to which they refer, international contracts can be governed by different types of laws, both national and international.

A contract is a voluntary, deliberate, legally binding and enforceable agreement, that creates mutual obligations between two or more persons or entities (the “parties”).

It is “voluntary” and “deliberate”, because the contractual bound is created by the parties, who also set their mutual obligations. It is worth emphasizing that the agreement reached by the parties is valid if—and to the extent that—it includes those elements that are necessary in order to make it “legally binding”; finally, a contract is “enforceable” when it can be enforced in a court of law.

This definition of “contract” highlights the close connection between the obligation created by the parties and the legal framework in which the obligation exists: an agreement can be considered as “valid” and “enforceable” as long as it adheres to the basic requirements set by the law.

In addition to defining the essential requirements of the contract, the law can intervene in different ways on the contents of the agreement, such as including implying terms into a contract, guiding its interpretation or determining the cancellation of clauses that are contrary to mandatory rules.

An example could clarify the extent of the impact of the law on the content of the contract.

In Singapore, section 14 (2) of the Sale of Goods Act states: “w...