Myth #4: We Can Just Have Our Local Contracts Lawyer Review Our 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. That was certainly not in the contract, and not something the U.S. supplier would ever have considered putting there.
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 negotiating with a California supplier and you both agree that Michigan law governs interpretation of the contract, it generally will. And if you put in your agreement that all lawsuits must be filed in Michigan courts, that, too, will probably 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, the selection of which legal system to adopt for interpretation of the contract (called “choice of law”) is respected. But in most 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 force 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 might depend on the amount at stake.
But before refusing to pay a valid French court judgment, 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 other operations or future plans in France that must be taken into account? Does it have employees that will travel to France?
Balancing all this is complicated. Depending on the amount at stake, it 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 likewise is experienced with cross-border transactions.
How do you find these local lawyers? Experienced international lawyers 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 lawyer with lots of cross-border expertise.
For these reasons, you should NOT have your international distribution agreement reviewed by the local lawyer who helps your company with 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 cross-border agreements—and you should listen to them. And if they don’t tell you? Stay tuned for our next article in the series.
Get tips on how to improve the ROI on your distributor export business by downloading our whitepaper “10 Things to Look for in Your International Distributor.”
Doris Nagel is Managing Partner of Globalocity LLC, helping companies in healthcare, nutrition, chemicals, and manufacturing achieve sustainable growth in their indirect sales channels. She’s a frequent speaker and author, and is currently working on a book on international distributor networks.
This article previously appeared in Global Trade Magazine. Earlier articles in the series can be found here, here, and here.
I witnessed another scenario: with petrochemical. The manufacturer refused to sign a distribution contract, years later they wanted to change distributor, and discovered that by local laws of the distributor’s country, because there were no contracts signed, the relarion of exclusivity was implicit.. After 10M dollars paid to outgoing distributor, the new distributor started, with contracts written in the target country by local lawyers.
Wow — great example, Enrique — thanks for sharing! A painful lesson, indeed.