The issue of choosing for the appropriate jurisdiction
Doing business abroad proves not only a commercial challenge but also a legal one, raising questions like: should I conduct the sales myself or should I appoint someone else to handle the foreign market? And if I appoint such a third party what kind of contractual relationship suits my business best? And if a contract is drawn up, which law should be applicable? This article will briefly discuss the differences between agency- and distribution contracts and the question by which law those contracts should be governed.
Agency versus distribution
For a company, setting up a sales organization from scratch in a foreign market can be a hassle, financially as well as legally. For that reason, it can be quite beneficial to seek a partnership with a third party who knows the market. Generally, this partner is either an agent or a distributor. An agent acts as a representative for the exporting company: he manages client relationships and assists in the entering into contracts with customers. The customer orders directly from the company and all goods and services are to be delivered directly from the company to the customer. The agent receives a commission for his services to the company. Traditionally, many European countries have drawn up mandatory rules regarding agency contracts from which contract parties may not deviate. A distributor on the other hand acts for his own account and risk. He buys from the exporting company and sells the products in its own market. A distributor therefore can be described as a merchant, and for that reason most European countries do not differentiate distribution contracts from other commercial contracts. Also in the Netherlands, no specific (mandatory) statutory rules exist that govern distribution contracts.
Choice of law and forum selection The choice of law can heavily influence the contents of a contract between a company and its agent or distributor. Because most countries have imperative rules on agency contracts these contracts will usually be governed by the laws of the country in which the agent has its seat and there is no possibility to deviate from this. Distribution contracts on the other hand are usually not covered by imperative laws, the parties have the freedom to choose for a particular jurisdiction and/or court. The freedom to choose a particular jurisdiction also gives more freedom to set the contents of the contract. Usually an exporting company wishes a contract to be governed by its own national law and judged over by its own national courts; there can however be reasons to choose differently.
Within the European Union
If the exporting company is European and the target market is also within a EU Member State, no particular reason exists not to choose for the home jurisdiction and courts. The EU Rome I Regulation stipulates that parties have the freedom to jointly make a choice of law which governs any dispute arising out of the contract. The Brussels I Regulation in turn provides contracting parties with the possibility to select a forum where they can bring their dispute. When a judge finds that a contract includes a valid choice of law and/or forum, he will assume jurisdiction over the dispute and decide on the dispute (whereas possible) according to the chosen law. The ruling of the court can, by virtue of the Brussels I Regime, be enforced and executed in any European country (with the exception of Denmark). As of January 2015, it is no longer necessary to seek permission of a local judge for the enforcement of a ruling of a court of an EU member state.
Outside the European Union
Outside the European Union, the enforcement and execution of a court ruling can be more complicated since most countries do not recognize the validity of foreign rulings as such and there are not always (bilateral) treaties in place which may form the legal base for recognition and enforcement. For example, if a Dutch company has a ruling of a Dutch court in a case with a Chinese party it cannot enforce this judgment in China since the Chinese authorities do not recognize the validity of this judgment and there is no specific treaty between China and the Netherlands with regard to the recognition and enforcement of judgments.
Arbitration is usually the solution for situations like this. If parties agree to arbitrate, they choose not to request a ruling from a court but from an arbitral tribunal they have appointed themselves. Usually this choice is made in the original contract between the parties but it can also be made in a separate document drawn up after the dispute did arise. Generally, such ‘arbitration clause’ contains the choice for arbitration and the choice for the law governing the contract and the arbitration. An arbitral judgment can (usually upon the prior permission of a local judge) be enforced in all 146 countries that have signed the New York Convention of 1959. Through this convention the signing states have accepted the obligation to recognize arbitral awards and to make them enforceable in other contracting states, subject only to certain limited defenses. Arbitral procedures are known to have some other distinct advantages over normal court proceedings. For example, the possibility to choose one’s own arbiters gives the parties the possibility to appoint experts on the subject of the contract and the dispute. Also the confidentiality of the procedure may be a reason to opt for arbitration.
Knowing the differences between agency and distribution contracts, as well as understanding under which law – i.e. country – those contracts should be governed, will deliver smoother commercial transactions when conducting business in foreign markets.