Agency, Representation and Distribution Agreements in Asia Charles Routh
International Trade for the Nonspecialist, ALI-ABA, 2000.
I. Foreign Laws Governing Rights and Duties of Commercial Agents, Distributors and Franchisees
A. Japan.1
There is no uniform law dealing with distribution, consignment or agency agreements in Japan. Instead some aspects are provided for in the Civil Code or the Commercial Code.2 The law of contracts governs the agreements, as does the law of sales and the law of agency (if there is an agency relationship). In addition the antimonopoly law, the security interest law, the law concerning debtor and creditor relationships and the tax law have significant impacts on such agreements in Japan. International agreements may be governed in part by laws concerning international trade, conflict of laws and foreign exchange. Courts also generally enforce contractual provisions which are not strictly covered by statutory provisions or even conflict with statutory provisions if they are not in violation of the good faith rule or public order.3 In addition, in some cases, such as termination of a distributorship discussed infra, judge made law is very important.
1. Distributorship. Distributorships are the most frequently used method of sales representations in Japan. There is no strict legal definition of the term "distributor" or "distributorship". A distributor differs from an agent or consignee in that the distributor normally has the ownership right to, as well as possession of, the goods sold. However, for security purposes, in some cases the ownership right to the goods is retailed by the supplier. Even here, the distributor is entitled to sell the goods as their own in the ordinary course of business. The relationship between the distributor and the supplier is a vendor-vendee. The distributor is not the agent of the supplier and has no fiduciary duties to the supplier in the absence of contractual provisions providing for such duties. Absent contractual provisions, the distributor is free to handle competing products and to sell goods to anyone chosen. Indeed in certain cases, a restriction on the free choice of customers may violate certain provisions of the antimonopoly law.
The distributor bears the risk of loss on credit sales and from unsold goods. All of the risk of damages to or loss of the goods after delivery is on the distributor, even if the ownership right to the goods is retained by the supplier as a security device. It is frequently provided by contract, but certainly not required, that the distributor has an exclusive territory and will not handle products of competing suppliers.
Japan does not have a uniform system of secured transactions similar to Article 9 of the UCC. However there are certain security provisions which apply to sale of goods. The seller of personal property has a preferential right (sakidori-tokken), a security interest, created by statute without any documentation or registration, to secure payment for goods sold. However, in order to realize such security interest, the merchandise must be foreclosed in a rather cumbersome procedure. In some cases the proceeds are also subject to the preferential right. Priority is as provided in the Civil Code.4
There is also a title transfer security interest, judicially created, which has no statutory basis. Where such a security interest is created in a distributorship agreement, the goods sold to the distributor are reassigned back to the supplier when they are sold. If the goods are sold in the ordinary course, title passes to the purchaser. Against a third party, such as other obligees of the distributor, the supplier has ownership rights to the goods. This third party can not attach or execute on the goods to collect from the distributor. Upon default the supplier does not need to go through the statutory foreclosure procedure in order to realize on the security interest.
A third security interest is to retain title by the seller until full payment is made. In this case, priority over other obligees of the distributor is even more clearly established. In some circumstances, the distributor is free to resell the goods in the ordinary course of business, with good title transferring to the purchaser of the goods. This is a creation of the contract between the supplier and the distributor and, like the title transfer security interest, provides for a faster realization on the security interest.
A continuing suretyship is widely used for Japanese distributorship relationships, although mostly for domestic distributorships. The surety of a continuing suretyship guarantees the payment owed or to be owed by the distributor to the supplier. Ordinarily the amount guaranteed and the duration of the surety relationship are not fixed. This creates some problems which has led to a fair amount of litigation (for Japan) and judicially created limitations of the liability to that reasonably contemplated by the surety. It is also thought that a continuing suretyship could be terminated if there has been an unforeseeable and material changes in the circumstances which would seriously affect the liability of the surety.
Unilateral termination of a distributorship is not covered by any specific statutory provision in Japan. However, if the distributorship is not for a set period of time and if the distributor makes a substantial investment in reselling the supplier's products in anticipation that the agreement would continue for a long period of time, the parties are not free to arbitrarily terminate the agreement. Courts have laid down restrictions on arbitrary or immediate termination of agreements by the supplier without good cause. Termination for cause must be based on a breach so serious that it justifies the imposition of the termination of the distributorship on the distributor. Lost profits for a year is the damages which is most frequently awarded, although the circumstances of the breach severity, length of time of the distributorship, prior notice, amount of investment, or level of business obtained all have an impact on the amount of the damages.
It is not clear whether similar damages are available in cases of refusal to renew a distributorship of a fixed term. However, if the term is relatively short, has been consistently renewed in the past and the parties reasonably anticipated that it would be renewed, the distributor termination would probably be subject to the same damages as termination of an indefinite period distributorship. However, a fixed term is advisable for the supplier if it is possible. Grounds for termination should be as concrete as possible, with standards for performance spelled out. The agreement may also spell out certain payments or compensation for termination for any reason as a way of avoiding the uncertainty of a damages claim.
2. Agency. The word agency (dairi) has a broad meaning and is rather a general term. Under the Civil and Commercial Codes, the term describes one empowered to act on behalf of the principal. The agent is not a party to a sales contract at all but rather if the agent executes a contract on behalf of the principal, the principal becomes the seller. An agent as a sales representative is an independent merchant who makes repeated sales of the goods of his principal. Ordinarily the sales agent does not have possession of the goods but only has samples. The agent is not an employee of the principal. The sales agent is authorized to execute a contract for the sale of goods of the principal, which contract is directly binding on the principal.5 The principal may, by contract limit the authority of the sales agent to, for example, only certain goods or certain territory. In certain cases, the act of an agent outside the authority of the agent, may still be binding on the principal under "apparent agency" (hyoken-dairi), when the principal by its acts leads a third party to believe that the agent is within the agent's authority.
The agent has a fiduciary responsibility to the principal. Thus the agent can not act for a competitor without the permission of the principal. Unless otherwise agreed in the contract, the agent is not responsible for payment by the customer.
Under the Commercial Code, a sales agency agreement may be terminated unilaterally without notice if the termination is unavoidable for a reason beyond the control of the parties or with two months notice if the agreement does not stipulate the term.6 If the sales agent has a substantial investment, some authorities believe that more damages might be awarded if there is a premature or arbitrary termination.
3. Consignee. Consignment is not generally provided for in the Civil and Commercial codes. However the Commercial Code does have the concept of a commission agency (toiya), which term is defined as "a person whose business it is to sell or purchase goods in his own name for [the account of] other persons."7 It is occasionally used for sale in Japan, although most frequently for products such as wood products, fish, etc. The Consignor has the ownership rights to the goods consigned to the consignee and the latter sells them for the account of the consignor. Because of the fiduciary duty created and the reliance on the consignee's knowledge of prospective purchasers, the Commercial Code requires that as to the purchase by a consignee's customer of goods from the consignee, the consignee shall perform the obligations of the purchaser if the purchaser fails do to so.8
There is no established law related to damages for termination of a consignee.
B. Korea
Korea also has a civil law system. The basic legal concepts are very similar to other civil law countries. An agent acting within the scope of his authority for his principal binds the principal. Civil Code Art. 114. The basic agency law in Korea is very similar to western agency law. The appointment, maintenance and termination of an agent in Korea is primarily a matter of contract. There are no statutory provisions dealing with termination of an agent. Exclusive and nonexclusive arrangements are possible, as are territorial restrictions. The rules for determining the circumstances under which an agent binds its principal and when apparent agency applies are set forth in Civil Code Arts. 114-136.
Establishing a distribution agreement is fairly easy in Korea. However there are certain unique aspects in Korea other than compliance with fair trade laws and registration with the government. These include two unique parties to any import transaction: a licensed trader and an offer agent. A licensed trader (one possessing a Class A Traders License from the government) is the only party who can arrange imports into Korea. An offer agent must provide "offer sheets" for foreign products in order to secure an import license.
For a distributor to import products, the distributor must either have a traders license itself or deal through a business which does. Since it is difficult to become a licensed trader and the fees of a licensed trader are relatively small, most distributors deal through the licensed trader. The participation of the licensed trader does not affect the liability exposure of the supplier to the Korean customer.
The "offer agent" is a hold over from times when Korea had limited foreign trade and most distributors did not have the size to obtain the service and support from the foreign supplier considered necessary. Consequently the government required that all foreign suppliers use a local agent to support and assist the customer. To ensure that the offer agent was used, one of the documentary requirements to obtain an import license was an offer sheet prepared by the registered offer agent which described the products, their cost and delivery terms, etc. This offer sheet was submitted to the customer who then could accept the offer which was considered to come from the foreign supplier. Today the offer agent and offer sheet survive as an anachronism in all import transactions. Although without any real use today, the need for the offer sheet survives as a requirement for an import license. The offer sheet must be prepared by a member of the Association of Foreign Trade Agents of Korea. Typically this does not replace the actual offer which may go directly from the supplier to the distributor. The offer sheet is usually considered only as a documentary requirement to get the import license. Indeed occasionally the distributor will qualify as an offer agent, thus combining the real offer with the documentary requirement.
In drafting a distributor license in Korea, one should be sure to add trader's fees and offer agent fees to the list of items such as taxes, custom duties, shipping, insurance, etc. which should be considered to be import costs. The combination of "agency" language in a distribution agreement can also lead to confusion regarding liability to the end-user in Korea. This is true particularly if the supplier initials or signs the agreement between the distributor and the end-user. Thus the supplier should be careful to state that there is no agency established and that the end-user understands that no such relationship exists or is to be implied. Specifically disclaim any agency relationship between the supplier and the distributor as being created by the distributor contract or by the offer agent agreement.
There are also requirements to report some agreements to the Korean Fair Trade Commission under the Korean Monopoly Regulation & Fair Trade Law. This includes agency agreements with a term over one year. The FTC has promulgated "Standards of Review" for such agreements which includes prohibited provisions. Anyone drafting such an agreement should get a copy of the Standards of Review to find out which provisions are prohibited.
A Commission Merchant is widely used in Korea. This is a person who effects sales or purchases of goods in his own name for the account of another person. There is a fiduciary duty established by statute. Commercial Code Arts. 104-108. By sale or purchase effected for his principal, the commission merchant directly acquires rights and incurs obligations with regard to the other party to the transaction. Commercial Code Art. 102. Goods which have been received by the commission merchant from his principal, or acquired by purchase and sale, shall be deemed to belong to the principal insofar as the commission merchant or creditors of the commission merchant are concerned. Commercial Code Art. 103
The Korean Foreign Exchange Management Law is a very comprehensive act governing not only foreign exchange but also contractual relationships, payment mechanisms, etc. between "residents" and "non-residents" of Korea. Branches, local offices and subsidiaries of foreign companies are considered "residents" even if their main office is located abroad. Previously government approval of many transactions was required. In 1992, the law was amended to adopt a "negative system" whereby most transactions are permitted unless specifically subject to prior approval by authorities such as the Ministry of Finance, Bank of Korea, or other foreign exchange banks. The law was further liberalized effective June 1, 1994. Prior approval may be required of both the underlying transaction or in some cases for payment abroad regardless of the underlying transaction. Failure to obtain the approval does not affect the validity of the transaction between the parties but may prevent remittance of foreign exchange if approval is not obtained. In addition, failure to obtain foreign exchange approval is a criminal violation which could lead to substantial fines or imprisonment. One should check with local counsel to see if a particular distribution or agency agreement may be subject to registration and approval. If a license of technology or intellectual property is involved, there is a greater likelihood that approval will be required.
In 1995, the Korean National Assembly made substantial revisions to the Commercial Code which became effective January 1, 1996. Most significantly for this subject, Art. 92-2 provides that a principal would be required to pay a terminated agent reasonable compensation for business developed by the agent which benefits the principal.
C. China
The primary law affecting distribution of foreign goods in the Peoples Republic of China is the Foreign Trade Law of China, adopted by the National People's Congress in May of 1994 which become effective as of July 1, 1994. China's foreign trade has increased dramatically from 4.7% of GNP in 1978 and 10.8% of GNP in 1988 to approximately 38% of GNP in 1993. The new Foreign Trade Law, together with recently negotiated intellectual property protections hopefully will go even further in both opening the Chinese market, providing protection of companies selling products in China and preventing piracy of U.S. goods.
A key legal concept in the Foreign Trade Law is the "Foreign Trade Operator". This refers to a legal person engaged in foreign trade. (Art. 8). Foreign Trade Operators must obtain a license from the government department in charge of foreign economic cooperation and trade under the State Council. In addition they must (1) operate under their own name and organizational setup; (2) have a clearly defined scope of foreign trade business; (3) have the funds, location and personnel necessary to carry out foreign trade; (4) import and export businesses handled through agencies must have prescribed merits or have access to goods for import or export; and (5) meet other requirements which may be established by law and regulations. Art. 9. An enterprise with foreign investment is exempt from the license requirement if they import only raw material or equipment for their own production. A company without a foreign trade operator license may contract with a foreign trade operator to act as an agent to handle transactions for the company. Art. 13.
China generally allows free export and import of goods and technologies unless otherwise prohibited by law. Art 15. Unfortunately, the areas prohibited by law seem pretty broad. They include (1) restrictions for national security or public interest reasons; (2) restrictions of exports because of inadequate supply in China; (3) restrictions of import in importing country or region due to a limited market capacity; (4) restrictions to protect development of particular Chinese industries; (5) agricultural or fishery products in any form which are competitive with a protected Chinese industry; (6) import restrictions to maintain a favorable balance of payments or for other financial reasons; or (7) restrictions to comply with international treaties or agreements. Art. 16. Recent reforms to Chinese export licensing laws substantially reduced (to about 30% of total export value) the number of commodities which requires export licenses. In addition, China may ban specific goods or technologies which are (1) a danger to national security or public interest; (2) necessary to protect life or health of Chinese people; (3) a danger to the ecology or the environment; or (4) pursuant to international treaties or agreements. Art. 17. Articles 22 to 25 of the new law govern trade in services.
D. Philippines.
Jurisprudence in the Philippines is based partly on Spanish law and partly on U.S. law. It thus has a mixed civil law and common law system. The Code of Commerce of Spain, which was made effective in the Philippines during the time when it was a Spanish colony, is still in force although it has been substantially modified over the years. Many other statutes are modeled after U.S. federal or state law, and U.S. court decisions are frequently cited in Philippine courts.
Generally contracts involving distributorships, agencies, and franchises are governed by Civil Code provisions on sales and contracts. Contracting parties may establish whatever terms and conditions they want as long as they are not contrary to law, public policy or public order. Foreign companies can engage in wholesale distribution but, in accordance with the Retail Trade Nationalization Law, retail activities are restricted to Filipinos or companies wholly owned and controlled by Filipinos.
All agreements involving exchange of technology must be submitted for registration at the Bureau of Patents, Trademarks and Technology Transfer office. The following restrictive clauses in any technology transfer agreement are prohibited: (1) Those which restrict directly or indirectly export of licensed products under technology transfer arrangement; (2) those which restrict use of technology supplied after expiration of technology transfer arrangement; (3) those which restrict manufacture of similar or competing products after expiration of technology transfer arrangement; (4) those which require payments for patents and other industrial property rights after their expiration, termination or invalidation; (5) those which provide free of charge that major improvements made by technology recipient shall be communicated to technology supplier; (6) those which require that technology recipient shall not contest validity of any of patents of technology supplier; (7) those which restrict technology recipient in non-exclusive technology transfer arrangement from obtaining patented or unpatented technology from other technology suppliers with regard to sale or manufacture of competing products; (8) those which require technology recipient to purchase its raw materials, components and equipment exclusively, or fixed percentage of requirement, from technology supplier or person designated by him; (9) those which restrict research and development activities of technology recipient designated to absorb and adapt transferred technology to local conditions or to initiate R & D programs in connection with new products, processes or equipment; (10) those which prevent technology recipient from adapting imported technology to local conditions, or introducing innovations to it, as long as it does not impair quality standards prescribed by technology supplier; (11) those which require technology recipient to keep part or all of information received under technology transfer arrangement confidential beyond reasonable period; and (12) those which exempt technology supplier from liability for nonfulfillment of his responsibilities under technology transfer arrangement and/or liability arising from third party suits brought about by use of licensed product or licensed technology.
A technology transfer agreement has a fixed term of ten years with no automatic renewal, and royalty of 5% of net sales is allowed. Royalties in excess of 5% may be allowed upon prior approval of Bureau of Patents, Trademarks and Technology Transfer.
For agents, the previous law regarding agents found in the old Code of Commerce has been superseded by the recently adopted new Civil Code. The new provisions are fairly standard with few surprises. A third party with whom the agent wishes to contract on behalf of a principal may require presentation by the agent of a power of attorney or written instructions from the principal. The agent is responsible for negligence as well as fraud.
E. Taiwan
The term "distributor", "franchise" or "dealer" is not known in the legal system in Taiwan. There are no specific laws governing such contracts except for the Foreign Trade Law promulgated in 1993 and six secondary regulations promulgated during the last few years since 1993. These govern more of the public issues, such as registration of traders, than relationships between parties. The principal of freedom of contract between parties is upheld in Taiwan as long as the agreement does not violate any statutory provisions or violate public policy or good morals. As such, the rights and obligations of distributors or franchisees are governed by general law and provisions in the Civil Code related to contracts, sales, entrustment, commercial agent and commission agent. Antitrust and competition law provisions also apply to attempts to impose such restraints as tying agreements, resale price maintenance, price fixing, division of markets, restriction of territory or business activities, etc. Some of the provisions in the Fair Trade Law, such as prohibitions on restrictions of territory or business may require prior approval from the Fair Trade Commission which is responsible for administering the Fair Trade Law.
F. Hong Kong9
No special laws have been enacted regulating the termination of agency agreements. The legislation follows English Common Law principles. The parties are to negotiate their contract conditions including provisions for termination of the relationship. Customarily the relationship is ended by serving a termination notice on the other party.
G. India
The principal-agent relationship is governed by Chapter X of the India Contract Act (Sections 1982-238). If the agency is for a fixed period, the principal must pay compensation to the agent for this revocation or termination of the agency without just cause. The agent is also liable for unjust termination. The principal may terminate an agreement prematurely if the agent is guilty of misconduct in the due discharge of his duties. Service of "reasonable" notice is required. The law does not define "reasonable" and each case is decided according to the facts. Indefinite term agreements may be terminated by the principal at any time. Service of reasonable notice of termination is advisable.
Agency agreements are also terminated by: (1) expiration of the contract term, (2) death or incapacity of the principal, (3) death or incapacity of the agent, (4) ompletion of the business, or (5) impossibility of execution by reason of law or destruction of the subject matter.
Section 28(i)a of the Foreign Exchange Regulation Act of 1973 forbids wholly or partially foreign-owned Indian companies to act as agents, or to accept appointment as agents, for any foreign individual or company without prior specific permission of the Reserve Bank of India. This approval is also required for agency agreements in effect before the date of the regulation.
H. Indonesia
The principal-agent relationship is regulated by Decree No. 295/M/SK/7/1982, issued by the Ministry of Industry, entitled: "Provisions concerning sole-agency." Special implementing regulations were issued by Decree No. 446/M/SK/7/1982 covering "Provisions on the sole-agency of electronic equipment and household electrical appliances" and Decree No. 347/M/SK/7/1982 for "Provisions concerning subagency of automotive products and heavy equipment."
Under Decree 295/1982, effective as of July 7, 1982, the sole-agency contract is exclusively governed by Indonesian law and must be approved by the Ministry of Industry. The agent must be a legal body organized under the laws of Indonesia. A national enterprise may operate as an agent and may deal with several lines of goods. A principal may freely select and appoint his agent, who shall be exclusive for the territory of Indonesia. The parties are free to agree to the terms of their agreement which must include: (a) name and full address of the contracting parties, (b) statement of agreement's objectives, (c) description of the goods subject to the agreement, (d) provisions under which the agreement may be cancelled, and (e) determination of unsatisfactory conduct and non-performance by the agent. The contract duration may not be fewer than 3 years, extendable for identical periods, and no fewer than 5 years when the agent is engaged in the assembly or manufacture of products. The principal may not assign an agency to another national enterprise except for reasons established in the contract.
The agency agreement may only be terminated prior to its expiration, without incurring damage liability, by mutual consent of the parties, or when the sole agent is dissolved, goes bankrupt, or loses its business license. The principal may also terminate the contract unilaterally when the subagent engages in extremely unsatisfactory conduct or by reason of nonperformance of the agreement. Unilateral termination makes the principal liable to compensate the agent for the costs or investments which the sole agent has made in the marketing/distribution of the products, which may include: (a) stocks of goods in the agent's custody, (b) building or equipment for the goods, and (c) cost of training employees to handle the goods.
I. Malaysia
No special legislation has been enacted to regulate the termination of agency and distributorship agreements. The relationship is governed by the contract terms as agreed by the parties within the provisions of Articles 135-191 of the Malaysian Contract Law, supplemented by Law No. 136 of July 1, 1950 (1974 revision). Malaysian legislation follows English Common Law principles. Only Malaysian nationals, whether individuals or firms, may operate as agents or distributors. Legal entities must have 100 percent Malaysian capital and management. The local representative must be registered with the Ministry of Trade and Industry.
Revocation of the agency may be express or implied by reason of the conduct of the principal or agent. Reasonable termination notice must be given to the party being terminated. Failure to give notice may make a party liable to compensation for damages caused by the termination or the revocation. Definite term agreements may be prematurely terminated by the principal only based on just cause and giving the agent reasonable notice of termination. Otherwise, the terminating party may be liable to compensate the other for damages. Agencies may also be terminated by: (1) completion of the business, (2) death of incapacity of the principal or agent, (3) bankruptcy or insolvency of any of the parties.
J. Singapore
There is no law applicable to the termination of agency or dealership agreements between firms and local agents. Customary practice allows the terms decided upon between two parties in the agreement or contract to govern the relationship.
K. Thailand
There is no specific law regulating the termination of agency agreements. Sections 797 to 848 of the Thai Commercial Code regulate the rights and duties of the parties to an agency agreement. These Code provisions prevail unless the parties, by private contract, agree otherwise. Such agreement cannot, on the other hand, override provisions of the Commercial Code on matters affecting public policy. Accordingly, except for the foregoing limitation, the parties may freely agree to the terms and conditions that shall govern their relationship, including clauses regulating the termination or cancellation of the representation. Thus, the principal or the agent can terminate the agency at will, but under Section 827 of the Thai Commercial Code either party may be held liable to compensate the other for damages caused by the termination.
The principal-agent relationship may also terminate, unless otherwise provided in the contract, in case of death of either party, bankruptcy, insolvency, or by reason of the nature of the business.
II. Critical Issues in Negotiating and Drafting Agreements
A. Distributorship Agreement
The distributor has both title to and possession of the products sold by the distributor. Consequently payment may be a significant issue. In addition the distributorship agreement covers the continuing relationship between the supplier and the distributor. It normally contemplates a series of individual contracts for the sale of goods. Appendix A is a draft distribution agreement, with alternative provisions from the standpoint of both the supplier and the distributor.
1. Appointment. The distributor can be either an exclusive distributor, in which case the supplier can not appoint any other distributors for the particular products in the territory, or non-exclusive, in which case the supplier can appoint competing distributors in the territory.
2. Products. The agreement should clearly set out what products are involved in the contract. Some products may be on an exclusive basis and others on a non-exclusive basis. The contract may also consider possible changes or additions of products or the issue of upgraded products.
3. Territory. Territory is important, particularly if it is an exclusive distributorship. The territory should be described in a manner to make its boundaries clear. Virtually every country in Asia has had political changes which can change the territory. From the addition of Okinawa to Japan, changes in boundaries in Southeast Asia, to reversion of Hong Kong on July 1, 1997, territory can change.
4. Sales outside the Territory. Occasionally the distributor will receive (or solicit) orders from purchasers outside the territory where they have an exclusive right to sell. This may be from advertising or referrals which are received outside the territory or even attempts to "poach" on other exclusive distributor's territory. If the distributorship is completely exclusive within the territory, the distributor cannot accept orders from outside the territory and must refer such orders to the exclusive distributor of that territory. In other cases, the distributor can accept such orders, but must pay a defined commission to the other distributor. The agreement should provide for such an event.
5. Sales Channels. If the distributor is prohibited from selling to certain specified industries or classes of buyers, this should be spelled out in the agreement. For example, for historical or other reasons, the distributor may be limited to certain types of industries or to wholesale channels only. In drafting these provisions, ensure that you consider anti-monopoly or fair trade laws.10
6. Direct Sales by Supplier. The supplier may want to sell directly to certain prospective buyers, such as governmental organizations, international bidding contracts, U.S. military or other governmental purchases for use or resale in the territory, etc. Therefore if the distributorship is exclusive and the supplier wants to retain the right to make such sales, the agreement should retain that right. The agreement should also provide that the distributor should refer any orders from such prospective purchasers to the supplier.
7. Competing Products. A distributor's exclusive right to sell the products of the supplier does not necessarily prevent the distributor from selling competing products. Therefore the agreement should prohibit such sales of competing products. Under some circumstances, such as preexisting sales of competing products, such a prohibition may violate the country's antimonopoly law. Japan, for example, distinguishes between preexisting sales of competing products and prohibitions of undertaking new distribution of competing products.
8. Performance Levels and Quotas. A quota or performance clause, coupled with a termination clause, may afford the supplier with a remedy when the distributor does not perform at the levels desired. Since the supplier's success is directly tied to the performance of the distributor this may be one of the most crucial clauses in the contract. However it must be clearly tied to termination and not just a statement of a desired goal. In addition, if the quota is unreasonably high or virtually impossible of performance in the early stages of the agreement, a court may try to avoid an abrupt termination. Thus termination should not be the only remedy for low performance. You should consider incentives such as a graduated price level for higher sales, expanded territory or other incentives.
9. Inventory. The supplier wants the distributor to maintain a high level of inventory to supply the ultimate customer in a timely manner. The distributor in turn would probably like to limit the cost of inventories as much as possible. Therefore it may be desirable to put inventory levels in the agreement.
10. Orders. Each order is a separate contract. Therefore it may be desirable to set forth the requirements, such as a written order and confirmation, for each individual contract of sale. Be careful of differences between the provisions of the distributor contract, the order form and any acceptance of the order. It may be advisable to state that, in the absence of a specific reference to the provision, certain provisions in the distributorship agreement will prevail over varying provisions in the order form.
11. Acceptance of Orders. The distributor may want the supplier to agree to accept orders up to a certain level during a particular time period. However if the supplier's obligation is to actually ship the products, it may put the supplier at risk because shipment may be beyond the supplier's control. At the least there should be a carefully drafted force majeure clause.
12. Price. The simplest pricing mechanism is to separately price each individual sale. However there may be a pricing formula, a set price with a mechanism for changes, or a periodically published price list. Which method is used is determined by the individual agreement. The agreement may also include components of the price, such as transportation cost, insurance, assistance in advertising, handling and packaging costs, etc. Some of these items will be determined by the shipment and delivery term. INCOTERMS, published by the I.C.C., are widely used in Asia.
13. Title and Risk of Loss. It is advisable to either specifically include a provision or carefully check the shipment or delivery term to ensure that the definition by INCOTERMS is one actually intended by the parties.
14. Shipment Terms. The price term, such as cif or fob, is also a delivery term. If the agreement contemplates a documentary sale, the documents of title, inspection, insurance, invoice, etc should be described with specificity.
15. Payment. Include a provision setting forth the terms and method of payment by the distributor. Each individual sale may be made either in cash, credit or by use of a payment mechanism such as a letter of credit, payment against documents. If a letter of credit is desired, its terms should be included in the agreement. Currency and exchange rates should be included if relevant.
16. Warranties. As more and more Asian countries are adopting comprehensive product liability statutes,11 warranty provisions are increasingly important.Check to see if the UN Convention on the International Sale of Goods applies.
17. Trademarks. A distributor is normally authorized to use the supplier's trademarks and tradenames used with the products. However ensure that the distributor does not register the supplier's trademarks in the distributor's name. It may also be advisable to limit such use to the case-by-case approval of the supplier. A provision for cessation of use upon termination should be included.
18. Licensing Issues. Consider a provision for the distributor to keep secret any information and trade secrets the distributor learns in the course of the distributorship. Some products may require a provision related to any products invented by the distributor in the course of making or selling the products of the supplier. Note that some countries have specific provisions related to these type of clauses in their antimonopoly laws. Consider a provision making the supplier not responsible for possible infringement of third parties' patents or trademarks.
19. Inspection and Records. The right to inspect the accounting records of the distributor is important if the supplier sells the goods on credit. The supplier may want to have reports on projected sales, returns, warranty claims, etc. so the supplier can adequately plan for future sales.
20. Termination. The agreement should contain provisions related to grounds and method of termination, rights of the parties on termination, including in some countries, limitations on damages for termination, and the effect of termination on individual sales.
21. Other Provisions. Other provisions which should be included are force majeure, assignment, duration and renewal, breach of contract and remedies, dispute resolution, including arbitration and mediation, governing law, and notice provisions.
B. Agency Agreement
An agency agreement resembles a distributorship in many ways but differs in two substantial ways: the agent does not obtain title to the goods sold and the agent sells the products in the name of and for the account of the principal. The agent normally does not have an inventory of the goods sold but may have samples.
1. Appointment. Make it clear whether the agent is exclusive or nonexclusive.
2. Scope of Authority. The principal is bound by the acts of the agent. Therefore the scope of the agents authority should be clearly stated in the agreement. If the authority of the agent is limited to representation and cannot make contracts, that should be provided in the contract.
3. Price and Terms of Sale. The agreement should state who determines the terms of the individual sales contract.
4. Payments. The agreement should state who has the responsibility to collect payments from customers. Should the agent collect, subtract its commission and remit the balance to the principal? If the agent guarantees payment by the customers, this should be clearly provided.
5. Commission. The agreement should state how the commission accrues, how much it is and how it is paid. Note that the level of the commission may raise questions under the Foreign Corrupt Practices Act.
6. Expenses. In some cases some of the expenses of the agent may be borne by the principal.
7. Other Provisions. Similar provisions to those of a distributorship should be included.
C. Consignment Agreement
A consignment agreement is similar to a distributorship in that the consignee takes possession of the goods. However, like an agent, a consignee does not take title to the goods, sells them as products of the consignor and receives a commission as payment. The terms of the agreement should reflect these differences.
1. Appointment. Make it clear whether it is exclusive or non-exclusive.
2. Products. A consignee may be consignee of some products of the supplier and a distributor of other products. Consequently a clear description of the products is essential.
3. Sales Channels. Since there is no sale from the consignor to the consignee, there cannot be a restriction on customers for purposes of resale price maintenance.
4. Direct Sales by Consignor. Since the consignor retains title, there is less need for restrictions or permissions for direct sales by the consignor.
5. Performance Levels and Quotas. The consignee may have an obligation to sell a certain level of products. However if the consignee is required to buy all products which are not sold up to the level required, the agreement becomes a distributorship, subject to the requirements and possible penalties for termination of a distributor.
6. Inventory. Since the consignee does not pay for the inventory, it is usually not an issue.
7. Ownership of Products. Since the consignee does not obtain title to the products, it is advisable to clearly state that the title remains in the consignor.
8. Storage of Products. Since the consignor owns the products, the agreement should specify in some detail how the products are to be stored, who pays for insurance, etc.
9. Price. The agreement should contain a provision for the prices at which the products are sold by the consignee.
10. Payment. Because of the fiduciary duty of the consignee to the consignor, there should be a provision on how payment is made and whether commission is deducted. There should also be a provision on what happens if the customer does not pay for the goods. If the consignee guarantees the payment, this should be clear in the agreement.
11. Commission. The agreement should cover how the commission accrues and how it is paid to the consignor. The agreement may cover exchange rates and risk of loss in the event of currency fluctuations.
12. Inspection and Records. The consignee should be required to maintain accurate records of the products and to make periodic reports to the consignor. The consignor should be authorized to inspect both the books and the inventory held by the consignee.
13. Termination. The method of termination of the consignee should be clearly set forth in the agreement.
14. Other Provisions. Similar provisions for distributorship and agency agreements should be included.
III. Product Liability
A. Japan
Japan passed a new product liability law in 1994 in response to both domestic and foreign criticism. The new law went into effect July 1, 1995. A translation of the new law is attached as Appendix B. The new law was passed after years of study and pressure from Japan's trading partners, all of whom have product liability legislation. The law permits injured parties to recover damages without proving that the manufacturer was negligent. Instead, the plaintiff need only show that the product was defective. The definition of defect was deliberately left vague. The factors to be considered include whether the product was used in a normal manner, the nature of the product and the date it was placed in the stream of commerce. Presumably, a product that was sold without a safety feature after such feature became mandatory could be considered defective. The statute of limitations is three years after injury or 10 years after the product was sold (assuming that there was no apparent injury initially).
1. Introduction of the Product Liability Law.12Prior to the passage of the Product Liability Law ("PLL"), there was no specific statute or body of law governing questions of product liability in Japan. Instead, the law traditionally dealt with products liability and related issues of consumer protection under the Civil Code of Japan (hereinafter, the "Civil Code"). Some 200 cases dealing with products liability in Japanese jurisprudence have developed on theories of liability in contract, where a contractual relationship of some type exists between a plaintiff and a defendant, or of liability in tort under the Civil Code (i.e., in those instances where a contractual relationship does not otherwise exist between plaintiff and defendant). Under both theories, courts have generally required a finding of negligence to establish the defendant's liability. In most cases where product liability is an issue no contractual relationship exists, and therefore most cases are brought under a tort theory. However, please also note that in some cases based on a tort theory the courts have imposed a very high duty of care on a defendant or have tentatively recognized a presumption of negligence, especially in cases involving food and medical products, and accordingly in these cases the liability of the defendant has become akin to strict liability.
The law, which is the product of numerous draft versions debated over many years, is modeled closely on the Directive on liability for defective products that the European Union (formerly the European Community) adopted in 1985 (see Directive 85/374, at Official Journal L/210/85) (hereinafter, the "EC Directive"), rather than on the substantial body of products liability law that has developed in the U.S. The general features of the PLL are set forth below:
2. General Features of the PLL. The primary purpose of the PLL, as provided in Article 1, is to protect consumers against injury caused by defective products, and thereby improve national living standards and the development of the economy generally. Key provisions include Article 2, which prescribes the scope of products subject to the law, in particular manufactured or processed items of movable property, and Article 3, which establishes a standard for strict liability. Exemptions from liability are set forth in Article 4 and include proof that a product meets "development risk" or "state-of-the-art" standards for such products, or that the product is a component or ingredient manufactured without negligence and according to specifications provided by a manufacturer of a product into which the components or ingredients are incorporated. Liability may be further limited under Article 5, which provides certain time limits in which a plaintiff may claim damages, although Article 5 also stipulates special time limits for damages accumulated over long periods or which are identified later. Finally Article 6 provides that, in addition to the relief provided under the PLL, a plaintiff may seek relief under the provisions of the Civil Code. A detailed analysis of each provision of the PLL follows below.
3. Individual Articles.
a. Purpose (Article 1)
The specific purposes of the PLL include the (i) stable upgrading of the national quality of life and the (ii) proper development of the national economy by way of protection of consumers. Article 1 provides only abstract purposes and is a general principle, and therefore it is not intended to apply to particular cases directly.
b. Definition (Article 2)
A key provision of the PLL, Article 2 defines the scope of manufactured products covered by the PLL, as well as factors and criteria for determining defects and defining persons which may be held liable for damages, as follows:
c. Manufactured Products
Item 1 of Article 2 defines products to which the PLL applies as "manufactured or processed movable items of property". The substantive meaning of this definition is that the PLL shall not apply to immovable property, energy, services or unprocessed products, including unprocessed agricultural products. In addition, the following points should be noted with regard to this definition:
d. Intangibles such as electricity or services, which are not regarded as movable items of property under the Civil Code, are outside the scope of the PLL. Thus, the PLL does not apply to electricity, unlike Article 2 of the EC Directive which does apply to it. However, a product such as software, which is generally regarded as intangible, is not considered within the scope of the PLL, but a product incorporating software would be subject to it.
e. It should also be noted that when an item of movable property is installed into immovable property after such products are delivered, such parts of components will become subject to the PLL because they are items of movable property at the time of their delivery.
f. Unprocessed agricultural products are not included among movable items of property in principle because they are products of nature and are not manufactured. However, in recent years numerous agricultural products have been produced artificially by using high technology (e.g., with the aid of biotechnology). Accordingly, the applicability of the PLL to such products is currently vague and uncertain and will likely remain so until clarified by the courts.
g. One of the most hotly debated issue in the drafting of this legislation was the applicability of the PLL to ketsuekiseizai, whole blood preparations and blood derivative preparations for use in transfusions in humans. The Economic Welfare Council, an auxiliary organ of the Economic Planning Agency, reported in December 1993 that kesshoubunkatuseizai, granulated blood plasma products, which are extracted from human blood and processed in a highly complicated manner, would be subject to the product liability law because of the extensive processing required to produce it, whereas zenketuseizai, whole blood preparations, an ketsuekiseibunseizai, blood derivative preparations, both of which are substances used for transfusion purposes and which are made from human tissue left intact and applied in natural form, would not be deemed subject to the PLL because they are left in essentially their natural forms. However, following various discussions and evaluations by relevant ministries and by the government's project team, the government's view now is that both zenketsuseizai, whole blood preparations, and ketsuekiseibunseizai, blood derivative preparations, shall indeed be subject to the PLL on the basis that they are produced using coagulating agents. The Diet finally adopted the government's proposed treatment thereof, as discussed above, without any changes. However, opponents of the official version succeeded in passing a resolution in the Upper House of the Diet providing that any defects in ketsuekiseiazi, blood preparations, should be evaluated in consideration of possible mitigating factors such as the need for the product in emergency situations, the inclusion of clear warnings about side effects and risks from use, and demonstrated preparation in compliance with the highest safety standards.
h. Furthermore, the Economic Welfare Council maintained that raw vaccine should be outside the scope of the PLL, whereas inactivated vaccines such as Influenza vaccine or Hepatitis B vaccine would be subject to the PLL. However, the view of the government is that all vaccines, including raw vaccines, should be covered by the PLL.
i. Second-hand goods are also subject to the PLL, although waste products are not.
j. Parts and raw materials are included in the definition of a movable item of property (Please see Article 4 Paragraph 2).
k. Defects
The level of safety which the relevant product is generally expected to meet will be judged according to that which an ordinary person in a society including manufacturers and consumers would expect under normal circumstances. Item 2 of Article 2 stipulates three (3) factors to be considered in determining defects: (i) the characteristics of the product; (ii) the manner of expected use of the product; and (iii) the presence of the defect at the time of delivery of the product by the manufacturer. All of these factors are generally important and relevant to all products. In this regard, Item 2 of Article 2 basically follows Item 1 of Article 6 of the EC Directive.
l. Liable Entity (Article 2)
Item 3 of Article 2 provides that a person who manufactures, processes or imports a product ("Manufacturer") is an entity which, in principle, may be held liable for defective goods. Furthermore, a party which affixes to a product its name, trade name, trademark or any other indication that it is the Manufacturer of the product ("Represented Manufacturer") is also an entity which, in principle, may be held liable for defective goods. Finally, a person who affixes its name, trade name, trademark or any other indication from which he or she may be deemed the substantial Manufacturer of the product is, in principle, an entity which may be held liable for defective goods.
It should be noted that the PLL does not include a distributor as a party who could be held liable for defective goods, and in this regard the PLL differs significantly from the EC Directive. However, please note that if a distributor affixes its name, etc., it may also be deemed a Manufacturer, and thus become subject to the PLL. In this regard, several courts have ruled that a chemical company which indicates itself as distributor could be deemed a substantial manufacturer and thus be held liable for a defective product it distributes (The so-called "Sumon" case).
m. Product Liability (Article 3)
Article 3 provides for "strict liability" or "liability without faults" of the Manufacturer, etc. As mentioned above, this is a dramatic departure from liability recognized under the Civil Code and based on fault (i.e., negligence).
It is important to note that the PLL does not cover pure economic loss pursuant to conditions of Article 3. Instead, such economic loss may be recovered under the Civil Code. On the other hand, in the event that pure economic loss occurs along with other damages, and such is attributable to a defective product, pure economic loss can be covered together with other damages under the PLL.
As Article 3 does not exclude the economic loss of a business person, various parties have criticized this provision because it can operate to protect against business loss under a theory of strict liability and thereby diverge from the intent of the law, to protect consumers against damages to person or property. In this regard, the Economic Welfare Council maintains that economic loss of business persons should not be covered by the PLL because business persons can deal with manufacturers on an equal basis and because the purpose of the PLL is to protect consumers. However, the PLL has not adopted such distinction between business persons and consumers because this distinction is not always clear, in particular because there are many small business operators in Japan and because the applicability of the Civil Code, which is not excluded by the PLL, also recognizes no such distinction. For example, in a recent case before the Osaka District Court which ruled in favor of the plaintiff concerning fire damages caused by a defective TV set (March 29, 1994, Osaka district Court, (WA), No. 4671 of 1994), the plaintiff was a company.
n. Exemptions (Article 4)
Item 1 of Article 4 is the so-called "state-of-the-art" or "development risk" exemption. Item 2 of Article 4 provides an exemption for manufacturers of components or ingredients when such products are used as such in a finished good that proves defective or are produced according to the specifications of a manufacturer that incorporates such products into an end product, provided that the manufacturer of such components or ingredients has not otherwise been negligent with respect to such defect. Both of these Items are based on a similar exemption in Article 7 of the EC Directive.
The adoption of Item 1 was hotly debated. In particular, various industries insisted on the adoption of the "state-of-the-art" or "development risk" exemptions to ensure that this legislation does not in effect discourage development or innovation. On the other hand, if this exemption is interpreted too broadly, it may substantially result in a return to liability with fault. Taking these considerations into account, the Economic Welfare Council has taken the position that scientific and/or technological knowledge be judged against the highest standards of technology applicable at the time and not against the level applied by a specific manufacturer or the industry. Accordingly, many manufacturers may find it difficult to take the advantage of this exemption.
o. Limitation on Period (Article 5)
Article 5 concerns the limitation period during which the plaintiff can bring a lawsuit under the PLL and is based on the corresponding provision of the EC Directive. The limitation of ten (10) years from the date of delivery of the products in Item 1 of Article 5 is in stark contrast to the twenty (20) year limitation from commission of the tortious act, which applies under the Civil Code. The drafters of the PLL determined that a ten (10) year limitation is a reasonable term in which to settle legal disputes, considering the normal life period of products, preservation period of documents and application of insurance coverage. In addition, Item 1 requires the plaintiff to commence an action within three (3) years after the victim or its legal representative identifies damage or injuries and the liable parties. Item 2 of Article 5 provides for a calculation of a period in which to identify damages that may have been accumulated or delayed but which have not yet become apparent.
p. Application of Civil Code (Article 6)
Pursuant to Article 6, unless otherwise provided by the PLL, the Civil Code shall also apply. This is significant because the Civil Code allows a defendant to limit liability by way of comparative damages, which may have great importance. In addition, Article 6 operates to permit a plaintiff to seek compensation for damages both through the PLL and the Civil Code to the extent they are not overlapping. In this regard, the limitation of period under the Civil Code is twenty (20) years, enabling a plaintiff to seek relief even after the ten (10) year limitation under the PLL has expired.
4. Other Matters
a. The PLL provides for no presumptions as to the existence of defects or as to causality between defects and damages (though Japanese courts have recognized certain presumptions, as explained in Item 1 of this letter). The legislator chose not to include such presumptions because it reasoned that proof of the existence of defects or casualty depends on the particular facts of each case and to recognize such presumptions would go beyond an objective of the PLL, to relax the burden of proof of a plaintiff.
b. The PLL also includes no provision for discovery of evidence. This notwithstanding, the Civil Procedure Law is currently under review regarding the possible inclusion of broader discovery procedures, but until such changes, if any, are adopted, the scope of permissible discovery under Japanese law will remain very limited.
c. The Diet has adopted resolutions proposing that an ombudsman-type of institute be established to monitor causes of damages in products liability cases with an aim toward lessening the burden of proof borne by the plaintiff.
d. Finally, there is no provision for punitive damages, nor is there a limit on the amount of liability.
In conclusion, the introduction of the Law will assist in safeguarding consumers from defects in products, while creating various new challenges for both manufacturers of products and importers of manufactured products.
MITI established guidelines that industry associations should follow in setting up ADR mechanisms to handle claims under the law. They are attached as Appendix C.
B. Taiwan
Taiwan passed a new Consumer Protection Law on January 11, 1994. Under the new law, business operators who are engaged in the design, production or manufacture of goods and the provision of services must ensure that such goods or services produced by them are free from any danger to safety or sanitation. In addition, warnings and methods of handling the goods in an emergency must be conspicuously set forth on the label. The new law imposes strict liability on designers, sellers or manufacturers of goods. If the business against whom a claim is made can establish that the injury suffered was not a result of negligence on the part of the business, the court may reduce the liability but not eliminate the liability. Distributors are generally jointly and severally liable with suppliers of the goods, but they may be exempted from liability if they exercised due diligence.
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APPENDIX A
TRANSLATION OF JAPANESE PRODUCT LIABILITY LAW
PRODUCT LIABILITIES LAW
Article 1. (Purpose)
The purpose of this law is to protect victims by setting forth provisions concerning the liability of manufacturers, etc. of products which have caused damage to life, body or property of human beings due to a defect in the products; thus the law promotes stable upgrading of the nationwide quality of life and the proper development of the national economy.
Article 2. (Definition)
1. For the purpose of this Law, a "Product" means a manufactured or processed movable item of property.
2. For the purpose of this Law, a "Defect" means the lack of safety which the relevant Product is generally expected to bear considering the characteristics of the Product, the normally expected manner of use of the Product, the time of delivery of the product by the relevant manufacturer, etc. and any other circumstances relating to the Product.
3. For the purpose of this Law, a "Manufacturer, Etc." means any of the following persons:
(1) A person who manufactured, processed or imported the relevant Product for his business purposes (hereinafter referred to as "Manufacturer");
(2) A person who affixed his name, trade name, trademark or any other indication (hereinafter "Indication of Name, Etc.") on the relevant Product which identified him as the manufacturer thereof; or a person who affixed indication in a manner which may lead a victim to falsely believe him to be the Manufacturer of the relevant products; or
(3) In addition to the foregoing, a person who affixed Indication of Name, Etc. from which he may be deemed the substantial Manufacturer of the Product taking into consideration the manner of manufacturing, processing, import of sale of the relevant Product and any other circumstances.
Article 3. (Product Liability)
In the event that any damages are caused to the life, body or property of other persons due to a Defect in the Product which was manufactured, processed or imported by the Manufacturer, Etc. or carries Indication of Name, Etc. as referred to in Paragraph 3, Item 2 or Item 3, of the preceding Article, and was delivered by such Manufacturer, Etc., the relevant Manufacturer, Etc. shall be liable to compensate for damages caused by such Defect, unless such damages were caused only to the relevant Product.
Article 4. (Exemptions)
The Manufacturer, Etc. shall be exempted from liability to compensate for damages set forth in the preceding Article, if it successfully proves any of the following facts:
(1) It was impossible, under the scientific and/or technological knowledge at the time of delivery of the Product by the Manufacturer, Etc., to recognize such Defect existing in the Product; and
(2) In cases where the Product was used as a component of other products, such a Defect was induced solely as a result of compliance with the design instructions requested by a manufacturer of such other products, and, there was no contributory negligence on the Manufacturer with respect to inducing such Defect.
Article 5 (Limitation on Period)
1. The right to claim damages as provided for in Article 3 hereof shall expire three (3) years from the time the victim, or a legal representative thereof, is aware of the damages and the party liable for compensation for such damages. Further, said right shall expire upon the lapse of ten (10) years from the time of delivery of the Product by the Manufacturers, Etc. thereof.
2. In the event that the damages are caused by substances which accumulated in the body of the victim, injuring his health, or that symptoms of the damages are developed after a certain incubation period, the expiration period set forth in the latter sentence of the preceding Article shall commence at the time the damages become apparent.
Article 6. (Application of Civil Code)
In addition to provisions set forth in this Law, the provisions of the Civil Code of Japan (Law No. 89 of 1896) shall apply to the liability of the Manufacturer, Etc. to compensate for damages caused by the Defects in Products.
Supplemental Provisions
1. (Date of Enforcement, Etc.)
This law shall come into effect one (1) year from the date of promulgation hereof, and shall apply thereafter to the Products delivered by the Manufacturer, Etc.
(2. Omitted)
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APPENDIX B
MITI ADR GUIDELINES FOR JAPANESE PRODUCT LIABILITY LAW
[The following is a summary of the MITI ADR guidelines provided by the Japan External Trade Organization (JETRO-NY).]
MINISTRY OF INTERNATIONAL TRADE & INDUSTRY
English Summary of Guidelines for
"Establishment of Alternative Dispute Resolution
System in Each Product Area"
(tentatively translated)
I. Background
The Ministry of International Trade and Industry (MITI) sent guidelines describing the above to around 130 industry groups on October 27. It is hoped that some of the industry groups will be encouraged to prepare various measures in line with the guidelines based on their individual circumstances and necessity.
The background for these guidelines is that the Product Liability Law came into force on July 1, 1995, and establishment of Alternative Dispute Resolution Systems has been one of the most important issues in order to provide optional means of dispute resolution.
MITI has been expanding their establishment which would secure impartiality, neutrality and expertise as a part of General Product Safety Policy.
II. Outline of the Guidelines
A. Framework of the Dispute Resolution System
1. Possible types
Frequency, contents and severity of product accidents vary according to each product area, and thus the type of organization is recommended to be in line with the circumstances of each product area. These types are:
a) establishment of an independent dispute resolution organization (ex. a public corporation, etc.). From the point of view of maintaining neutrality, this type is more independent and desirable than below, or
b) establishment and improvement of a section in existing organizations serving in a consultative and intercessional capacity.
2. Structure
a) Consultation and Intercession
In order to make it possible for disputes to be handled properly, it is recommended that the staff of the organizations who work for consultation and intercession include such persons as follows: (i) dispute settlement experts, (ii) engineering experts. Also, it is recommended that these persons be not employees of related industry manufacturers.
b) Mediation
In mediating between parties concerned and proposing plans for settlement to them, it is recommended that an examination body (so-called Panel) be established which ensures impartiality, neutrality and expertise. The panel should include more than one person in each category, such as follows:
(i) legal experts (ex. former judge, lawyer, etc.)
(ii) engineering experts (ex. university professor, production engineer, etc.)
(iii) consumer affairs experts (ex. Advisory Specialist for Consumer Affairs, etc.
Also, it is suggested that these persons be neither employees of related industry manufacturers nor members of the staff working in the organizations.
c) Funding
In order to establish a financial foundation for Dispute Resolutions Systems, each organization should be funded mainly by industry associations, not individual companies in order to ensure impartiality.
B. Operation of Dispute Resolution Systems
1. Scope
a. dispute resolution concerning product accidents
b. handling inquiries, consultations, claims, etc. concerning safety and defects of products
c. handling inquiries, consultations, claims, etc. concerning functions and quality of products
A. Japan.1
B. Korea
C. China
D. Philippines. 
E. Taiwan