In the Dominican Republic, the contractual relations between the parties intervening in any distribution agreement between a foreign licensor and a local distributor/importer are under the scope of Law 173, enacted in 1966 and subsequently amended, which establishes extraordinary protection for the local distributor/importer of foreign services and products.
The object of this law is to prevent the foreign licensor from terminating a distribution contract without liability after the local distributor has created a market for the products and/or services of the foreign licensor.
Foreign companies must be alerted to the consequences if the distributor should fulfill the formalities of the Law and benefit from its highly protective provisions.
The local distributor, in order to qualify for the benefits of the Law, must necessarily register the distribution contract with the Central Bank of the Dominican Republic within sixty (60) days following its signature or renewal. A letter or document from the foreign licensor indicating the status of the local distributor may be construed as being sufficient for the purposes of registration.
Law 173 is a “public order” statute. This means that its provisions prevail over any contractual clause that contradicts, modifies or restricts its provisions. In that same vein, the following contractual clauses, among others, are at variance with Law 173 and thus would be non-enforceable by a Dominican Court:
1) Waiver by the local distributor of its rights to register and obtain Law 173 benefits.
2) Setting applicable law and legal jurisdiction different from Dominican legislation and courts.
3) Most termination mechanisms. Law 173 establishes that the distributor contract can only be terminated without incurring in liability by the foreign licensor in the event of “just cause”. In accordance with the highly protective nature of the law itself, Dominican courts are consistently reluctant to admit the existence of “just cause”. The foreign licensor’s refusal to renew the contract upon the expiration of the original term could be and has been used to invoke suits for damages and losses, alleging effective termination without just cause.
In the event the foreign licensor is found to be in violation of the Law 173 rights of its distributor, especially with respect to termination without “just cause”, the potential indemnities are considerable. The Law provides for the following:
a) All the losses the Licensee has experienced due to the personal efforts it has exerted to the exclusive benefit of the business of which it is deprived, including disbursements for the payment of indemnities foreseen by labor laws;
b) The current value of that which is invested for the acquisition or leasing and conditioning premises, equipment, installations, furnishings and utensils to the degree that they may be solely usable for the business of which it is deprived;
c) The value of the promotion activities of the services developed by reason of the commercial prestige of the Agent, the merchandise or products, spare parts, parts, accessories and utensils it may have in stock and the sale, rental or exploitation of which it ceases to benefit from, which value shall be determined by the cost of purchasing and transportation to the establishment, plus the duties, taxes, fees and expenses which such objects may have caused until they were in its possession and any others; and
d) The amount of gross profits obtained by the Licensee in the sale of merchandise or products or services during the last five years or, if fewer than five, five times the annual average of the amount of the gross profits obtained during the past years, however many they may be. in the event that the Licensee should have represented the Licensor during more than five years, it must pay, in addition, the amount resulting from multiplying the number of years in excess of five by one-tenth of the average gross benefits it may have obtained during the past five years of the representation.
Due to the process of economic globalization, Law 173 has been considered as limiting competition on the Dominican market; therefore, it has been amended by Law 424-06, enacted in 2006, which implements the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA).
According to this amendment, for all distribution contracts executed after the entry into force of the DR-CAFTA, that is, March 1st 2007, where one of the parties is a United States supplier, the dispositions of Law 173 shall not be applicable, unless the contract specifies that it is governed by the provisions of the aforementioned Law; and in such case, the following dispositions of Law 173 shall not apply:
1. Characteristic of “public order”; as a consequence, the contract’s termination by expiration when the foreign licensor’s refuses to renew it shall not be considered as termination without just cause; in like manner, any differences that would arise from the contract could be resolved by arbitration, and the parties are allowed to establish the mechanism and forum for such purpose.
2. Estatutory formula for calculating indemnities; as a consequense, all indemnities shall be ruled by any indemnity clause or non-indemnity clause included in the distribution contract. In case the contract did not include any clause regarding indemnity, it shall be calculated based in the actual economic damages.
I usually advise foreign companies, in order to try to prevent their local distributors from obtaining Law 173 protection, to create a local Dominican subsidiary and formalize an exclusive distribution contract between the parent company and the subsidiary. This is then filed with the Central Bank. The local subsidiary sub-contracts the distribution services to local sub-distributors, who are not eligible for Law 173 benefits. The Dominican subsidiary acts as a coordinator in the country for the execution of the sub-distribution contracts.