Local distributors and commercial agents

Distribution structures

What distribution structures are available to a supplier?

Various distribution structures are available in China, including the typical structures of distributorship, commission agency, franchise, trademark licence and joint ventures. Apart from the usual business considerations such as whether the model can achieve better penetration into the market and serve the objectives of the brand owner, tax issues and actual logistic arrangements are also crucial in determining whether a certain structure is preferred. For example, it is common to use local agencies for importing cosmetic products due to certain testing procedures of the China Food and Drug Administration, and the distributors are supplied through such local agencies.

Legislation and regulators

What laws and government agencies regulate the relationship between a supplier and its distributor, agent or other representative? Are there industry self-regulatory constraints or other restrictions that may govern the distribution relationship?

Generally, the Contract Law of the PRC governs the relationship. There is no specific government agency regulating the distribution aspect, provided that in the context of franchising, the Ministry of Commerce is the regulatory authority that oversees compliance pursuant to the franchise laws and regulations such as the Regulations of Administration of Commercial Franchising. Recently, the government released a series of national standards for different sectors stipulating the necessary standards for management of different contractual relationships. However, the legal position of these national standards has not yet been defined.

Contract termination

Are there any restrictions on a supplier’s right to terminate a distribution relationship without cause if permitted by contract? Is any specific cause required to terminate a distribution relationship? Do the answers differ for a decision not to renew the distribution relationship when the contract term expires?

The Contract Law of the PRC does not restrict the supplier’s contractual rights to terminate a distribution relationship without cause. The contractual provisions regarding termination are usually descriptive and elaborate in contracts with Chinese parties, because some common concepts in other jurisdictions, such as time sensitivity, do not exist under Chinese law.

Is any mandatory compensation or indemnity required to be paid in the event of a termination without cause or otherwise?

The Contract Law of the PRC does not require the brand owner to provide a mandatory compensation or an indemnity at the termination of the distribution or similar relationship. There is no requirement under the law to compensate the distributor for the goodwill established by the distributor.

Transfer of rights or ownership

Will your jurisdiction enforce a distribution contract provision prohibiting the transfer of the distribution rights to the supplier’s products, all or part of the ownership of the distributor or agent, or the distributor or agent’s business to a third party?

It is common to have change of control provisions in distribution or agency contracts enabling termination of the agreement in the event of transfer of ownership of the distributor or agent to a third party, and so far there is no specific judicial precedent prohibiting the enforcement of such contractual provisions.