There are many means and
methods of doing business
abroad. Most people who do
business abroad or who are
considering expanding into the
international arena are
familiar with the terms
"agent",
"distributor" and
"joint venture".
Many business people, however,
may not realize that the
meanings of these terms vary
from country to country and
their use in international
business usually have distinct
legal consequences. Therefore,
it is essential for those who
do business abroad to have a
general understanding of the
differences in the
relationships that these terms
describe. It is even more
important, however, to
investigate and understand the
precise legal consequences of
a particular type of business
relationship in a given
jurisdiction before entering
into any agreements, verbal or
written.
Agency vs. Distributorship
Agents have been used in
international commerce for
thousands of years. The
concept of agency is as old as
international commerce itself.
Today, agents are the most
common intermediaries in the
chain of distribution between
manufacturers and consumers.
Agents handle virtually all
aspects of international
commerce, from sales to
shipping, financing,
advertising, and regulatory
matters. The types of
relationships between
principals and agents are as
varied as the duties
performed. The long history
and variety of agency
relationships in international
commerce has resulted in a
complex and evolved body of
agency in both common law and
civil law countries.
The distributorship
concept, on the other hand, is
of more recent vintage.
Distributorship became
increasingly prevalent in the
early part of this century.
Distributors typically
purchase goods on their own
account and resell at a higher
price, accepting the risks and
the rights incident to
ownership of the goods.
However, distributorship
relationships also vary
greatly.
The Control Issue
The most significant
difference between agents and
distributors often is the
degree of control exerted over
the intermediary by the
supplier. The issue also
distinguishes types of agents.
The supplier of the product
often wants to control the
price at which the product is
sold, how it is advertised,
and the extent of the
intermediary's territory. The
supplier is also motivated to
control market development,
restrict its intermediary from
selling competing products,
and regulate other matters
relating to the sales of its
products. These issues can be
controlled by the supplier to
varying degrees, depending of
the type of relationship that
exists between the supplier
and the intermediary.
II. TYPES OF AGENTS
Agents in Common Law
Countries
The agency relationship in
common law countries is
characterized by an agreement
between principal and agent in
which the principal gives the
agent authority to act on
behalf of and bind the
principal. In most cases, an
agent acts solely on behalf of
the principal, not on the
agent's own account, and the
principal is bound by the
agent's agreements. Therefore,
the principal usually dictates
the terms the agent will offer
and carefully delineates the
agent's authority. The issues
are control and authority.
Agents may or may not be
employees of their principals.
Agents in Civil Law
Countries
In civil law countries,
agency relationships are
creatures of statute. There
are frequently many different
types of agency relationships
that are specifically
described in statutes. It is
particularly important to
consult with legal counsel
familiar with the laws of the
country in which you intend to
do business before entering
into such a relationship in
any country where agency
relationships are dictated by
statute.
For instance, you may find
unfamiliar concepts, such as
varying treatments of the
undisclosed agent. If your
agent fails to clearly
disclose that he is an agent,
the agreement may only run
between the agent and the
buyer, and the principal may
not have authority to enforce
the agent's agreement. In such
a case, the problem can be
solved by providing in the
agency agreement for the agent
to assign all contracts to the
principal, including a
parallel provision in the
agent's agreement with the
buyer authorizing assignment
of the contract.
The Employee Agent
In many countries, the
employee-agent is a statutory
relationship that is heavily
regulated. The country's labor
and other legislation may well
prevail over the agreement
between the agent and his or
her principal as to terms of
employment. Frequently, the
social benefits are similar to
those mandated for employees
in the United States, but they
may be even more extensive.
There is little uniformity
from country to country,
although developments such as
the evolution of the European
Economic Community and the
North American Free Trade
Agreement in the past few
years have tended to create a
minimum level of labor
legislation in member
countries.
A problem frequently
encountered by the unwary
business person who chooses to
utilize an agent is the
unintentional employment of an
employee-agent who has
statutory benefits that turn
out to be much more extensive
than the principal envisioned
or the agreement allowed.
Again, it is essential to
consult with counsel in the
jurisdiction where the agent
will work before entering into
any such relationship.
However, certain
characteristics can be built
in the agency agreement to
help ensure that the agent
will not be held to be an
employee-agent. One can
provide in the agency
agreement that (1) the agent
works for commissions, not a
salary, (2) the agent is free
to work for others as well as
the principal, (3) the agent
is free to set his own
schedule and organize his own
work, (4) the agent provides
his own office, pays his own
expenses and may hire
sub-agents at his discretion,
and (5) the agent registers
with the governmental or
commercial authorities as an
independent agent. Such
provisions would be helpful to
identify the independent agent
as such in most jurisdictions.
The Independent Commercial
Agent
Independent commercial
agents are statutorily defined
in civil law countries.
Typically, they represent more
than one business. The risk
faced by the principal, as
discussed above, is that if
too many restrictions are
imposed on the agent in the
agency agreement, the agent
may be held to be an
employee-agent, with the right
to employment benefits in
excess of those planned by the
principal.
The Commission Agent
Commission agents are
generally independent traders
acting in their own names and
are therefore not entitled to
social benefits provided by
the principal. The
relationship is much closer to
that of a distributor than the
types of agents discussed
above.
Other Relationships
There are many other types
of statutorily defined agency
relationships in some
countries. One must be aware
of the legal characteristics
of the various relationships
in order to choose the one
best suited to the purpose.
Also, there are other types of
contractual relationships,
such as brokers, which simply
bring buyers and sellers
together. Whatever commercial
relationship one chooses to
utilize in employing an
intermediary, there will be
legal consequences that are
governed by local law.
III. AGENCY AND
DISTRIBUTORSHIP AGREEMENTS
All business relationships,
both domestic and
international, should be
governed by a written
agreement. Written agreements
provide clarity and
enforceability, and the
exercise of negotiating the
agreement forces the parties
to address the important
issues. The terms will vary,
of course, depending on what
types of business relationship
or arrangement is being
addressed. However, there are
certain terms that are common
to most agreements with
intermediaries.
Contract Terms
A distributorship agreement
is in effect a contract for
the sale of goods as well as a
long-term supply contract. As
such, it should cover price
terms, provide a complete
description of the goods,
shipment and delivery terms,
insurance terms, warranties,
methods of payment, assumption
of risk, etc. Since a
distributorship agreement is
in effect an agreement for a
continuing sale of goods,
there should be terms relating
to the sale of goods, although
much more will typically be
left within the discretion and
control of the principal, and
other issues such as
commission payments will be
addressed.
Additional terms are
required in distributorship
agreements due to the nature
of the distributorship
relationship. Distributorship
agreements usually cover the
extent of the distributor's
territory, advertising and
promotional efforts required
of the distributor, and volume
discounts and other
incentives. All these issues
should be viewed from both
business and legal
perspectives, and reviewed in
the context of the laws of
both countries.
Territory Issues
The need to limit and
protect a distributor's
territory raises some
interesting legal issues: (1)
To what extent can the
territory be lawfully
protected against sales from
outside the territory? (2) Can
the supplier require the agent
or distributor not to sell for
use outside his territory? (3)
Can an agent or distributor
require the supplier not to
sell to others inside the
territory?
Over the past twenty-five
years, the U.S. Supreme Court
has held restrictions on the
resale of goods to be both
legal and illegal, depending
on the circumstances. The
reason that this issue has
created difficulties for the
Court is that governments do
not want markets controlled,
businesses have a legitimate
need to protect business
relationships by restricting
the territory of individual
distributors and agents and
preventing resale of goods
outside the intermediary's
territory.
EEC Antitrust Concepts
Antitrust concepts in the
EEC are similar to those in
the United States. It is not
illegal per se to restrict
territory in an agreement with
an intermediary, but one must
be careful. The policy of the
law is to prohibit absolute
territorial protection in
distributorship. As always,
however, there are exceptions,
including commercial agents,
very small suppliers who could
not penetrate the market
without protection, and
suppliers who represent less
than five percent of a given
market. If the prospective
purchasers of the goods have
other comparable means of
access to similar goods,
antitrust laws may not be a
problem. It is wise, however,
to review the local law and
U.S. law on territorial
restrictions in connection
with entering into any
international business
relationship.
Exclusive Territory
Provisions
Antitrust problems are
frequently encountered when a
supplier agrees to restrict
other agents or distributors
from selling in a specified
territory, in order to protect
the agent or distributor.
Problems also arise when the
supplier agrees not to import
into the territory directly.
These are direct export/import
restrictions that have been
considered illegal in many
cases. However, a converse
provision, requiring the
supplier not to appoint
another agent or distributor
in the territory, is usually
acceptable.
Even an exclusive territory
term may be illegal in some
jurisdictions, including the
EEC, but exemptions are often
available where export bans
are not also provided in the
agreement and where the effect
is not to effectively control
the market for the goods.
Authority of Agent
Distributors
It is important to make the
degree of authority of the
intermediary completely clear
in the agreement. Typically,
agents only take orders,
subject to home office
approval, or at most, the
agent has limited authority to
accept orders. The
distributor, on the other
hand, does not represent his
supplier, but trades on his
own account. Standard theories
of Apparent authority apply.
If an agent or distributor
appears to have authority to
consummate a transaction, the
principle/supplier will be
bound in most instances.
Termination of authority must
be communicated to the third
party customer to prevent
further dealings by the agent
on behalf of the supplier.
Taxation
The United States has tax
treaties with most countries.
Generally, income tax is not
charged unless the supplier
has a permanent establishment
in the country. The issue then
becomes whether the agent's
office constitutes a permanent
establishment. Use of a
commission agent generally is
not considered to constitute a
permanent establishment
because the commission agent
is free to represent others
and has limited authority. If
an agent has authority to
conclude contracts, however,
the principal probably has a
permanent establishment for
tax purposes.
Warranties
Agency and distributorship
agreements should always cover
what warranties and what
disclaimers will be provided
to the customer, and what
representations may be made by
the agent or distributor. The
effectiveness of disclaimers
will depend on local law,
which should be examined.
Best Efforts
Promotional efforts to be
undertaken by the intermediary
are always a concern in agency
and distributorship
agreements. Of course,
maximizing sales is the goal
of both the supplier and the
intermediary. Nevertheless,
the issue should be covered in
the agreement. The
supplier/principal may impose
specific advertising and
promotional requirements or
may simply require "best
efforts" of the
intermediary. The vagueness of
the term "best
efforts" sometimes leads
to problems, and distributors
and agents often prefer
limiting the obligation to the
intermediary's normal and
customary business practices,
also a vague term. The
agreement should provide for
termination if specific goals
are not met.
Restraints on Competition
In some countries,
commercial agents and
distributors cannot represent
competitors without the
consent of the supplier, while
in other jurisdictions, the
practice is common. Local law
will dictate the outcome of
this issue. Also, provisions
preventing the agent from
competing for a time after
termination of the agreement
are valid in some
jurisdictions but not in
others. Local law should be
consulted concerning any
provision that could be
construed as a restraint on
competition. Use of such
provision is discouraged
because they are inherently
suspect under the laws of many
countries.
Pricing and Compensation
All agreements with
intermediaries should address
the issues of the price of
goods and compensation.
Typically, the supplier will
set the price of goods to be
offered by agents, which will
effect the amount of the
commission. Distributors
almost always set the prices
at which they sell the goods
that they have purchased from
the supplier. Compensation of
the distributor lies in the
spread between the cost at
which the distributor
purchases the goods and the
price at which they are sold.
Pricing and compensation
provisions should also
affirmatively state that there
are no other claims for
compensation other than those
stated therein. Resale price
maintenance is illegal in
virtually all major commercial
jurisdictions. Suggested
resale pricing is tolerated,
so long as it is not used as a
means of coercing
distributors.
IV. TERMINATION OF AGENCIES
AND DISTRIBUTORSHIPS
Perhaps the most frequent
problem area with agency and
distributorship agreements is
in termination of the
relationship. A variety of
problems can arise. Using a
degree of common sense
initially in setting up the
relationship can avoid many of
these problems.
Contract Term
Business people tend to
view agency and
distributorship relationships
as long-term. Common sense
suggests, however, that an
initial short fixed term
agreement may be advisable, in
order to "test the
water". Upon expiration
of the initial short term, the
agreement will terminate
without further liability in
most jurisdictions, although
indemnity upon termination is
required in some
jurisdictions. Once the
agreement is terminated, the
parties are then free to
renegotiate or simply renew
the agreement.
Many agreements provide
that if the agreement is not
renewed formally at the end of
the contract term, it is
tacitly renewed for the length
of the original term, unless
either party terminates by
notice to the other party.
Where an agreement has been
renewed, it is considered in
some countries to have an
indefinite term, which invokes
protective legislation that
may not have been anticipated
by the parties. Even in the
United States, laws prohibit
an arbitrary or bad faith
failure to renew such
agreements (particularly in
franchising). It is advisable
to use a fixed term contract,
and if a re-negotiation
provision is necessary, be
certain to document the
re-negotiation of the
contract.
Options to Terminate
A mutual right to terminate
an intermediary agreement with
or without cause often makes
business sense, when the
parties have had no prior
dealings. Giving one party a
unilateral right to terminate,
however, often has unexpected
consequences. In some
countries, giving one party
the right to terminate at any
time without cause renders the
contract illusory and
therefore unenforceable. For
instance, if an agency
agreement includes
post-termination
non-competition provisions
that are otherwise enforceable
against the agent, they could
be rendered unenforceable by
the inclusion of a unilateral
right on the part of the
principal to terminate the
agreement without cause.
Further, termination without
cause may be permissible under
the agreement, but it may also
invoke statutory
indemnification requirements.
The right to terminate for
cause may be built into the
agreement, but local law
should always be consulted
before terminating an agency
or distributorship, because
local law often defines the
permissible causes of
termination. One reason for
which a distributor may not be
terminated is failure to
maintain prices at levels
established by the supplier.
Such termination can result in
liability of the supplier
under antitrust laws.
Where an agency or
distributorship agreement is
wrongfully terminated, the
remedy is for breech of
contract, and one element of
damages is the loss of the
goodwill of the business.
Other penalties may exists,
such as a rule that the
supplier may not import into
the country while a claim for
indemnification is pending.
The main point to remember
with respect to termination is
that in the United States, our
basic freedom to contract
leaves most issues relating to
agencies and distributorship
in the hands of the parties.
This is not the case in many
countries. One should always
consult local law and conform
to its requirements.
V. JOINT VENTURES
In the domestic context,
"joint venture"
usually means an association
of businesses or individuals
for the purpose of handling a
specific business venture,
which may be a single,
short-term venture. The term
"joint venture" in
the context of international
business usually connotes a
more substantial, longer-term
relationship. Joint ventures
are often formed for purposes
beyond the international sales
of goods, such as the
exploration and development of
minerals or the development
and construction of energy
generation or manufacturing
facilities.
A joint venture usually has
independent legal existence
under the laws of the
jurisdictions where the joint
venture engages in business.
Joint ventures frequently are
corporations, the stockholders
of which are individuals or
business corporations of two
or more countries. On the
other hand, a joint venture
may be an informal association
of individuals or businesses
who simply combine resources
to jointly engage in business
for a shared profit, with or
without a written agreement.
The term "joint
venture" is very
flexible.
Regulation of Joint
Ventures
In the United States, joint
ventures are governed by the
laws of partnership, although
this is not the case in all
countries. Local laws,
particularly in developing
countries, often require a
specific level of
participation in management by
local nationals and mandate
local majority ownership. Such
laws are a response to the
perceived threat of foreign
investment. Very recently,
laws have been passed in
Russia which govern foreign
investment in joint ventures
for energy production. These
laws firmly limit foreign
investment to a minority of
equity and maintain local
control of management of such
ventures, while mandating the
contribution of technology by
the foreign investor. Access
to technology is frequently a
key to the joint venture
relationship.
Local Corporate Law
The concepts of control
through ownership and majority
rule are so basic to our
system that it can be
difficult to imagine that they
are not universal. However,
mechanisms exist in our own
legal system that allow for
minority control, and such
provisions may be even more
prevalent under the local law
of other countries. Careful
study of local corporate law
may reveal opportunities to
maximize protection of your
interests. Management
contracts and election of
directors by various classes
of stock may be effective
means of minimizing the effect
of restrictive local laws.
Conflict Resolution
Careful planning prior to
entry into a joint venture can
go far to eliminate conflicts
between the parties. However,
long-term relationships rarely
escape conflict and it is
essential to build into the
joint venture agreement a
conflict resolution mechanism.
An enforceable arbitration or
mediation provision in the
joint venture agreement may be
preferable to reliance upon
local courts for dispute
resolution. Conflict of law
rules should be examined in
advance to determine the
enforceability of provisions
relating to conflict
resolution and the choice of
the forums that could decide
any issues that may arise
under the joint venture
agreement.
Joint Venture with
Competitors
Antitrust concepts arise
again in the context of joint
venture agreements. Where
competitors join together in a
joint venture, particularly
when they are dominant in the
industry, care must be taken
to avoid price-fixing or
sharing of duties or
information that could result
in a perceived reduction in
competition between the
competitors. Discussions of
pricing, cost allocation,
market division and similar
matters must be avoided. Also,
care should be taken to limit
the scope of the venture to
avoid the appearance of a
merger between the
participants.
Terms of Joint Venture
Agreements
It would be impractical to
attempt to discuss all of the
terms that can be included in
joint venture agreements, due
to the great variety of
businesses and business
formats that are represented
by joint venture. Numerous
checklists of terms, issues
and considerations relating to
joint venture agreements are
available. The main point to
remember is that joint venture
agreements should be well
thought out in advance from a
business perspective and
should be carefully examined
in light of local law, in
order to create an effective
legal and business entity.
A final word concerning
joint ventures: Know your
joint venture partner well
before entering into a
contract that results in a
long-term relationship. Be
certain that your business
principles and goals are in
agreement and that you are
able to deal with your partner
comfortably on a day to day
basis.
