ADELAIDE-BASED LAWYER Mark Hamilton warns there are a lot of legal issues in the background of any deal to export wine. Issues which can quickly become problems if you don’t have the right contracts and are stuck in the mire of a foreign legal system.
Terms which often give difficulty in negotiating agreements with domestic and overseas importers/distributors include:
- Governing Law and Jurisdiction Clauses;
- Period of contract and method and grounds for termination;
- Consequences upon termination; and
- Most vexingly, payment of compensation upon termination.
GOVERNING LAW AND JURISDICTION
In this globalised wine market, Australian wine companies often have a mixture of domestic and international distribution agreements.
In terms of domestic agreements, the financial risk of failure of a proposed distributor is a major consideration.
There is also a choice of having the convenience and potential coverage of one national distributor versus the risk of all “eggs in one basket” in the event of the distributor’s failure or non performance.
Australia now exports wines to a lot of countries, each with its own legal jurisdiction.
The potential difficulties caused by this are compounded by the expansion of Australia’s export markets into Asia and the Indian sub-continent.
Gone are the days where most wine companies would write their major distribution contracts in Australia, the UK, Canada and the US – all using the English language, and with all countries having recognisable common-law-based legal concepts.
Add in cultural differences, language barriers and differing jurisdictions and laws and then contracting internationally represents a significant challenge.
Given the prohibitive cost of litigation overseas, especially in foreign-speaking jurisdictions, for breach of contract, one can begin to see the immense difficulty in enforcing distribution agreements or recovering money overseas.
What does this mean in practical terms?
Most Australian wine producers are undercapitalised by virtue of both an inherent lack of capital overlaying the highly capital intensive nature of the industry.
I daresay few Australian wine companies have litigated in offshore jurisdictions for breach of distribution agreements. Certainly, this could only be contemplated by the largest wine producers.
This means a key feature of any export arrangement must be dealing with the financial risk of not being paid, as well as what happens in the market place, if a distributor ceases performance.
Payment before delivery on Bill of Lading or, dealing only where credit insurance is available is mandatory.
It is not worth doing business in any other circumstances due to credit risk and impracticality of recovery.
There is, as in Australia, a risk the importer will become insolvent during the course of the distribution contract.
The further away from the market place the less “local” knowledge the winemaker will have regarding the credit worthiness and business reputation of the people with whom it is dealing. Winemakers must carry out proper due diligence including visiting the market place, and carrying out financial and personal checks – and a proper internal check list should be developed.
It may be possible to negotiate an Australian application of laws and jurisdiction clause which may at least give your client the opportunity to litigate in its own backyard. This contract should be written preferably in English pursuant to Australian law and commercial practice.
DOMESTIC DISTRIBUTION CONTRACTS
It is of fundamental importance to wine producers to achieve contractual provisions making the law of their State the applicable or governing law for the purposes of the contract and giving exclusive jurisdiction to the Courts of their State to determine any dispute under the contract.
OVERSEAS IMPORTATION /DISTRIBUTION AGREEMENTS
Of great importance for Australian wine producers who enter into importation/distribution agreements with overseas entities, is to ensure the contract is to be governed by Australian law and for Australian courts to have exclusive jurisdiction to hear any disputes arising in relation to the contract.
If possible, the wine producer should press to have the law of their State and the Courts of that State, as the relevant law and applicable courts.
If one cannot negotiate exclusive jurisdiction then one should seek concurrent jurisdiction.
When; or if, a dispute occurs the vital importance of these provisions will became apparent as the party who can litigate in its own backyard will have an enormous advantage in terms of legal costs, time, administrative costs and understanding of the process.
There is also local knowledge including things such as the ability to access suitable legal representation.
The difference in overall costs to the business will not just be “chalk and cheese” but truly enormous.
This is worth fighting for notwithstanding any discussion about the enforceability of “forum shopping” type clauses.
The fall back of a neutral jurisdiction such as the UK, with a reliable legal system and good courts, is a possibility.
In terms of commercial practice, it is useful if the contract is executed by the Australian producer in its home jurisdiction, preferably as the party signing last and accepting the contract.
This is worth arranging so as to emphasise the connection of the contract and the home jurisdiction.
PERIOD OF CONTRACT AND METHOD AND GROUNDS OF TERMINATION
Brand development in a market takes planning, resources and time.
The results may accumulate slowly at first. Distributors do not want to invest time and resources in building the brand presence over the first few years only to find that the wine producer moves onto, for example, a larger distributor.
The problem is that neither party wishes to be locked in an arrangement which is not working from their perspective, on the one hand, but does not wish to be dropped, where the arrangement is working from their perspective, on the other.
Conversely, wine producers do not wish to be bumped out of a distributor’s list if, for example, the distributor is offered a larger, more established, comparable, brand.
Therein lies a dilemma of great importance.
Being locked into an underperforming distributor is a serious matter with potentially serious financial repercussions including business failure at worst; or stagnation at best.
During the pre GFC Australian wine boom in the US, many American importer distributors sought “evergreen” contracts which renewed automatically if certain minimum performance standards were met. This was probably a feature of a booming market.
Realistically, a contract term of three or five years with some form of renewal agreement seems to represent a balance of interests.
The more unknown parties are to each other; and the more uncertain the outcome, the shorter the term should be.
Another major issue is the need to agree to marketing plans and sales targets and to decide what, if any, rights of termination exist for non-achievement.
Also significant is to agree whether the distributor can take on “competitive” brands without breaching the contract, and, if so, in what circumstances.
CONSEQUENCES UPON TERMINATION
These consequences need to be agreed and clearly dealt with in the contract to avoid disputation.
Matters to consider include the right to the re-purchase unsold product at cost (or for it to be purchased by an incoming distributor); delivery up of merchandising and sale material; payment of all money owing without abatement and covenants to act in good faith in relation during any transition period.
Also, what happens regarding ordered but undelivered goods?
PAYMENT OF COMPENSATION UPON TERMINATION
Clauses which seek to expand the compensation payable by a wine company beyond ordinary damages for breach of contract to include a compensation payment by a winemaker for not renewing a distribution agreement are problematic.
Again, during the pre GFC wine export boom some importer distributions in the US (and to an extent in the UK) sought payment of compensation for loss of future sales commission which they would suffer if the brand where taken elsewhere based upon their “right” to share in the brand goodwill built up during the distribution period.
This is arguably “double dipping” and represents the acceptance of a possibly significant contingent liability of unknown proportions by the winemaker.
A public company would need to recognise this contingent liability in its accounts.
Contact: Mark Hamilton. Phone: 61 8 8231 0088. Email: MHamilton@gropehamiltonlawyers.com.au.
Mark Hamilton of Grope Hamilton Lawyers in Adelaide who holds a Bachelor of Law and Masters of Laws (Commercial) provides specialist wine law services. He has substantial wine sector experience through his involvement with Hamilton’s Ewell Vineyards.