International ContractsPart Two

Agency vs. DistributorshipLegal Issues

What’s the difference between an agency and a distributor?

Agency

Agency

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Agency

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Agency

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Agency

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Distributor

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Agency vs. Distributorship Legal Issues

• There is no international agreement regarding relationships between exporters and their agents or 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.

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.

Distributor Agent

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Distributor Agent

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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.

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).

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?

Agency or Distributor ContractsTerm 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.

Agency or Distributor ContractsTerm 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.

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.

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.

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.

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More on Termination• 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.

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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).

End of program.

End of Program