Saturday, January 03, 2009

Discussion on Governing Law Clauses in International Distributorship Agreements

Discussion on Governing Law Clauses in International Distributorship Agreements

Arguing in favour for Saskatchewan in terms of governing law clauses in case of disputes for distribution of Swedish Bofors Super Waterbed by Ace Distribution Inc.

While omission of the governing clause is a significant flaw in the contract one must assume Ace Distribution Inc.'s ability to perform the function of full-stocking distributor according to Chapter Five Agency and Distributor Agreements in Export Sales and Marketing Manual (Jagoe, 2007).

For example, is this distributor able to provide evidence of local contacts, product knowledge, personnel, facilities, and financial resources to perform all duties included in the distribution agreement? By such means can disputes be anticipated?

Disputes may revolve around profit margins on discount purchases from Bofors to re-sell in the Canadian market and their resolution proceedings would normally include clauses such as: effective agreement dates with inclusive future contingencies in terms of dispute resolution, mediation or arbitration and termination of agreement which is generally subject to the local laws in an importing country.

These local laws, in Canada or Saskatchewan, would implicate the effectiveness of official termination dates or even requirements and stipulations of written notice of intention to terminate distributorship agreement which demonstrates further dispute resolution mechanisms beyond the simple scope of governing law. They would need to agree with Canadian laws ruling terms of distributorship.

Termination clauses might include circumstances such as:

1. Failure to meet or exceed agreed sales goals and targets as specified in the agreement.

2. Payments not made to exporter according to contract agreement or failure to meet credit or consignment terms.

3. Dismissal or removal of essential staff seen as crucial to compliance with the terms of the distributorship and thus listed in the agreement.

4. Loss of legal authorization to act as import representative.

In "International Business Transactions" (Folsom, Gordon and Spanogle, 2004) as well as our course text, the Province of Saskatchewan determines its own policies and has several options regarding omission of governing law concerning foreign distributorship agreements as in the US.

Should Bofors seek to litigate arbitration in a Swedish court, local judiciary authority (Eg. Saskatchewan) may have the perogative to reject foreign judgements providing de novo (new) trial in its own courts. Conversely it may seek to enforce a Swedish court's decisions as its own in domestic judgements. Recognition of a Swedish judgement could also occur, but would require local court proceedings to enforce it. Also in terms of reciprocity between Canada and Sweden, special conditions regarding disputes and governing law which may void any mention of it in the contract in any event could exist.

Our text relates considerable attention is given to the exposure level of the entrepreneur as a key factor to governing law. Therefore the Ace Distributor Inc. agreement would have to ensure that it meets minimum standards to maintain distributorship rights in Canada as a primary motivation to review and inclusion of a governing law clause from the outset which protects the Canadian entrepreneur's best interest.

So while inclusion of the governing law clause would be useful depending upon local conditions it may not even be enforceable.

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