The Dominican Republic's onerous dealer protection law will no longer automatically apply to US suppliers, as a result of a new law to ensure the country's implementation of its obligations under the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA). The new law, DR-CAFTA Implementation Law No. 456-06, paves the way for increased investment in the Dominican Republic by US companies but also could raise questions about the dealer protection law's application to suppliers from other countries.
The dealer protection law, Law No. 173 on Import Agents of Merchandise and Products (Law No. 173), is intended to protect local agents and distributors of foreign products against unfair or unilateral termination of their distributorships by foreign suppliers once their products have gained a foothold in the Dominican market. Law No. 173 grants extraordinary protection to local agents and distributors by allowing termination by a foreign supplier only in cases involving "just cause" and by providing for substantial remedies in cases of termination without just cause. Moreover, Law No. 173 stipulates that it is a "public order" statute, so it supersedes any agreements among the parties that are contrary to its provisions.
Because these protections present substantial barriers to foreign suppliers seeking to enter the Dominican market, Law No. 173 has been addressed by Free Trade Agreements (FTAs) including DR-CAFTA. Annex 11.3 of DR-CAFTA, which applies only to the United States and not to other member countries, states that the Dominican Republic "shall not apply" Law No. 173 to any covered contract signed after the entry into force of DR-CAFTA unless the contract explicitly provides for the application of the law.
Although the Dominican Republic had agreed to Annex 11.3, Law No. 173 remained in effect, and regulations were needed to implement DR-CAFTA. This led to discussions with the US Trade Representative regarding two main subjects: (1) the legal instrument to be used to make Law No. 173 consistent with DR CAFTA and (2) the effects of this amendment on the principle of general application of laws, as well as its effects on distribution agreements signed prior to DR-CAFTA's entry into force.
- Dominican and US negotiators eventually agreed on the following:
- Amendment of Law 173 would be made by an Implementation Law, not by a decree as was initially proposed by the Dominican government.
- The Implementation Law would create a special regime for distribution contracts in which any supplier of products or services from the United States is involved, as well as any company that is controlled by such a supplier.
If a distribution agreement is covered by Law No. 173, whether because it was entered into prior to DR-CAFTA's effective date or because the contract expressly provides so, Law No. 173 shall be applied according to articles 46 and 47 of the Dominican Constitution, which stipulate the principle of consistency of the laws with the Constitution and the nonretroactive application of laws. Title V of the recently enacted Implementation Law meets these requirements by providing that that Law No. 173 shall no longer apply to any covered contract, signed after the entry into force of DR-CAFTA, in which a supplier of products or services from the United States is involved, as well as any company that is controlled by such a supplier, unless the contract explicitly provides for the application of Law No. 173. Instead, provisions of the Dominican Republic's Civil Code establishing the principle of contracting freedom shall prevail.
Because the changes to the dealer law apply only to US suppliers, this would appear to contravene the Dominican Republic's constitution as well as its national treatment obligations under DR-CAFTA itself (other CAFTA countries are not covered by the new law). Certainly this could pose a problem for suppliers outside the region such as companies in Europe or Asia.