When creating a new retail network in China, through the cooperation of local distributor or partner, a cooperation framework shall be agreed upon, within a Distribution Agreement, a Franchising Agreement, a Master License Contract or within any other retail agreement which best fit the specific project. However, the critical points of such agreements are recurring and affect many contracts aimed at creating at retail networks in China, with negative, costly and time-consuming consequences.
APPLICABLE LAW
Many retail agreements are subject to foreign law, like Italian law, and prospective disputes are referred to Italian judges or to arbitration in Italy, in Hong Kong, in Switzerland. Unfortunately, no choice can be more ineffective: foreign laws are inadequate to regulate commercial issues arising in China, which are peculiar.
Besides, laws on franchising in China are mandatory, and may not be eluded by simply applying foreign laws to the retail agreement; therefore, you might chose foreign law trusting to be protected, while you end up squeezed between inapplicable foreign laws and mandatory local laws; under such circumstances, your chosen Italian judge or arbitrator will thus be called to resolve disputes related to retail in China, coordinating foreign laws and mandatory Chinese law and practice; quite a hard task for any judge and definitively a strong enemy against effectiveness and timesaving.
When your Chinese partner commences to sell other products under your insignia, to sell low quality products, to amend your concept store according to Chinese tastes, or simply fails to pay the goods you sold him, at that time you do not want to litigate in Geneva, in Milan or in Hongkong, waiting months even years to obtain a judgement or a decision in your favor, to then commence again a new proceeding to enforce it. At that time you want to act directly against your ex-partner, to obtain urgent protection measures and to seize its assets, if needed, in a few days’ time. This, you can achieve only by applying Chinese law to your contracts and to refer dispute to Chinese judges.
TRADEMARK
Before taking any action in China, even before starting to plan it, you must ensure that your trademark has been well registered with the China Trademark Office, the Hong Kong Trademark Office, the Macao Trademark Office and the trademark authorities of any neighboring country where you might plan to expand.
Should you discover that your trademark has already been registered in China by a local company, a so called “trademark squatter”, take all actions you can to have it cancelled, but, at the same time, plan a backup solution with an alternative trademark, because you will need years to recover your trademark, if you will ever be able to recover it.
SELL OFF PERIOD
You shall monitor orders made by your partner on the basis of your experience and ERP, to understand whether the partner is overestimating his purchasing needs with respect to sales forecasts.
In the retail contract you shall ensure to stipulate a Sell Off period, during which your partner is allowed to continue the sale of your brand products’ stock, even after
termination of the retail agreement, but only for a limited period.
A penalty shall be applied in case of breach of such clause, because to prove the damages that your partner, by continuing the sales of your products, may cause to your new overall retail strategy with a new partner, could be extremely burdensome.
Without such clause and relevant penalty, and without a Chinese court to enforce it, the conspicuous stock accumulated by your ex-partner, due to its overestimated sales forecast, will continue to be sold in China long after termination of your cooperation and you will not be able to stop him, due to the principle of exhaustion of trademark rights: in brief, you may not attack a company in China, who is selling your genuine products, lawfully acquired from you, even if such company is no more your partner or your licensed retailer; the reason is that the goods have been legally obtained and entered the market, and thus they can be sold.
You may stop your ex-partner, exclusively if you have a sell off clause in the retail contract and a judge to apply it.
CALL OPTION
You shall ensure to obtain, under the retail contract, a call option over the retail network. If your partner is successful, upon development of the retail network, you will find yourself, at the end of the cooperation, without a valid contract and with your full precious retail network in the hands of your partner, compelled to renegotiate cooperation terms. Your trademark ownership might not be enough to save you from a lengthy and risky negotiation.
To avoid such unpredictable outcome, it is advisable to request your partner, since first entering into the retail agreement, to establish the new retail network by means of an ad hoc new corporate vehicle, who shall enter into all the contracts forming the retail network, from lease contracts from goods purchase contract, from decoration contracts to labor contracts.
The best solution would be to use a corporate retail vehicle registered in Hong Kong or Singapore. Under such “umbrella”, you would be able to enter into a shareholder agreement with your partner, under a “foreigners friendly law”, granting you an enforceable call option right on the shares held by your partner in the vehicle.
In future, should you decide to continue alone the retail project in China, you may trigger such call option, knowing that it shall work, and, by paying the fair price, you may get to own and control 100% of the vehicle and, thus, the Asia retail network.
Be aware that, call and put option clauses, in China, do not operate automatically, thus breach of the obligation of the Chinese partner to sell his equity under a call option, will result in you acquiring the equity, but merely obtaining an damage compensation.
Riproduzione riservata Avv. Paola Bernardi
