I. Preliminary Issues
A. Agency or Distributorship Relationship Appropriate?
1. Consider other possible forms of doing business abroad: Deal by Deal Direct Sales to End Customers, Joint Venture, Licensing, Acquisition of a Foreign Company, Establish a Foreign Branch or Subsidiary.
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2. Define Nature of Relationship:
a. Agency (Agent does not take title to the goods, but sells them for the manufacturer (or other seller) and is compensated by a commission on his sales):
• Does not buy or sell for own account;
Does Not Take Title to the Goods
• Solicits Orders for Manufacturer/ Supplier
• May be Independent Contractor, Agent or Employee of Manufacturer/ Supplier
• Manufacturer/ Supplier Sells Directly to End Customer
• Compensated by Commissions or Salary
• Usually Bears No Credit Risk with respect to Customers
• Maintains no Warehouse or Inventory
• May be Exclusive or Non-exclusive in given Territory
Does Not Take Title to the Goods
• Solicits Orders for Manufacturer/ Supplier
• May be Independent Contractor, Agent or Employee of Manufacturer/ Supplier
• Manufacturer/ Supplier Sells Directly to End Customer
• Compensated by Commissions or Salary
• Usually Bears No Credit Risk with respect to Customers
• Maintains no Warehouse or Inventory
• May be Exclusive or Non-exclusive in given Territory
b. Distribution (Distributor purchases the goods, takes title and then re-sells them, being compensated by the spread between his sales price to customers and the purchase price he pays for them):
• Buys Goods From Supplier,
Takes Title in Own Name, and
Re-sells the Goods For Its Own Account
• Compensated by Markup Received on Resale of the Goods (the spread between his sales price to customers and the purchase price he pays for them)
• Independent Entity;
Does Business in its Own Name;
No Authority to Obligate Supplier;
• Bears All Commercial and Credit Risk on Sales to End Customers
• Usually Maintains Inventory and Physically Distributes the Goods to its Customers
• Usually Sells in Original Packaging with Manufacturer’s Labeling
• May have Exclusive or Non-exclusive Right to Sell Supplier’s Goods in given Territory
Takes Title in Own Name, and
Re-sells the Goods For Its Own Account
• Compensated by Markup Received on Resale of the Goods (the spread between his sales price to customers and the purchase price he pays for them)
• Independent Entity;
Does Business in its Own Name;
No Authority to Obligate Supplier;
• Bears All Commercial and Credit Risk on Sales to End Customers
• Usually Maintains Inventory and Physically Distributes the Goods to its Customers
• Usually Sells in Original Packaging with Manufacturer’s Labeling
• May have Exclusive or Non-exclusive Right to Sell Supplier’s Goods in given Territory
c. Some hybrid.
3. Consider Pros and Cons of Commission Agent/ Sales Representative vs. Distributor:
a. Commission Agent/ Sales Representative:
(1) Pro:
•Greater Control/ Supervision By Supplier
•Greater Profit on Sales to Supplier
•Avoid Anti-Trust Concerns; Clauses Restrictive of Agent are Permitted
•Greater Profit on Sales to Supplier
•Avoid Anti-Trust Concerns; Clauses Restrictive of Agent are Permitted
(2) Con:
• More Commercial & Credit Risk On Supplier
• Local Laws Protective of Commercial Agents:
• Regulate Compensation
• Restrict Termination: Require Notice & Indemnity or Compensation
• Require Registration or Grant other Rights to Agent which Cannot Be Contracted Out Of
• May Be Deemed an Employee, Protected Under Local Labor Laws (Especially if Power to Bind Supplier to Contracts)
• May Cause Supplier to Have a “Permanent Establishment” — Deemed Doing Business in the Foreign Country — for Tax Purposes (Especially if Agent has authority to bind Supplier to Contracts and/ or is economically dependent on Supplier)
• Local Laws Protective of Commercial Agents:
• Regulate Compensation
• Restrict Termination: Require Notice & Indemnity or Compensation
• Require Registration or Grant other Rights to Agent which Cannot Be Contracted Out Of
• May Be Deemed an Employee, Protected Under Local Labor Laws (Especially if Power to Bind Supplier to Contracts)
• May Cause Supplier to Have a “Permanent Establishment” — Deemed Doing Business in the Foreign Country — for Tax Purposes (Especially if Agent has authority to bind Supplier to Contracts and/ or is economically dependent on Supplier)
b. Distributor:
(1) Pro:
• Less Commercial Risk on Supplier
• May Be Subject to Fewer Local Protective Laws; Greater Freedom of Contract
(Tho: Beware. Check Law of Country Involved. E.g. Belgium regulates Distributors but not Commission Agents. E.g. Some Latin American Countries treat Agents and Distributors Alike.)
• Generally Avoid Risk of Deemed Employee
(Tho: Beware. Supplier May be Jointly and Severally Liable for Distributor’s Obligations to its Employees under Local Labor Law)
• Generally Avoid Risk of “Permanent Establishment” for Tax Purposes
(Tho: Beware. Substance Over Form or Title)
• May Be Subject to Fewer Local Protective Laws; Greater Freedom of Contract
(Tho: Beware. Check Law of Country Involved. E.g. Belgium regulates Distributors but not Commission Agents. E.g. Some Latin American Countries treat Agents and Distributors Alike.)
• Generally Avoid Risk of Deemed Employee
(Tho: Beware. Supplier May be Jointly and Severally Liable for Distributor’s Obligations to its Employees under Local Labor Law)
• Generally Avoid Risk of “Permanent Establishment” for Tax Purposes
(Tho: Beware. Substance Over Form or Title)
(2) Con:
• Less Control/ Supervision by Supplier
• Lower Profit On Sales to Supplier
• Potential Anti-Trust Concerns arise from restrictions on Distributor (E.g. Resale Restrictions; Minimum Purchases)
• Depending on Country: May Still be Subject to Local Protective Laws
• Lower Profit On Sales to Supplier
• Potential Anti-Trust Concerns arise from restrictions on Distributor (E.g. Resale Restrictions; Minimum Purchases)
• Depending on Country: May Still be Subject to Local Protective Laws
B. Consider Applicable laws in the Agent’s or Distributor’s Country
1. Need for experienced international counsel who has working relationship with local counsel in Agent or Distributor’s country and can obtain and interpret for you advice of local counsel
2. Types of Foreign Protective Laws common with respect to Agents and Distributors:
Continued…
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