Facing a Commercial Supply Chain Dispute?

Exclusive distributorship is a contractual relationship where the supplier grants the distributor the sole right to sell the products. An exclusive distributorship may be limited in time, geographical scope, market segment, or other aspects. The supplier agrees not to appoint any other distributor in the same area or market. This arrangement allows the distributor to invest in marketing and promotion, while the supplier can receive focused market development and revenues.

If the goods were damaged or lost, it is crucial to understand who is responsible for the loss and whether the insurance covers the losses.

Which party is responsible?
The answer depends on the contract terms. Ideally, the contract will determine the exact point at which the risk of loss shifts to the other party. The common shipment arrangements include FOB (Free on Board), CIF (Cost, Insurance, and Freight), or DDP (Delivered Duty Paid) terms. There may be other variations of shipment terms. They can be found in Incoterms published by the International Chamber of Commerce.

If the contract does not specify the risk of loss, the default rules of the governing law will determine it. For example, if the governing law is the law of California, you will need to check the California Uniform Commercial Code and California case law. If the governing law is the law of Maryland, you will need to check the Maryland Uniform Commercial Code and Maryland case law. To check which state's law governs the contract, courts will look at the contract and the rules of choice of law. Please see the answer to the next question.

All states have adopted the Uniform Commercial Code (UCC) with minimal modifications. The UCC provides that the title of goods passes to the buyer "at the time and place at which the seller completes his performance with reference to the physical delivery of the goods." See UCC 2-401(2). Where the contract requires or authorizes the seller to ship the goods by carrier, the risk of loss passes to the buyer when the goods are duly delivered to the carrier or duly tendered by the carrier (depending on whether the destination was specified or not). See UCC 2-509(1). In other cases, the risk of loss passes to the buyer on his receipt of the goods if the seller is a merchant. See UCC 2-509(3).

Effect of breach on the risk of loss
If the delivered goods do not conform to the contract, the risk of their loss remains on the seller until the seller cures the breach or the buyer accepts the non-conforming goods. See UCC 2-510(1).

Will the insurance cover the losses?
The insurance coverage depends on the policy and its interpretation. If the insurance denies the coverage, there may be an insurance gap, which the parties will need to resolve based on the risk of loss rules described above.

The choice-of-law question depends on the nature of the dispute, the contract terms, and the laws governing the choice of law.

If the dispute relates to a contract
Many contracts specify the governing law. The courts will often honor the choice-of-law provisions, with some exceptions. If the contractual relationship has no connection to the state, the choice-of-law rules of a particular state may override the contractual choice of law.

If the contract does not have a choice-of-law provision, the court will apply the choice-of-law rules of the state where it sits. The choice-of-law rules can be found in the case law or in statutes. Those choice-of-law rules typically consider which state has more connection to the contract, where the contract should be performed, the place of contracting, the location of the subject, where the parties are incorporated or headquartered, and other factors.

Does CISG apply?
CISG is the UN Convention on Contracts for the International Sale of Goods. It applies only to sale of goods between parties whose places of business are in different countries. Distributorship agreements are not contracts for the sale of goods. However, specific sales between the supplier and distributor may be subject to CISG. The U.S. is a signatory to CISG.
The CISG may apply if:

• the contract does not have a choice-of-law provision,
• the contract does not opt out of CISG,
• the contract concerns the sale of goods,
• the contract is between businesses from different countries,
• the parties are from countries who are CISG signatories (or at least one country is a CISG signatory + (1) the private international law indicates application of CISG or (2) the contract itself makes CISG applicable law).

Please consult with an attorney to determine which law applies to the dispute.

If the dispute relates to non-contractual claims
Even if the claims are non-contractual (such as fraud, conversion, negligence, or unfair competition), some contracts may still specify the governing law for those situations. But this will depend on the interpretation of the choice-of-law provision and the specific facts of the case.

If the contractual choice-of-law is found inapplicable, the court will apply the choice-of-law rules of the state where it sits, which may depend on various factors. For example, the court may look at the connection of the dispute to the state, where the events took place, where the losses or injury were sustained, and where the parties are located.

The common compensation models in a distributorship agreement may include various elements:

• wholesale discount when the distributor buys in bulk and receives the markup as the margin.
• commissions and consignment. The distributor receives a certain percentage of the price of sold goods.
• tiered pricing and quantity discounts based on volume thresholds.
• performance bonuses depending on market penetration, sales targets, and other performance metrics.
• distributorship exclusivity fees for the right to distribute without competition in certain markets or geographic areas.
• marketing and advertising fees to promote the brand and goods.

The distributorship agreement should clearly determine the payment terms, methods, and formulas. If the agreement does not specify the payment terms, the default rules, usage of trade, and course of performance and dealing may help determine them. The Uniform Commercial Code (UCC), which was adopted in all states with minimal changes, states that the payment is due upon delivery. UCC 2-511(1).

Arbitration is a private dispute resolution with a binding result. Arbitration is usually mandatory if the parties agree to it through an arbitration agreement. However, the right to arbitration may sometimes be waived if the other party does not timely object to it.

Advantages of arbitration:

• it is more informal and streamlined
• it may be faster than courts because there are usually no appeal proceedings
• discovery proceedings may be more limited than in courts
• case records are less available to the public, making arbitration more confidential
• it may limit the potential for a class action
• there is no jury, which in some cases may help your case

Disadvantages of arbitration:

• arbitrator's award is final and usually cannot be appealed
• discovery proceedings may be more limited
• arbitration can be expensive because of administrative and arbitrator's fees
• there is no jury option, which in some cases may affect your case negatively

Whether arbitration is better for your situation will depend on your resources, timeline, preferences for confidentiality, and other factors, which you should discuss with your attorney.

Yes.
An agreement can be amended or supplemented if the other party agrees to it. To renegotiate the terms of an agreement, it is important to understand your leverage, the other party's leverage and interests, your best alternatives, and your zone of potential agreement (often referred to as "ZOPA").

To ensure the amendment is valid, the parties must follow the requirements and formalities specified in the original agreement. For example, if the original contract requires the amendment to be in writing and signed, the parties should follow that requirement. However, even if the formalities are not followed, the amendment may still be valid if the court finds grounds for a waiver of the formalities, estoppel, or other exceptions.

It depends on the terms of the agreement and the nature of the "cause".

If the agreement allows for termination at will, then the distributorship can be terminated with or without cause. Some contracts may specify that the terminating party must send a notice of termination. Some contracts allow termination at will only by one party. Please consult with an attorney to understand the procedures and implications of contract termination.

If the agreement does not provide for termination at will, the contract may be terminated only if the other party breaches the agreement. Whether the "cause" amounts to a breach of contract is fact-specific and depends on the nature and extent of the "cause."

Yes, if the trademark holder authorized the distributor.
Suppliers often give distributors a license to use their trademark. However, this license may have limitations in time, geographical scope, purpose, marketing channels, and other aspects. Issues may arise when a distributor uses the trademark outside of the license scope. Another problem may arise when the distributor uses confusingly similar marks on lower-quality products.

Owners and holders of intellectual property (IP) have several types of redress:

1. Customs recordation of IP rights with Customs and Border Protection (CBP). This process allows the IP owner to exclude and seize the infringing products at the border. Section 526 of the 1930 Tariff Act (19 U.S.C. Sec. 1526) authorizes CBP to exclude infringing goods in the course of enforcing the customs laws. Section 42 of the Lanham Trademark Act (15 U.S.C. Sec. 1124) provides for customs recordation of any trademark registered in the U.S. The 1976 Copyright Act also provides for the exclusion of infringing works (17 U.S.C. Sec. 603). If CBP has suspicion about goods, it may contact the owner for clarification. However, this redress is difficult to enforce in relation to patents and trade secrets because of the nature of these IP rights.
2. Section 337 Investigation to stop the goods at the border. This is an administrative procedure authorized under 19 U.S.C. Sec. 1337. The IP owner may file a petition with the U.S. International Trade Commission (ITC), but only if the IP is part of the U.S. domestic industry. A foreign company with no significant presence in the U.S. will be unable to invoke the 337 Investigation. ITC may not award monetary damages, but it may issue an exclusion order to CBP to deny entry of goods, and to issue a cease and desist order with a potential fine. 19 U.S.C. Sec. 1337(f).
3. Litigation. Owners and holders of IP can also file a lawsuit for an injunction to stop the infringement, including future infringements, and to stop the distribution of the products. IP owners may also ask for monetary damages caused by the infringement.