1. Definition of Territory
The contract should define the geographical scope of the territory to be represented by the agent or distributor and whether the representative has sole marketing rights. In exclusive contracts, the agreement has to clearly specify whether the firm reserves the right to sell certain product lines to a specific class of buyers such as governments or quasi-government agencies. If agreements do not explicitly state that they are exclusive, they will often be deemed exclusive if no other representatives have been appointed within a reasonable time. The contract should also state whether the representative can appoint subagents or subdistributors and the latter’s status with relation to the firm. It is also important, because of financial and tax implications, to explicitly state the intention of the parties not to create an employer-employee relationship.
2. Definition of Product
The contract should identify those products or product lines covered by the agreement as well as the procedures for the addition of successive products. It should also provide for the alteration or deletion of certain product lines based on the exporter’s continued production, representative’s performance, or other events.
3. Representative’s Rights and Obligations
The agreement should state that the representative will do its best to promote and market the product and cooperate to attain the objectives of the exporting firm. It should also include (1) the representative’s commitment to periodically inform the exporter of all pertinent information related to market conditions and its activities; (2) the parties’ agreement to provide due protection to each other’s confidential information as defined in the contract, which often includes seller’s patents, trade secrets, and know-how, as well as the representative’s marketing information, including customer lists; (3) a provision as to whose responsibility it is to arrange for all the necessary approvals, licenses, and other requirements for the entry and sale of goods in the foreign country; and (4) the right of the representative to carry noncompetitive and complementary products.
An agency agreement should state the nature and scope of an agent’s authority to bind the exporter (which is often denied) as well as the agent’s discretion with respect to pricing. All sales of products are to be in accordance with the price list and discount structure as established in the contract. The parties could also agree on mechanisms to implement changes in prices and terms. It is also important to stipulate the amount of compensation (commission), when it accrues to the account of the agent, and the time of payment. Most agreements state that all commissions shall not become due and payable until full settlement has been received by the firm. The agent could also be given the responsibility for collection with respect to sales it initiated.
Distributor agreements should state clearly that the overseas distributor acts as a buyer and not as an agent of the seller. The agreement could require the distributor to maintain adequate inventories, facilities, and competent personnel. The exporter could sometimes stipulate that orders representing a minimum value or quantity shall be placed within a fixed time. The agreement also defines the advertising and promotion responsibilities of the distributor, including an undertaking to advertise in certain magazines or journals a minimum number of times a year at its own expense, for example:
The distributor agrees during the lifetime of this contract to provide and pay for not less than seven full-page advertisements per year, appearing at regular monthly intervals in the national journals or magazines of the industry circulating generally throughout the territory.
4. Exporter’s Rights and Obligations
In agency contracts, the exporter is often required to provide the agent with its price schedules and catalogs and brochures describing the company, its product, and other pertinent features. In distributor contracts, the exporter is required to provide the distributor and the distributor’s personnel with training and technical assistance as are reasonably required in order to service, maintain, and repair products. In both agency and distributor agreements, the exporter should warrant only that the product complies with the specified standards of quality and also state the party that will be responsible for warranty service.
The exporter is also required to provide sufficient supplies of the product and new developments in products, as well as marketing and sales plans.
5. Definition of Price
In agency agreements, all sales of products are made in accordance with the price list and discount structure agreed upon by the parties. However, the seller reserves the right to change prices at any time, usually with thirty or sixty days’ prior notice.
Distributor agreements also contain provisions relating to the price to be charged by the seller upon purchase of goods by the distributor. Any discounts available are also stated. In the case of products that are affected by inflation, the parties could set a definite price ruling on a specific date, such as the date of the sales contract or shipment. The parties could also agree that the exporter charge the distributor the best price it provides other customers at the time of sale (the most-favored-customer price) except for those products supplied to a holding company, subsidiary, or other associated companies of the supplier. The distributor agreement should also stipulate the terms of sale, such as FOB (free on board) or CIF (cost, insurance, and freight), as well as the method of payment (e.g.., open account, letter of credit), for example:
The prices specified are in U.S. dollars, exclusive of taxes and governmental charges, freight, insurance and other transportation charges. Payment shall be on consignment. The product will be shipped FOB (Miami) to the buyer’s address in Colombia.
6. Renewal or Termination of Contract
In many countries, issues relating to appointment, renewal, or termination of representatives are largely determined by local law. Many foreign representation agreements provide for a short trial period followed by a longer-term appointment if the representative’s performance proves satisfactory. It is important to state the duration of appointment and the basis for renewal or termination. Any renewal or termination requires an act of notification to the representative.
In certain countries, the longer the period the representative has been appointed, the more difficult and expensive it is to terminate the contract. Representative agreements are terminated in cases when one of the parties is guilty of nonperformance or of not performing to the satisfaction of the other party, for example:
In the event that either party should breach any term or condition of this agreement or fail to perform any of its obligations or undertakings, the other party may notify the defaulting party of such default, and if such default is not rectified within sixty days, the party giving notice shall have the right, at its election, to terminate the agreement.
The previous clause is often used to terminate nonperforming representatives. It is, however, important to set certain targets and objective performance criteria against which representative’s performance will be measured: sales volume, inventory turnover rates, advertising, and market share. It is also advisable to include other causes of termination, such as the following:
Right to terminate without cause: A significant number of contracts allow for termination of the contract by either party with no prerequisite of action or omission by the other party upon giving advance notice, for example:
Either party shall have the right to terminate the agreement at any time by giving not less than 180 days prior written notice of termination to the other party.
Force majeure: Most contracts state the occurrence of specific events beyond the control of the parties as a basis for termination of the contract. The enumerated actions or events fall into four major categories: (1) acts of God; (2) wars and civil disorder; (3) acts of government such as exchange controls or changes to host government regulations; and (4) other acts beyond the parties’ control.
Other causes of termination: Some contracts provide for termination of the contract in cases such as bankruptcy or liquidation of either party, assignment of contractual rights or duties, change of ownership or management, and nonexclusivity, or the firm’s decision to establish its own sales office or assembly operations.
In most countries, the exporter can terminate a representative in accordance with the contractual terms and without payment of indemnity. In situations lacking reasonable ground for termination, courts impose a liability for unjust termination that is often based on the volume of sales, goodwill developed by the representative, and duration of the contract. A typical formula is to award one year’s profit or commission to the distributor or agent based on an average over the previous five years or the duration of the contract, whichever is shorter. It may also include cost of termination of the representative’s personnel.
7. Applicable Law and Dispute Settlement
The parties are at liberty to agree between themselves as to what rules should govern their contract. Most contracts state the applicable law to be that of the manufacturer’s home state. This indicates the strong bargaining position of exporters and the latter’s clear preference to be governed by laws about which they are well informed, including how the contract will function and its repercussions on the whole commercial and legal situation of the parties. In cases with no express or implied choice of law, courts have to decide what law should govern the parties’ contract on the basis of the terms and nature of the contract. Many factors are used to settle this issue in the absence of an express choice of law, including the place of contract, the place of performance, the location of the subject matter of the contract, and the place of incorporation and place of business of the parties. The contract should also provide for a forum (court) to settle the dispute relating to the validity, interpretation, and performance of the agreement.
Many representative contracts also provide that any dispute between the parties shall be submitted to arbitration for final settlement in accordance with the rules of the International Chamber of Commerce.
Source: Seyoum Belay (2014), Export-import theory, practices, and procedures, Routledge; 3rd edition.