International Contracts Part Two This is part Two of International Contracts

Agency vs. Distributorship Legal Issues What’s the difference between an agency and a distributor? We’re going to talk about the differences between agencies and distributorships from the standpoint of legal issues. What’s the difference between and agency and a distributorship?

Agency An agency finds buyers for a product, but does not take title to the product. It never owns the product. In fact, it probably never even sees or touches the product.

Agency Suppose I export products to Germany. There I have hired an agency. It has sales representatives who are German, they know the language, they know the culture… http://www.worldofmaps.net/europe/maps_europe.htm

Agency …and they sell my products in Germany. http://www.weltkarte.com/europa/deutschland/Deutschland_Staedte.gif

Agency When the agency finds a buyer for my product, they place an order with me, and I send the product, usually directly to the buyer. http://www.weltkarte.com/europa/deutschland/Deutschland_Staedte.gif

Agency The important thing to remember is that the agency never owns the product – they don’t take title. http://www.weltkarte.com/europa/deutschland/Deutschland_Staedte.gif

Distributor A distributor, on the other hand, does own the product. They may have warehouses and when they buy my products they may store them in their warehouses and they may have their own delivery system to get the products to the customers. Distributors own the product. Agents do not. http://www.weltkarte.com/europa/deutschland/Deutschland_Staedte.gif

Agency vs. Distributorship Legal Issues There is no international agreement regarding relationships between exporters and their agents or distributors. Some foreign governments take a more protective role toward companies functioning as agencies in their country, since these agencies tend to be small and the local government is concerned about them being taken advantage of by manufacturers in other countries. Distributors, on the other hand, tend to be larger and are seen to have more of an equal chance in disputes with exporters in other countries. Perhaps the most significant difference in the way some governments treat agents as opposed to distributors is that agents and their relationships with the exporters from other countries are sometimes placed under the jurisdiction of the host country’s labor law. Relationships with distributors, on the other hand, are government by contract law.

Agency vs. Distributorship Legal Issues There is no international agreement regarding relationships between exporters and their agents or distributors. Applicable law generally is that of the country where the agent or distributorship is located. Individual countries usually decide how they will treat agents and distributors.

Agency vs. Distributorship Legal Issues There is no international agreement regarding relationships between exporters and their agents or distributors. Applicable law generally is that of the country where the agent or distributorship is located. Basically, agreements between an exporter and an agent/distributor are called distribution contracts. Agreements between the exporter and agents or distributors are called distribution contracts.

Distributor Agent Some countries believe that an agreement between an exporter and a distributor is an agreement between equals. As a result, the agreement is covered by contract law. http://www.weltkarte.com/europa/deutschland/Deutschland_Staedte.gif

Distributor Agent With agents, however, some countries believe that because many agencies are small, they are at a disadvantage when they deal with an exporter. As a result, they don’t use contract law in these the agreement between the exporter and the agent. They use labor law. http://www.weltkarte.com/europa/deutschland/Deutschland_Staedte.gif

Agency vs. Distributorship Legal Issues –Home Government Restrictions Home governments sometimes regulate agents/distributors to protect them from more powerful exporters. Home governments also may want to regulate the activities of agents and distributors within their borders. They may have to register with the government. They may have to be nationals of the country. Government may inspect contracts. Commissions may be regulated. Agents/distributors may be limited to geographic area. Home governments sometimes regulate agents/distributors to protect them from more powerful exporters. Home governments also may want to regulate the activities of agents and distributors within their borders. They may have to register with the government. They may have to be nationals of the country. Government may inspect contracts. Commissions may be regulated. Agents/distributors may be limited to geographic area.

Important Elements of Agency or Distributor Contracts Language in which contract is written. One language is considered primary contract language. Other languages are considered “translations.” Good faith – participants agree to act in good faith, not attempting to take advantage of one another. Force majeure (“overwhelming power”) – contract not binding in event of catastrophe (ship sinking, hurricane, strike). Language in which contract is written. One language is considered primary contract language. Other languages are considered “translations.” Good faith – participants agree to act in good faith, not attempting to take advantage of one another. Force majeure (“overwhelming power”) – contract not binding in event of catastrophe (ship sinking, hurricane, strike).

Agency or Distributor Contracts Scope of appointment Is contract with an agent or distributor? What products are involved? What is the territory involved? Is the agent/distributor an exclusive representative? What is the status of corporate accounts? Scope of appointment Is contract with an agent or distributor? What products are involved? What is the territory involved? Is the agent/distributor an exclusive representative? What is the status of corporate accounts?

Agency or Distributor Contracts Term of appointment: Must always be a definite time period. Termination of contract is usually a bad solution. May be problem to find a new representative. Fired representative may cause problems. Customers may think exporter is not committed to market. Better to not renew contract, but identify terms that were not met. Failure to say this may mean a court may consider the contract an evergreen, meaning it is of unlimited duration and nonperformance cannot be used to terminate it. Term of appointment: Must always be a definite time period. Termination of contract is usually a bad solution. May be problem to find a new representative. Fired representative may cause problems. Customers may think exporter is not committed to market. Better to renew contract, but identify terms that were not met. Failure to say this may mean a court may consider the contract an evergreen, meaning it is of unlimited duration and nonperformance cannot be used to terminate it.

Agency or Distributor Contracts Term of appointment: Must always be a definite time period. Termination of contract is usually a bad solution. May be problem to find a new representative. Fired representative may cause problems. Customers may think exporter is not committed to market. Better to not renew contract, but identify terms that were not met. Failure to say this may mean a court may consider the contract an evergreen, meaning it is of unlimited duration and nonperformance cannot be used to terminate it. Term of appointment: Must always be a definite time period. Termination of contract is usually a bad solution. May be problem to find a new representative. Fired representative may cause problems. Customers may think exporter is not committed to market. Better to renew contract, but identify terms that were not met. Failure to say this may mean a court may consider the contract an evergreen, meaning it is of unlimited duration and nonperformance cannot be used to terminate it.

Agency or Distributor Contracts Choice of legal jurisdiction: International contracts always say which country’s laws will govern disputes over the contract. Exporter usually makes this choice. International Chamber of Commerce (ICC) “Model Contracts for Agency and for Distributorship” provide two choices: Traditional choice of specific country’s laws. Generally recognized international trade laws. Choice of legal jurisdiction: International contracts always say which country’s laws will govern disputes over the contract. Exporter usually makes this choice. International Chamber of Commerce (ICC) “Model Contracts for Agency and for Distributorship” provide two choices: Traditional choice of specific country’s laws. Generally recognized international trade laws.

Agency or Distributor Contracts Choice of forum and arbitration Both parties agree on court to rule and laws to apply in dispute. Increasing number of contracts call for an arbitration panel to settle disputes. Profitability or commission Determines price/margin of products distributor sells. Determines commission of agents. Choice of forum and arbitration Both parties agree on court to rule and laws to apply in dispute. Increasing number of contracts call for an arbitration panel to settle disputes. Profitability or commission Determines price/margin of products distributor sells. Determines commission of agents.

Agency or Distributor Contracts Miscellaneous clauses Facilities and activities: size of retail site and inventory, extent of employee training, complaint handling. Advertising responsibilities of both parties. Competing lines agent/distributor can carry, if any. Use of trademarks, patents, and copyrights. Confidentiality of trade secrets, strategic information. Ownership of customers’ list. Miscellaneous clauses Facilities and activities: size of agent/distributor’s retail site and inventory, extent of employee training, complaint handling. Advertising responsibilities of both parties. Competing lines agent/distributor can carry, if any. Use of trademarks, patents, and copyrights. Confidentiality of trade secrets, strategic information. Ownership of customers’ list. Press “Page Down” to continue.

More on Termination Just cause termination. Convenience termination. Exporter not fulfilling contract (rare). Agent/distributor not fulfilling contract. Even if there is failure to perform, the “guilty party” may be legally entitled to a minimum notice and compensation even though it is not so stated in the contract. Convenience termination. Exporter may think agent/distributor is earning too much. Exporter may be changing strategy. Best to include lengthy notice period and generous goodwill compensation package. Just cause termination. Exporter not fulfilling contract (rare). Agent/distributor not fulfilling contract. Even if there is failure to perform, the “guilty party” may be legally entitled to a minimum notice and compensation even though it is not so stated in the contract. Convenience termination. Exporter may think agent/distributor is earning too much. Exporter may be changing strategy. Best to include lengthy notice period and generous goodwill compensation package. Press “Page Down” to continue.

Arbitration Increasingly preferred way of resolving disputes between international partners instead of going to court. Venues for arbitration: International Chamber of Commerce Rules of Conciliation and Arbitration. United Nations Conference on International Trade Law Rules of Conciliation and Arbitration. London Court of International Arbitration. Stockholm Chamber of Commerce. World Intellectual Property Organization. American Arbitration Association. Individual law firms (many in Switzerland). Increasingly preferred way of resolving disputes between international partners. Venues for arbitration: International Chamber of Commerce Rules of Conciliation and Arbitration. United Nations Conference on International Trade Law Rules of Conciliation and Arbitration. London Court of International Arbitration. Stockholm Chamber of Commerce. World Intellectual Property Organization. American Arbitration Association. Individual law firms (many in Switzerland). End of program.

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