Archive for the ‘Contract Law’ Category

Agency Contracts versus Distributor Contracts

Thursday, December 1st, 2011

Assessing Control, Freedom & Exploring Risks for New Business Markets

For an entrepreneur, expanding one’s corporation to other states or countries may be challenging because of differing laws and corporate cultures. An entrepreneur may identify desirable growth areas, but logistical issues such as lack of contact with potential customers, not understanding the local laws, and the inability to identify consumers’ preferences could complicate the decision to open a new market.

Generally, it is easier to expand economic activities abroad if a representative native to the country of interest can physically represent the company´s interests overseas.

Sometimes, it may be beneficial to reduce an initial profit by hiring an onsite representative in the new business zone. In practice, the long-term benefits do not diminish by increasing costs and sharing profits. The representative’s local networking abilities, legal knowledge, and understanding of operating requirements tends to expand business possibilities in the new territory, thus reducing initial costs.

An entrepreneur could attain a partner through a joint venture or incorporate a subsidiary to run the operations in the expanded territory, joining with a third party.

If third-party inclusion is personally undesirable, an entrepreneur can hire a representative, which often achieves better results and multiplies contracts in the expansion zone. The two basic legal structures for these representatives are agency contracts and distributor contracts.

Both contracts provide expansion opportunities, with different levels of third-party independence.

  1. Agency Contracts:

    In agency contracts, the company hires a local individual, who generates new business in a previously unused territory.

    The agent is an employee of the corporation, usually with an exclusive territory, that earns commission through the general amount of profit that the company generates.

    An important characteristic of an agency representative is that the agent does not profit from goods. Instead, the agent arranges sales deals for the manufacturer. The agent facilitates business and protects the company’s interests.

  2. Distributor contracts:

    Distributor contracts, on the other hand, have more manufacturer independence. Agents buy goods from manufacturers directly, reselling the goods at their own cost and risk.

    The profits for the distributor are determined by the difference of the goods’ buying price and resale price. In very specific cases, the manufacturer could intervene in the price-fixing process. However, the common rule in antitrust matters is that any price fixing between the distributor and the manufacturer violates antitrust statutes.

The following blogs discuss main points that entrepreneurs, looking to expand businesses nationally and internationally, should consider when deciding between agency contracts and distributor contracts.

Conclusion

Some innovative business strategies that an entrepreneur can consider in order to increase profits are not only based in business administration logic, but also in law, as a practical tool for expanding business. These articles are informative and thought-provoking for those deciding the best way to explore new markets.

Both of the contracts discussed are basic methods used to increase a company’s profit and expand the regions where a company can legally conduct business. Without major investments, a company can attract the right representatives in a desired trading region.

While this is a broad and complicated subject, these articles focused on some of the main aspects that a businessperson may consider before deciding between agency and distributor contracts. From taxation to special rights conceded by the specific jurisdictions at the termination of agency and distributor agreements, to opening a branch or subsidiary abroad, an entrepreneur should consider the best way to minimize risk and maximize profit.

Both agency and distributor contracts have unique advantages, and the manufacturer must decide between two differing values, control over independence.

If a company opts for control, an agency contract may better meet the company’s needs. However, an agency contract could legally bind the company to foreign tax obligations or in legal battles with the agent over contract disputes. The manufacturer conducts transactions, including exporting products, collecting necessary disbursements, and loss absorption if the end product does not perform as expected.

If a company opts for a representative with more freedom and less supervision, the distributor agreement could be a better choice. However, the company is still responsible for product liability.

In this case, two particular aspects of the distributor contract should be considered.

Any improvements done by the distributor should be communicated to the manufacturer to ensure that these product design changes fall within the distributor’s contract-approved responsibilities and scope. In the distributor contract, the manufacturer may have forbid product modification.

The manufacturer must also ensure that the distributor does not use the company’s trademarks, controlling any negative consequences affecting the company resulting from a distributor’s error.

Obligations of Parties in Agency Contracts: the Agent

Sunday, November 20th, 2011

The binding and main purpose of a contract is that both parties assume legal obligations by signing the agreement.

Every agent must realize that despite the clauses of the contract, some duties are inherently understood and undocumented.

To fulfill the contract, the agent must act in the company’s best interests. While it is not the agent’s responsibility to ensure that every transaction concludes with positive results for the company, the agent diligently works on the company’s behalf in an effort to meet its desired outcome.

When delegated by the company, the agent must negotiate and conclude transactions when appropriate. An agent, unlike a regular employee, does not require regular instructions and supervision from management. Instead, an agent has more freedom, and must act on the company’s behalf, making decisions at one’s discretion. In this case, an agent acts more independently and within one’s knowledge base to aid the company’s end goal.

The agent is responsible for communicating any necessary information to the company regarding the business. Based on the information’s value, communication between an agent and the company may change the business strategy altogether. The agent provides relevant information to the company, thus aiding in decision-making and business strategies.

The agent must respect and follow the instructions of company. Even though the agent has freedom to execute the assignment, the agent works for the company and must follow its instructions.

Based on the agent’s experience, the agent may identify imminent danger to both the project and company if the company’s instructions are strictly followed. While the agent cannot disregard the company’s guidelines, the agent must communicate the identified concerns to the company, allowing the company to make an informed decision.

If the agent fails to communicate guideline concerns to the company, the agent could be held liable based on one’s experience or expertise. The agent is not only an employee that aids the company in economic expansion, but the agent it is also hired for one’s task-specific expertise. In short, an agent’s professional opinion is an integral part of one’s expected efforts to support the company.

Reference: International Shipping > Terminating an Agent in Foreign Countries

Obligations of Parties in Agency Contracts: the Company

Wednesday, November 9th, 2011

In an agency contract, the company is required to provide the agent with the necessary information and documents needed to complete the required tasks. The company’s directions are dictated by the nature of the commission.

In general, a company must ensure that the agent, a direct employee, is legally well-treated, considering the best interests of both the company and the agent.

For example, the prices that an agent must give to potential distributors or re-salespeople exceed the expected company profits. It may be tempting for a foreign businessperson to conduct negotiations directly with the company, circumventing the agent and cutting the agent’s commission to reduce the cost of the transaction. This behavior is not only unlawful, but breaches the trust between the agent and the company.

The manufacturer must provide the agent with all the documentation related to the goods in question. For example, an import’s shipping documents are not sent directly to the buyer after the manufacturer receives the letter of credit. Instead, the agent receives the documents and finalizes the transaction on behalf of the manufacturer.

In business, information is an asset that could impact how a company secures a transaction. The company must provide the agent with several types of information:

  1. Information regarding the agency contract performance.The company should notify the agent if the anticipated commercial transactions are lower than the agent normally expects based on the nature of the product or the characteristics of the business.

    This may occur, for example, if the agent attracts a potential buyer for the manufacturer’s goods, but the manufacturer does not have the availability to fulfill the client’s commercial order. In this case, the profits of the transaction will be less that the amount expected by the agent, and the manufacturer has an obligation to inform the agent of the losses.

  2. Information regarding objections to the operation itself.The company should inform the agent if the contract’s terms are accepted or refused, or other unexecuted commercial transactions that the agent has produced for the company.

An agent’s career success is oftentimes measured by one’s performance and reputation. When an agent acts on behalf of a company for transactions, the agent becomes the face of the company to customers in the expansion area. Decisions regarding concluding negotiations, or even the operation itself, should be communicated to the client by the agent quickly to ensure that the agent remains a reputable and trustworthy businessperson.

Reference: Legal > The Pros and Cons of Having an Agent Abroad

Agency Contracts

Wednesday, November 2nd, 2011

An agency contract is one of the most complicated contracts to define in corporate law doctrine because it includes many commercial contracts that aids in the profitability and efficiency of a company. According to French doctrine, agency contract workers are considered independent from their employers because they do not work in the office proper, but in new sites nationally and internationally based on one’s competence.

A commercial agent is an intermediary that has been granted the authority by the manufacturer to negotiate the sale or the purchase of goods on the company’s behalf, or to negotiate and conclude such transactions.

The agent is both an independent worker and company controlled. The agent is an independent employee because the company does not control the agent’s schedule, or provide direct instructions on a regular basis. However, the agent is accountable financially for one’s actions and business conducted on behalf of the company.

As previously discussed, the agency contract employee surrenders more control to the manufacturer, yet performs in the organization’s favor. In agency contracts, the manufacturer determines the customer’s price because, according to agency contracts, the agent legally cannot participate in price fixing.

An agent, a direct employee of the corporation, is hired to connect the manufacturer with potential customers in the new location, where the agent is specialized and earns commission.

The agent reduces the risk of customer´s non-payment to the manufacturer. The customer pays the manufacturer directly who in turn pays the agent commission.

It is important to note that while the agent represents the manufacturer in agency contracts, an agent is a company employee, taking direction from the company and working in its interests. The agent will not personally fulfill the contract because the agent works for the company, not the manufacturer, regardless if the deal yields profits or losses.

When hiring an agent for international business, the applicable legislation for the agency contract is based on the foreign country’s laws. This leaves the manufacturer disadvantaged under foreign courts. To protect the company, it is vital that one understands the applicable rules in the state or country for business expansion, ensuring control of possible risks.

For example, if a company terminates an agency contract in Europe, the corporation would adhere to the conditions of the Directive (86/653/EEC) formed on December 18, 1986 [1]. Coordinated by EU Member States, the law relates to self-employed commercial agents and requires that a company compensates the agent comparable to the projected commission that the agent would have earned. For instance, the agent may have generated new customers or increased the volume of business with existing customers. This blog further discusses the unique features of agency contracts abroad.

References

[1] See http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:1986:382:0017:0021:EN:PDF.

Also See: Automobiles > The Exceptional Act of Automobiles

Agency and Distributor Contracts and Competition Laws in the US

Saturday, July 9th, 2011

Newspapers and television programs often report on public concerns over economic cartels and monopolistic strategies of major companies. Economists argue that monopolies threaten free markets, could tie consumers to a single manufacturer for a certain good, and describe the economic and public ramifications.

Others believe that a concentrated market is beneficial because the manufacturer can produce goods more efficiently, lowering costs using the economy of scale theory and through the negotiation power of an economic agent.

[Note: Every time you bargain for the price of the product the costs will depend on the amount of goods you are purchasing, in a more concentrated market, the number of units purchased by the company will be larger, and so it will be the price reduction for this reason.]

Aside from one’s personal perceptions, the competence restrictions and other clauses already discussed do not allow a market agent (the distributor) to engage in activities with a competitor brand in the designated territory. These clauses could be considered by international regulators as breaching the antitrust regulation.

The Sherman Act, which regulates antitrust violations in the US, contains an ambiguous Article 1, which states: “Every contract, combination in form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.” Even so, the US Supreme Court does not consider the Sherman Act a violation because according to court rulings, these activities help improve commerce. For example, refer to the exclusive distribution agreements.

Moreover, the Supreme Court allows vertical restrictions, or agreements between different agents in the production line, like manufacturers, distributors, and salespeople. The Supreme Court seems to favor economic utility over the danger of market share that these agreements may generate.

On the other hand, the European Union (EU) legally condemns such economic agreements, because in their opinion they tend to create monopolies. However, the EU has direct provisions that forbid monopoly conduct, like Article 81 of the Treaty of Rome. On the other hand, the United States allows vertical agreements, and as a result, authorizes restriction clauses on agency and distributor contracts. For example, refer to the Commission Regulation (EC) No. 2790/1999, of December 22, 1999; more specifically, how Article 81(3) of the treaty applies to vertical agreements and concerned practices.

This regulation permits such agreements without regulation if the company’s market share does not exceed 30%.

These provisions exist in developed markets, but for developing countries regulations often differ. For instance, local courts may not allow such clauses in contracts, and ignoring these laws could result in fines.

Reference: Legal > When Should a Company to Pay an Agent for one’s Services?

Representing a Corporation Through an Agent or a Distributor

Saturday, July 9th, 2011

After deciding to expand business operations abroad via a third party, an entrepreneur should consider the potential clients when choosing a representative, which becomes the visible face of the company.

More importantly, the chosen representative may have different legal capabilities and commitments. For instance, a representative abroad may legally bind your corporation in accordance with local law, even if this is not explicitly described in the contract. One must understand that even if a company tries to avoid certain legal effects, these effects may be legally required in the choice country, regardless of the contract’s terms.

Agents open new business areas and deals outside of the company’s home-base, at the discretion of management. However, the agent interfaces with and forms business agreements with customers directly. An agent determines the price of the goods, date of arrival, form of payment, and other key features of the sales contract, which is delivered to the customer. Sometimes, agents conduct business outside of the agreed-upon scope with the company.

To avoid unwanted third-party involvement where an agent oversteps the bounds of the contract, a company may choose to monitor an agent’s business transactions. An agent’s representation powers are an intrinsic feature of an agency contract. A company may legally require a client to check the terms of the agency agreement before negotiations, which may be a burden. However, if the client breaches this legal clause, a court battle may ensue. Legal arguments may negatively impact the company’s commercial image in the expansion location. In fact, legal disputes and a tarnished reputation may be more detrimental to a company than an unsupervised agency contract gone wrong.

A tarnished business reputation due to legal battles or unfulfilled obligations may be more damaging than profit losses incurred by a single transaction. For example, an agent may offer a client an unrealistic delivery date that the company cannot meet. The company may hire additional staff to ensure on-time delivery, even if this isolated incident results in losses. Sometimes, it may be beneficial for a company to sacrifice profits than to breach the contract.

On the other hand, the distributor purchases goods from the manufacturer, reselling them. This representative generally has no ties or obligations to the company outside the terms of the contract. However, in certain business jurisdictions, like some Latin American countries, the goods supplier is not only the salesman, but also the manufacturer. The distributor may be subject to administrative and criminal liability in certain cases, e.g. when negligent goods negatively impact the final customer. For example, a computer explosion due to faulty parts or a soda contaminated with inconsumable products creates liabilities and legal implications. .

Regardless, legally requiring representative supervision burdens clients. The company or manufacturer is solely responsible for third-party actions. A manufacturer cannot take legal action against the agent or the distributor, reducing their contract to recover losses, or even terminate their contracts based on the breach.

Distributor Contracts

Saturday, July 9th, 2011

If a manufacturer chooses a representative that has increased freedom and wants lower risks, a distributor contract is an appropriate choice.

A distributor acts almost as an independent contractor because the representative assumes expense and risk. The representative buys goods directly from the manufacturer, and resells them in the designated area governed by the distributor contract signed with the manufacturer. [Note: In this regard, incidentally, we have to consider the antitrust statute applicable to the agreement, because if the parties are considered in breach could be held liable under the respective legislation.]

Usually, the distributor pays the manufacturer in advance, multiplying the manufacturer’s profits. Distributor contracts are also beneficial for the distributor because of transactions generated in favor of the corporation.

The payment structure of this contract is usually freely determined by the distributor, not the manufacturer, during resale. A distributor generally yields more profit than an agent.

Distributor contracts differ from other sales, where the parties involved regularly work together and have a mutually-beneficial relationship. In distributor contracts, it is more likely that the distributor would have access to a manufacturer’s confidential information, which requires protection. For example, a distributor may become aware of potential deficiencies in a product through customer complains. However, the distributor is typically entitled to disclose this information to a competing brand.

Despite such freedom, distributors assume greater risks because distributors are personally responsible for any product defects that may impact consumption. Distributors also assume the costs for a potential nonpayment.

Interestingly, a distributor’s business is not limited to importing and reselling goods. A distributor, via consulting an expert manufacturer, may also implement technical services for any product damages at one’s own expense, increasing a distributor’s personal business transactions.

Because a distributor assumes the risk and cost for all transactions, the manufacturer is only accountable for obligations agreed upon in the distributor contract.

Regarding foreign transactions and laws, agents tend to protect legislation, which is unnecessary for a distributor. According to common practice, a distributor is equal to the manufacturer, matching bargaining possibilities. Under distributor contracts, local government intervention is unnecessary to protect all parties involved.

Reference: Legal > The Pros and Cons for Having a Distributor Abroad

Restriction Clauses on Agency and Distributor Contracts

Saturday, July 9th, 2011

Once a company confidently selects a representative that will, to a limited extent, independently represent the organization, the company must then focus the representative’s actions to a particular area.

A company must understand the contractual boundaries and obligations. A representative may only conduct business on the company’s behalf in the area defined in the agency or distributor contract. This includes a representative’s negotiations and goods’ sale and distribution.

A company may impose restrictions on the representative to ensure compliance, such as territorial exclusivity, territorial restrictions, and noncompeting obligations.

  1. Territorial exclusivity:One benefit of a distributor agreement is the territorial exclusivity clause. This clause forbids the manufacturer to find a new distributor to compete with the first in the prescribed territory.

    Normally, this territory is restricted to a certain state or country. If you would like to expand the territory of the principal contract through a representative and are interested in locating newbusiness opportunities nearby, then it may be more beneficial to generate new contracts, adding other regions to the agreement, than to limit the company’s range of action. .

    For example, the distributor could be granted exclusive rights to sell a new suntan lotion in Brazil. Under a distributor contract, the company cannot locate other representatives capable of generating sales in the same country.

  2. Territorial restrictions:
    Territorial restrictions forbid the distributor from expanding its operations outside of the contract signed with the manufacturer. 

    The distributor cannot sell goods outside the territorial scope defined by the manufacturer. Using the suntan lotion example, if the intended territory was appointed in Brazil, the distributor cannot export the product to Argentina because that territory exceeds the agreed-upon development area with the manufacturer. However, the distributor could sell the goods to a third party in Brazil, and not be held liable for exporting goods by stealthily circumventing the agreement. because the distributor can prove that the goods were delivered to a local address.

  3. Noncompeting obligations:
    This clause demands a representative’s exclusivity, meaning that the agent or distributor cannot offer clients goods similar to those produced by the manufacturer. In other words, the representative cannot represent products that directly compete with and meet the same consumer needs as the manufacturer’s goods.

For example, the distributor cannot represent another suntan lotion brand in Brazil. However, unless otherwise stated in the original distributor contract, the representative could sign a different distributor agreement, representing suntan lotion outside Brazil.

Reference: Legal > Agency Contracts, Distributor Contracts, and Technology