The Exclusive Distributor Breaches of Contract by Distributing the Competitor’s Goods, Who Shall Bear the Liability? –From the perspective of the Third Party Encroaching upon Creditor’s Rights

Company A and Company B signed a contract, in which it has stipulated that B would be A’s exclusive distributor by selling A’s digital products, and B should not sell the other similar products. B promoted A’s products very well, and its sales amount was increasing step by step. Company C, the competitor of A, found B’s talent, and proposed a distribution contract with high profit to B. B accepted this proposal and signed another distribution contract with C, which said that B had to sell C ’s products. Hearing of this, A’s in-house counselor proposed to request B to undertake the liability for breach of contract. But A’s the sales executive proposed to request C to undertake the liability, because C had lured B to breach the contract. There were different voice in A, then how could A to make a choice?

It is obviously that A could request B to undertake the liability for breach of contract. But whether A could request C to undertake the liability?

This problem is an argued topic in the civil law system —- the Third Party Encroaching upon Creditor’s Rights (the ‘TPEUCR’). The ‘TPEUCR’ has been mentioned many times in the legislation draft, but till now there is no laws or regulations has prescribed it in details. In the judical practice, there are some judgments on supporting the ‘TPEUCR’.

The ‘TPEUCR’ has various circumstances. The normal circumstances related to contracts are, ① the third party lures the debtor to breach the contract; and ② the third party maliciously colludes with the debtor to infringe the creditor’s rights. The case in the beginning belongs to the circumstance ①. In fact, for both circumstances, the preconditions for the creditor to obtain the support on the ‘TPEUCR’ including, (a) the third party has known or ought to know that the existence of the creditor’s rights, but it intends to do so; and (b) the creditor suffers direct loss due to the action of the third party and the debtor.

In practice, it is difficult for the plaintiff (the creditor) to prove that the third party has known or ought to know the existence of the creditor’s rights.

However, the relationship between the third party and the debtor might be an entry point. For example, in the case (2014) Pu Min Er (Shang) Chu Zi No. 2509 (Remark: circumstance ①), the court decides that the third party has infringed the plaintiff’s exclusive cooperative operation rights. The court states that, ‘The defendant Cai is the shareholder and ex-supervisor of the plaintiff, who has signed a non-competition agreement. So the defendant Cai knows that the plaintiff has the exclusive cooperative operation rights. Another defendant Zhu (the legal representative of Company X) had been the shareholder of the plaintiff. The defendant Company X accepts the defendant Cai as its shareholder. The defendant Company X fails to provide the cooperation agreement with Xinan Railway Tourist. Xinan Railway Tourist has provided ‘The Letter on requesting Sichuan X Technology Limited Liability Company to provide the relevant documents’. In view of these, the defendant Company X shall have known the plaintiff has the exclusive cooperative operation rights, the defendants take advantage of Cai’s ‘Resource’ to set Company X’s automatic ticket selling machine in the ticket selling area of Chengdu Railway Bureau. In addition, in the case (2014) Hu Yi Zhong Min Si (Shang) Chu Zi No.7 (Remark: circumstance ②), the court decides that the third party has known the existence of the creditor’s rights based on 2 facts, including the plaintiff (the creditor) has a long cooperation with the debtor, the legal representative of the debtor is the brother of the legal representative of the third party, and the legal representative of the debtor had been the director of the third party. The court also decides that the third party has maliciously colluded with the debtor based on 1 fact, which says the articles in the sales agreement between the debtor and the third party fail to meet the commercial convention.

Besides the above information, in practice, some objective facts also could be used to prove third party who has known or ought to know. For example, the creditor and the debtor signed an exclusive distribution agreement and such event has been published via media or internet; or the debtor has advertised such exclusive distribution relationship in the exhibition or other public areas.
For the individual cases, if it is difficult to prove the third party who has known or ought to know, or the third party is intended to do so, then the creditor could only claim for the liability of breach of contract. So it is very important to design clauses on the circumstances for the breach of contract and the relevant liabilities.