BLA-CLE/ISLP 2011 COMMERCIAL LAW PROGRAMME Session 8 CONTRACTING FOR GOODS AND SERVICES July 2011 East London: Linda Robinson TOR_P2Z: 5242720.2

Companies (and individuals) carry on business with a variety of contractual relationships with: their employees, their suppliers, their customers or clients, their service providers, their equipment providers and their landlords. Each of these areas of activities gives rise to a contractual relationship

Area of Activity Agreement Human resources or services Suppliers of goods and services Employment contracts and/or consulting or personal services contracts. (When use one and not the other?) Supplier contracts/ product supply agreements (generally standard form and provided by the supplier of the goods)

Area of Activity Agreement Customers for the products or services of the company Space/Facilities in which to carry on business Purchase orders (standard forms), customer contracts (either standard form or customized) Lease of land and buildings

Area of Activity Agreement Utilities (electricity, gas, telephone, internet) to service the business Equipment to produce the goods Sales Standard form contract from the utility Lease of personal property/equipment lease Distribution Agreement Sales Agency Agreement Licensing Agreement Franchising Agreement

Area of Activity Agreement Know-how and technology Advertising and marketing Storage Software and technology licenses Agreements with the service providers of advertising and marketing, promotion etc. Warehousing Agreement

(Except for employment contracts), most commercial contracts have a similar form and structure: Identification of the parties Obligations of the supplier/seller of the product or service Description of the product or service Obligations of the company receiving the service/the buyer Price and payment terms Warranties of the supplier/seller; standards of services Timing, term and termination Default and remedies for default; damages, indemnities, exclusions, caps on liability Dispute Resolution Procedure Boilerplate (interpretation, domicilium, whole agreement, notice, no waiver, severability, assignment) Other (when applicable) - confidentiality

SALE AND PURCHASE CONTRACTS Anything capable of ownership may be sold, including: Immovable assets Movable assets Incorporeal Assets In addition to the general requirements for a valid contract - consensus, capacity and legality – for a Sale and Purchase contract to be valid there must be consensus between the Parties on: the Goods purchased and sold; and the Purchase price for the Goods

GOODS Goods must either be – Specific – 100 ordinary shares in a company Ascertainable – any single portion of land comprising 10 hectares capable of subdivision from the 100, 000 hectares of land adjacent to the company’s business premises Generic sales – a specified quantity of Goods Example 1 – 100 350ml blue bottles Example 2 – 100 bottles of the size and quality utilised by the company to store its oil

PURCHASE PRICE Purchase price must be definite or ascertainable, i.e. The purchase price could be – a price per unit determined through calculation of a formula could be linked to an independent index/ valuation determined by a third party Can the purchase price be in a foreign currency? Can purchase price be payable other than in cash? What if the Parties do not specify how the purchase price is to be paid?

Delivery - Key objective of Sale and Purchase Contracts Transfer could be conditional upon Credit facilities being granted Guarantees being raised Licences being issued Transfer of – Immovable Assets– registration of transfer of title Movable Assets – delivery Incorporeal Assets – assignment/ cession and delegation Transfer of Movable Assets could be through – Actual Delivery (physical handing over of Assets) Symbolic (handing over of keys to car) Long-hand delivery (pointing out the Goods which are too large for physical handing over) Short-hand delivery (goods already in Purchaser’s possession)

BRINGING PRODUCTS TO MARKET Options Direct sales force Sales agents Distributors Patents and Know-How Licenses Franchisees

DIRECT SALES FORCE Employees sell the product at the company-set price over a counter in a retail store or wholesale shop Or out of an office or offices around the country or the world Or on the street Or on the phone Or on the internet Or a combination of all or some of the above

Point to note is:-Sales people are company employees selling the product or service at the company's set price, using company space, brochures or selling documents. They sell or lease on credit or with terms controlled by the company. They are compensated with a salary or a combination of salary and bonus if sales targets set by the company are met. The company can allocate them at will across the country or the continent, and give them responsibilities in any manner the company chooses.

Sales Agents Not employees, but they can still do all that an employee can for the manufacturer Independent agents working for themselves in offices supplied by themselves Hire their own employees Take orders at prices set by the company Send the orders to the company for approval Company ships to the customer Or the agent could keep an inventory belonging to the manufacturer on consignment, and ships from that after the manufacturer approves the order Agent collects from the customer and sends proceeds to the manufacturer after deducting the agent's percentage

Point to note:-The agent is in the business of selling the manufacturer's product, and is working for him/herself usually out of the agent’s own office space, and getting paid by a percentage of the sales price paid by the customer. The agent pays for his or her own employees and follows the manufacturer’s instructions as to price, territory, terms and conditions, credit and service.

Distributors Pay the manufacturer for an inventory of the manufacturer's product at an agreed price and thus takes title to the products Resell the product to customers and retain the proceeds of sale Responsible for maintaining an adequate inventory to meet demand Responsible for promotion and advertising

Point to note:-The distributor makes a greater investment in the business than either the employee or the agent because the distributor invests in and takes title to the inventory of the manufacturer. The manufacturer, therefore, gives up title and receives payment regardless of what the ultimate customer does. The manufacturer also parts with a measure of control – it may not be able to control the ultimate price of the product, nor the territory in which it is sold.

Licensees Are licensed by the owner of technology (know-how or patents or trade secrets) or trade-marks to produce products either under the name of the owner or under any other name Common in the technology industry Will be subject to standards set by the owner

Franchisees A form of licensing, in which the owner (the franchisor) of a business system (think MacDonald’s) licenses the right to use its format, business systems and trademarks to the franchisee Products of the franchisor are required to be bought by the franchisee

AGENCY, DISTRIBUTION, LICENSING AND FRANCHISING AGREEMENTS Legal issues and differences Agents Distributors Licensees Franchisees Territories, pricing, termination

Distribution Agreements Agency Agreements Services Agreement in terms of which the Agent sells goods or services for and on behalf of the Principal (manufacturer/distributor) Agent earns commission payments based on sales made Delivery could be effected by Principal Distribution Agreements Manufacturer utilises Distributor’s distribution network and marketing and sales organisation to market and distribute the Product Distributor appointed as distributor within designated Territory with the right to distribute, market, sell and service the Product Appointed either exclusively or non-exclusively Licensing Agreements Right to manufacture Product using Licensor’s patents and/or know-how and other intellectual property (such as trade marks) Could be infused in the Distribution Agreement or there could be an option provided in favour of the Distributor to this effect

Franchise Agreements Licensed commercial use by Franchisee of Franchisor’s developed business systems and the intellectual property Depending on the franchise, the intellectual property could comprise patents, know-how, trade-marks, service marks and get-up Franchisor offers or is obliged to maintain a continued interest in the business of the Franchisee, particularly in relation to know-how, training and marketing Franchisor operates under a common name, format and business operating procedures owned and/or controlled by the Franchisor Franchisor is required to make significant investments in the business – initial payment to Franchisor, marketing and royalty payments and improvements to decor as these evolve Ongoing support – training, assist with purchasing Adequate supply of Product Building from which selling to be approved Payment of royalties

Right of first refusal in relation to new Product range Payment of marketing fees Discontinuation of particular types of Product Restricted list of suppliers Product promotion Control over business system Product packaging – legal requirements Access to training Ownership of trademarks Metering Product liability Restraint of Trade in respect of similar products Product supplies – order, supply and delivery procedures Consistency of quality Take-or-Pay provisions Strict compliance with specification Prices, price adjustments and terms of payment Standardised Agreements

Distribution vs. Agency Advantages and disadvantages Licensing When is it optimal? Franchising Commitment involved and benefits arising

ISSUES IN AGENCY, DISTRIBUTION AND LICENSING AGREEMENTS Appointment Exclusive/Non-Exclusive Period/Term (when does appointment commence and expire) Services to be rendered When are the Services to be rendered Standard of Services Nature of Services Appointing Commitment involved and benefits arising

Issues, cont’d Warranties Damages and Indemnity Negligence Exclusion of consequential damages Caps of liability Remuneration (Fees and Expenses) Confidentiality Labour law applicability Forum for resolving disputes Termination