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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. Outline of the Presentation. Overview of Agent/Distributor Protection Law No. 173

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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.


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Outline of the Presentation

  • Overview of Agent/Distributor Protection Law No. 173

  • Exceptions to Law No. 173 Introduced by DR-CAFTA

  • Practical Advice


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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”


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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


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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


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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”


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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


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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


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    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


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    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


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    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


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    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


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    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


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    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