In brief: dealing with local distributors and commercial agents in China

Bizar Male

Local distributors and commercial agents

Distribution relationships

What alternative distribution relationships are available to a supplier?

Various distribution relationships are available in China, including the typical relationships of distributos, commission agencies, franchises, trademark licences 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 relationship is preferred. For example, it is common to use local agencies for importing cosmetic products because of certain testing procedures of the China Food and Drug Administration, and the distributors are supplied through those 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 laws governing rules of contracts under the Civil Code of the People’s Republic of China (the Contract Law) governs the relationship. There is no specific government agency that regulates the distribution aspect, though 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. In recent years, the government has released a series of national standards for different sectors stipulating the necessary standards for the 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 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 does not require the brand owner to provide mandatory compensation or indemnity upon termination of the distribution or similar relationship. There is no requirement under the law to compensate the distributor for the goodwill established by it.

Transfer of rights or ownership

Will your jurisdiction enforce a distribution contract provision prohibiting or restricting 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. To date, there has been no specific judicial precedent prohibiting the enforcement of such contractual provisions.

Law stated date

Correct as of

Give the date on which the information above is accurate.

15 January 2021

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