The distribution contract in Guatemala subject to foreign law

By: Rafael Alvarado

Within the professional practice, it is very common that we are consulted by foreign clients who wish to enter into a distribution agreement with a potential distributor in Guatemala, about the possibility of subjecting such agreement to foreign law. Within such analysis, in addition to determining the legal feasibility of such subjection to foreign law of the referred contract, we usually have to review whether any of the rules that regulate the distribution contract can be considered a mandatory rule or of public order and therefore the parties cannot agree against it.

This is what motivates this brief analysis.

The possibility of subjecting the distribution contract to foreign law and to arbitration outside of Guatemala

Regarding the possibility of subjecting the distribution contract to foreign law, considering that there is no rule that expressly prohibits it, it must be understood that it could be done, as long as the content of the mandatory rule referred below is respected and observed, in order to comply with its content.

This is in accordance with the provisions of Article 31 of the Law of the Judiciary, which establishes that legal acts and businesses are governed by the law to which the parties have submitted, unless such submission is contrary to express prohibitive laws or public order.

For the same reasons established above (there is no rule that expressly prohibits it), in case of controversies or conflicts between the parties, the distribution contract could be subject to arbitration outside Guatemala and even more so, when the contractual relationship is developed in an area of international trade, since, as the Constitutional Court has established in its rulings, it is this type of circumstances that allow the effective intervention of the autonomy of the will of the parties, since the reality of the situation itself argues for a less rigid perspective and more open to the needs of international trade, through the projection of the principle of the autonomy of the will.

Furthermore, the same article 291 of the Code of Commerce limits only that the judicial proceedings must take place, be processed and resolved in Guatemala, according to the national laws applicable to judicial proceedings. Therefore, the parties to the distribution contract are free to submit their disputes to arbitration outside Guatemala.

The Constitutional Court itself has established that the development of arbitration in international trade has become an unavoidable necessity to underpin the process of economic and social development in the member countries of a specific integration framework. Hence, the Dominican Republic-Central America-United States of America Free Trade Agreement establishes in its chapter twenty the promotion and use of arbitration and other alternative means for the resolution of commercial disputes -to the greatest extent possible- arising within the framework of that Agreement.

In this context, the Constitutional Court has also warned that the State must promote the orderly and efficient development of trade [literal l) of Article 119 of the Constitution], which is why, for effective international trade, the legislator must propose to the operators of such trade the possibility of settling their disputes through arbitration and, to that end, must create a highly effective framework for the settlement of disputes through arbitration, to this end, it must create a highly dispositive framework in which the parties may agree on the arbitration procedure to be carried out, institutional or ad hoc, according to which rules and in relation to which law, thus allowing a space for action that accommodates the needs of protection of the parties with those of international trade traffic.

The Constitutional Court adds that such circumstances have their basis in the autonomy of freedom, which traders enjoy, implicit in Article 43 of the Constitution, which recognizes the freedom of trade.

Nature of the regulations governing the distribution contract within the Guatemalan legal system

The Constitutional Court has indicated that in general, the legal norms are characterized by their imperativeness, since they have a mandate contained in the norm that has the purpose of being complied with (they are independent of the will of the subject since they cannot dispense with their content, the will of the legislator must be complied with); However, the normative mandate does not always have the character of an imposition or prohibition to the citizen, because sometimes, the rule empowers individuals to decide to perform a certain act or omission, derived from particular interests (based on the principle of the autonomy of the will), especially in the field of Private Law. From this point of view, two types of rules can be distinguished, namely: a) mandatory rules, which are characterized by containing a normative mandate that does not allow any modification by individuals; therefore, the legal consequence is compulsorily circumscribed to the pre-established legal provision derived from the factual assumption, without the contrary will of the intervening subjects being able to replace it with another different rule; b) dispositive rules, which are regulatory normative mandates whose factual assumptions entail the observance of a different rule; c) normative rules, which are regulatory mandates whose factual assumptions entail the observance of a different rule; d) normative rules, which are not mandatory, and which are not subject to any modification by individuals; e) normative rules, which are not subject to any modification by individuals; f) normative rules, which are not subject to any modification by individuals.

In principle, and as a “general rule”, it can be concluded that the regulations governing the distribution contract within the Guatemalan legal system are of a “dispositive” or “supplementary” nature, i.e., they are regulatory provisions that apply only “in the absence” or “absence” of a consensus born of the express will of the parties.

The distribution contract is slightly regulated within the Commercial Code, since although the chapter that regulates it is entitled “Commercial Agents, Distributors and Representatives”, most of the articles of such chapter regulate commercial agents and only five articles expressly regulate distributors (articles 280, 283, 286 bis, 290 and 291) and they regulate it mainly from the perspective of the subjects that intervene in the relationship.

The distribution contract is inspired by the philosophical principles of “known truth” and “kept good faith” that sustain and structure, by legal provision, all commercial obligations and contracts within the Guatemalan legal system and, by virtue of which, commercial contracts must always be interpreted, executed and complied with in order to preserve and protect the right and honorable intentions and wishes of the contracting parties, without limiting with arbitrary interpretation their natural effects.

In this sense, it can be established and concluded that the non-existence of normative provisions within the Code of Commerce that refer, expressly and specifically, that distribution contracts must be governed by some specific and preset condition, stipulation or legal clause, must always be understood “in favor” of the autonomy of the will of the parties that enter into such contract. The foregoing, in congruence and observance of the “principle of general legality” or “freedom of action” contained in article 5 of the Constitution, by virtue of which, individuals may do everything that is not expressly prohibited by law and, even more so, when the scope of action of the individuals is in matters of commercial contracts in which the “principle of the autonomy of the will” governs or prevails, as a general rule.

It is also important to take into account, as previously indicated, the autonomy of the freedom of which the merchants enjoy, implicit in article 43 of the Constitution, which recognizes the freedom of trade.

The existence of a rule of a mandatory nature within the regulation of the distribution contract in the Guatemalan code of commerce

Notwithstanding the foregoing, it is very important to note that, within the regulations governing “Commercial Agents, Distributors and Representatives” contained in the Code of Commerce, which, as previously established, are mostly of a “dispositive” nature, there is a rule of a “mandatory” nature, by virtue of which, the contractual relationship between the principal and the distributor can only be terminated in the forms or circumstances prescribed by law and, therefore, in this specific aspect of the distribution contract, there is no room for the autonomy of the will and, therefore, it is the law that contemplates the applicable normative assumptions without the option of alterations or modifications by the parties.

Article 290 of the Code of Commerce, referring to the “termination of the agency, distribution or representation contract” contains, in my opinion, by virtue of the way in which the article is expressed, a mandatory and not a dispositive rule by establishing that “independent agency, distribution or commercial representation contracts can only be terminated or rescinded” for the causes or reasons established therein. In this sense, the parties to the distribution contract cannot agree against or vary or modify the scope of the provisions of this rule, which means, among other things, that different forms of termination could not be agreed and that, for example, in the event that the termination is carried out by unilateral decision of the principal, the latter will be liable to the agent for the damages caused as a consequence of the termination of the contract or commercial relationship if there is no just cause to have terminated such contract or relationship.

Specifically, article 290 of the Code of Commerce does contain a “public order” rule, specifically, regarding the “forms of termination” of the distribution contract, because it is an imperative and mandatory rule, with a normative force based on reasons of collective interest which, in this case, could be that of “legal security” focused, essentially, on protecting the “weak” or “most vulnerable” party of the contractual relationship, that is, the distributor, and this objective or purpose, for the State, transcends the scope of a conflict between parties.

By virtue of the foregoing, it is finally concluded that, from the rules that regulate the distribution contract in Guatemala, only and specifically, Article 290 of the Code of Commerce contains normative provisions of a mandatory nature, which cannot be waived or modified by the parties with the intention of enforcing the principle of free will. And, therefore, the content of this article must be observed and respected and its normative assumptions cannot be restricted or extended by the contracting parties because, if they were to do so, such restrictions or extensions would become null and void, in accordance with the provisions of article 4 of the Law of the Judiciary.

Notwithstanding the foregoing, the same article 290, in its numeral 5, literal A, subnumeral I, establishes that distribution contracts may only be terminated or rescinded, for just cause, by any of the parties, for breach or contravention by the other party, of the obligations agreed upon.

This rule returns to the autonomy of the will of the parties to agree which are the obligations of each party, which if breached, validly allow the termination of the distribution contract without liability for damages of the party that invokes such cause for breach of the other party. Therefore, in this case, at the time of conflict, judges or arbitrators must respect what has been agreed by the parties as grounds for termination, derived from contractually established obligations.