Ending a distributor agreement in Mexico

If you are reading this because the relationship has already gone wrong, the useful news first. Mexico does not have the statutory indemnity that European companies expect, because European companies are used to their own law.

In the EU, Directive 86/653 on self-employed commercial agents gives an agent a right to an indemnity or to compensation for damage on termination, and member state implementations of it are the reason a European principal's first question is always "what will this cost me". Mexican commercial law contains no equivalent regime for distributors. The Codigo de Comercio regulates the comision mercantil, a different and narrower relationship, and a distribution agreement is generally treated as an atypical contract governed by what the parties actually agreed and by general contract principles.

So there is no automatic goodwill payment, no statutory formula based on years of service, and no non-derogable minimum. That is a materially better position than the one you would be in terminating a Spanish or German agent.

The exposure is somewhere else, and it is mostly not legal.

Where the legal risk actually sits

Terminating an open-ended contract without reasonable notice. Where a distribution agreement has no fixed term, Mexican courts have been prepared to find that abrupt termination gives rise to damages, on general principles about the abusive exercise of a right and about acting in good faith. We want to be precise about the sourcing: this proposition reaches us through practitioner commentary reporting decisions of the Suprema Corte de Justicia de la Nacion, and we have not read the underlying theses in the Semanario Judicial de la Federacion. Treat it as a real risk to be managed rather than a settled rule you can compute, and get a Mexican litigator's view on your specific facts.

The practical answer is the same either way: give notice, in writing, of a length that is defensible against the life of the relationship and the investments the distributor made at your request. Six months is a common contractual figure. Whatever you choose, write it into the contract at the start, because a notice period agreed in advance is far easier to defend than one invented at the end.

Re-characterisation. If the arrangement in substance looks like agency rather than distribution, with the distributor selling in your name and for your account rather than buying and reselling, a court may treat it as something other than what the contract calls it. Colombia takes this considerably further, and it is worth understanding the contrast: see what it costs to end a Colombian distribution agreement, where article 1324 of the Codigo de Comercio does provide a formula and article 1328 makes Colombian law non-negotiable.

Inventory and orders in the pipeline. Ordinary contract exposure, and the most common actual dispute. Say in the contract what happens to unsold stock and to orders accepted but not shipped.

Where the real risk sits

Three practical holds, and they matter more than the law.

Your NOM certificates are in their name. The certificate is issued to a Mexican legal person, and if the distributor is your importer they are usually that person. Changing distributor means re-certifying, which is months. See who holds your NOM certificate.

Your import registration is theirs. A foreign company generally cannot register in the Padron de Importadores, so the distributor imports. When they stop, your goods stop until a new importer is in place and certified. See why a European company cannot be its own importer.

Your trademark may be theirs. Mexico operates a first to file trademark system under the Ley Federal de Proteccion a la Propiedad Industrial. If your distributor registered your brand in Mexico, in their own name, they own it there, and your prior use in Europe does not automatically defeat them. Recovering it is possible on several grounds, including bad faith, and it is litigation rather than administration.

Stack those and a distributor who has done nothing legally wrong can still make leaving them slow and expensive. That is not a legal problem with a legal fix. It is a structural problem that had to be fixed at the start.

What to fix before you sign the next one

If you are about to appoint a distributor, this is the section that pays for itself.

1. Register your trademark in Mexico yourself, before you appoint anyone. It is the cheapest insurance in the whole entry and it is routinely skipped.
2. Agree a notice period in writing, and make it long enough to be defensible.
3. Set a fixed term with renewal, rather than an open-ended contract. A term that expires is a cleaner exit than a contract that has to be terminated.
4. Deal with the certificates explicitly. Either hold them yourself through a Mexican entity, or write a transfer and cooperation obligation with a defined timetable and a consequence for breach. The second is weaker than it sounds because the certification body is not bound by your contract, but it is better than silence.
5. Say what happens to inventory, pipeline orders and customer data on termination.
6. Choose the dispute mechanism with your eyes open. Arbitration is generally enforceable in Mexico, which is a New York Convention state. That does not help with the certificates, which is why the certificates are point four.
7. Avoid exclusivity in year one, or grant it against a minimum. Exclusivity given away for nothing is the concession that is hardest to reverse.

For the selection process itself, finding the right distributor in Mexico covers what to check before you get here, and do you need a Mexican company to sell in Mexico covers the structural alternative.

Common questions

Is there compensation for terminating a distributor in Mexico?

There is no statutory indemnity comparable to the EU commercial agents regime. Compensation is a matter of what the contract provides plus any damages a court awards, and the main damages risk is terminating an open-ended agreement without reasonable notice.

Can I terminate a Mexican distributor without cause?

Generally yes, where the contract permits it and you give the agreed notice. The risk rises where the agreement has no fixed term, no notice provision, and the distributor made investments at your request, because that is the pattern in which abrupt termination has been challenged.

My Mexican distributor registered my trademark. What now?

Mexico is a first to file jurisdiction under the Ley Federal de Proteccion a la Propiedad Industrial, so the registration is theirs until it is successfully challenged. Challenges are possible, including on bad faith grounds, but this is litigation. Registering the mark yourself before appointing anyone avoids the whole problem.

Can my distribution contract be governed by Danish or Swedish law?

For a genuine distribution relationship, a foreign governing law clause is generally workable, and arbitration is enforceable in Mexico. It is a weaker protection than it looks, because it does not touch the certificates or the import registration, and because it does not help if the relationship is re-characterised. Colombia, by contrast, expressly voids such clauses for agency.