Towards the correct interpretation, the just application or the simple elimination, of article 11 of law 173-66, governing relationships among foreign companies and their local distributors

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Law No. 173 dated April 6, 1966 is a public order statute that governs relationships between foreign companies (usually referred as licensors or grantors) and their local counterparts (acting either as agents, distributors, representatives, importers, etc.) By establishing that its regulations are of public order, the law prevents the parties from entering into any negotiation that may reduce any privilege already granted to the local agent or distributor.

Although being a brief statute (only 12 articles), the law has kept many foreign companies either captive or afar from the Dominican market. The most recent attempt to reduce the force of the law was the entry of the so-called DR-CAFTA (the free trade agreement signed with USA and Central America), whereby members of the treaty can waive the application of such legislation. However, for contracts entered before the DR-CAFTA, or for countries that are not members of the treaty, the law keeps its bite, and continue to be a problem for many foreign companies.

One of the most grievous provision contained within law 173 is article 11, which expressly set forth:

 “In the cases provided for in both Article 3 and Article 4, the Grantor shall not be established within the country, either by domicile in the same or by establishing a Dominican subsidiary company, nor in any other manner, in order to replace the activities undertaken by the Concessionaire, nor may the Grantor appoint a new domestic or foreign Concessionaire as a replacement, without first having arrived at a friendly, definitive agreement within the provisions of this law with his Concessionaire and paid the latter compensation by means of a single, full payment.”

Based on said provision, upon termination of their agreements, local agents prevent foreign companies from continuing selling their products, or from providing their services, if they have not previously paid in full (in an amount acceptable for such local agent), each and every one of the compensations set forth in law 173. Facing the possibilities of a huge lawsuit, while not being able to continue profiting from the local market, the foreign entity either abandon the country or simply accepts to pay the amount requested by the local company without a serious fight.

Introduction

We believe that article 11 has been grossly misinterpreted and, mostly, ill-used by local agents. Truth is that there have been very few judicial decisions interpreting the aforesaid article, but given the proper opportunity and right arguments, the judges should either shield the foreign company from abusive local practices, or simply eliminate the article on the lack of constitutional basis.

In this short commentary, we argue: (a) that article 11 does not apply in case of contract termination by just cause; (b) that even in unilateral termination by the foreign company, the courts should shield the foreign company by allowing her to continue doing business, and (c) that facing a proper challenge, the local courts should find the provision to be unconstitutional.

 1.   Article 11 does not apply if the contract has been terminated based on just cause.

First, let us state the obvious: article 11 does not apply for Just Cause termination cases. Just cause is defined under the same law as the breach by the local agent of relevant obligations of the contract, or actions and omissions that adversely affect the interest of the foreign company in the sale of their goods or services in the Dominican Republic.

By experience, however, foreign companies -even when have terminated the agreement on just cause- are reluctant to challenge any attempt from local distributor to disrupt their business, and usually end paying some sort of financial compensation. That settlement, unfortunately, is wrongly motivated either by legal fear (that a fast-track judge will not apply an injunction to a local distributor) or by financial fear (the possibilities to have their merchandise seized, by its former distributor on the grounds of article 11.)

But law 173, clearly establishes that article 11 is confined to cases provided in article 3 and article 4 thereof. Article 3 deals with termination without cause when the foreign company appoints another distributor; while article 4 deals also with termination without cause, but in this case, when the foreign company is taking over the market on her own.

Because law 173 has set forth that -in case of just cause termination- a foreign company is free from paying the indemnifications provided in article 3, we may rationally conclude that article 11 obviously does not govern those cases where the foreign company has terminated the local agent or distributor on just cause. Therefore, once it has terminated the contract on such basis, the foreign company may continue selling its products and services, regardless the fact that the local agent does -surely- challenge its termination and litigate the matter.

2.    The courts must shield a foreign company from abusive practices.

Upon unilateral termination of the agreement, a foreign company knows that it has to compensate and pay the damages set forth in article 3 of law 173. And, if appointing a new distributor in substitution of the former one, this new distributor may end being joint and severally responsible for those damages along with the foreign entity. With that picture in mind, it seems there is no much to do, other than pay the compensation and continue with the business.

However, it is very frequent in the practice that the local distributor/agent requests an amount that significantly differs with the amount the foreign company is willing to pay or that is not correctly based on the factors provided in law 173. This mostly occur because the factors to calculate the damages are in some cases, subjective, or because the lack of proper evidence from the local company to support its claim. In either case, foreign companies and local distributors may have a controversy in setting the amount of the compensation, thus being compelled to litigate the matter.

In those cases, where the local agent has different expectations regarding the compensation, it is the job of the courts to evaluate the evidence that supports the amount claimed and assess the corresponding reparation. Until a judgment is entered setting the amount of compensation, said compensation is neither certain, nor liquid nor enforceable.  As such, the foreign entity should be able to seek protection from a fast-track judge (Juez de los Referimientos) and obtain an injunction preventing the former agent from stopping the sale of goods. Alternatively, the judge should allow the foreign company to place a monetary guarantee or bond, which would then enable such foreign company to continue doing business.

In the latter scenario, by providing an economic guaranty, the parties and the whole community would find a win-win situation: the local agent is financially protected; the foreign company is allowed to continue doing business, either by herself or through the new distributor; and most important, the local economy is benefited by, among others, (i) keeping jobs or creating new ones; (ii) keeping products and services for the consumers; and (iii) the Government collecting duties for the new imports, taxes on sales, and the income generated, etc.

3. Article 11 shall be declared to be unconstitutional.

 Finally, we believe that article 11 of law 173-66 does violate the Constitution in many provisions, of which we mention a few:

  • Article 50, on free enterprise. Since article 11 does impede the free exercise of commerce, in the absence of any judicial control, or at least an irreversible judicial decision establishing the amount of a compensation.
  • Article 39, on equality rights, which expressly condemns any privilege that breaks the equality among nationals. By preventing a new agent to continue with the representation that has been forfeited to the prior agent, there is a privilege to the latter in detriment of the former.
  • Article 40, number 15, which requires that the law must order only what is useful and just for the community and should only prohibit the things that may damage it. By granting the local company a right to stop the continuation of the business, the whole community suffers from better products or services, a wealthy competition, adversely affects the job creation, and prevent the Government from collecting taxes and duties.
  • Article 221, which expressly declare the equal treatment of foreign investment and local investment, with very few exceptions, of which article 11 does not apply.
  • Article 53, on consumers’ rights, by taking out of the market products and services that the consumers have a right to receive.
  • Article 62, on right to labor, because as noted above, the immediate effect of the application of article 11 is to prevent the foreign company to create new jobs, by impeding her to continue operating in the local market.

Conclusion

Besides our own Constitution, law 173 also contends with various treaties signed by the Dominican Republic, of which we may address the issue in another occasion. At the time, we believe the authorities must seriously address the abusive practices that have been generated as result of the application of the statute and seek its elimination or mitigation for the greater good and benefit of the local community.

Seeing it with the lenses of the modern world and our current Constitution, the possibility that a party could unilaterally -without the control of the courts or without an irreversible decision- prevent another party from doing business, seems so far-fetched, that we have no doubt a winnable case shall be brought to Courts to bring down this legislation in the near future.