From 1997 and until the Code of Commerce came into effect last May 29, 2019, the distribution contract did not have a specific regulation. It was governed by the general rules applicable to trade acts, contracts and regulations on jurisdiction.
On December 31, 1976, the Law for the Protection of Agents or Distributors of Foreign Companies (Distributors Law) was enacted, which regulated the commercial relationship between an entity not based in Ecuador and a person – be it natural or legal- designated as representative, agent or distributor. This Law mainly provided a special protection regime for the distributor / agent. Thus, among the most relevant provisions included, the grantor was not authorized to unilaterally terminate the contract even by expiration of the term established in the contract itself, save for specific causes established in the Distributors Law, which in turn had to be qualified by the competent judge, and established a method of calculating large compensation for damages.
On July 5, 1996, the Distributors Law was amended, fundamentally limiting the compensation amount, and on September 19, 1997, it was repealed. Even so, the rights and obligations born while the Distributors Law was in force were maintained. The Antitrust Law, enacted on October 2011, introduced concepts such as exclusivity – of products, territories, customers or types of customers – that a priori seemed to be in conflict with the free competition regime, which required a robust support – from the economic and market techniques – that would legitimize its stipulation.
Since May 29, 2019 the new Code of Commerce (Code) clarified the picture, clearly tracing the rules governing the distribution contract. The most prominent are:
- The distribution contract is the authorization in which a party called the grantor or principal confers on another party called concessionaire or distributor the possibility of selling products, providing services, or a combination of both, in a given territory.
- In general, it leaves to the will of the parties the conditions of these contracts, such as: exclusivity of territory, exclusivity of product, minimum volumes and periodicity in purchases, among others; and establishes rules that will be applied in the absence of stipulation by the parties or that are contrary to the Antitrust Law.
- Establishes the obligation of the supplier to deliver commercial and technical information necessary for the best distribution of the goods or services stipulated in the contract.
- Allows the supplier to make direct sales without the participation of the distributor, unless otherwise agreed.
- Prohibits the supplier from limiting the possibility of the distributor to make sales, through the internet, except for reasons of public health, consumer safety or legal prohibition.
- Determines that, if a term of validity is not established, distribution contracts are considered as indefinite and may be terminated by either party, prior a 90-day notice. The Antitrust Law states that termination without a cause with no prior 30-day notice, could be considered as abuse of market power in an economic dependency relationship.
- The serious or repeated breach of the contract that is not remedied within 15 days from the notification of the breach, will result in its termination, and the compliant party will be entitled to compensation for damages.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.