As your domestic business grows, you may consider expanding overseas. With reference to this, an easy way to achieve international reach is to appoint distributors in other countries. You can gain access to a new market by taking advantage of the distributor’s ready-made network, instead of yourself taking the risk of setting up shop in a foreign country.
However, appointing distributors abroad can be riskier than it seems. We regularly work with our network of local lawyers across the world in relation to the appointment of overseas distributors (as well as, agents and franchisees). What emerges is that distributors in many overseas countries enjoy much greater protections than those in the UK.
The most significant risk is that in many countries, laws which protect commercial agents often also apply to distributors and franchisees. Examples are South Korea and several Middle Eastern countries. As a result, on termination of the distribution agreement, the overseas distributor may be entitled to receive a compensation payment for developing the goodwill of the supplier in the relevant territory. As any UK business with experience of using agents in the EU will know, compensation payments on termination can be considerable.
In addition to the potential minefield of compensation payments on termination, there are other local law issues which may need to be considered. One of these relates to the duration of the distribution agreement. In some countries, it is better to have a fixed-term distribution agreement, rather than an agreement for an indefinite term which can be terminated on notice. This may minimise the risk to the supplier of a claim from a distributor that it has suffered loss by investing in the market in the reasonable expectation that the distribution agreement would last longer than it did.
Not to be forgotten is the issue of good faith. Whilst the English courts have only recognised in the last few years that a reciprocal duty of good faith may be implied into certain agreements (including long-term distribution agreements), in civil law countries such as France, the concept of good faith is very well-developed and its scope is far greater than under English law. It is important that the UK company understands whether it will automatically owe a duty of good faith to the distributor under local law and, if so, the extent of that duty.
Finally, there are the practical points. For example, in some countries, it is a requirement for distribution agreements to be ‘registered’ with a governmental body, whilst in others registration is not compulsory. Further, from a tax perspective, care should be taken to structure the arrangement with the distributor so as to avoid any concerns that it has given rise to the supplier having a permanent establishment in the distributor’s country.
The point to take away from all this is that, whilst there are benefits to using distributors overseas, it is crucial to do two things. First, to get clued up about the protections enjoyed by distributors under local law – do not go into it blind. Second, it is important to get an agreement in place which best protects the supplier’s position. Whilst it is not always possible to circumvent local law via the terms of the distribution agreement, it is usually possible to reduce exposure considerably. Forewarned is forearmed, and when it comes to another country’s legal system, it is best to have as much armour as possible!
For further information in relation to this case or the issues raised by it please contact Emma Roake at firstname.lastname@example.org