Terminating a Guatemalan distributor, and whether Swedish law can govern

Guatemala had a reputation, deserved in its time, as one of the hardest places in the Americas to end a distribution relationship. That reputation was formed under an older version of the law and it has outlived the reforms.

We should be direct about the sourcing before going further. The propositions below come from Guatemalan practitioner commentary on the Codigo de Comercio, Decreto 2-70, and on a Corte de Constitucionalidad decision concerning arbitration. We have not read the code articles or the judgment in their original text. Treat this as an orientation to the shape of the problem and take Guatemalan advice on your specific contract, which for a matter this consequential you should be doing anyway.

The structure of the rules

Distribution, agency and representation are dealt with in the Codigo de Comercio, principally at articles 280, 283, 286 bis, 290 and 291. The relevant features for a European principal:

Article 290 sets out the causes for termination. Terminating for a recognised cause is clean. Terminating without one exposes the principal to damages, and the assessment reflects what the distributor put into building the business.

Article 291 addresses jurisdiction, and does more than that. On the reading available to us it requires judicial proceedings to take place, be conducted and be resolved in Guatemala in accordance with Guatemalan law. That is not merely a forum rule. If the dispute goes to court, Guatemalan substantive law applies whatever your contract says.

That last point is the one that trips up European drafting, and it is the reason the next section matters.

Can you choose Swedish or Danish law?

Generally yes, on the commentary available to us, but with two limits rather than one. Article 31 of the Ley del Organismo Judicial permits parties to submit their acts and transactions to a chosen law, unless that submission is contrary to express prohibitory laws or to public order. Both limits matter here, because article 290 is described by Guatemalan practitioners as imperative, which makes it an obvious candidate for the first of them.

And arbitration abroad has been upheld. The Corte de Constitucionalidad has recognised the validity of arbitration outside Guatemala in international commercial disputes, which is what makes a Stockholm or Miami arbitration clause workable rather than decorative.

So the drafting position is better than in Colombia, where article 1328 of that country's Codigo de Comercio expressly voids a foreign governing law clause for agency performed in Colombia: see what it costs to end a Colombian distribution agreement. Guatemala allows the choice; Colombia does not.

But note the asymmetry inside Guatemalan law itself. If your contract sends disputes to arbitration abroad, the foreign law and the foreign seat can hold. If it does not, and the matter reaches a court, article 291 points at a Guatemalan court resolving it in accordance with Guatemalan law. Choosing foreign law and then leaving disputes to the courts gives you close to nothing: it is the arbitration clause, not the governing law clause, that does the work.

What to actually do

Put arbitration in the contract, seated outside Guatemala. Guatemala is a party to the New York Convention, so an award is enforceable, and this is the mechanism that makes your governing law choice real.

Choose a recognised institution and a seat with a functioning supervisory court. An ad hoc clause naming no institution is a dispute about the dispute.

Set a fixed term with express renewal, rather than an open-ended relationship. An expiring term is a cleaner end than a termination and it reduces the argument about cause.

Document performance contemporaneously. Because the exposure turns on whether there was a recognised cause, a file built over two years is worth vastly more than one assembled in the month you decide to leave. Targets, written warnings, responses, dated.

Deal with the registration. If the distributor holds sanitary registrations for your products, the legal analysis is only half the problem, and in a regional entry they may hold them in several countries: see do you need a separate product registration in every Central American country.

Register your trademark yourself, first. The cheapest insurance in the entry, and it is not covered by any of the above.

The wider point

Across the four markets we cover, the same commercial question has four different legal answers. Mexico gives the distributor no statutory indemnity at all. Colombia gives a formula and makes its own law mandatory. Chile sits between. Guatemala allows foreign law and arbitration abroad but keeps its courts for court proceedings.

One contract template used across all four is how European companies acquire exposure they did not price. See ending a distributor agreement in Mexico for the contrast, and can one distributor cover all of Central America for the regional version of the problem.

Common questions

Can I terminate a Guatemalan distributor without cause?

You can end the relationship, but terminating without one of the causes the Codigo de Comercio recognises exposes you to damages reflecting what the distributor invested in developing the business. Terminating for a recognised cause, properly documented, is the clean route.

Can a Guatemalan distribution contract be governed by foreign law?

Generally yes, but only effectively if disputes go to arbitration abroad. Article 31 of the Ley del Organismo Judicial permits a chosen foreign law subject to express prohibitory laws and to public order, while article 291 of the Codigo de Comercio requires judicial proceedings to be resolved in Guatemala in accordance with Guatemalan law. A foreign law clause without an arbitration clause is close to inert. It is still a better position than Colombia, which voids such clauses outright for agency.

Is arbitration outside Guatemala enforceable?

The Corte de Constitucionalidad has upheld arbitration abroad in international commercial disputes, and Guatemala is a New York Convention state, so a foreign award is enforceable. Arbitration is what makes a foreign governing law clause effective in practice.

Does Guatemalan law require compensation for a terminated distributor?

There is no simple statutory formula of the Colombian kind. The exposure is damages where termination was without a cause the code recognises, assessed by reference to the distributor's investment in building the business.