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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
by Guillermo C. Jimenez
Agency and distributorship are two of the most common forms used by exporters to market goods internationally. Many of the world’s largest global manufacturers began their international marketing through networks of agents and/or distributors. Although agency and distributorship arrangements are often mutually beneficial for many years, they contain an inherent tension in that the principal (manufacturer) may choose to terminate the arrangement. These and other sensitive points make the negotiation of agency/distributorship contracts a sophisticated task.
The global harmonization of agency law and practice has been less successful than with sales law: there remain strong regional differences in the legal treatment of agency and distributorship contracts. While Common Law countries permit parties broad freedom to structure agency or distributorship countries, the same is not always true in the European Union, the Middle East, and Latin America.
A typical problem in the field is that principals from Common Law countries are surprised to find that in Civil Law countries the parties’ contractual provisions may be overridden by mandatory national law intended to protect agents. As a result, principals should make sure that contracts conform to local law, and in particular should carefully review and abide by any termination provisions. Local law may require that a minimum notice period be given and, in some cases, the payment of a termination indemnity.
Another common problem is that national tax authorities closely scrutinize agency and distributorship relations to make sure the representative is truly independent. If the representative is deemed to be not independent, a number of local tax and labour consequences may follow.
Since agency and distributorship are so important in international trade, it is important to be conversant with the key provisions in agency/distributorship contracts, in particular those related to territory, exclusivity, term and termination, commission structure, etc.
As exporting firms develop their international business, they must decide which foreign markets to enter directly (via direct export or subsidiary) and which markets to enter with the support of a local representative.
Small and medium sized companies lack sufficient resources to establish subsidiaries in all international markets. Agents and distributors step in to fill this crucial gap. If it were not for agents and distributors, most exporters would be priced out of global distribution.[Page76:]
Agency and distributorship provide important business benefits for both parties. For the exporter or principal, the foreign representative offers deep knowledge of the foreign market, a highly-motivated partner, and a buffer from local legal entanglements.
For the agent or representative, the principal offers the opportunity to represent a new or attractive foreign product. Distributorships provide an opportunity for local entrepreneurial ventures to grow into large independent businesses; eventually, distributors can launch their own brands, source product from different exporters, and compete with former principals.
One critical aspect of agency and distributorship arrangements is that their duration is uncertain. In effect, agency/distributorship agreements create medium-term joint ventures in which it may be difficult to predict when the relationship will come to an end. This can place the parties in an asymmetrical or antagonistic, position.
If the target market is effectively developed by the agent or distributor, the market may become so attractive that the principal will seek to reap its rewards on its own, terminating the contract (or simply electing not to renew it when it expires). This can be a problem for the agent or distributor, which may have invested years to build up the local market. It may take time for the agent or distributor to seek out a substitute business partner. As a result, the parties may disagree on the terms of the termination or renewal provisions.
Foreign sales intermediaries may be referred to variously as “sales representatives”, “commission agents” (or “commissionaires”), or “distributors”. These terms are often used imprecisely by business people, so that even if a party is referred to as an “agent” or “rep” it is necessary to look at the actual terms and execution of the agreement to verify if the relationship actually qualifies as one of agency or distributorship.
We must first distinguish between independent parties (such as agents or distributors) and employees. A common sales approach in small or developing markets is for the principal to use a single sales employee, or a small staff, to develop sales. As compared with agents and distributors, there are a number of disadvantages to using employees. Employees are not independent (as are agents and distributors). One result of using employees is that local taxation and labour law may be invoked and applied to the foreign principal. Another risk is that the employee will fail to develop the market, in which case the costs of opening the sales office and staffing it will not be recouped. In some cases, it will be difficult to convince an employee from the home office to accept an expatriate posting; alternatively, it may be difficult to hire and manage a local person.
Next, let us address the basic difference between agency and distributorship arrangements:
In commercial agency relationships, the principal contracts to sell goods directly to the end-customers. The agent only “introduces” the principal and customers. The agent conducts marketing and prospecting activities in the territory as an intermediary, and earns a commission fee on sales as compensation. In some cases, the agent may even sign contracts on behalf of the principal, but the agent does not buy the goods from the principal for resale to the customer. There are different categories of agents (e.g., “buying agent” or “service agent”), and in some countries, special rules govern contracts with agents that the government categorizes as “dependent” or as employees. In such cases, the special rules applicable to employed agents will apply. In this book, we will be focusing primarily on commercial sales agents.
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 agents do not buy the goods and take title to them.
Although there are many exceptions to the rule, agents tend to be smaller than distributors. One reason for this is that distributors usually commit themselves to a[Page77:]minimum amount of purchases over a period of years, a risk structure associated with larger operations. It is possible for former buying executives in a particular industry to set up a thriving businesses as small agencies.
One common path is for exporters to begin their market entry using agents, then move to distributorship, and then finally capture the market with a wholly-owned subsidiary. A similar trajectory for representatives is to begin as agents, grow to become distributors and importers, and finally to develop their own foreign-sourced brands.
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 large stock of goods on hand for resale to a large number of customers, the appropriate contract is likely to be one for distributorship.
The concept of agency has wide application in the law. In the broadest sense, an agent is anyone who is authorized to legally represent another party. Here, we explore the specific case of commercial sales agents representing foreign principals.
Disclosure of Principal: May Principal sue the Customer?
An agent may or may not disclose the fact that it is acting on behalf of a foreign 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 — in such cases, only the agent can sue the customer. If a principal wishes to avoid this constraint, it should contractually require the agent to disclose the agency during any sales or professional communications. Another alternative is to include a clause in the agency contract which 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.
The commercial agency relationship places important duties and obligations on both agent and principal:
Duties of Agent
> Efforts: 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.
> Transparency: 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. The agent may have a[Page78:]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.
> Loyalty and good faith: not to make secret profits
The agent cannot accept bribes or make secret profits. The standards of honesty that an agent must respect are very high.
> Confidentiality: not to divulge confidential information
The agent must not reveal privileged information about the principal and the principal’s business operations.
> Accounts/audit: 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.
Duties of Principal
> Compensation: to pay commission
The commission system provides an incentive for the agent to maximize sales. The principal may provide in the contract that the commission will be paid only 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.
> No reimbursement: 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.
> Unearned orders: 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.
> Repeat orders: 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.
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[Page79:]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.
Agency and distributorship contracts require careful drafting because they govern long-lasting relationships and major investments. As a result, these contracts must provide for a wide range of contingencies over the time the contract will remain in force. The parties and the products may evolve over time. The agent or principal may prosper or decline, or be purchased by third parties. How will the contractual agreement respond to such changed situations? A good contract will be precise enough to provide clear solutions for product-line variations, but flexible enough to adapt to contingencies.
Agency and distributorship commercial relationships demand work, patience and investment of time and money by both parties. An eventual separation can be painful, especially for the agent or distributor. Nonetheless, it is common for exporting firms to outgrow their agents and distributors and seek to terminate them when they wish to take over the territory directly. Therefore, the parties are well-advised to carefully negotiate and draft the termination provisions in the contract (and to assure that these provisions accord with 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 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 may suffer for years. Moreover, an unsatisfied or dismissed agent may establish relations with a rival exporter.
Case Example: How to Find an Agent or Distributor
George S. Parker, founder of the Parker Pen Co., took meticulous care in appointing foreign distributors. After appointing the first foreign distributor in 1902, Parker Pen grew steadily until it became one of the world’s most recognizable brands. By the late 1980s, Parker Pen had appointed distributors in 153 countries and was doing over 80% of its business outside its home base of the United States.
George Parker’s procedure was as follows. He would first select his next target market, then do careful preparatory research. He would then visit the market, planning to spend up to three weeks there. He would visit a number of stores where pens were sold, carefully examining how they were presented and marketed. Then he would ask store owners which brands sold best and why. Gradually, he would develop a firm understanding of the pen market in that country. After establishing a list of the key pen wholesalers, he would visit banks, as well as the American embassy, to check on the backgrounds of the prospective partners. Only after such exhaustive research would he prepare a short list of candidates. He began to personally call on each of them and would carefully interview each potential candidate. After this, he would return to the US for further research. He would contact other exporters that sold into the particular market, asking them to evaluate the various candidates. And when asked why he performed such exhaustive research, he explained that appointing a distributor was like entering into a marriage — he wanted to be absolutely sure of a long-term commitment. The success of Parker’s system can be found in the remarkably durable nature of the relationships he established: the very first distributor he appointed in 1902 is still associated with Parker.
[Page80:]
It is common for traders and legal counsel to base their draft contracts on model contracts. In doing so, they should be careful that the scope of application of the agency is similar. In this section, we refer to the example provided by the ICC Model Commercial Agency Contract (the “ICC Model”). The ICC Model is specifically meant to be used by self-employed commercial agents for the international 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.
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. If a dependent does not meet the local tax authorities’ standards for independence, the agency may trigger application of local taxation as well. The simplest way to avoid these problems is for principals to contract only with agents which have the legal status of a company or corporation or other “legal person”.
> 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).
> 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.[Page81:]
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.
> Acceptance of Orders by the Principal
The principal should inform the agent rapidly and in good faith whether an order has been accepted or rejected, and should not arbitrarily refuse orders. A principal unhappy with an agent but lacking objective justification for terminating the contract might be tempted to “freeze” the agent out of business by arbitrarily refusing orders. Under the ICC Model, such “freezing out” would constitute a breach of contract.
> No Competition: Agent’s 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 generally free to represent non–competing products, provided that he informs the principal in advance.. However, the agent is prohibited from representing even non-competing products of a competitor of the principal if the principal so requests.
> Sales Organisation
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 organisation:
> Servicing/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 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 exclusive distributorship. 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.
> Fairs and Exhibition Presence at trade fairs and exhibitions may be important. If so, the parties should develop a team approach with shared responsibilities.
> 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.
> Sub-Agents
Either the principal will require that the agent to notify the principal before the engagement of any sub-agent (“Alternative A” in the ICC Model), or the agent will be prohibited from recourse to sub-agents entirely(“Alternative B” in the ICC Model). The employment of sub–agents is most commonly left to the agent because the agent is independent and should be free to organize its activities. However, in some cases the principal may have entered into the agency contract specifically because of the personal reputation or unique talents of a particular agent. In this case the principal may justifiably refuse to allow the agent to delegate his responsibilities to a sub-agent.
> Principal to be Informed
The agent should report back to the principal on market conditions and answer any reasonable request for information from the principal.
> 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.
> Principal’s Trademarks
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.[Page83:]
> 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.
> 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.
> Agent to be Kept Informed
The agent should be kept continually informed on developments involving the products, their technical features and their competitive 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.
> 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 to customers established in the territory, even if the agent did not do the work required to approach a particular customer. This provision was drafted 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:
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 is not reimbursed for business expenses incurred (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.[Page84:]
> 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 EXW Incoterms® rule reference value, regardless of which Incoterms® rule was chosen in the contract of sale.
> 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 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).
> Term of the Contract
The ICC Model provides for two alternatives:
> a contract for an indefinite period (which can be terminated at any time upon sufficient notice by either of the parties); or
> 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.
> 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.
> 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: change of control, ownership or management of the agent-company.
> 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:[Page85:]
> A termination indemnity equal to a maximum of one year of an agent’s average remuneration;
> 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.
> Dispute Resolution: Arbitration and Applicable Law
In the ICC Model, dispute resolution is either by arbitration under the Rules of Arbitration of the International Chamber of Commerce, or by litigation in the courts of a chosen country..
Two alternatives are provided in the event that the arbitrators or courts are not able to find the solution by looking to explicit contractual provisions. Under the first alternative, the decisionmakers 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. Note that the lex mercatoria option is realistic primarily in arbitration, and typically where the case is being heard in a court, a chosen national law will be applied.
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.
> 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.
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.
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[Page86:]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.
Many of the legal issues covered by distributorship agreements are quite similar to those covered in agency contracts (discussed above). Our review of distributorship agreements below is therefore somewhat briefer.
> Territory
The geographical extent of the territory must 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.
> Price
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.
> Sole Buying or Selling Rights
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 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.
> Advertising, marketing, and I.P. protection
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.
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Test Your Knowledge: Choosing Between Agency and Distributorship
True/False
Answers: 1. F 2. F 3. F 4. T 5. T