International distribution agreements | 7 lessons from the history of Nike

25 2 月 2023

意大利

契约
分销协议
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Summary

The framework supply contract is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier) that take place over a certain period of time. This agreement determines the main elements of future contracts such as price, product volumes, delivery terms, technical or quality specifications, and the duration of the agreement.

The framework contract is useful for ensuring continuity of supply from one or more suppliers of a certain product that is essential for planning industrial or commercial activity. While the general terms and conditions of purchase or sale are the rules that apply to all suppliers or customers of the company. The framework contract is advisable to be concluded with essential suppliers for the continuity of business activity, in general or in relation to a particular project.

What I am talking about in this article:

What is the supply framework agreement?
What is the function of the supply framework agreement?
The difference with the general conditions of sale or purchase
When to enter a purchase framework agreement?
When is it beneficial to conclude a sales framework agreement?
The content of the supply framework agreement
Price revision clause and hardship
Delivery terms in the supply framework agreement
The Force Majeure clause in international sales contracts
International sales: applicable law and dispute resolution arrangements

What is a framework supply agreement?

It is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier), which will take place over a certain period.

It is therefore referred to as a “framework agreement” because it is an agreement that establishes the rules of a future series of sales and purchase contracts, determining their primary elements (such as the price, the volumes of products to be sold and purchased, the delivery terms of the products, and the duration of the contract).

After concluding the framework agreement, the parties will exchange orders and order confirmations, entering a series of autonomous sales contracts without re-discussing the covenants already defined in the framework agreement.

Depending on one’s point of view, this agreement is also called a sales framework agreement (if the seller/supplier uses it) or a purchasing framework agreement (if the customer proposes it).

What is the function of the framework supply agreement?

It is helpful to arrange a framework agreement in all cases where the parties intend to proceed with a series of purchases/sales of products over time and are interested in giving stability to the commercial agreement by determining its main elements.

In particular, the purchase framework agreement may be helpful to a company that wishes to ensure continuity of supply from one or more suppliers of a specific product that is essential for planning its industrial or commercial activity (raw material, semi-finished product, component).

By concluding the framework agreement, the company can obtain, for example, a commitment from the supplier to supply a particular minimum volume of products, at a specific price, with agreed terms and technical specifications, for a certain period.

This agreement is also beneficial, at the same time, to the seller/supplier, which can plan sales for that period and organize, in turn, the supply chain that enables it to procure the raw materials and components necessary to produce the products.

What is the difference between a purchase or sales framework agreement and the general terms and conditions?

Whereas the framework agreement is an agreement that is used with one or more suppliers for a specific product and a certain time frame, determining the essential elements of future contracts, the general purchase (or sales) conditions are the rules that apply to all the company’s suppliers (or customers).

The first agreement, therefore, is negotiated and defined on a case-by-case basis. At the same time, the general conditions are prepared unilaterally by the company, and the customers or suppliers (depending on whether they are sales or purchase conditions) adhere to and accept that the general conditions apply to the individual order and/or future contracts.

The two agreements might also co-exist: in that case; it is a good idea to specify which contract should prevail in the event of a discrepancy between the different provisions (usually, this hierarchy is envisaged, ranging from the special to the general: order – order confirmation; framework agreement; general terms and conditions of purchase).

When is it important to conclude a purchase framework agreement?

It is beneficial to conclude this agreement when dealing with a mono-supplier or a supplier that would be very difficult to replace if it stopped selling products to the purchasing company.

The risks one aims to avoid or diminish are so-called stock-outs, i.e., supply interruptions due to the supplier’s lack of availability of products or because the products are available, but the parties cannot agree on the delivery time or sales price.

Another result that can be achieved is to bind a strategic supplier for a certain period by agreeing that it will reserve an agreed share of production for the buyer on predetermined terms and conditions and avoid competition with offers from third parties interested in the products for the duration of the agreement.

When is it helpful to conclude a sales framework agreement?

This agreement allows the seller/supplier to plan sales to a particular customer and thus to plan and organize its production and logistical capacity for the agreed period, avoiding extra costs or delays.

Planning sales also makes it possible to correctly manage financial obligations and cash flows with a medium-term vision, harmonizing commitments and investments with the sales to one’s customers.

What is the content of the supply framework agreement?

There is no standard model of this agreement, which originated from business practice to meet the requirements indicated above.

Generally, the agreement provides for a fixed period (e.g., 12 months) in which the parties undertake to conclude a series of purchases and sales of products, determining the price and terms of supply and the main covenants of future sales contracts.

The most important clauses are:

the identification of products and technical specifications (often identified in an annex)
the minimum/maximum volume of supplies
the possible obligation to purchase/sell a minimum/maximum volume of products
the schedule of supplies
the delivery times
the determination of the price and the conditions for its possible modification (see also the next paragraph)
impediments to performance (Force Majeure)
cases of Hardship
penalties for delay or non-performance or for failure to achieve the agreed volumes
the hierarchy between the framework agreement and the orders and any other contracts between the parties
applicable law and dispute resolution (especially in international agreements)

How to handle price revision in a supply contract?

A crucial clause, especially in times of strong fluctuations in the prices of raw materials, transport, and energy, is the price revision clause.

In the absence of an agreement on this issue, the parties bear the risk of a price increase by undertaking to respect the conditions initially agreed upon; except in exceptional cases (where the fluctuation is strong, affects a short period, and is caused by unforeseeable events), it isn’t straightforward to invoke the supervening excessive onerousness, which allows renegotiating the price, or the contract to be terminated.

To avoid the uncertainty generated by price fluctuations, it is advisable to agree in the contract on the mechanisms for revising the price (e.g., automatic indexing following the quotation of raw materials). The so-called Hardship or Excessive Onerousness clause establishes what price fluctuation limits are accepted by the parties and what happens if the variations go beyond these limits, providing for the obligation to renegotiate the price or the termination of the contract if no agreement is reached within a certain period.

How to manage delivery terms in a supply agreement?

Another fundamental pact in a medium to long-term supply relationship concerns delivery terms. In this case, it is necessary to reconcile the purchaser’s interest in respecting the agreed dates with the supplier’s interest in avoiding claims for damages in the event of a delay, especially in the case of sales requiring intercontinental transport.

The first thing to be clarified in this regard concerns the nature of delivery deadlines: are they essential or indicative? In the first case, the party affected has the right to terminate (i.e., wind up) the agreement in the event of non-compliance with the term; in the second case, due diligence, information, and timely notification of delays may be required, whereas termination is not a remedy that may be automatically invoked in the event of a delay.

A useful instrument in this regard is the penalty clause: with this covenant, it is established that for each day/week/month of delay, a sum of money is due by way of damages in favor of the party harmed by the delay.

If quantified correctly and not excessively, the penalty is helpful for both parties because it makes it possible to predict the damages that may be claimed for the delay, quantifying them in a fair and determined sum. Consequently, the seller is not exposed to claims for damages related to factors beyond his control. At the same time, the buyer can easily calculate the compensation for the delay without the need for further proof.

The same mechanism, among other things, may be adopted to govern the buyer’s delay in accepting delivery of the goods.

Finally, it is a good idea to specify the limit of the penalty (e.g.,10 percent of the price of the goods) and a maximum period of grace for the delay, beyond which the party concerned is entitled to terminate the contract by retaining the penalty.

The Force Majeure clause in international sales contracts

A situation that is often confused with excessive onerousness, but is, in fact, quite different, is that of Force Majeure, i.e., the supervening impossibility of performance of the contractual obligation due to any event beyond the reasonable control of the party affected, which could not have been reasonably foreseen and the effects of which cannot be overcome by reasonable efforts.

The function of this clause is to set forth clearly when the parties consider that Force Majeure may be invoked, what specific events are included (e.g., a lock-down of the production plant by order of the authority), and what are the consequences for the parties’ obligations (e.g., suspension of the obligation for a certain period, as long as the cause of impossibility of performance lasts, after which the party affected by performance may declare its intention to dissolve the contract).

If the wording of this clause is general (as is often the case), the risk is that it will be of little use; it is also advisable to check that the regulation of force majeure complies with the law applicable to the contract (here an in-depth analysis indicating the regime provided for by 42 national laws).

Applicable law and dispute resolution clauses

Suppose the customer or supplier is based abroad. In that case, several significant differences must be borne in mind: the first is the agreement’s language, which must be intelligible to the foreign party, therefore usually in English or another language familiar to the parties, possibly also in two languages with parallel text.

The second issue concerns the applicable law, which should be expressly indicated in the agreement. This subject matter is vast, and here we can say that the decision on the applicable law must be made on a case-by-case basis, intentionally: in fact, it is not always convenient to recall the application of the law of one’s own country.

In most international sales contracts, the 1980 Vienna Convention on the International Sale of Goods (“CISG”) applies, a uniform law that is balanced, clear, and easy to understand. Therefore, it is not advisable to exclude it.

Finally, in a supply framework agreement with an international supplier, it is important to identify the method of dispute resolution: no solution fits all. Choosing a country’s jurisdiction is not always the right decision (indeed, it can often prove counterproductive).

Summary

Phil Knight, the founder of Nike, imported the Japanese brand Onitsuka Tiger into the US market in 1964 and quickly gained a 70% share. When Knight learned Onitsuka was looking for another distributor, he created the Nike brand. This led to two lawsuits between the two companies, but Nike eventually won and became the most successful sportswear brand in the world. This article looks at the lessons to be learned from the dispute, such as how to negotiate an international distribution agreement, contractual exclusivity, minimum turnover clauses, duration of the contract, ownership of trademarks, dispute resolution clauses, and more.

What I talk about in this article

The Blue Ribbon vs. Onitsuka Tiger dispute and the birth of Nike
How to negotiate an international distribution agreement
Contractual exclusivity in a commercial distribution agreement
Minimum Turnover clauses in distribution contracts
Duration of the contract and the notice period for termination
Ownership of trademarks in commercial distribution contracts
The importance of mediation in international commercial distribution agreements
Dispute resolution clauses in international contracts
How we can help you

The Blue Ribbon vs Onitsuka Tiger dispute and the birth of Nike

Why is the most famous sportswear brand in the world Nike and not Onitsuka Tiger?
Shoe Dog is the biography of the creator of Nike, Phil Knight: for lovers of the genre, but not only, the book is really very good and I recommend reading it.

Moved by his passion for running and intuition that there was a space in the American athletic shoe market, at the time dominated by Adidas, Knight was the first, in 1964, to import into the U.S. a brand of Japanese athletic shoes, Onitsuka Tiger, coming to conquer in 6 years a 70% share of the market.

The company founded by Knight and his former college track coach, Bill Bowerman, was called Blue Ribbon Sports.

The business relationship between Blue Ribbon-Nike and the Japanese manufacturer Onitsuka Tiger was, from the beginning, very turbulent, despite the fact that sales of the shoes in the U.S. were going very well and the prospects for growth were positive.

When, shortly after having renewed the contract with the Japanese manufacturer, Knight learned that Onitsuka was looking for another distributor in the U.S., fearing to be cut out of the market, he decided to look for another supplier in Japan and create his own brand, Nike.

shoes

Upon learning of the Nike project, the Japanese manufacturer challenged Blue Ribbon for violation of the non-competition agreement, which prohibited the distributor from importing other products manufactured in Japan, declaring the immediate termination of the agreement.

In turn, Blue Ribbon argued that the breach would be Onitsuka Tiger’s, which had started meeting other potential distributors when the contract was still in force and the business was very positive.

This resulted in two lawsuits, one in Japan and one in the U.S., which could have put a premature end to Nike’s history.

Fortunately (for Nike) the American judge ruled in favor of the distributor and the dispute was closed with a settlement: Nike thus began the journey that would lead it 15 years later to become the most important sporting goods brand in the world.

Let’s see what Nike’s history teaches us and what mistakes should be avoided in an international distribution contract.

How to negotiate an international commercial distribution agreement

In his biography, Knight writes that he soon regretted tying the future of his company to a hastily written, few-line commercial agreement at the end of a meeting to negotiate the renewal of the distribution contract.

What did this agreement contain?

The agreement only provided for the renewal of Blue Ribbon’s right to distribute products exclusively in the USA for another three years.

It often happens that international distribution contracts are entrusted to verbal agreements or very simple contracts of short duration: the explanation that is usually given is that in this way it is possible to test the commercial relationship, without binding too much to the counterpart.

This way of doing business, though, is wrong and dangerous: the contract should not be seen as a burden or a constraint, but as a guarantee of the rights of both parties. Not concluding a written contract, or doing so in a very hasty way, means leaving without clear agreements fundamental elements of the future relationship, such as those that led to the dispute between Blue Ribbon and Onitsuka Tiger: commercial targets, investments, ownership of brands.

If the contract is also international, the need to draw up a complete and balanced agreement is even stronger, given that in the absence of agreements between the parties, or as a supplement to these agreements, a law with which one of the parties is unfamiliar is applied, which is generally the law of the country where the distributor is based.

Even if you are not in the Blue Ribbon situation, where it was an agreement on which the very existence of the company depended, international contracts should be discussed and negotiated with the help of an expert lawyer who knows the law applicable to the agreement and can help the entrepreneur to identify and negotiate the important clauses of the contract.

Territorial exclusivity, commercial objectives and minimum turnover targets

The first reason for conflict between Blue Ribbon and Onitsuka Tiger was the evaluation of sales trends in the US market.

Onitsuka argued that the turnover was lower than the potential of the U.S. market, while according to Blue Ribbon the sales trend was very positive, since up to that moment it had doubled every year the turnover, conquering an important share of the market sector.

When Blue Ribbon learned that Onituska was evaluating other candidates for the distribution of its products in the USA and fearing to be soon out of the market, Blue Ribbon prepared the Nike brand as Plan B: when this was discovered by the Japanese manufacturer, the situation precipitated and led to a legal dispute between the parties.

The dispute could perhaps have been avoided if the parties had agreed upon commercial targets and the contract had included a fairly standard clause in exclusive distribution agreements, i.e. a minimum sales target on the part of the distributor.

In an exclusive distribution agreement, the manufacturer grants the distributor strong territorial protection against the investments the distributor makes to develop the assigned market.

In order to balance the concession of exclusivity, it is normal for the producer to ask the distributor for the so-called Guaranteed Minimum Turnover or Minimum Target, which must be reached by the distributor every year in order to maintain the privileged status granted to him.

If the Minimum Target is not reached, the contract generally provides that the manufacturer has the right to withdraw from the contract (in the case of an open-ended agreement) or not to renew the agreement (if the contract is for a fixed term) or to revoke or restrict the territorial exclusivity.

In the contract between Blue Ribbon and Onitsuka Tiger, the agreement did not foresee any targets (and in fact the parties disagreed when evaluating the distributor’s results) and had just been renewed for three years: how can minimum turnover targets be foreseen in a multi-year contract?

In the absence of reliable data, the parties often rely on predetermined percentage increase mechanisms: +10% the second year, + 30% the third, + 50% the fourth, and so on.

The problem with this automatism is that the targets are agreed without having available the real data on the future trend of product sales, competitors’ sales and the market in general, and can therefore be very distant from the distributor’s current sales possibilities.

For example, challenging the distributor for not meeting the second or third year’s target in a recessionary economy would certainly be a questionable decision and a likely source of disagreement.

It would be better to have a clause for consensually setting targets from year to year, stipulating that targets will be agreed between the parties in the light of sales performance in the preceding months, with some advance notice before the end of the current year. In the event of failure to agree on the new target, the contract may provide for the previous year’s target to be applied, or for the parties to have the right to withdraw, subject to a certain period of notice.

It should be remembered, on the other hand, that the target can also be used as an incentive for the distributor: it can be provided, for example, that if a certain turnover is achieved, this will enable the agreement to be renewed, or territorial exclusivity to be extended, or certain commercial compensation to be obtained for the following year.

A final recommendation is to correctly manage the minimum target clause, if present in the contract: it often happens that the manufacturer disputes the failure to reach the target for a certain year, after a long period in which the annual targets had not been reached, or had not been updated, without any consequences.

In such cases, it is possible that the distributor claims that there has been an implicit waiver of this contractual protection and therefore that the withdrawal is not valid: to avoid disputes on this subject, it is advisable to expressly provide in the Minimum Target clause that the failure to challenge the failure to reach the target for a certain period does not mean that the right to activate the clause in the future is waived.

The notice period for terminating an international distribution contract

The other dispute between the parties was the violation of a non-compete agreement: the sale of the Nike brand by Blue Ribbon, when the contract prohibited the sale of other shoes manufactured in Japan.

Onitsuka Tiger claimed that Blue Ribbon had breached the non-compete agreement, while the distributor believed it had no other option, given the manufacturer’s imminent decision to terminate the agreement.

This type of dispute can be avoided by clearly setting a notice period for termination (or non-renewal): this period has the fundamental function of allowing the parties to prepare for the termination of the relationship and to organize their activities after the termination.

In particular, in order to avoid misunderstandings such as the one that arose between Blue Ribbon and Onitsuka Tiger, it can be foreseen that during this period the parties will be able to make contact with other potential distributors and producers, and that this does not violate the obligations of exclusivity and non-competition.

In the case of Blue Ribbon, in fact, the distributor had gone a step beyond the mere search for another supplier, since it had started to sell Nike products while the contract with Onitsuka was still valid: this behavior represents a serious breach of an exclusivity agreement.

A particular aspect to consider regarding the notice period is the duration: how long does the notice period have to be to be considered fair? In the case of long-standing business relationships, it is important to give the other party sufficient time to reposition themselves in the marketplace, looking for alternative distributors or suppliers, or (as in the case of Blue Ribbon/Nike) to create and launch their own brand.

The other element to be taken into account, when communicating the termination, is that the notice must be such as to allow the distributor to amortize the investments made to meet its obligations during the contract; in the case of Blue Ribbon, the distributor, at the express request of the manufacturer, had opened a series of mono-brand stores both on the West and East Coast of the U.S.A..

A closure of the contract shortly after its renewal and with too short a notice would not have allowed the distributor to reorganize the sales network with a replacement product, forcing the closure of the stores that had sold the Japanese shoes up to that moment.

tiger

Generally, it is advisable to provide for a notice period for withdrawal of at least 6 months, but in international distribution contracts, attention should be paid, in addition to the investments made by the parties, to any specific provisions of the law applicable to the contract (here, for example, an in-depth analysis for sudden termination of contracts in France) or to case law on the subject of withdrawal from commercial relations (in some cases, the term considered appropriate for a long-term sales concession contract can reach 24 months).

Finally, it is normal that at the time of closing the contract, the distributor is still in possession of stocks of products: this can be problematic, for example because the distributor usually wishes to liquidate the stock (flash sales or sales through web channels with strong discounts) and this can go against the commercial policies of the manufacturer and new distributors.

In order to avoid this type of situation, a clause that can be included in the distribution contract is that relating to the producer’s right to repurchase existing stock at the end of the contract, already setting the repurchase price (for example, equal to the sale price to the distributor for products of the current season, with a 30% discount for products of the previous season and with a higher discount for products sold more than 24 months previously).

Trademark Ownership in an International Distribution Agreement

During the course of the distribution relationship, Blue Ribbon had created a new type of sole for running shoes and coined the trademarks Cortez and Boston for the top models of the collection, which had been very successful among the public, gaining great popularity: at the end of the contract, both parties claimed ownership of the trademarks.

Situations of this kind frequently occur in international distribution relationships: the distributor registers the manufacturer’s trademark in the country in which it operates, in order to prevent competitors from doing so and to be able to protect the trademark in the case of the sale of counterfeit products; or it happens that the distributor, as in the dispute we are discussing, collaborates in the creation of new trademarks intended for its market.

At the end of the relationship, in the absence of a clear agreement between the parties, a dispute can arise like the one in the Nike case: who is the owner, producer or distributor?

tiger

In order to avoid misunderstandings, the first advice is to register the trademark in all the countries in which the products are distributed, and not only: in the case of China, for example, it is advisable to register it anyway, in order to prevent third parties in bad faith from taking the trademark (for further information see this post on Legalmondo).

It is also advisable to include in the distribution contract a clause prohibiting the distributor from registering the trademark (or similar trademarks) in the country in which it operates, with express provision for the manufacturer’s right to ask for its transfer should this occur.

Such a clause would have prevented the dispute between Blue Ribbon and Onitsuka Tiger from arising.

The facts we are recounting are dated 1976: today, in addition to clarifying the ownership of the trademark and the methods of use by the distributor and its sales network, it is advisable that the contract also regulates the use of the trademark and the distinctive signs of the manufacturer on communication channels, in particular social media.

It is advisable to clearly stipulate that the manufacturer is the owner of the social media profiles, of the content that is created, and of the data generated by the sales, marketing and communication activity in the country in which the distributor operates, who only has the license to use them, in accordance with the owner’s instructions.

In addition, it is a good idea for the agreement to establish how the brand will be used and the communication and sales promotion policies in the market, to avoid initiatives that may have negative or counterproductive effects.

The clause can also be reinforced with the provision of contractual penalties in the event that, at the end of the agreement, the distributor refuses to transfer control of the digital channels and data generated in the course of business.

Mediation in international commercial distribution contracts

Another interesting point offered by the Blue Ribbon vs. Onitsuka Tiger case is linked to the management of conflicts in international distribution relationships: situations such as the one we have seen can be effectively resolved through the use of mediation.

This is an attempt to reconcile the dispute, entrusted to a specialized body or mediator, with the aim of finding an amicable agreement that avoids judicial action.

Mediation can be provided for in the contract as a first step, before the eventual lawsuit or arbitration, or it can be initiated voluntarily within a judicial or arbitration procedure already in progress.

The advantages are many: the main one is the possibility to find a commercial solution that allows the continuation of the relationship, instead of just looking for ways for the termination of the commercial relationship between the parties.

Another interesting aspect of mediation is that of overcoming personal conflicts: in the case of Blue Ribbon vs. Onitsuka, for example, a decisive element in the escalation of problems between the parties was the difficult personal relationship between the CEO of Blue Ribbon and the Export manager of the Japanese manufacturer, aggravated by strong cultural differences.

The process of mediation introduces a third figure, able to dialogue with the parts and to guide them to look for solutions of mutual interest, that can be decisive to overcome the communication problems or the personal hostilities.

For those interested in the topic, we refer to this post on Legalmondo and to the replay of a recent webinar on mediation of international conflicts.

Dispute resolution clauses in international distribution agreements

The dispute between Blue Ribbon and Onitsuka Tiger led the parties to initiate two parallel lawsuits, one in the US (initiated by the distributor) and one in Japan (rooted by the manufacturer).

This was possible because the contract did not expressly foresee how any future disputes would be resolved, thus generating a very complicated situation, moreover on two judicial fronts in different countries.

The clauses that establish which law applies to a contract and how disputes are to be resolved are known as “midnight clauses“, because they are often the last clauses in the contract, negotiated late at night.

They are, in fact, very important clauses, which must be defined in a conscious way, to avoid solutions that are ineffective or counterproductive.

How we can help you

The construction of an international commercial distribution agreement is an important investment, because it sets the rules of the relationship between the parties for the future and provides them with the tools to manage all the situations that will be created in the future collaboration.

It is essential not only to negotiate and conclude a correct, complete and balanced agreement, but also to know how to manage it over the years, especially when situations of conflict arise.

Legalmondo offers the possibility to work with lawyers experienced in international commercial distribution in more than 60 countries: write us your needs.

Eventually, after more than 30 years of negotiations, the world is now looking at the first pan-African trade agreement, which entered into force in 2019: the African Continental Free Trade Area, or AfCFTA.

Africa, with its 55 countries and around 1.3 billion inhabitants, is the second largest continent in the world after Asia. The continent’s potential is huge: more than 50% of Africa’s population is under 20 years old and the population is growing at the fastest rate in the world. By 2050, one in four new-born babies is expected to be African. In addition, the continent is rich in fertile soil and raw materials.

For Western investors, Africa has become considerably more important in recent years. As a result, a considerable amount of international trade has emerged, not least promoted by the “Compact with Africa” initiative adopted by the G20 countries in 2017, also known as the “Marshall Plan with Africa”. Its focus is on expanding Africa’s economic cooperation with the G20 countries by strengthening private investment.

At the same time, however, intra-African trade has stagnated so far: partly still existing high intra-African tariffs, non-tariff barriers (NTBs), weak infrastructure, corruption, cumbersome bureaucracy, as well as non-transparent and inconsistent regulations, ensured that interregional exports could hardly develop and most recently accounted for only 17 % of the pan-African trade and only 0.36 % of world trade. It’s already been a long time since the African Union (AU) had put the creation of a common trade area on its agenda.

What is behind AfCFTA?

The establishment of a pan-African trade area was preceded by decades of negotiations, which finally resulted in the entry into force of the AfCFTA on 30 May 2019.

AfCFTA is a free trade area established by its members, which – with the exception of Eritrea – covers the entire African continent and is thus the largest free trade area in the world by number of member states after the World Trade Organisation (WTO).

How the common market was to be structured in detail was the subject of several individual negotiations, which were discussed in Phases I and II.

Phase I comprises the negotiations on three protocols and is almost completed.

The Protocol on Trade in Goods

This protocol provides for the elimination of 90 % of all intra-African tariffs in all product categories within five years of entry into force. Of these, up to 7 % of products can be classified as sensitive goods, which are subject to a tariff elimination period of ten years. For the least developed countries (LDCs), the preparation period is extended from five to ten years and for sensitive products from ten to thirteen years, provided they demonstrate their need. The remaining 3 % of tariffs are fully exempted from tariff dismantling.

A prerequisite for tariff dismantling is the clear delimitation of rules of origin. Otherwise, imports from third countries could benefit from the negotiated tariff advantages. Agreement has already been reached on most of the rules of origin.

The Protocol on Trade in Services

The AU General Assembly has so far agreed on five priority areas (transport, communications, tourism, financial and business services) and guidelines for the commitments applicable to them. 47 AU member states have so far submitted their offers for specific commitments and the review of 28 has been completed. In addition, negotiations, for example, on the recognition of professional qualifications, are still ongoing.

The Protocol on Dispute Settlement

With the Protocol on Rules and Procedures Governing the Dispute Settlement, the AfCFTA creates a dispute settlement system modelled on the WTO Dispute Settlement Understanding. Under this, the Dispute Settlement Body (DSB) administers the AfCFTA Dispute Settlement Protocol and establishes an Adjudicating Panel (Panel) and an Appellate Body (AB). The DSB is composed of a representative of each member state and intervenes as soon as there are differences of opinion between the contracting states on the interpretation and/or application of the agreement with regard to their rights and obligations.

For the remaining Phase II, negotiations are planned on investment and competition policy, intellectual property issues, online trade and women and youth in trade, the results of which will be reflected in further protocols.

The implementation of the AfCFTA

In principle, the implementation of trade under a trade agreement can only begin once the legal framework has been finally clarified. However, AU Heads of State and Government agreed in December 2020 that trade can begin for goods for which negotiations have been finalised. Under this “transitional arrangement“, after a pandemic-related postponement, the first AfCFTA trade settlement from Ghana to South Africa took place on 4 January 2021.

Building blocks of the AfCFTA

All 55 members of the AU were involved in the AfCFTA negotiations. Of these, 47 belong to at least one – and some to more than one – recognised Regional Economic Communities (RECs), which, according to the preamble of the AfCFTA agreement, are to continue as building blocks of the trade agreement. It was therefore they who acted as the voice of their respective members in the AfCFTA negotiations. The AfCFTA provides for RECs to retain their legal instruments, institutions and dispute settlement mechanisms.

Within the AU, there are eight recognised RECs, overlapping in some countries, which are either preferential trade agreements (Free Trade Agreements – FTAs) or customs unions.

Under the AfCFTA, the RECs have various responsibilities. These are in particular:

coordinating negotiating positions and assisting member states in the implementation of the agreement.
solution-oriented mediation in the event of disagreements between member states
supporting member states in the harmonisation of tariffs and other border protection regulations
promoting the use of the AfCFTA notification procedure to reduce NTBs

Outlook of the AfCFTA

The AfCFTA has the potential to facilitate Africa’s integration into the global economy and creates the real possibility of a realignment of international integration and cooperation patterns.

A trade agreement alone is no guarantee of economic success. For the agreement to achieve the predicted breakthrough, member states must have the political will to implement the new rules consistently and create the necessary capacity to do so. In particular, the short-term removal of trade barriers and the creation of a sustainable physical and digital infrastructure are likely to be crucial.

If you are interested in the AfCFTA, you can read an extended version of this article here.

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Summary

Political, environmental or health crises (like the Covid-19 outbreak and the attack of Ukraine by the Russian army) can cause an increase in the price of raw materials and components and generalized inflation. Both suppliers and distributors find themselves faced with problems related to the often sudden and very substantial increase in the price of their own supplies. French law lays down specific rules in that regard.

Two main situations can be distinguished: where the parties have just established a simple flow of orders and where the parties have concluded a framework agreement fixing firm prices for a fixed term.

Price increase in a business relationship

The situation is as follows: the parties have not concluded a framework agreement, each sales contract concluded (each order) is governed by the General T&Cs of the supplier; the latter has not undertaken to maintain the prices for a minimum period and applies the prices of the current tariff.

In principle, the supplier can modify its prices at any time by sending a new tariff. However, it must give written and reasonable notice in accordance with the provisions of Article L. 442-1.II of the Commercial Code, before the price increase comes into effect. Failure to respect sufficient notice, it could be accused of a sudden “partial” termination of commercial relations (and subject to damages).

A sudden termination following a price increase would be characterized when the following conditions are met:

the commercial relationship must be established: broader concept than the simple contract, taking into account the duration but also the importance and the regularity of the exchanges between the parties;
the price increase must be assimilated to a rupture: it is mainly the size of the price increase (+1%, 10% or 25%?) that will lead a judge to determine whether the increase constitutes a “partial” termination (in the event of a substantial modification of the relationship which is nevertheless maintained) or a total termination (if the increase is such that it involves a termination of the relationship) or if it does not constitute a termination (if the increase is minimal);
the notice granted is insufficient by comparing the duration of the notice actually granted with that of the notice in accordance with Article L. 442-1.II, taking into account in particular the duration of the commercial relationship and the possible dependence of the victim of the termination with respect to the other party.

Article L. 442-1.II must be respected as soon as French law applies to the relation. In international business relations, to know how to deal with Article L.442-1.II and conflicts of laws and jurisdiction of competent courts, please see our previous article published on Legalmondo blog.

Price increase in a framework contract

If the parties have concluded a framework contract (such as supply, manufacturing, …) for several years and the supplier has committed to fixed prices, how, in this case, can it change these prices?

In addition to any indexation clause or renegotiation (hardship) clause which would be stipulated in the contract (and besides specific legal provisions applicable to special agreements as to their nature or economic sector), the supplier may seek to avail himself of the legal mechanism of “unforeseeability” provided for by article 1195 of the civil code.

Three prerequisites must be cumulatively met:

an unforeseeable change in circumstances at the time of the conclusion of the contract (i.e.: the parties could not reasonably anticipate this upheaval);
a performance of the contract that has become excessively onerous (i.e.: beyond the simple difficulty, the upheaval must cause a disproportionate imbalance);
the absence of acceptance of these risks by the debtor of the obligation when concluding the contract.

The implementation of this mechanism must stick to the following steps:

first, the party in difficulty must request the renegotiation of the contract from its co-contracting party;
then, in the event of failure of the negotiation or refusal to negotiate by the other party, the parties can (i) agree together on the termination of the contract, on the date and under the conditions that they determine, or (ii) ask together the competent judge to adapt it;
finally, in the absence of agreement between the parties on one of the two aforementioned options, within a reasonable time, the judge, seized by one of the parties, may revise the contract or terminate it, on the date and under the conditions that he will set.

The party wishing to implement this legal mechanism must also anticipate the following points:

article 1195 of the Civil Code only applies to contracts concluded on or after October 1, 2016 (or renewed after this date). Judges do not have the power to adapt or rebalance contracts concluded before this date;
this provision is not of public order. Therefore, the parties can exclude it or modify its conditions of application and/or implementation (the most common being the framework of the powers of the judge);
during the renegotiation, the supplier must continue to sell at the initial price because, unlike force majeure, unforeseen circumstances do not lead to the suspension of compliance with the obligations.

Key takeaways:

analyse carefully the framework of the commercial relationship before deciding to notify a price increase, in order to identify whether the prices are firm for a minimum period and the contractual levers for renegotiation;
correctly anticipate the length of notice that must be given to the partner before the entry into force of the new pricing conditions, depending on the length of the relationship and the degree of dependence;
document the causes of the price increase;
check if and how the legal mechanism of unforeseeability has been amended or excluded by the framework contract or the General T&Cs;
consider alternatives strategies, possibly based on stopping production/delivery justified by a force majeure event or on the significant imbalance of the contractual provisions.

Under French Law, franchisors and distributors are subject to two kinds of pre-contractual information obligations: each party has to spontaneously inform his future partner of any information which he knows is decisive for his consent. In addition, for certain contracts – i.e franchise agreement – there is a duty to disclose a limited amount of information in a document. These pre-contractual obligations are mandatory. Thus these two obligations apply simultaneously to the franchisor, distributor or dealer when negotiating a contract with a partner.

General duty of disclosure for all contractors

What is the scope of this pre-contractual information?

This obligation is imposed on all co-contractors, to any kind of contract. Indeed, article 1112-1 of the Civil Code states that:

(§. 1) The party who knows information of decisive importance for the consent of the other party must inform the other party if the latter legitimately ignores this information or trusts its co-contractor.

(§. 3) Of decisive importance is the information that is directly and necessarily related to the content of the contract or the quality of the parties. »

This obligation applies to all contracting parties for any type of contract.

Who must prove the compliance with such provision ?

The burden of proof rests on the person who claims that the information was due to him. He must then prove (i) that the other party owed him the information but (ii) did not provide it (Article 1112-1 (§. 4) of the Civil Code)

Special duty of disclosure for franchise and distribution agreements

Which contracts are subject to this special rule?

French law requires (art. L.330-3 French Commercial Code) communication of a pre-contractual information document (in French “DIP”) and the draft contract, by any person:

which grants another person the right to use a trade mark, trade name or sign,
while requiring an exclusive or quasi-exclusive commitment for the exercise of its activity (e.g. exclusive purchase obligation).

Concretely, DIP must be provided, for example, to the franchisee, distributor, dealer or licensee of a brand, by its franchisor, supplier or licensor as soon as the two above conditions are met.

When the DIP must be provided?

DIP and draft contract must be provided at least 20 days before signing the contract, and, where applicable, before the payment of the sum required to be paid prior to the signature of the contract (for a reservation).

What information must be disclosed in the DIP?

Article R. 330-1 of the French Commercial Code requires that DIP mentions the following information (non-detailed list) concerning:

Franchisor (identity and experience of the managers, career path, etc.);
Franchisor’s business (in particular creation date, head office, bank accounts, historical of the development of the business, annual accounts, etc.);
Operating network (members list with indication of signing date of contracts, establishments list offering the same products/services in the area of the planned activity, number of members having ceased to be part of the network during the year preceding the issue of the DIP with indication of the reasons for leaving, etc.);
Trademark licensed (date of registration, ownership and use);
General state of the market (about products or services covered by the contract)and local state of the market (about the planned area) and information relating to factors of competition and development perspective;
Essential element of the draft contract and at least: its duration, contract renewal conditions, termination and assignment conditions and scope of exclusivities;
Financial obligations weighing in on contracting party: nature and amount of the expenses and investments that will have to be incurred before starting operations (up-front entry fee, installation costs, etc.).

How to prove the disclosure of information?

The burden of proof for the delivery of the DIP rests on the debtor of this obligation: the franchisor (Cass. Com., 7 July 2004, n°02-15.950). The ideal for the franchisor is to have the franchisee sign and date his DIP on the day it is delivered and to keep the proof thereof.

The clause of contract indicating that the franchisee acknowledges having received a complete DIP does not provide proof of the delivery of a complete DIP (Cass. com, 10 January 2018, n° 15-25.287).

Sanction for breach of pre-contractual information duties

Criminal sanction

Failing to comply with the obligations relating to the DIP, franchisor or supplier can be sentenced to a criminal fine of up to 1,500 euros and up to 3,000 euros in the event of a repeat offence, the fine being multiplied by five for legal entities (article R.330-2 French commercial Code).

Cancellation of the contract for deceit

The contract may be declared null and void in case of breach of either article 1112-1 or article L. 330-3. In both cases, failure to comply with the obligation to provide information is sanctioned if the applicant demonstrates that his or her consent has been vitiated by error, deceit or violence. Where applicable, the parties must return to the state they were in before the contract.

Regarding deceit, Courts strictly assess its two conditions which are:

(a material element) the existence of a lie or deceptive reticence (article 1137 French Civil Code);
And (an intentional element) the intention to deceive his co-contractor (article 1130 French Civil Code).

Damages

Although the claims for contract cancellation are subject to very strict conditions, it remains that franchisees/distributors may alternatively obtain damages on the basis of tort liability for non-compliance with the pre-contractual information obligation, subject to proof of fault (incomplete or incorrect information), damage (loss of chance of not contracting or contracting on more advantageous terms) and the causal link between the two.

French case law

Franchisee/distributor must demonstrate that he would not have actually entered into the contract if he had had the missing or correct information

Courts reject motion for cancellation of a franchise contract when the franchisee cannot prove that this deceit would have misled its consent or that it would not have entered into the contract if it had had such information (for instance: Versailles Court of Appeal, December 3, 2020, no. 19/01184).

The significant experience of the franchisee/distributor greatly mitigates the possible existence of a defect in consent.

In a ruling of January 20, 2021 (no. 19/03382) the Paris Court of Appeal rejected an application for cancellation of a franchise contract where the franchisor had submitted a DIP manifestly and deliberately deficient and an overly optimistic turnover forecast.

Thus, while the presentation of the national market was not updated and too vague and that of the local market was just missing, the Court rejected the legal qualification of the franchisee’s error or the franchisor’s willful misrepresentation, because the franchisee “had significant experience” for several years in the same sector (See another example for a Master franchisee)

Similarly, the Court reminds that “An error concerning the profitability of the concept of a franchise cannot lead to the nullity of the contract for lack of consent of the franchisee if it does not result from data established and communicated by the franchisor“, it does not accept the error resulting from the communication by the franchisor of a very optimistic turnover forecast tripling in three years. Indeed, according to the Court, “the franchisee’s knowledge of the local market was likely to enable it to put the franchisor’s exaggerations into perspective, at least in part. The franchisee was well aware that the forecast document provided by the franchisor had no contractual value and did not commit the franchisor to the announced results. It was in fact the franchisee’s responsibility to conduct its own market research, so that if the franchisee misunderstood the profitability of the operation at the business level, this error was not caused by information prepared and communicated by the franchisor“.

The path is therefore narrow for the franchisee: he cannot invoke error concerning profitability when it is him who draws up his plan, and even when this plan is drawn up by the franchisor or based on information drawn up and transmitted by the franchisor, the experience of the franchisee who knew the local market may exonerate the franchisor.

Takeaways

The information required by the DIP must be fully completed and updated ;
The information not required by the DIP but communicated by the franchisor must be carefully selected and sincere;
Franchisee must be given the opportunity to request additional information from the franchisor;
Franchisee’s experience in the economic sector enables the franchisor to considerably limit its exposure to the risk of contract cancellation due to a defect in the franchisee’s consent;
Franchisor must keep the proof of the actual disclosure of pre-contractual information (whether mandatory or not).

Wine Market in Mexico 2020-2021

The wine market in Mexico has shown an annual growth of approximately 8% during the past 5 years.

Importations have increased during the past 10 years, increasing its value in 88%.

Mexico has the second highest consumption growth rate worldwide according to the International Organization of Vine and Wine (OIV).

Current Trends in Mexico

Mexican wines accounted for 29% of Mexico’s consumption, while the remaining 71% corresponds to imported wines.

Wine consumption is primarily concentrated in 3 cities, Mexico City, Monterrey, and Guadalajara, with a potential increase in touristic locations.

Due to the health contingency generated as a result of the COVID19, on-line sales of the various supermarkets have increased in 300% during 2020.

Digitalization of processes represents a huge potential in terms of sales’ increase, and are expected to grow in a 40% yearly.

Consumers in Mexico are under 45 years old, having a pretty good balance in terms of gender (55% male and 45 female).

Types of wine consumed (71% red, 11% white, 9% sparkling, and 9% rose and others).

Comparison of wine consumption per capita

Following we share the following available information to illustrate differences between specific countries on current wine consumption per capita.

Country	Consumption per capita
France	49.5 lts
Italy	43.0 lts
Austria	29.4 lts
Spain	27.8 lts
United States	10.14 lts
China	1.7 lts
Brazil	1.6 lts
Mexico	1.34 lts

For more information you can visit our country guide on wine distribution in Mexico and watch the following video

Summary

At the end of the agency and distribution contracts, the main source of conflict is the goodwill (clientele) compensation. The Spanish Law of the Agency Contract —like the Directive on Commercial Agents— provides that when the contract is terminated, the agent will be entitled, if certain conditions are met, to compensation. In Spain, by analogy (although with qualifications and nuances), this compensation can also be claimed in distribution contracts.

For the Clientele compensation to be recognized, it is necessary that the agent (or the distributor: see this post to know more) have contributed new clients or significantly increased operations with pre-existing ones, that their activity can continue to produce substantial benefits to the principal and that it is equitable. All this will condition the recognition of the right to compensation and its amount.

These expressions (new customers, significant increase, can produce, substantial advantages, equitable) are difficult to define beforehand, so, to be successful, it is recommended that claims in courts are supported, case by case, on expert reports, supervised by a lawyer.

There is, at least in Spain, a tendency to directly claim the maximum that the norm provides (one year of remuneration calculated as the average of the previous five) without going into further analysis. But if this is done, there is a risk that a judge will reject the petition as unfounded.

Therefore, and based on our experience, I find it convenient to provide guidance on how to better substantiate the claim for this compensation and its amount.

The agent / distributor, the expert and the attorney should consider the following:

Check what the agent’s contribution has been

If there were customers before the contract began and what volume of sales was made with them. To recognize this compensation, it is necessary that the agent has increased the number of clients or operations with pre-existing ones.

Analyse the importance of these clients when it comes to continuing to provide benefits to the principal

Their recurrence, their loyalty (to the principal and not to the agent), the migration rate (how many of them will remain with the principal at the conclusion of the contract, or with the agent). Indeed, it will be difficult to speak about “clientele” if there have only been sporadic, occasional, non-recurring customers (or few) or who will continue to remain loyal to the agent and not to the principal.

How does the agent operate at the end of the contract

Can he compete with the principal or are there restrictions in the contract? If the agent can continue to serve the same clients, but for a different principal, the compensation could be very much discussed.

Is the compensation fair?

Examine how the agent has acted in the past: if he has fulfilled his obligations, his work when introducing the products or opening the market, the possible evolution of such products or services in the future, etc.

Will the agent lose commissions?

Here we must examine whether he had exclusivity; his greater or lesser facility to get a new contract (for instance, due to his age, the economic crisis, the type of products, etc.) or with a new source of income, the evolution of sales in recent years (those considered for compensation), etc.

What is the legal maximum that cannot be exceeded?

The annual average of the amount received during the contract period (or 5 years if it lasted longer). This will include not just commissions, but any fixed amounts, bonuses, prizes, etc. or margins in the case of distributors.

And, finally, it is convenient to include all the documents analysed in the expert’s report

If this is not done and they are only mentioned, it could result in them not being considered by a judge.

Check out the Practical Guide on International Agency Agremeents

To read more about the main features of a contract of agency in Spain, go to our Guide.

Resale prices maintenance on the internet is unlawful while ban on resale on third-party platforms seems to be a new lawful option

In a nutshell

On December 3, 2020 the French Competition Authority (the FCA) :

reiterated clearly the illegality of behavior aimed at imposing resale prices, especially in e-commerce and then condemned Dammann Frères, a French manufacturer of premium teas, to a € 226,000 fine for imposing minimum online resale prices maintenance on its distributors
extended the right of ban on resale on third-party platforms from selective distribution of luxury products to quite common commercial relations, and then rejected the alleged illegality of this ban.

Between “recommended” and “imposed” resale prices: a dangerous game to play

Article L 442-6 of French Commercial Code prohibits “imposing, directly or indirectly, a minimum character at the resale price of a good, at the price of a service or at a commercial margin”. The FCA has ruled that, under the pretext of communicating recommended prices to its distributors, Dammann Frères has in fact imposed resale prices on them, failure to comply with these prices being punishable by retaliations (removal or reduction of the amount of discounts granted to them, delay in deliveries, removal of their contact details from the list of distributors presented on its website, disruption of supply, or even termination of commercial relations).

The supplier justified – vainly – this practice by its will to preserve the image and the positioning of its products but above all to avoid excessive price differences between resales by distributors on the internet and those carried out by network stores (where dealers had more latitude in setting prices).

The restriction of competition resulting from resale price maintenance can be obvious when contractual stipulations directly fix the price; but it can be deduced from a set of indices which is characterized according to a method strictly applied by the FCA :

the supplier communicates its (recommended) resale prices to distributors,
the latter apply them significantly and,
a “price policing” system is put in place to prevent the price agreement from being questioned by deviant distributors. This mechanism results in price monitoring by the supplier (or even by other distributors, etc.),
this leads to pressure, or even retaliation, to force distributors to align their prices upwards, such as delivery delays, supply disruptions, removal of discounts, etc.

There is a fine line between a price surveillance mechanism and a price constraint mechanism. This legal insecurity has been criticized and the European Commission could provide, on the occasion of the upcoming reform of the European block exemption regulation on vertical restraints, additional advice on the circumstances in which recommended resale prices should be qualified as imposed resale prices. The reform expected in 2022 could even go further by highlighting the pro-competitive effects of resale price maintenance.

Ban on resale on third-party platforms: a serious option to consider

With regard to the ban on the resale of its products on third-party platforms, openly imposed by Dammann Frères, the FCA took a rather liberal and innovative approach by applying the rules of the Coty case law (ruling of 6 12 2017, Coty Germany GmbH, C 230/16) to decide ultimately that there is no need to prosecute and therefore to fine. If this approach is confirmed later on by French courts, it will have a considerable impact on suppliers ‘policy who seek to control and restrict the terms of resale of their products on third-party platforms such as Amazon or e-Bay.

In this case, the FCA noted that the tea manufacturer’s market share was less than 30% and that this restriction did not constitute a hardcore restriction. Indeed, the FCA noted that this practice (i) did not prohibit distributors from selling products online nor from marketing themselves through third party websites (advertising and use of search engines) and (ii) did not constitute a restriction on the number of distributors, as the prosecution file did not evidence the number of customers of these platforms amongst the group of online buyers.

The FCA’s decision is therefore extends the Coty case law according to which the supplier of a selective distribution network for luxury products can prohibit the resale of its products on third-party platforms in order to preserve the image of its products (see our comments Here).

The FCA had already extended the Coty case law to technical products in a decision of 24 October 2018 (n ° 18-D-23), concerning the practices of the company Stihl, leader in mechanized garden equipment (mainly confirmed on appeal, Paris court of appeal 17 10 19), where the FCA, in a premonitory manner, stated: “it is important to specify that the analysis carried out by the Court of justice in the Coty ruling for the online marketing of luxury products seems likely to be extended to other types of products ”(see our comments Here).

The FCA is now going even further because, even though Dammann Frères teas are “high-end” positioned, they are neither luxury products nor even distributed through a selective distribution network.

Key takeaway

As part of its relations with its distributors, the supplier must ensure:

not to stipulate any express minimum resale price clause;
not to implement a system, nor tolerate practices, of commercial retaliation against distributors deviating from the minimum “recommended” prices (or even threaten them to do so);
not to prohibit them from selling the products online or from advertising online;
carefully examine the possibility of prohibiting them from reselling its products on third-party platforms.

Roberto Luzi Crivellini

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