Debunking The Top Ten Myths About International Distribution Agreements
Our story today begins with a Michigan company terminating their poorly-performing French distributor. They gave the required written notice under their distribution agreement, which stated that Michigan law applied. The French distributor’s response was to demand a six-figure goodwill payment, not something that was in the contract and certainly not something the U.S. supplier would have ever considered.
So the U.S. company refused, saying Michigan law did not entitle the distributor to this payment. The French distributor sued in French court and won the full award plus costs and other expenses.
How can this be, you may ask? Because French legislators decided it was fair and reasonable for local companies to receive termination compensation for their efforts to develop a supplier’s business. The French distributor is based in France, and therefore entitled to this protection. French judges are not particularly interested in what Michigan law says about the issue, and there is no international body or treaty that can force any other decision. So, the French distributor seeks the protection of French laws and the French judge agrees.
How did things go so wrong?
Just Because a Signed Contract Says Something Doesn’t Make it So
Many companies are surprised by situations similar to our Michigan supplier’s. After all, if you’re a Michigan company and you’re negotiating with a California supplier, if you agree that Michigan law governs, it generally will. And if you put in your contract that all lawsuits must be filed in Michigan courts, that, too, will be respected.
But that’s because U.S. states follow the same legal system. When you have a contract with a foreign distributor, you now have two completely different legal systems—yours, and that of your distributor. The contract interpretation becomes much more complicated and much less predictable. Expert legal advice is needed to sort out the rules that will apply, and how they will apply.
In some countries, such as the UK, the selection of which legal system to adopt for the contract (called “choice of law”) is respected. But in most other countries, if there are local laws that offer more protection than Michigan law, the distributor may be entitled to sue you locally to benefit from that protection. And they’ll often win.
Returning again to our French distributor, the Michigan company could have decided to ignore the French court judgment, and forced the French distributor to figure out how to come to Michigan to actually collect on his French court award. This is neither an easy nor inexpensive process, so it may depend on the amount at stake. But our Michigan supplier also needs to consider its future plans for the French market: is it willing to suffer serious damage to its brand in France? Are there any other operations in France that must be taken into account?
Balancing all this is complicated, and depending on the amount at stake, requires not only an experienced international attorney in your home country, but selective consultation with their counterpart in the distributor’s country. And the lawyer in the distributor’s country cannot be just any local commercial lawyer, but a lawyer who also is experienced with crossborder transactions.
How do you find these local lawyers? Experienced international lawyers in the U.S. have developed networks of specialized lawyers in other countries that they have tested and come to rely on over the years. It’s part of what you get when you hire a U.S. lawyer with lots of crossborder expertise.
For these reasons, you should NOT have your international distribution agreement reviewed by the local lawyer who helps your company with other business, even other contracts—unless they also happen to be an experienced international lawyer, which is unlikely.
That attorney needs to be smart enough and honest enough to tell you to hire a lawyer experienced in crossborder agreements—and you should listen to them. And if they don’t tell you? Stay tuned!
Doris Nagel is president of Blue Sky Consulting Services, a company that helps clients enter the global marketplace and and works with them to build the foundation for sustained global sales growth. Previous articles in this series can be found here, here, and here.