Incoterms_® and Commercial Contracts

12.1 International business expansion: paths to globalization

International business growth obliges companies to enter into a variety of contractual arrangements with foreign representatives, partners, buyers, suppliers and intermediaries. International trade professionals should understand the business strategies and legal constraints underlying each of these transactional structures. One important tool in this regard can be found in model international contracts such as those developed by the ICC Commission on International Commercial Law and Practice.

12.2 Using model contracts

An international business transaction requires a precise and detailed underlying contract. However, it can be expensive and time-consuming to draft such a contract oneself. In practice it is difficult to find attorneys or executives with prior experience in all possible modes of international distribution. One solution is to rely on a “model contract”. Model contracts are usually written in the form of a complete standard contract with blanks left open for the parties to fill in specific contract details. Model contracts have been developed by a number of international organizations and trade or industry associations.

The simplest way to use a model contract is to fill in the blanks with information related to the transaction. The danger of this approach is that some of the clauses in the model contract may not be appropriate for the given transaction. Therefore, traders and their counsel should carefully review each clause to verify that it is suitable for the given transaction. A more sophisticated way to use a model contract is as a source of inspiration for the company’s own contracts. Here, the trader or its counsel will seek to incorporate only the most relevant clauses, and will re-draft or substitute for clauses that are not appropriate.

A final way to use model contracts is as a negotiation device and/or reference. When the counterparty presents a proposed contract, the trader can compare it with the provisions of a relevant model contract. If a particular clause seems troublesome or less favourable than a similar clause contained in the model contract, the party can put forward the model contract clause as a fair compromise.

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12.3 Organizations producing model contracts

Although legal publishers provide a range of sample contracts and clauses, the concept of a “model” contract implies that the contract has been thoroughly and professionally drafted by a team of experts. Usually, this is done by an international or non-governmental organization.

The model contracts of the International Chamber of Commerce (“ICC Model Contracts”) are drafted to permit a broad scope of application, given the ICC’s status as a global, multi-industry trade association. ICC Model Contracts also distinguish themselves by their balanced, neutral approach. They are drafted so that the agreement will be safe for either side to sign.

ICC Model Contracts are developed by international teams of legal experts working under the auspices of ICC’s Commission on International Commercial Law and Practice. Drafts are widely circulated around the world to ICC national committees and their experts for comment and revision before being formally adopted by ICC.

The International Trade Centre (ITC), a joint agency of the World Trade Organisation (WTO) and the United Nations Commission on Trade and Development (UNCTAD), has developed a series of model contracts that are particularly suitable for small firms. ITC provides international model contracts for contractual alliance, corporate joint venture, commercial sale of goods, long-term supply of goods, contract manufacture, distribution of goods, commercial agency and supply of services.

In some industries, highly detailed and sophisticated model contracts and general conditions have been developed that are only suitable for transactions in that sector. Thus, FIDIC (the acronym of the International Federation of Consulting Engineers) represents the global consulting engineering professions. FIDIC has developed a number of model contracts and clauses for international technology-based services contracts. Orgalime, the European federation of engineering industries, also provides a series of model contracts as well as a range of general conditions for the supply of various mechanical, electrical and electronic products.

12.4 ICC Model Contracts

The current portfolio of ICC Model Contracts for International Business:

12.4.1 ICC Model International Sale Contract

The most basic international trade agreement is the sale or purchase agreement. ICC has developed a model contract specifically for the international sale of manufactured goods intended for resale. The structure of this contract is more fully set forth in Chapter 5. Note that the scope of this contract (spot transactions in manufactured goods) excludes international commodities sales or long-term supply agreements. Note further that contracts for the commercial sale of goods are to be distinguished from contracts for the sale of services, intellectual property or corporate interests. The ICC Model International Sale Contract was drafted specifically to operate in harmony with CISG as the applicable law.

12.4.2 ICC Model Commercial Agency Contract

The use of foreign commercial agents is a very common phase in international expansion. A
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commercial agent is an independent sales representative who works on a commission basis. Agents are useful because they know local market conditions and industry sectors very well and are highly motivated to develop the territory. This ICC Model Contract is reviewed in detail in the following section of this chapter.

Commercial agency requires relatively more investment than direct exporting, because the exporter must go to the expense of negotiating and contracting with the representative, and must further concede an important share of the profits to the representative. However, the agency option is cheaper and less risky than establishing a joint venture or a branch.

12.4.3 ICC Model Distributorship Contract (sole importer-distributor)

Distributorship is very similar to commercial agency: in both cases the exporter enters into a cooperative agreement with a foreign representative. However, the distributor actually buys the goods and then resells them for a profit in the contract territory (agents do not buy the goods or take ownership of them, they merely market them). This ICC Model Contract is reviewed in detail below.

12.4.4 ICC Model Short-Form Contracts

These contracts represent abbreviated form versions of the above–described agency and distributorship contracts.

12.4.5 ICC Model Selective Distributorship Contract (sole importer-distributor)

Selective distributorship refers to a distribution structure in which goods are marketed through a network of qualified resellers. This type of structure is common in high-value sectors such as luxury or high-technology products. Selective distribution allows the exporter to control the way in which products are marketed and provide a certain level of aftersales service to the end customer. The need to maintain strict selection criteria for retailers requires a closed network that prohibits members from selling to non-authorized resellers.

12.4.6 ICC Model Franchising Contract

Franchising is a very specific mode of business expansion in which the franchisor grants a franchisee the right to exploit a bundle of intellectual property rights, brand goodwill and business strategies in exchange for payments which are usually calculated as a percentage royalty on sales. Franchise offerings are highly regulated in many countries.

Franchisors may seek to expand internationally either through direct franchising or through “master franchise” structures. A master franchise is an agreement under which the foreign partner enters into sub-franchises and develops the territory. The ICC Model Contract was developed for the direct or unit franchising. Unidroit has drafted a guide to international master franchise agreements.

12.4.7 ICC Model Contract for Turnkey Supply of an Industrial Plant

Turnkey contracts are agreements under which one party agrees to design and build an industrial plant for a buyer or employer. The term “turnkey” refers to the contractor’s obligations to provide all services and materials necessary for the buyer/employer to merely “turn the key” to start the plant’s operation.

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The ICC Model Turnkey Contract is intended to have a broader, more general scope of application than the turnkey contracts provided by FIDIC and Orgalime.

12.4.8 ICC Model Turnkey Contract for Major Projects

The ICC Model Turnkey Contract for Major Projects is a much more detailed and complete version of the ICC Model Contract for Turnkey Supply of an Industrial Plant. This model contract runs to 110 pages and is intended to provide a structure that would be helpful for negotiating very large or high-value construction or engineering projects. Notably, this contract contains an extremely detailed provision for dispute resolution through the use of a Combined Dispute Board (CDB). The great detail of this provision may allow parties to avoid (or at least to resolve promptly) most disputes.

12.4.9 ICC Model Occasional Intermediary Contract

One important form of international distribution is through an intermediary or “middleman” structure. In such cases, the prospective intermediary wishes to be protected by a non-circumvention non-disclosure agreement. This type of agreement is intended, for example, to prevent other parties from making unfair use of information provided in a proposal (a buyer might otherwise be tempted to circumvent the intermediary once the identity of the ultimate supplier was revealed). ICC uses the term “occasional intermediary” to describe a party that undertakes to provide services to a party or parties without any continuing obligation to the parties.

12.4.10 ICC Model Transfer of Technology Contract

The term “transfer of technology” covers such transactions as cross–border patent or knowhow licenses. The ICC Model International Transfer of Technology Contract was specifically developed for those situations in which a manufacturer licenses a bundle of information and industrial property rights to a licensee in order to permit the licensee to manufacture products using the licensor’s technology.

12.4.11 ICC Model Mergers and Acquisitions Contract 1 – Share Purchase Agreement

As companies grow internationally, they may seek to enter new markets by buying all or parts of companies. Such purchases can be quite complex and trigger the application of local securities law. The ICC Model Mergers and Acquisitions Contract is the first in a series of model contracts dealing with the transfer of a company or business to an international buyer. This model contract is a Share Purchase Agreement (SPA) for the acquisition of the entire issued stock of a company. It was not intended to apply to complex transactions nor to the acquisition of public companies, that are governed by strict securities laws.

12.4.12 ICC Model Trademark License Contract

Consumer brands and branded products often grow rapidly internationally through trademark licensing agreements. The owner of a valuable trademark (for example, a brand name) may lack the capital to enter a particular market or sector. The licensee (for example, a foreign manufacturer) will offer to develop the market or sector and pay percentage royalties in exchange for the right to use the trademark according to the contract conditions. This ICC model contract is based on the assumption that the licensed products will be designed and developed by the licensee and that the licensor’s principal consideration is to verify that the product quality conforms to the brand image associated with the trademark.

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12.4.13 ICC Model Confidentiality Agreement

Confidentiality is a very common contractual stipulation. This ICC model contract provides both a full confidentiality agreement as well as a standalone confidentiality clause.

12.4.14 ICC Model Contracts in development

As this book went to press, the following ICC Model Contracts were in preparation:
– ICC Model Mergers and Acquisitions Contract 2 – Business and Assets
– ICC Model Clauses on Electronic Contracting

12.5 Focus on agency and distributorship

12.5.1 Choosing between agency and distributorship

The basic distinction between agency and distributorship is as follows:

In commercial agency relationships, the principal contracts directly with the customers. The agent only “introduces” the principal and buyers by conducting marketing and prospecting activities in the territory. The agent is an intermediary.

Conversely, in distributorship relationships, the distributor stands between the principal and the ultimate customers - the distributor buys the goods and then resells them on its own account to the final purchaser. The distributor is a buyer-reseller. The key difference with agency is that the agent does not buy the goods and take title to them in its own name.

The following simple rule of thumb can help traders determine whether an agency or distributorship structure is more suitable for a given project.

• Agency preferable
  If the final purchasers are likely to want to deal directly with the principal (for example, as with products that are unique or must be customized, or machinery which is complicated, expensive, or maintenance-intensive), then agency is more appropriate.
• Distributorship preferable
  If the distributor needs to keep a very large stock of goods on hand for resale to a large number of customers, the appropriate contract is likely to be one for distributorship.

Many exporters begin with direct export sales, then move to international sales via an agent, then later on to sales via a distributorship relationship, and then finally, if the market has become extremely well-developed, to a branch or subsidiary.

12.5.2 Drafting agency and distributorship contracts

Agency and distributorship contracts require careful drafting because they govern longlasting relationships and major investments. These contracts must allow for a wide range of contingencies over the period of time the contract is in force. Not only products but also parties may change over time -prospering or declining, or being purchased by third parties. How does the contractual agreement respond to such changed situations? The contract must be precise enough to provide clear solutions for predictable price and product-line variations, but flexible enough to adapt to contingencies.

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Agency and distributorship commercial relationships demand work, patience and investment of time and money by both parties. Consequently, an eventual separation can be quite painful, especially for the agent or distributor. Nonetheless, it is quite common for firms to outgrow their agents and distributors and to terminate them when they wish to take over the territory directly. Therefore, both sides are well advised to pay careful attention to the termination provisions under the contract as well as under local law.

Under some systems of law, the exporter who wishes to terminate an agency contract may be forced to pay the agent an indemnity - an equitable compensatory payment for the financial loss the agent is deemed to suffer as a result of the separation. If an exporter becomes unhappy with the agent and wishes to terminate the contract, he may be surprised to discover that an indemnity payment is necessary.

Agents or distributors should therefore be selected with great care, after a thorough analysis of the foreign market and all potential representatives in that market. Agents and distributors are like ambassadors. If they give customers a bad impression of the exporter’s products and services, the exporter’s sales to that market may suffer for years. Moreover, an unsatisfied or dismissed agent may establish relations with a rival exporter.

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12.6 Law of agency contracts

The use of the word “agency” in international trade does not always accord with legal definition of the term. Therefore, it is recommended that the parties clearly qualify their relationship in the contract. There are different categories of agents (e.g., “buying agent” or “service agent”), and in some countries, special rules govern contracts with agents categorized as employees. In such cases, the rules applicable to employed agents will apply.

An agent may or may not disclose the fact that it is acting on behalf of a foreign exporter, the principal. In civil law countries, as a general rule the principal may not directly sue the customer if the agent has not disclosed the principal’s existence to the customer - only the agent can sue the customer. If an exporter wishes to avoid this constraint, it should contractually require the agent to disclose during any sales or professional communications the fact that he is acting as an agent, or contractually require the agent to assign to the principal any relevant claims against customers.

Actual authority refers to authority which the principal gives expressly to the agent; apparent authority (or ostensible authority) is the authority that an agent appears to have to others. Under certain circumstances, a third party may rely on an agent’s apparent authority to bind the agent or principal to the contract. Thus, the principal should avoid giving the impression to third parties that the agent has full authority to bind the principal.

12.7 Fundamental duties of agent and principal

To use reasonable diligence – The agent must carry out his duties with customary and reasonable care, skill and diligence, and is responsible to the principal for any loss caused by a failure to observe such standards. For example, an agent cannot give a buyer any warranty unless the principal has given him the authority to do so.

To disclose all material facts – The agent must pass on all information likely to be of interest to the principal in deciding whether or not to accept the customer’s order. Clearly, the agent may have a financial incentive to neglect this duty if he feels that certain information will result in the principal refusing to accept the order. However, such a violation of the duty to disclose makes the contract voidable at the principal’s option. Thus, for example, the agent cannot act simultaneously as an agent for the buyer and seller, thereby receiving a double commission.

Not to make secret profits – The agent cannot accept a bribe or make other secret profits. The standards of honesty that an agent must respect are very high.

Not to divulge confidential information – The agent must not reveal privileged information about the principal and the principal’s business operations.

To account to the principal – The agent must keep proper business records so that the principal can verify the terms and obligations of the agreement. The agent must pay over all moneys received on behalf of the principal.

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To pay commission – The commission system is meant to provide an incentive for the agent to maximize sales. The principal may provide in the contract that the commission will only be paid when the purchase price is received in cash by the principal. Another alternative is to arrange a contract on del credere terms, which means that the agent undertakes to indemnify the principal for losses resulting from sales made to customers who turn out to be insolvent or fail to pay for whatever reason. Obviously, the calculation of the agent’s commission is at the very heart of the contract. It is vital that the parties express themselves with absolute precision on this point.

Agent’s expenses and indemnity – The self-employed sales agent normally cannot claim his expenses from the principal unless they have agreed to this effect in the agency contract.

Orders emanating from the agent’s territory but not procured by him – The basic principle is that the agent is remunerated for orders placed that are derived from his efforts. However, if the order is placed directly with the principal by a customer within the agent’s territory, the agent may or may not be entitled to commission, depending on the law governing the contract and the specific contractual provisions.

Commission on repeat orders – The contract should provide whether the agent is entitled to commission on repeat orders during the period of the agency agreement, as well as after the termination of the contract.

Principal’s ability to accept or reject orders – If the agent has not been given the authority to do more than introduce customers, then the principal may either accept or reject the customer’s order. Commission will only be paid if the principal accepts the order.

12.8 Agency and law/regulation: the case of the European Agency Directive 86/653 of 18 December 1986.

The European Commission Directive on Commercial Agents – The European Commission Directive on Commercial Agents (the “Directive”) is a key example of a regulation which provides protection for agents. Under Article 17 of the Directive, the agent is entitled to a certain indemnity after termination of the contract, provided that he requests it in writing within one year of the termination of the contract. The agent will be entitled to an indemnity that corresponds to the amount of business he brought the principal. The indemnity can be lost if the agent is guilty of culpable behaviour. Finally, the agent can seek damages if, for example, he has not been able to amortize the investments he has undertaken pursuant to the principal’s advice.

12.9 Focus on: ICC Model Commercial Agency Contract

12.9.1 Scope of application

This ICC Model Contract is meant to be used by self-employed commercial agents for the sale of goods. Agency contracts for services, for example, or with agents who are not self– employed (e.g., “salaried commercial representatives”), do not come within the scope of this contract, although it may still be used as a source of inspiration. Similarly, “buying agents” or “purchasing agents” who procure goods for a principal, generate a different set of considerations, and the ICC Model was not developed for these situations.

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12.9.2 Agents as employees

In the case of agents who may be considered employees of a particular principal, national labour law may override the provisions of the ICC Model Contract. The simplest way to avoid this problem is for principals to contract only with agents which have the legal status of a company or corporation or other “legal person”.

12.9.3 Key clauses in agency contracts

1. Territory and products -A precise definition of the products is essential because the obligations set out in the contract apply only to products that are clearly covered by the contract. Agents desire the right to distribute as many as possible of the principal’s current and future products, whereas principals may wish to restrict the agent to only certain products.
   The contract products can be described specifically or generally. A specific listing can result in a contract that must be updated too frequently to accord with a periodically changing product line. An overly general description may bring goods into the contract which the principal would have preferred to distribute through another agent or himself.
   The ICC Model sets forth a compromise solution: the principal must inform the agent of any intention to put new products on the market and must discuss with the agent the possibility of including the new products in the contract.
   The contractual territory should also be described precisely. Generally, this territory is that area where the agent can realistically promote sales, although in some cases a wider territory may be granted as a form of incentive (additional territories may be permitted, for example, on a non-exclusive basis).
2. Good faith and fair dealing – This clause sets forth the parties’ commitment to abide by standards of decency, fairness and reasonableness.
3. Agent’s functions – This clause states the duty of the agent to actively and competently promote the contract goods, and to follow reasonable directions made by the principal. The ICC Model works on the assumption that the agent is independent and not an employee of the principal. This distinction can be significant, because in many countries an employee’s contract cannot be submitted to arbitration, which would defeat one of the essential premises of the ICC Model.
   The ICC Model also includes a provision that the agent has no express authority to bind the principal toward third parties, nor to vary the terms and conditions of the principal’s standard sales contract. Note, however, that the principal cannot completely remove the possibility that the agent will act with “apparent” authority, the only solution being practical supervision and vigilance.
   Note further that there may be tax consequences in allowing an agent to enter into contracts which bind the principal. Such acts may be considered for tax purposes as sufficient to indicate a “permanent establishment” of the principal in the given jurisdiction.
4. Acceptance of orders by the principal – It is important for the agent to contractually oblige the principal to inform the agent rapidly and in good faith whether an order has been accepted or rejected. The principal should not arbitrarily refuse orders. A principal unhappy with an agent, but lacking objective or contractual justification for terminating the contract, might be tempted to “freeze” the agent out of business by
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   arbitrarily refusing orders. Under the ICC Model, such “freezing out” would constitute a breach of contract.
5. Undertaking not to compete – The agent must not sell products which compete with those of the principal. It may not always be easy to determine exactly what constitutes a “competing product”, so it may be advisable to provide for a precise definition of “competing products”.
   Under the ICC Model, the agent is free to represent non–competing products, provided that he informs the principal in advance. He does not have to inform the principal if the products are so obviously non-competitive that it would be unreasonable to expect him to do so. However, an exception to this latter rule is made for the products of a competitor of the principal. If an agent worked for competing principals this could easily give rise to conflicts of interest, which could impair the necessary trust between principal and agent.
6. Sales organization – A good agency contract will balance the principal’s right to set standards of quality with the agent’s freedom to design his own internal organization:
   SERVICING OR WAREHOUSING – If these are an important competitive feature, the principal should contractually provide for minimum service standards or warehousing capacity. The parties should determine whether the stock should be owned by the agent (which may entail changing the legal status to that of distributor) or by the principal (in which case it would be consignment stock).
   CONSIGNMENT AGREEMENTS – A consignment agreement should make clear which of the parties will be liable for the cost of storage and maintenance of the stock. Specific clauses should cover handling, safeguarding, insurance and procedures for inventorying the stock.
   In some countries, special laws apply to consignments, making recognition of the principal’s ownership of the stock conditional on the stock being appropriately identified and even stored physically apart from other goods. This is especially important in the event of the insolvency of the agent, in which case the agent’s creditors may seize the agent’s stock. The principal must have precisely followed the legal provisions in order to be able to assert control over the goods.
   STOCK OWNED BY THE AGENT – The parties may want the agent to hold stock on his account, so that he is able to rapidly effect delivery. This brings up issues of whether or not the relationship is really one of principal and exclusive distributor. In the European Union, this raises the question of whether competition and cartel regulations may apply. Presumption of distributorship may also arise if the agent is contractually required to effect after-sales servicing activities free of charge, without receiving any compensation from the principal.
   AFTER–SALES SERVICE – If service is under the principal’s guarantee, it is usually free (for the agent as well as for the ultimate customer), and in some way reimbursed by the principal. Also, if the after-sales service is judged as “necessary”, the agent can ask the principal for compensation for costs. After-sales service may, in some cases, be a cost or burden for the agent, but in other cases it can be a primary source of revenue. For example, it would appear that in the elevator business the agent may earn more from the service contract than the sale contract.
   ADVERTISING – Agents usually are not responsible for advertising, but the principal may wish to allow it in particular cases. The agent’s knowledge of the local market may enable him to suggest necessary adaptations to the principal’s advertising materials.
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   Sometimes the agent is reimbursed for a percentage of advertising costs incurred, as an incentive for the agent to invest in the product, and as an encouragement to use his best efforts to sell the product.
   FAIRS AND EXHIBITIONS – Presence at trade fairs and exhibitions may be important. If so, the parties should develop a team approach with shared responsibilities.
7. Guaranteed minimum target – Under the ICC Model, the parties can set either an ordinary sales target or a guaranteed minimum target. An ordinary sales target is a “soft” target, indicating a sales figure that the parties believe is possible, but fixing no direct consequence from a failure to reach the target. Especially in new markets with no previous experience with the principal’s product, it may be unreasonable to set a guaranteed minimum target. A guaranteed minimum target is a “hard” minimum. It can be calculated in terms of money, amount of products sold, or percentage of the general sales target. Failure to reach the target constitutes a breach of contract allowing the principal to terminate the contract. However, the principal might take steps less drastic than terminating the contract, i.e., eliminating the agent’s exclusivity, or reducing the size of the agent’s territory.
   The agent may, therefore, wish to negotiate for a clause excusing non–attainment of the minimum when such failure was caused by conditions beyond his control (such as an economic decline, new import restrictions, the arrival of new competitors, etc.).
8. Sub-agents – Either the matter will be completely left up to the agent (“Alternative A” in the ICC Model), or the principal will require that the agent, for example, notify him before the engagement of any sub-agent (“Alternative B” in the ICC Model). The employment of sub–agents is most commonly left to the agent, because of the basic principle that the agent is independent and should be free to organize his activities. However, in some cases the principal may have entered into the agency contract specifically because of the personal reputation of a particular agent. In this case the principal may justifiably refuse to allow the agent to delegate his responsibilities to a sub-agent.
9. Principal to be kept informed – The agent should report back to the principal on market conditions and answer any reasonable request for information from the principal.
10. Financial responsibility – The agent must take a certain level of care in checking the solvency of potential customers. Although, under the ICC Model, the agent is not required to perform an exhaustive credit check on the potential customers, he must not pass on an order to the principal if he has any reason to doubt the solvency of the customer.
    Del credere contracts – The ICC Model spells out the possibility of a del credere contract, under which the agent agrees to reimburse the principal for any loss the principal may suffer from non-payment by the customer. Because the potential exposure of the agent under such an agreement is great, these agreements are frequently subject to legal limitations on the extent to which the agent must indemnify the principal. There are two basic possibilities:
    
    i. 100% reimbursement - the agent agrees to reimburse the principal for 100% of the loss he may suffer, in which case it may be advisable for the agent to limit this exposure to certain types of business or certain sectors. Under this option, the parties will usually agree on an increased commission for the agent; or
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    ii. limited percentage reimbursement - the parties limit the agent’s exposure to a certain percentage of the loss (i.e., 15%) suffered by the principal. The primary goal under this option is to provide a strong incentive for the agent to do a thorough job in verifying the credit of potential customers.
    
    Because the del credere clause can have a large financial impact on the agent, the ICC Model requires that the Del Credere Annex be signed by both parties. Since many national laws limit the agent’s power to subject himself to del credere exposure, parties should seek to arrive at a balanced solution which does not impose undue liability on the agent (a rule of thumb is to limit the percentage to that of the agent’s commission).
11. Principal’s trademarks and symbols – Both principal and agent have an interest in protecting the principal’s intellectual property rights in the contract products: infringement will cost both parties money. Thus, agency contracts often require the principal to protect his intellectual property interests in trademarks, trade names and corporate symbols (although this is not the ICC approach). Similarly, the agent is often contractually required to share the obligation of protecting such property, as by initiating legal procedures - though this is not required under the ICC Model.
    In the absence of any contractual provisions on intellectual property, an unscrupulous agent might be able to register the principal’s trade names or symbols under his own name, and retain the rights to these names after the termination of the contract. The consequences could be serious if the principal had allowed the agent to use the principal’s name or symbols in the agent’s corporate name - after termination of the contract the principal might not be able to prevent the agent from continuing to use a name which could easily be confused with the principal’s.
    The ICC Model therefore expressly prohibits the agent from registering the principal’s marks in his own name. After the termination of the contract, the agent must immediately and clearly stop associating himself with the principal’s trademarks. The agent must also inform the principal of any possible infringements of the principal’s trademarks. However, since a defence of these trademarks may be quite expensive and prove unsuccessful, there is no obligation in the ICC Model for either party to undertake such a defence.
12. Complaints by customers – Under the ICC Model, the agent has no authority to commit the principal to take back allegedly defective goods or to compensate the buyer for any alleged breach. In many cases, however, the principal and agent will agree on the need to quickly respond to customer complaints. If it is anticipated that such a quick response will be necessary, the principal should give the agent specific written authorization to respond to the complaints.
13. Exclusivity – Agency agreements may provide for total exclusivity in the territory to the agent, or for no exclusivity whatsoever. The ICC Model seeks to strike a balance. The agent is granted exclusivity in the territory, with the exception that the principal himself can make sales into the territory (provided that he informs the agent and pays the agent’s commission on these sales). If the principal already has large customers or prospects in the territory, there is not much reason for him to grant full commission to the agent on sales made to these parties. Therefore, the ICC Model provides for an Annex in which these customers can be listed, and allows the principal to pay reduced commission for these sales.
14. Agent to be kept informed – The agent should be kept continually informed on developments involving the products, their technical features and their competitive
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    position against the prices and technical characteristics of rival products. The agent should also be fully briefed on the principal’s operations, because clients may ask for details. For example, the agent should know the principal’s financial status, growth projections, factory specifications, number of employees, capital reserves, research plans, export strategy, etc. Ideally, the agent will have a permanently accessible interlocutor at the principal’s home office.
15. Commission – The agent’s commission is usually expressed as a percentage of the value of sales made during the life of the contract. The commission may be a simple set percentage, or there may be a variable commission depending on the size of a particular sale or on the total volume of sales.
    
    Under the ICC Model, the agent is entitled to a commission an all sales made in the territory, even if the agent did not actually do any of the work required to approach a particular customer. This provision was drafted so as to accord with Art. 7.2 of the European Directive on Agency.
    
    Exceptions to the rule (entitling the agent to payment of a reduced commission) are allowed for:
    – sales made by the principal himself;
    – orders placed outside the territory, but owing to the agent’s work, or placed within the territory, but not owing to the agent’s efforts;
    – sales on reduced price terms;
    – commissions where the customer turns out to be insolvent but the principal is reimbursed for its loss by insurance.
    
    The above rules avoid the problem of two agents from different national territories claiming commission for the same sale, by encouraging agents to try to make sales even if it appears that the ultimate order will be placed from outside the territory. Agents are often willing to make sales at reduced prices even if it means giving up part of the commission; the ICC Model therefore allows for such a practice if expressly agreed to by the parties.
    
    The agent will not be reimbursed for any expenses incurred in fulfilling the contract (such as telephone or travel expenses). It is expected that the commission paid will allow the agent to cover these expenses and still earn some profit. However, the ICC Model allows the parties to provide otherwise with a specific agreement in writing.
16. Method of calculating commission and payment – The calculation of the commission payable to the agent is not infrequently the source of disagreement between the parties. The ICC Model seeks to set out a clear scheme by calculating the commission on the net amount of the invoice. An alternative would be to agree on a fixed lumpsum commission per item sold.
    
    Since the calculation is based on the net invoice price, any reductions granted by the agent to the customer will reduce the commission owed. If the principal grants any additional price reductions after sending the invoice, such as a discount for payments made in cash, these will not affect the commission. Additional expenses for packaging, carriage or taxes are excluded from the calculation when they appear separately on the invoice, which is generally the case. However, if the additional expenses and taxes are included in the net invoice price, they must be included in calculating the commission.
    
    Time of payment of commission – If the agent has been given the authority to represent the principal, then it may be reasonable to allow him to claim the commission as soon
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    as the customer has agreed to place an order. If the agent lacks the authority to bind the principal, several options are possible - the commission may become payable when:
    
    – the order is placed (very favourable for the agent - he may even claim commission on orders ultimately rejected by the principal);
    – the order is accepted by the principal – here the commission will remain due even if the order is ultimately not executed or the customer fails to pay;
    – the goods are delivered by the principal;
    – the customer pays for the goods (most favourable for the principal).
    
    The ICC Model has chosen the latter of the above possibilities - commission is payable when the principal receives payment from the customer for the goods. The agent is allowed partial payment only in proportion to partial payments made by the buyer. The commission must be paid not later than the last day of the month following the quarter in which it became due (this rule is required under the EC Directive).
17. Unconcluded business – The ICC Model clause strikes a balance as regards allocating liability for the principal’s failure to conclude a contract with a customer. If the principal does not conclude the sale because of, for example, insolvency of the buyer, strikes, natural disasters or other factors beyond his control, he will not have to pay commission. If the non–performance, however, is the principal’s fault, then the commission will still be owed to the agent.
18. Term of the contract – The ICC Model provides for two alternatives:
    i. a contract for an indefinite period (which can be terminated at any time upon sufficient notice by either of the parties); or
    ii. a contract for a fixed period which is automatically renewable for successive one– year periods (which can be terminated at the end of the fixed period, provided sufficient notice has been given).
    
    In either case, if the contract has lasted less than five years, a minimum of four months’ notice is required by either party to terminate the contract; if the contract has lasted more than five years, the minimum notice is six months.
    
    Typically, the principal and agent will have opposing perspectives as regards the term of the contract. The agent, called upon to invest time and energy in marketing the principal’s products, wants to be assured of a long duration. The principal, on the other hand, would like to be free to move to another system of distribution, as by opening a subsidiary himself, and therefore prefers a shorter term. A common compromise is for parties to agree to an indefinite term but to specifically enumerate the conditions under which each party is allowed to terminate the contract.
19. Unfinished business – Under the ICC Model, if the agent’s efforts result in orders being placed before the termination of the contract, but only concluded after termination, a commission shall be payable to the agent.
20. Earlier termination – Notwithstanding the basic termination provisions, an earlier termination is possible if either of the parties is guilty of a substantial breach of contract. Moreover, the parties may indicate specific conditions which they would consider as constituting a substantial breach. Certain specific situations automatically give rise to the termination right: bankruptcy, liquidation, receivership, etc.
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21. Indemnity in case of termination – In many countries, there is a legal right on behalf of the agent to claim compensation for the goodwill that the agent has built up for the principal in the event of termination of the contract. Therefore, the ICC Model provides for two possible alternatives:
    
    i A termination indemnity equal to a maximum of one year of an agent’s average remuneration;
    ii No indemnity.
    
    However, in many jurisdictions it will not be possible to choose the second alternative.
    Clearly, agents will prefer to stipulate an indemnity in the contract, whereas principals will be reluctant to agree. However, the principal should be aware that regardless of the contract drafting, national law in certain countries (particularly in Latin America and the Middle East) imposes certain restrictions on principals and protection for agents. Even where an indemnity is made available by law, an agent generally cannot benefit from the indemnity if in fact the principal has not derived any substantial revenues from customers introduced by the agent.
22. Arbitration - applicable law – In the ICC Model, dispute resolution is by arbitration under the Rules of Arbitration of the International Chamber of Commerce. Arbitration was chosen because arbitration proceedings are confidential and are often faster and cheaper than litigation in state courts.
    Two alternatives are provided in the event that the arbitrators are not able to find the solution by looking to explicit contractual provisions. Under the first alternative, the arbitrators will refer to the lex mercatoria, which are the principles of law generally recognized in international trade as applicable to agency contracts. The second alternative is to specifically make the contract subject to a particular national law.
    If the agent is established in a country where mandatory legal rules are in force with respect to agency contracts, these mandatory rules will be applied regardless of the choice of lex mercatoria as the legal foundation for dispute resolution.
23. Previous agreements; modifications in writing – The ICC Model is presumed to supersede all previous agreements between the parties. Modifications to the contract must be in writing.

12.10 Focus on: ICC Model Distributorship Contract

12.10.1 Characteristics of exclusive distributorship contracts

The ICC Model Distributorship Contract assumes exclusivity of representation by the distributor. In practice, a distinction is sometimes made between a “sole” distributorship and an “exclusive” one. In a sole distributorship, the supplier may make sales into the territory, whereas with an “exclusive” distributorship not even the supplier may compete with the distributor in the territory. However, this distinction is not always supported by the law.

A sole distributorship agreement provides that a supplier grants a foreign party the sole trading rights within a particular territory with respect to the supplier’s goods. This agreement is commonly completed by a reciprocal provision that the buyer will rely on the supplier as the sole source of supply.

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Note that the sole distribution agreement is not itself a contract of sale - rather, it sets out the general framework for later individual contracts of sale between the manufacturer and distributor, and further sales to end customers. Where the contract includes exclusive buying provisions, and the buyer resides in either the European Union or the United States, which have strict competition laws, the parties should be careful to avoid violating the law.

Although distributors are often loosely referred to as agents, a sole distributor does not - as opposed to an agent - act on behalf of the principal in dealing with the end customer. Rather, the distributor resells the goods in his own name and his profit is derived from the difference between his buying price from the supplier and his selling price to the customer, and this difference is, in principle, left to his discretion.

An important advantage of the distributor agreement for the exporter is that he does not have to worry about the credit-worthiness of the ultimate customers - he only sells to the distributor, whose credit he will have fully investigated before signing the distributorship agreement.

12.10.2 Key clauses in distributorship agreements

Many of the legal issues covered by distributorship agreements are quite similar to those covered in agency contracts (discussed above); as a result the review of distributorship agreements is somewhat briefer.

The geographical extent of the territory should be precisely described. In some cases, the parties may wish to provide that when sales reach a certain level, the distributor will be entitled to a larger territory. The supplier will often be required to pass on direct inquiries from consumers in the territory to the distributor, and the distributor may also be required to pass on inquiries from outside the territory to the supplier. The supplier will often require the distributor to keep lists of customers and to supply them to the supplier. Within the European Union, a supplier may not prohibit a distributor from accepting orders emanating from another exclusive distributor’s territory. So long as the distributor does not actively solicit such customers, no further restrictions are allowable.

The competition laws of many countries prohibit principals from requiring distributors to adhere to certain, fixed prices. Distributors must therefore be allowed freedom to set their own resale prices. Manufacturers may, however, provide suggested prices and price ranges. As for the price of the goods to the distributor, this provision is tricky in the same way as any other long-term supply contract. Obviously, the prices of most goods will vary according to economic or strategic developments. One solution is to peg the contract price to a publicly available market price on a specific date. Another is to grant the distributor a price equal to the best price quoted by the supplier to any customer that is not a subsidiary or associated company of the supplier. In order to avoid contravention of antitrust rules, the exporter must avoid trying to set the distributor’s prices precisely or to control them.

While it is common for the supplier and distributor to exchange reciprocal agreements for sole buying and selling rights, this is not necessary. The supplier may be wise to specifically provide that the distributor will undertake positive and energetic efforts to offer the supplier’s goods in the market. Otherwise, the distributor would be free to ignore the distributorship contract after having signed it, although he would be able to prevent the supplier from selling
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into the territory through any other intermediary. Along these lines, the supplier may wish to provide for a minimum target, giving the supplier the option of terminating the contract if the orders placed by the distributor do not represent a minimum value during a trial period.

The seller commonly requires the distributor to undertake certain minimum obligations with respect to the advertising of the goods, as well as to provide him with basic commercial and market information, and moreover to help protect his intellectual property rights in trademarks or patents.

12.11.1 Introduction

Franchising is based on the notion of replicating success. In order to grow rapidly, business networks need large infusions of capital. Rather than invest its own capital, the franchisor enters into agreements with franchisees. The franchisor grants to each franchisee the right to exploit all or part of the franchisor’s business system, including trademarks, logo and distinctive signs, intellectual property, technical know-how and processes. In return, the franchisee usually makes a “front money” payment in order to enter the franchise network, invests a minimum amount in setting up and operating the business, pays the franchisor fees and royalties and adheres to the franchisor’s standards for quality of services. The combination of the franchisor’s reputation and expertise with the franchisee’s capital, local knowledge and motivation, can result in explosive growth.

Franchising has become one of the primary distribution channels for products and services in developed economies, where image and service reputation can determine market share. Franchising is found in industries as diverse as fast food chains, computer retail sales, real estate services, automobile rental and service stations, to name but a few.

In some countries, franchising, like agency, has been the subject of political scrutiny. Some organizations have expressed concern that local franchisees, like agents, have little bargaining power against large franchisors and therefore require mandatory legal protection. Thus, in certain countries there are strict regulations dealing with such things as the amount of disclosure that must be made by franchisors when recruiting franchisees. It does happen that franchisees claim to have been “lured” into franchises by a franchisor’s inflated, fraudulent statements as to likely returns on investment.

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12.11.2 Different types of franchises and franchising structures

Product (or trademark) franchising involves granting the right to manufacture and/or market a product under a specific trademark to the franchisee. Business format franchising covers a complete system of doing business, including service concepts and operations, in addition to trademark and logo rights. In production (or manufacturing) franchises, the franchisee manufactures according to the franchisor’s specifications and sells the goods under the franchisor’s trademark. In a service franchise, the franchisee provides a service developed by the franchisor under the franchisor’s service mark. Under a distribution franchise arrangement, the franchisor manufactures the product and sells it to the franchisee for resale to the final consumer.

The franchisor may structure a franchise network in terms of either unit or territorial franchising. In the case of unit franchising, the franchisor enters into an agreement directly with each franchisee. Under a territorial franchise, an entire geographical area is developed by a master franchisee or area developer responsible for a number of outlets.

International franchising is conducted through: 1) direct/unit franchises, 2) franchisor’s branch or subsidiary, 3) development agreement, 4) joint venture, 5) master franchises. Unit franchising is most common in domestic markets - it facilitates a maximum of control by the franchisor over the individual outlets, with promotion of the franchise system and trademarks usually remaining in the hands of the franchisor. In an international context, however, a unit franchise approach runs counter to one of the underlying business principles of franchising - minimizing costs via decentralization. The costs of supervising an international network from a single headquarters could prove onerous. In the international context, therefore, it is generally only advisable to franchise directly when the target country is geographically, culturally, linguistically and/or legally proximate to the franchisor’s country.

Territorial franchises cover multiple outlets in a specified area and may be granted through either a franchise development agreement or a master franchise agreement. Under a typical development agreement, the developer/franchisee is required to open and operate a certain number of units in the assigned geographical area (usually a particular country) within an agreed time frame. The franchisor benefits from dealing with a manageable number of franchisees. Area developers usually have sufficient financial and human resources to manage the set-up and day-to-day operation of the business with a relatively high degree of independence from the franchisor. Training costs can also be reduced, because the franchisor only trains the developer; the developer, in turn, trains the unit franchisees.

Area developer agreements are also subject to corresponding risks. If the developer fails, all of the outlets in the territory will be affected. On the other hand, if the franchisee does extremely well, he may become uncomfortably indispensable to the franchisor, because the developer may represent so many outlets. Another possible problem is that area developers may employ salaried managers to run the individual shops (as opposed to highly motivated unit franchisees).

Under master franchise agreements, the franchisor grants the master franchisee (or subfranchisor) the right to develop and operate franchise outlets on his own account, as well as - in some cases - the right to sub-franchise outlets to sub-franchisees. Some sub-franchisees may even be allowed to run several units, which may add to the complexity of the system. Decreased control over sub-franchisees is generally to be expected as a corollary to the increased decentralization. Although master franchise agreements commonly include strict provisions regarding the supervision of the system, their enforcement may be difficult in certain countries.

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A variety of other legal forms can be chosen for international franchise agreements. One option is to establish an overseas subsidiary in each target territory to act as franchisor. Under this system, the franchisor retains direct control over the foreign franchisees, but still benefits to some extent from local know-how. Alternatively, a joint venture may be set up by the franchisor and a local enterprise. Guidance from an experienced lawyer is essential.

12.11.3 ICC Model International Franchising Contract

This ICC Model Contract applies to international distribution franchise agreements. The following key elements should be kept in mind by the parties:

Know-how consists of all confidential, valuable and proprietary information, experience and operating techniques of the franchisor that would enable the franchisee to reproduce the franchisor’s success. This also includes the franchisor’s assistance in the operation of the business and training of the franchisee. In return, the franchisee has to respect the franchisor’s proprietary rights and take all reasonable steps to protect the confidentiality of the franchisor’s training materials and operation manuals.

The franchisee must acknowledge that the franchisor is the owner of all proprietary rights, titles and interest in the systems to ensure a proper protection of the franchisor’s rights.
Customer recognition and confidence in the products or services are usually linked to the trade mark, which is one of the key elements of a successful franchise system.

A clear definition of the products and the territory is essential to achieve the quality requirements, and also to allow the franchisee to maintain a stock of products to meet the needs of customers and to attain the sales requirements or targets. The granting of an exclusive territory will enable the franchisee, an independent business operator, to prosper. During the term of the contract, the franchisor is not allowed to operate itself or to license any person other than the franchisee to operate the business within the territory.

The parties should clearly decide how and when payment shall occur, taking into consideration the fact there are many ways to calculate royalties. Failure to pay royalties may be considered a breach of the contract and result in a right to terminate the contract.

The parties can contract for a definite period or an indefinite period. In the former case, they should bear in mind that the number of years cited in the contract should be tied to the capital investment of the franchisee, which should be reasonably able to recover its investments. Moreover, the relationship may evolve and new products or services may be introduced on the market. The parties should therefore carefully consider the conditions upon which the contract will be renewed, prolonged or terminated (i.e., the grounds for early termination and its effects).

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12.12 ICC Model Occasional Intermediary Contract (non-circumvention and non-disclosure agreement)

This ICC Model Contract completes the set of ICC Model Contracts in the field of international distribution. Contrary to the agent, the intermediary may agree to promote a specific business without accepting any continuing obligation to develop the market. Moreover, its activities may be limited to the simple supply of information about a possible business, whereas the agent generally must negotiate the contract on behalf of the principal.

The parties should clearly define the type of service the intermediary is to provide, e.g., to supply information about third parties or to put the principal in contact with third parties. They should also agree on the level of exclusivity with respect to the business the intermediary agrees to promote. In return, the intermediary must be assured that it will receive remuneration (commission or lump sum), which is a guarantee that it will not be “circumvented” by its counterpart for the work provided.

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