Towards the correct interpretation, a just application or the simple elimination, of article

11 of law 173-66, governing relationships among foreign companies and their local
distributors.

By Pablo Gonzalez Tapia

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). 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
provides:

“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 fight.

Introduction

I believe that article 11 has been grossly misinterpreted and, mostly, ill-applied by local
courts. Truth is that there have been very few judicial decisions interpreting the aforesaid
article, but I would concede that given the proper opportunity the judges (specially from
the Supreme Court or the Constitutional Court) would either shield the foreign company
from abusive local practices, or simply eliminate the article on the lack of constitutional
basis.
In this short commentary, I’ll argue: (a) that the article 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 me 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 based on article 11, 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.)

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, 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, I 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 -surely- does 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 a local distributor
knows that if accepting to be appointed in substitution of the former one, it may end joint
and severally responsible for those damages with the foreign entity. With that picture in
front, seems like 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. This
mostly occur on the basis that the factors to calculate those damages are in some cases,
subjective, while in others, the evidence to support them may be weak. 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. Since until a judgment is entered, the
potential compensation is not certain, liquid or enforceable, I am of the opinion that the
foreign entity should be able to seek protection from a fast-track judge (Juez de los
Referimientos) and obtain an injunction, either preventing the former agent from stopping
the sale of goods or allowing the foreign company to place a monetary guarantee or bond,
which would then allow such foreign company to continue doing business.

In the latter scenario, by providing an economic guaranty, the parties and the whole
community find in 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 importantly, this kind of protection does benefit the local economy
by, among others, (i) keeping jobs or creating new ones; (ii) keeping products and services
for the consumers; and (iii) the Government collecting taxes in new sales, and companies’
income, and duties on the imported merchandise.

3. Article 11 shall be declared to be unconstitutional.

In my opinion, article 11 violates the Constitution in many statutes, of which I will mention
a few:

• Article 50, on free enterprise, since the article does impede the free exercise of
commerce, in the absence of a judicial decision establishing a right to a
compensation, or at least, the amount of the said compensation.

• Article 39, on equality rights, which expressly condemned 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, which breaches our Constitution.

• Article 40, number 15, which requires that the law must order what is useful and
just for the community and should only prohibit the things that may damage it. By
allowing one distributor to hold in ransom a future market development, with such
action an individual prevents the whole community from better products or
services, misbalance the competition, adversely affects the job creation, and
prevent the Government from collecting taxes and duties, etc.

• Article 221, which expressly declare the equal treatment of foreign investment and
local investment, with very few exceptions, in 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 I could make a reference in another occasion. By this time,
I believe we need to seriously address the abusive practices that have been generated as
result of the application of the statute and seeks their elimination or mitigation for the
greater good and benefit of the local community, of which I have exposed a few.

Later, it shall come a time where article 11 is challenged and tested before our courts.
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 I have no
doubt a winnable case shall be brought to Courts to bring down this legislation.