Distribution agreements in the Dominican Republic: the Law 173 problem

Of all the surprises awaiting a foreign company entering the Dominican market, none costs more than this one: appointing a local distributor is easy, and removing one can be extremely expensive. Law 173 on the Protection of Import Agents of Goods and Products exists to protect Dominican concessionaires who invest in developing a foreign brand’s market, and it does so by making unilateral termination costly for the supplier.

What the law does

Law 173 recognises that a local distributor typically invests heavily — in inventory, staff, marketing, service infrastructure and customer relationships — to build demand for a product it does not own. Its protective mechanism responds to that: where the relationship falls within the law’s scope, the supplier cannot simply terminate, decline to renew or substitute the distributor without just cause. Doing so exposes the supplier to compensation calculated by reference to the value the distributor built.

Crucially, this protection does not depend on the parties having agreed to it. It attaches by operation of law where the conditions are met, which means a contract governed by foreign law and providing for termination on thirty days’ notice may not deliver what the supplier believes it has bought.

Registration is the trigger to watch

The protective regime is associated with registration of the relationship with the Central Bank. Distributors are generally well aware of this; foreign suppliers frequently are not. It is common for a supplier to discover, at the moment it wants to change distributors, that the relationship was registered years earlier and the counterparty is standing on a statutory right the supplier never contemplated.

The practical lesson is that the terms of the appointment matter far less than the legal frame the appointment falls into. A short trial arrangement, an informal supply relationship that grew, or an exclusive appointment made casually by email can each end up inside the regime.

The DR-CAFTA change

The position shifted with the entry into force of DR-CAFTA. For qualifying agreements with United States suppliers concluded after that point, the parties’ own contractual terms — including provisions on term, termination and dispute resolution — are given effect rather than the mandatory statutory regime, subject to the conditions and transitional rules that apply.

This is a genuine and valuable difference for US companies, but it is not a blanket exemption, and it turns on the nature of the parties, the timing and the terms of the agreement. It is precisely the sort of question that should be answered when the contract is drafted, because the answer determines what the contract can usefully say.

How to structure an entry

Foreign suppliers have more options than they usually realise, and the choice belongs at the start:

• Distribution with a properly drafted agreement, written with the applicable regime in view rather than lifted from a template used elsewhere.
• Non-exclusive appointment, or defined territories and product lines, so that a change affects part of the arrangement rather than all of it.
• Selling through your own Dominican entity — a subsidiary rather than a third-party distributor — which changes the analysis entirely.
• Clear performance standards defined in advance, so that if just cause ever has to be established, the record supports it.

If the relationship has already soured

Exits are still possible, but they are negotiations rather than notices. What determines the outcome is the documentary record: the performance standards agreed, the breaches evidenced, the communications preserved, and whether the relationship was registered. Suppliers who have documented a genuine performance failure over time are in a very different position from those who simply found a better partner.

Both the structuring and the exit are handled by our corporate and contracts desk, and both are considerably cheaper when the conversation happens before the appointment rather than after.

Frequently asked questions

Can I terminate a Dominican distributor on notice under my contract?

Not necessarily. Where Law 173 applies, protection attaches by operation of law and generally requires just cause or compensation, regardless of a contractual notice provision or a foreign governing law clause.

Does DR-CAFTA exempt US companies from Law 173?

It changed the position for qualifying agreements with US suppliers concluded after entry into force, giving effect to the parties’ own terms. It is not a blanket exemption and depends on the parties, timing and terms, so it should be assessed when the contract is drafted.

What counts as just cause for termination?

It rests on the record rather than on the supplier’s preference. Documented performance failures against standards agreed in advance are a very different position from having found a better partner.

How can a foreign supplier reduce this exposure?

By deciding the structure before appointing: a properly drafted agreement written for the applicable regime, non-exclusive or narrowly defined appointments, clear performance standards, or selling through its own Dominican subsidiary.