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 relation suits my business best? And if a contract is drawn, which law should be applicable? This article will shortly 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 organisation from scratch in a foreign market can be a hassle, both financially as legally. For that reason it can be quite beneficient to seek a partnership with a third party that knows the market. This partner can be an agent or a distributor.

An agent acts as a representative for the exporting company: he manages client relations and assists in the entering into contracts with customers. The customer orders directly from the company and all goods and services will be delivered directly from the company to the customer. For his services to the company the agent will receive a commission. Traditionally many countries have drawn up imperative rules regarding agency contracts from which no contractual derogation is possible.

A distributor on the other hand acts on 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 countries do not differentiate distribution contracts from other commercial contracts. Also in the Netherlands no specific (imperative) laws exist that govern distribution contracts.

Choice of law and forum selection

The choice of law can heavily influence the contents of a contract between an 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 wants a contract to be governed by its own national law and judged over by its own national courts; there can however be reasons to chose 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 under which any dispute arising out of the contract should be governed. 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 over the dispute (whereas possible) according to the chosen law. After adjudication, 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 a hassle since most countries do not recognise the validity of foreign rulings. So for example when a Dutch company has a ruling of a Dutch court in a case with a Chinese party it cannot execute this judgement in China since the Chinese authorities do not recognise the validity of this judgement.

A solution can be found in the form of arbitration, a form of alternative dispute resolution[1]. When parties agree to arbitrate, they choose not to request a ruling from a court but from an arbiter or 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 has arisen. Usually such an ‘arbitration clause’ contains the choice for arbitration, the choice of the arbiter(s) and/or tribunal and a choice for the law governing the contract and the arbitration.

When an arbitral decision has been awarded it can, although usually with the prior permission of a local judge, be executed in all 146 countries that have signed the New York Convention of 1959. During this convention the signing states have obliged themselves to recognise arbitral awards and to make them freely enforceable in other contracting states only subject to certain limited defences.

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. Also the speed and the confidentiality of the procedure can be a reason to opt for arbitration.

By Yntze Heida

[1] For more information on the issue of arbitration see also the article ‘Dispute settlement in international contracts: arbitration or the court’.