The distribution agreement in Guatemala subject to foreign law

Written by: Rafael Alvarado

The distribution agreement in Guatemala subject to foreign law


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 possible distributor in Guatemala, about the possibility of submitting said contract to foreign law. Within said analysis, in addition to determining the legal feasibility of said submission to foreign law of the aforementioned agreement, we normally have to review whether any of the rules that regulate the distribution agreement can be considered an imperative or public policy rule and that therefore, the parties cannot agree against it.


It is the above that motivates this brief analysis.


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


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


This is in accordance with the provisions of article 31 of the Judicial Branch Law, which establishes that legal acts and businesses are governed by the law to which the parties have submitted, unless said submission is contrary to expressly prohibitive laws or public policy.


For the same reasons previously established (there is no rule that expressly prohibits it), in the event of controversies or conflicts between the parties, the distribution agreement could be subject to arbitration outside of Guatemala and even more so, when the relationship contract takes place in an area of ​​international trade, since, as the Constitutional Court has established in its rulings, it is this type of circumstance that allows the autonomy of the will of the parties to intervene effectively, since that the very reality of the situation calls for a perspective that is less rigid and more open to the needs of international trade, through the projection of the principle of autonomy of will.


In addition, the same article 291 of the Commercial Code limits only that judicial proceedings must take place, be processed and resolved in Guatemala, in accordance with the national laws applicable to judicial proceedings. Therefore, the parties to the distribution agreement are completely free to submit their disputes to arbitration outside of Guatemala.


The Constitutional Court itself has established that the development of arbitration in international trade has become an inexcusable necessity to support 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 solution of commercial disputes – to the greatest extent possible – that arise in the framework of that Treaty.


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 that trade the possibility of resolving their disputes through arbitration and, for this, it must create a highly dispositive framework in which the parties can agree on which arbitration procedure will be carried out, institutional or ad hoc, according to what rules and in relation to with what Law, thereby allowing a space for action that accommodates the protection needs of the parties with those of international trade traffic.


The Constitutional Court adds that such circumstances are based on the autonomy of freedom, which merchants enjoy, implicit in Article 43 of the Constitution, in which freedom of commerce is recognized.



Nature of the regulations governing the distribution agreement within the guatemalan legal order


The Constitutional Court has indicated that, in general, legal norms are characterized by their imperativeness, since they have a mandate contained in the norm that is intended to be fulfilled (they are independent of the will of the individual since they cannot dispense with their content, the will of the legislator must be fulfilled); However, the normative mandate does not always have the character of an imposition or prohibition on the citizen, since on occasions, the norm empowers people to decide to carry out a certain act or omission, derived from private interests (from the principle of autonomy of the will), above all, in the field of Private Law. From this point of view, two types of norms can be distinguished, namely: a) mandatory norms, which are characterized by containing a normative mandate that does not allow any modification by individuals; therefore, the legal consequence is necessarily 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 a different rule; b) Dispositive norms, which are regulatory normative mandates whose factual assumptions entail the observance of the legal consequence contained in the norm, when there are no rules born from the express will of the interested persons, in such case, the legal norm performs an extra function.


In principle, and as a “general rule”, it can be concluded that the regulations that regulate the distribution agreement within the Guatemalan legal system are of a “dispositive” or “supplemental” nature, that is, they are regulatory normative provisions that apply only ” in default” or “absence” of a consensus born of the express will of the parties.


The distribution agreement 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 said chapter regulate the commercial agents and only five articles expressly regulate distributors (articles 280, 283, 286 bis, 290 and 291) and regulate it above all from the perspective of the subjects involved in the relationship.


The distribution agreement is inspired by the philosophical principles of “known truth” and “good faith kept” that support and structure, by legal provision, all obligations and commercial agreements within the Guatemalan legal system and, by virtue of which, commercial agreements must always be interpreted, executed and fulfilled in such a way as to preserve and protect the upright and honorable intentions and wishes of the contracting parties, without limiting their natural effects with arbitrary interpretation.


In this sense, it can be established and concluded that the non-existence of regulatory provisions within the Commercial Code that refer, expressly and specifically, that distribution contracts must be governed by some specific and pre-established legal condition, stipulation or clause, should always be understood ” in favor” of the autonomy of the will of the parties that celebrate said agreement. 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 can do anything that is not expressly prohibited by law and, more even when the scope of action of individuals is in the matter of commercial contracting in which the “principle of autonomy of will” governs or prevails, as a general rule.


It is also important to take into account, as indicated above, the autonomy of the freedom that merchants enjoy, implicit in article 43 of the Constitution, in which freedom of commerce is recognized.


The existence of a standard of imperative nature within the regulation of the distribution agreement in the commercial code of Guatemala


Notwithstanding the foregoing, it is very important to note that, within the regulations that regulate “Commercial Agents, Distributors and Representatives” contained in the Code of Commerce, which, as established above, is mostly of a “dispositive” nature, there is a rule of an “imperative” nature, by virtue of which, the contractual relationship between the principal and the distributor can only end in the forms or circumstances in which the law prescribes and, therefore, in this aspect specific to the distribution agreement, no room is left 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 Commercial Code, referring to the “termination of the agency, distribution or representation agreement” contains, in my opinion, by virtue of the way in which the article is expressed, an imperative and non-dispositive norm when establishing that “independent agency, distribution or commercial representation agreements can only be terminated or rescinded” for the causes or reasons established therein. In this sense, the parties to the distribution agreement cannot agree against or vary or modify the scope of what is established in this regulation, which means, among other things, that different forms of termination could not be agreed upon 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 result of the termination of the agreement or commercial relationship if there is no just cause to have terminated said agreement or relationship.


Specifically, article 290 of the Commercial Code does contain a “public policy” norm, specifically, regarding the “forms of termination” of the distribution agreement, because it is an imperative and obligatory norm, with a normative force based on reasons of collective interest that, in this case, could be that of “legal certainty” focused, essentially, on protecting the “weak” or “most vulnerable” part of the contractual relationship, that is, the distributor and this objective or purpose, for the State, transcends the scope of an inter-party conflict.


By virtue of the foregoing, it is finally concluded that, of the regulations that regulate the distribution agreement in Guatemala, only and specifically, article 290 of the Commercial Code contains normative provisions of an imperative nature, which cannot be waived or modified by the parties with the intention of asserting the principle of autonomy of the will. And, therefore, the content of this article must be observed and respected and its normative assumptions cannot be restricted or expanded by the contracting parties because, if they do so, said restrictions or expansions would even become null and void, in accordance with the provisions of Article 4 of the Judicial Branch Law.


Notwithstanding the foregoing, the same article 290, in numeral 5, literal A, sub-numeral I, establishes that distribution agreements can only be terminated or rescinded, for just cause, by either party, due to breach or violation of the other party, of the obligations that they have agreed upon.


This rule returns to the autonomy of the will of the parties to agree on 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 said cause for breach of the other party. Therefore, in this case, at the time of conflict, the judges or arbitrators must respect what was agreed by the parties as grounds for termination, derived from contractually established obligations.

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