Agent And Distributor Protection In The Dominican Republic: Avoiding Pitfalls From The Start

1. Agent And Distributor Protection In The Dominican Republic: Avoiding Pitfalls From The Start Alejandro Peña Prieto Partner Squire, Sanders & Dempsey Peña Prieto, Gamundi February 12, 2009.

2. Outline of the Presentation • Overview of Agent/Distributor Protection Law No. 173 • Exceptions to Law No. 173 Introduced by DR-CAFTA • Practical Advice

3. Overview of Law No. 173 • Protective statute • Main Purpose: Protect domestic agents/distributors from unilateral termination by foreign principals and manufacturers • Public order statute • Beneficiaries of the Law: Concessionaires • Protection against unilateral termination without “just cause”

4. Overview of Law No. 173 • Registration of the relationship with the Central Bank • Exclusive or non-exclusive • Within 60 days (only for contracts entered prior to enactment of Monetary and Financial Code) • Documents required for registration • Jurisdiction of Dominican Courts and Law • Mediation requirement

5. Overview of Law No. 173 • Triggering circumstance: Unilateral termination of the relationship by the foreign principal without just cause • Ways in which termination can occur: • Formal termination • Non-renewal of the agreement upon reaching its Term • Appointment of another concessionaire or direct distribution in the country (if relationship is exclusive) • Establishment by a foreign principal of a branch or subsidiary in the country • Constructive (de facto) termination (e.g., failure to supply goods, discriminatory increases in prices, reductions of margins, etc.) • Burden of proving termination on the concessionaire

6. Overview of Law No. 173 • Proving “just cause” for the unilateral termination is only way of avoiding liability • Burden of proving the existence of “just cause” is on the foreign principal • Legal definition: • Breach or non-compliance with an essential obligation of the concession agreement • Any action or omission by the concessionaire that adversely and substantially affects the interests of the licensor • Historical reluctance from Courts to find existence of “just cause”

7. Overview of Law No. 173 • If unable to prove just cause, principal shall pay damages as set forth by the Law • Formula to calculate the damages • Objective criteria • Five years of gross profits, plus • 10% of the average gross profits over the last five years of the relationship, multiplied by the number of years of the relationship exceeding five, plus • Repurchase of existing inventory (including shipping, storage and other costs), plus • Any amount invested in the acquisition or leasing of premises or equipment, to the extent that they were used solely for the business of the principal

8. Overview of Law No. 173 • Subjective criteria • Losses arising from the personal efforts of the concessionaire • The value added by the commercial prestige of the concessionaire • Other concessionaires held jointly liable with foreign principal for indemnities • Tendency of courts to disregard the formula and award indemnities arbitrarily

9. Exceptions to Law No. 173 Introduced by DR-CAFTA • DR-CAFTA does not repeal Law No. 173, but rather introduces exceptions in its application • Exceptions apply primarily to “Covered Contracts” signed after entry into effect of DR-CAFTA • Covered Contracts defined as concession contracts entered into with a US or US controlled supplier of goods and services

10. Exceptions to Law No. 173 Introduced by DR-CAFTA • Covered Contracts signed after DR-CAFTA would: • Be governed by general contract law • Be subject to freedom of contract principles • Terminate on its agreed-upon termination date, and if no termination date is indicated, with six-month notice • Allow parties to agree upon indemnities to be paid in the event of wrongful termination, or have indemnities be based on actual damages • Allow disputes to be resolved through binding arbitration, pursuant to mechanisms and at forums agreed by the parties

11. Exceptions to Law No. 173 Introduced by DR-CAFTA • Covered Contracts signed prior to DR-CAFTA: • Constitutional protection of acquired rights • Indemnities may not be greater than those available under general contract law • Parties may agree to (and DR Government would encourage) binding arbitration • For all Covered Contracts: • Exclusivity must be explicitly stated in the contract

12. Conclusions and Practical Advise • Foreign principals and manufacturers entering into new agency or distribution relations today can effectively avoid the onerous effects of Law No. 173 • If in doubt, determine the existence of prior relationships, before entering into a new one • Make sure that concession contract meets definition of “covered contract” (i.e., foreign principal must be a US person, or a US controlled entity) • Although not required, should consider expressly excluding application of Law No. 173

13. Conclusions and Practical Advise • Create controls within your organization regarding written correspondence with the agent/distributor and make sure everyone is aware of the repercussions of Law No. 173 • Maintain organized files of all your correspondence with the distributor

14. CONTACT INFORMATION Alejandro Peña Prieto Squire, Sanders & Dempsey,Peña Prieto, GamundiAve. Pedro Henríquez Ureña No. 157Santo Domingo, Dominican Republic+1. 1.809.472.4900Fax: +1. 809.472.4999apena@ssd.comwww.ssd.com