Matter note: a cross-border distribution or agency agreement in Asia

Cross-border distribution and agency agreements look straightforward at the heads-of-terms stage. The product exists, the territory is agreed, the parties have shaken hands. What follows – governing law, the forum clause, and the day-two operating reality across two or more Asian legal systems – is where the agreement either holds or fractures.

A distribution or agency agreement crossing the Mainland China–Hong Kong boundary, or spanning multiple Asian markets from a Hong Kong hub, engages at least two distinct legal orders. The choice of governing law and the forum clause are not administrative formalities; they determine which court or tribunal resolves a dispute, which mandatory rules override the parties' agreement, and whether a judgment or award can be enforced where the counterparty's assets actually sit. In our cross-border practice, the structural decisions made at drafting stage routinely define the outcome of any dispute that follows, sometimes years later.

This matter note describes, in anonymised form, a representative cross-border distribution engagement on which our desk has worked. The fact pattern draws on themes we see repeatedly. No client is identified; no party is named; no figures are given unless independently verified.

What was the situation and the commercial constraint?

A mid-sized Asian goods group – the principal – had built a regional distribution network across several markets over a number of years. Its holding entity sat in Hong Kong. Distribution rights in individual markets were held by separately incorporated local counterparties, some of which were genuinely independent businesses and some of which were related-party vehicles. The agreements governing these relationships had accumulated over time: some were governed by the law of the relevant market jurisdiction, others by a vague reference to "international trade law" with no identified forum, and a small number had Hong Kong governing-law clauses with no accompanying forum clause.

The constraint was structural. The group was not in dispute, at least not yet. It was preparing for a growth round, and the incoming investor's counsel had identified the distribution agreement stack as a diligence risk. The concern was legitimate: if any material distributor defaulted or terminated, the group had no clear, enforceable route to recover territory, protect brand standards, or seek damages in a predictable forum. The agreements also contained no consistent choice of law, meaning that the mandatory rules of several different jurisdictions – including rules on commercial agent termination compensation, minimum notice periods, and post-termination restraints – potentially applied to different parts of the same network.

The group's general counsel brought the matter to us in the second quarter of a recent year, with a six-week window before the investor's legal-due-diligence process was scheduled to close.

What was the legal issue and why did it matter?

The core legal issue was not, in fact, a dispute. It was a governance gap that would have become a dispute in the wrong circumstances. Three interlocking problems drove the work.

First, the governing-law patchwork created exposure to mandatory rules in markets where the group had not intended to create locally regulated commercial-agency relationships. In several Asian jurisdictions, a commercial agent who meets certain factual criteria – exclusivity, a defined territory, acting on behalf of a principal with authority to bind it – acquires statutory compensation rights on termination, regardless of what the written agreement says. The group's agreements were drafted as distribution agreements (the distributor buys and resells; no agency relationship), but several had operational features that blurred this line: the counterparty was referred to in correspondence as the "local agent", was required to follow pricing guidance, and operated under brand standards that limited its commercial discretion significantly.

Second, the forum clauses were inconsistent and, in two cases, entirely absent. An agreement without a forum clause does not mean the parties have agreed to litigate in no court; it means the parties have given up the ability to choose their court, and any court with jurisdictional grounds can take the matter. For a group with assets, brand rights, and counterparties across multiple markets, this is an asymmetric risk: the counterparty files where it chooses, the group must respond there, and any resulting judgment may or may not be recognised where it needs to be enforced.

Third, the post-termination provisions were either absent or unenforceable in the jurisdictions where they were most needed. Restraint-of-trade clauses in distribution and agency agreements are treated very differently across Asian legal systems. What is enforceable in Hong Kong under common-law principles – a geographically scoped, time-limited restriction on competing activities – may be void, partially enforceable, or subject to statutory override in other markets. The group's agreements had been drafted without jurisdiction-specific advice on this point.

What route was chosen and what were the turning points?

The approach was to work outward from Hong Kong. The group's holding entity was already incorporated in Hong Kong; the group's principal place of coordination was Hong Kong; and Hong Kong common law provides a well-settled body of contract-law doctrine that is familiar to commercial counterparties across the region. That made Hong Kong governing law the rational anchor for the revised agreement structure.

The Hong Kong legal system – a common-law system with English as an official working language of the courts – gives parties strong confidence in contractual predictability. Agreements governed by Hong Kong law are construed and enforced by courts that apply recognisable principles of offer, acceptance, consideration, and good faith implied terms. The contra proferentem rule (where ambiguous terms are construed against the drafter) and the doctrine of entire agreement are well understood by commercial counterparties from Mainland China, Southeast Asia, and Europe alike.

The first turning point was the decision on forum. The group had initially assumed that arbitration was automatically preferable to court litigation for cross-border commercial agreements. That assumption needed examination. Arbitration under the HKIAC Administered Arbitration Rules – the 2024 Rules, effective 1 June 2024 – offers confidentiality, finality, and enforceability across New York Convention states and, for Mainland China counterparties, under the 1999 Arrangement and the 2020 Supplemental Arrangement between Hong Kong and the Mainland. For a high-value, long-term distribution relationship where brand and trade-secret issues were likely to surface in any dispute, arbitration with a confidentiality obligation was appropriate.

However, for a subset of smaller, shorter-term agreements – particularly where the counterparty was a small local operator with limited assets outside its home market – court litigation under the Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (Cap. 645), in force since 29 January 2024, offered a more direct enforcement route for Mainland-registered counterparties. Under Cap. 645, a money judgment of the Court of First Instance of the High Court of Hong Kong can be registered and enforced on the Mainland without relitigating the merits. The old requirement for an exclusive jurisdiction clause was removed under the current regime; a connection-based test now applies. For the group's Mainland-registered distributors, this was a material practical advantage over arbitration in cases where the dispute was likely to be a straightforward debt claim.

The second turning point was the agency/distribution classification review. Counsel on our desk examined the operational features of each agreement against the factual criteria for commercial-agency status in the relevant jurisdictions. For three counterparties, the conclusion was that the agreement, regardless of its label, had the operational hallmarks of a commercial agency. For those three, the governing-law and forum clause were necessary but not sufficient: the mandatory rules of the counterparty's home jurisdiction applied to termination compensation regardless of the chosen law. The solution was to acknowledge the commercial-agency classification in the revised agreement, cap the compensation exposure contractually where the relevant jurisdiction permitted such a cap, and in one case restructure the relationship as a genuine arm's-length distribution arrangement to remove the agency characteristics.

The third turning point was post-termination drafting. Hong Kong common law permits reasonably scoped post-termination restrictions. The test is whether the restriction protects a legitimate business interest and goes no further than necessary. For each market, the agreed restriction was scoped to the group's actual customer relationships and brand in that territory, with a time period calibrated to the period needed to establish a replacement distribution relationship. Where the home jurisdiction of the counterparty imposed a statutory maximum on post-termination restrictions, the agreement was capped accordingly, with an acknowledgement that the parties intended the Hong Kong-law formulation to apply where the foreign-law maximum was not triggered.

What was the sequence of the work?

The engagement ran in four stages over approximately six weeks.

The first stage was an audit. Every distribution and agency agreement in the group's current portfolio was reviewed against a consistent set of criteria: governing law, forum, termination provisions, post-termination restrictions, brand-standard obligations, and any features with commercial-agency characteristics. The output was a risk-ranked schedule, with three tiers: agreements that needed immediate revision before the investor diligence closed, agreements that needed revision within a defined post-completion period, and agreements that were adequate as drafted.

The second stage was template drafting. A master distribution agreement and a master agency agreement, both governed by Hong Kong law and with an HKIAC arbitration clause, were prepared as the group's standard-form documents going forward. The templates included jurisdiction-specific schedule positions for the five markets in which the group operated, addressing the mandatory rules in each. The templates were drafted in English, with the instruction that locally admitted counsel in each market would need to confirm the local-law schedule positions – a step that went beyond our mandate as international and cross-border counsel, and which was handled by allied counsel admitted in the relevant jurisdictions.

The third stage was counterparty negotiation support. For the three agreements that required immediate revision, we supported the group's general counsel in the counterparty negotiation. The principal concern from counterparties was the shift to HKIAC arbitration from the local-court forum that some of the original agreements had specified. The commercial response – that HKIAC arbitration is faster, more confidential, and produces an award enforceable across a broader range of markets than a judgment from any single jurisdiction's courts – was generally accepted. One counterparty required a concession on the seat of the emergency arbitration; the agreement was adjusted to specify Hong Kong as the seat, which engaged the Mainland interim-measures Arrangement of 1 October 2019, allowing the group to seek interim relief from Mainland courts in support of any Hong Kong-seated arbitration.

The fourth stage was investor-package preparation. A legal-due-diligence memorandum was prepared setting out the revised position, the risk-ranked schedule, and the action plan for the post-completion revision tier. The memorandum identified the governing instrument for each agreement, the forum, and the enforcement route. This was the document that the incoming investor's counsel reviewed; the diligence process closed without material issue on the distribution-agreement stack.

What was the outcome and the transferable lesson?

The qualitative outcome was that the group closed the growth round on schedule. The distribution-agreement risk, which had been flagged as a potential condition to closing, was managed to a monitoring point rather than a deal condition. The revised template structure gave the group a consistent governing-law and forum position across its network for the first time.

The transferable lesson operates at two levels.

At the immediate level: the governing-law and forum clause in a distribution or agency agreement is not a boilerplate formality. It is the structural decision that determines every subsequent question of enforcement, termination, and brand protection. A clause drafted without reference to where the assets, the counterparty, and the dispute are likely to sit is a clause that will fail when it is most needed. In our cross-border practice, we regularly advise on agreements of this kind, and the pattern is consistent: the most expensive restructuring is the one that happens after the counterparty has defaulted.

At the strategic level: the choice between arbitration and court litigation for a cross-border agreement in Asia is not a binary preference question. It is a function of the counterparty's profile, the asset location, the likely dispute type, and the enforcement route that produces the fastest, most certain result in the relevant market. The Mainland Judgments (Reciprocal Enforcement) Ordinance (Cap. 645), in force since 29 January 2024, makes court litigation under Hong Kong governing law a materially stronger option for Mainland-counterparty agreements than it was under the prior regime. Counsel who defaults to arbitration without examining this option may be leaving a faster enforcement route on the table.

The agency/distribution classification point is also transferable. In our experience, this is the most frequently overlooked risk in Asian distribution networks. A group that describes its counterparty as an "agent" in its internal correspondence, requires that counterparty to follow pricing and brand guidelines, and does not give it genuine commercial freedom in the territory has, in several Asian jurisdictions, created an agency relationship regardless of the contractual label. The mandatory rules of commercial-agency statutes in those jurisdictions – minimum notice periods, compensation on termination without cause, restrictions on post-termination restraints – apply whether the parties intended them to or not. The solution is to review the operational reality of each counterparty relationship alongside the written agreement, and to make a deliberate, informed choice about which legal classification applies before the relationship is established or revised.

For groups building or rationalising cross-border distribution or agency networks in Asia, the sequencing matters: audit first, template second, negotiation third. A template that does not account for the mandatory rules in each market jurisdiction is a template that will create the same risk it was intended to remove.

For a preliminary read on your cross-border distribution or agency position and the enforcement route available across the relevant jurisdictions, email info@lockhartyip.com.

Related practices

• Corporate Counsel – cross-border agreements, governance, and commercial structures from a Hong Kong hub
• Disputes & Arbitration – enforcement strategy and HKIAC proceedings across Greater China and beyond

Speak with Lockhart & Yip

For a scoped view of your matter, contact info@lockhartyip.com. Discuss your matter →

Related

• Corporate Counsel
• Shareholders Agreement Terms Singapore Joint Venture Singapore
• Shareholders Agreement Terms Mainland China Joint Venture Mainland 5

This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.