Establishing a

presence abroad

1

Zagreb, May 23, 2014

koen.vanheusden@abh-ace.be

Writing an International Agency or Distributorship contract … using the ICC models

2

… probably the most difficult decision in a company’s lifetime

Going international requires continuity structure;

Long term relationship >< sale bill

is presented much later;

Decision prior to market knowledge / experience … and its return;

What’s possible?

3

How to structure my presence on a foreign market?

I don’t need someone else

I need someone else (cost sharing, complementarity, …)

Y N Direct trade Indirect trade

Can I afford a full time employee / sales organisation from the expected profit of the market? Am I prepared to invest in my presence on the market before turn-over?

Advantages: • limited financial risk • limited investment

/ fixed costs • limited engagement • partner knows the

market • easy access to

customers • complementarity

Disadvantages: • dependency of

partner • profit sharing • limited flexibility • limited product

knowledge • no direct contact with

customers

Advantages: • no dependency

of the partner • ho profit

sharing • high flexibility • high product

knowledge • direct contact

with customers

Disadvantages: • first the investment

financial risk • fixed costs • limited market

knowledge • slow market building • no complementarity

How to structure my presence on a foreign market?

I don’t need someone else

I need someone else (cost sharing,

complementarity, …)

Am I prepared to invoice in local currency, pay taxes locally, invoice with VAT, …? Is local

financing available? Is it a stable, permanent presence?

Sales Rep Rep Office

Do I want a separate legal entity with a separate capital, separate accounts, separate liability …?

Branch Subsidiary

Does the size of the customer justify a separate debt administration, credit policy, ligistics,, …? Is direct

contact / negotiations with the (final) customer required? Are we dealing with tailor made products?

Is the customer a better credit risk than the middleman?

Can I or my intended customer/buyer fulfill the import formanities

(customs VAT, …)

Distributor

Commercial agent

Commission agent

Agent-reseller

Y

Y

Y

Y

Y

N

N

N

N

N

Direct trade Indirect trade

Can I afford a full time employee / sales organisation from the expected profit of the market? Am I prepared to invest in my

presence on the market before turn-over?

Direct Trade

Rep office No separate legal entity = branch without permanent

establishment No autonomous activities – no contracts - no local

currency (invoicing – import/consignment/warehousing) Branch

No separate legal entity but permanent establishment Registrations – management – liability – income –

taxation … Subsidiary

Separate legal entity Establishment – registration - management – liability –

income – taxation … Joint venture, acquisition, greenfield, brownfield …

6

Order

7

Distributorship

Principal

(manufacturer)

Customer

Customer

Customer

Distributor

Stock

Contract of sale

Distribution contract Sale

Service

Invoice Invoice +

Profit margin

Payment Payment

Order

Order

8

Commercial agency

Principal

(manufacturer) Customer

Agent

Commission

Contract of sale

Mediation

Invoice

Payment

Mandate

Order Order confirmation

9

Commission agent

Principal

(Manufacturer) Customer

Commission

agent

Contract of sale

liability

Invoice Invoice

commission

Payment Payment

Administrative relation

Legal relation

‘CHANNEL DISTRIBUTION’

10

HOW LONG MAY THE ‘CHANNEL’ BE?

Rep office

Length of the channel depends of:

1. Nature of Product:

product features, size, weight, shape, durability, perishability, value etc. Perishable items, odd sizes, difficult are often found to have shorter channels.

2. Customer Characteristics:

huge and geographically dispersed customer base buying in small quantities longer channels. Industrial products technological and functional customer preferences shorter channels.

3. Nature of Market:

dense market spread across in length and breath long channel; niche market short.

4. Cost Consideration:

channels with many middlemen raise the price of the product. The shorter the chain, the lower the cost.

11

Length of the channel depends of:

5. Time:

Longer channel are often found to take shorter time to make the product available to the consumer because the channel goes deeper into the market. Keeping a channel short means that the customers have to first look for distributor and place his orders.

6. Competition:

If competition is intense (eg. consumer goods), the channel is longer; if competition is (eg. industrial equipment) less the channel is shorter.

7. Availability of Middlemen:

Products that are customer oriented and regularly/daily consumed use longer channels as middleman are very easily available. For high tech products and industrial equipment middleman are not easy to come by and may need to be trained.

12

Length of the channel depends of:

8. Technological Factors:

Simple products can have longer channels (no need to be explained). Technical products need explaining, training

shorter direct channel.

9. Consumption Pattern:

If the product is consumed regularly or periodic longer

channels as consumers want such product to be easily accessible and don’t want to run around for them.

10. Other Factors:

infrastructure in the foreign market, political context, legal regulations, social attitude, culture, values etc.

13

Indirect trade

14

Producer Market

Intermediary

Who do you want to pay? Who do you want as a supplier? Standard product – Taylor made

Competition Legal requirements

Supply chain …

Which distribution structure do you prefer – why?

Seller of fine artisanal chocolates

to delicatessen shops in Northern France;

to supermarket chain in France;

Shipping line prospecting Indian market;

Manufacturer selling high tech equipment for the aviation industry;

Manufacturer of consumer goods (design furniture) prospecting

the Russian market;

the German market;

the US market;

Engineering company World cup Football

Manufacturer of health care equipment public hospitals in France

15

Commercial agency - definition

Independent – self-employed (VAT, Commercial Registry, ...)

Continuing authority Primary – secondary activity

Fixed term – customer – project

Negotiation – power of representation prospection vs. negotiation

Remuneration (commission)

On behalf, in the name of the principal

Free of formalities exceptions - clauses - proof

1 invoice

Legal protection

16

Distributor - definition

Self-employed, continuing authority …

Represents the product vs. the principal

2 sales

2 invoices

Profit vs. commission

Own name – own account - commercial risk

Combination – agency

Contractual freedom

17

Commission agency - definition

Independent – self-employed No continuing authority (freight forwarders, customs

agents, …)

On behalf of the principal liability (payment,

conformity, …), legal relationship In his own name 2 invoices, administrative

formalities Contractual commission rate to be added to

invoice Free of formalities

exceptions - clauses – proof

Contractual freedom

18

Sales rep Rep Office

Employee Natural person

Authority

Salary

Social security – labor law

Professional expenses

Goodwill

VRP - representante de comercio …

salarié non statutaire - sales rep

19

Comparison

20

Advantages Disadvantages

Sales rep

- direct control on activities

- exporter owns goodwill

- exporter gets distribution margin

- fixed costs

- labour law / social security

- commercial risk / debt administration

- customs and logistical administration

Commercial agent

- fast access to customers (specialist,

complementary agencies)

- no fixed costs / remuneration depends

on results

- direct contact with customers

- control on prices and production

- commercial risk / debt administration

- customs and logistical administration

- independent organisation of the

activities (represents other principals)

- statutory protection

Distributor

- contractual freedom

- one single debtor

- consolidated deliveries

- local stocks

- no control over sales and marketing

policy

- intermediary takes higher distribution

margin

- no contact with customers

RIGHTS AND OBLIGATIONS MANAGEMENT

21

Risk management in international trade

Contract

22 National law

International law

Customs Lex Mercatoria

order (confirmation)

framework contract

general conditions

parties

port, trade, …

23

24

Model contracts

Models for specific users

Agents, distributors, vendors, …

Industry specific models

Orgalime (http://www.orgalime.org/) ….

GAFTA, NOFOTA, ….

National model contracts ACLA (All China Lawyers Association); Standard

Business Contracts (Larcier 2013); …

International models http://www.intracen.org/; http://www.intracen.org/contrats-

types-destines-aux-petites-entreprises/;

CCI (http://www.iccwbo.org)

24

Different structures

Per product/industry sector, trade, applicable law, interest focus …

1. Singular models comprehensive text

will fill in clauses

2. Dual models

Short part ‘specific clauses’ (fill in boxes)

Part ‘general conditions’

25

27

Purpose of (good) Model Contracts:

1. harmonization of industry/sector standards

contribution to ‘lex mercatoria’;

2. ‘weaker’ contracting parties looking for a ‘model of reference’ to counter contractual obligations presented by the stronger partner;

3. SME occasionally engaging in international operations and/or changing foreign partners;

4. contracting parties looking for a neutral/standard/compromise position to overcome different positions while negotiating;

28

29

Your contract

Contract = manual = specific for every user but

Draft your own model

Negotiations

Advantages of scale

Avoid competition in your own network

Uniformity Applicable law

Dispute settlement

Croatian law – croatian courts

29

Write your own contract

Agency

Principal >< Agent

Export of children’s clothing to France

Export of chemicals for the pharma industry in the US

… (your suggestion?)

Distributorship

Supplier >< Distributor

Export of electrical consumer tools to Germany

Export of chocolates to Brazil

… (your suggestion?)

30

31

32

Where did it

(almost) go wrong?

33

Territory &

products

Mandate of the agent/distributor

34

What & where ?

Territory (geographical - sectoral - …)

exclusivity – sole agency – no exclusivity

criterion (invoicing address, delivery, …)

Goods or services

Trademark – new products – …

Representative authority Permanent establishment – production – collection

Claim management

Written – additionnal fee

35

36

The remuneration

EU commercial agency commission - provision

During agreement orders procured by the agent

+ repeat orders

+ indirect BE - LU - NL - GB: exclusivity required

DE - FR : no exclusivity required

expenses …

After termination of the contract Order procured before termination

Reasonable delay – real effort 37

38

Commission

Fixed remuneration - % - combination Starting period – advance – exceptional expenses

...

Existing customers – new customers

Method of calculation Gross/net invoice price

Upon execution delivery or prepayment Ultimately upon payment (reasonable advance)

disputes digressive - progressive

39

40

41

Distributor – profit margin

42

Recommended resale prices

Maximum resale prices

Minimum resale prices

Quota

Indirect commission

…

Discount on the recommended retail/consumer price

Distributor

43

Principal

(manufacturer)

Customer

Customer

Customer

Distributor

Stocks

Contract of sale

Distribution contract Sale

Service

Invoice

Invoice +

profit margin

Payment

Payment

Price list

- Incoterm?

- Volume?

- Condition of

payment?

- …

• Product regulations – documents – registration

• “Grow the business”– develop sales to distribute to maximum potential in the territory - Minimum turnover – criteria – sanctions

• Stay within the territory

• Advertisements – publicity – trade fairs

• Harmonization conditions of sale – prices

• Keep manufacturer/seller apprised of market developments - Reporting

• Confidentiality – industrial property

• Stock obligations – title – consignment

• Trade mark use – sub distributors/agents

• Service – training staff …

44

Obligations of the representative

45

46

Obligations of the principal

• Marketing support – supply (distributor’s quantity requirements, lead times, …) – exclusivity – technical support – training – advertising – protection against claims - …

• Remuneration • Commission rate

• Bonusses

• Discounts

• …

47

48

Territorial market

approach & www.

E-commerce distribution agreements

Principal/supplier on the internet?

Agent/distributor on the internet?

Prohibition internet site?

Mandatory link?

Prohibited link?

Physical obligations

Data transmission – advertising (banners)

Site content – links – web design – domain name

Pricing – indirect commission

49

E-commerce & agency

50

E-commerce & distributorship

51

Term of the agreement

Fixed term With intermediate possibility of notice

Successive fixed term contracts

Prolongation indefinite term

Trial contracts

Notice: Directive: 1 - 2 - 3

National: 6 months

52

Commercial agency Indemnity - compensation

German system

New customers - substantial increase turnover (50%)

Continuing benefits

max. 1 year (new customers/increase)

French system (FR - IE - GB)

Termination of the agency

2 years commission (total turnover)

GB?

Indemnity

CN

53

Commercial agency Indemnity - compensation

Fixed term - indefinite term - trial - death ...

Exceptions

Default of the agent; sale of the card

Initiative agent

exc. decease, high age, … (! corporation)

? Secondary activities

Request within 1 year prescription (BE!)

54

Distributor

Contractual freedom

Pre-contractual information duty (BE – FR - ES)

Reasonable and good faith

Analogous application agency

Reasonable notice – stocks

‘rompre brutalement’

Concealed agency (DE – ES – CH - …)

55

What about termination in

Arab countries?

Latin America?

USA, Canada?

Asia?

…

56

(non-)Competition clause

written

territory - products

agency max. 2 years BE 6m.; AT 0m.; LU 12m.; …

distribution max. 1 year

indemnity ?

notice by principal?

necessary ?

57

APPLICABLE LAW

58

Legal context

Mandatory commercial agency legislation

European Union (28)

Norway – Iceland – Switzerland – Turkey

Morocco – Korea …

Middle-East ~ South-America

USA ~ South-East-Asia

Mandatory distributorship legislation Belgium - Middle-East - Latin-America

Concealed agencies

59

EU - Commercial Agency

Directive 86/653/EEC ‘on the coordination of the laws of the Member States relating to self-employed commercial agents’, 18.12.1986

Directive national differences

Mandatory law >< complementary law

Application in third countries?

60

Conflicts of Law (Applicable Law)

Regulation 593/2008 (Rome I) Choice

Exceptions: transport of people – consumer sales – insurance

No choice: The law of the “country of closest connection” autonomous rules

Rome I

contract of sale of goods Law of the country where the seller has his habitual residence

contract for the provision of services law of the country where the service provider has his habitual

residence

contract relating to a right in rem in

immovable property or to a tenancy of

immovable property

law of the country where the property is situated (exception

short time leases)

franchise contract law of the country where the franchisee has his habitual

residence

distribution contract law of the country where the distributor has his habitual

residence

contract for the sale of goods by auction law of the country where the auction takes place

contract for the carriage of goods law of the country of habitual residence of the carrier, provided

that the place of receipt or the place of delivery or the habitual

residence of the consignor is also situated in that country. If

those requirements are not met, the law of the country where

the place of delivery as agreed by the parties is situated shall

apply.

Take care - Europe:

ECJ judgment 9 November 2000, case C-381/98, Ingmar GB Ltd v. Eaton Leonard Technologies Inc.

Articles 17 and 18 of Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents, which guarantee certain rights to commercial agents after termination of agency contracts, must be applied where the commercial agent carried on his activity in a Member State although the principal is established in a non-member country and a clause of the contract stipulates that the contract is to be governed by the law of that country

63

Conclusions:

1. When appointing a commercial agent for a territory inside the EU, the protection against termination as provided for in Directive 86/653/EEC can not be excluded.

2. As far as the minimal protection of Directive 86/653/EEC is guaranteed, the applicable law may be chosen freely.

3. One model contract can be developed for the entire EU under the same national law.

64

Take care: Belgium

The law on agency of 13/04/1995 applies only to agents with a place of business in Belgium ICC

Arbitration 15/02/2010 (TBH 2012/3, maart 2012, 238-246)

The law on exclusive distributorship of 27/07/1961 applies only to concessions, granted for the Belgian territory Cass. 06/04/2006

Arbitration clauses are – as far as Belgium is concerned – invalid if the leads to the exclusion of

the law on agency of 13/04/1995 Cass. 03/11/2011

the law on distributorship of 27/07/1961 Cass.

28/06/1979, 22/12/1988

65

Conclusions

When appointing an agent/distributor in Belgium, the protection of the agent/distributor can not be avoided … by non-EU principals;

When rendering Belgian agency/distributorship law applicable to agencies/distributorships with execution outside Belgium, the statutory (mandatory) protection does not apply

As far as Belgian courts have competence

Belgian exporters are advised to make Belgian law applicable to their international agency & distributorship contracts as this gives them full contractual freedom.

66

Application statutory protection?

Definition

Self-employed

Continuing

Negotiation

In the name of

On behalf of

Remuneration

67

No statutory protection contractual freedom

sales rep

broker

consultant – market survey

undisclosed commission

distributor

‘agent’

DISPUTE

SETTLEMENT

68

Negotiations ADR -

Mediation

Binding third

party advice

Arbitration Courts

Third party

involvement

No Yes Yes Yes Yes

Parties Third party Decision

making

Parties

Dispute

review board

Dispute

adjucation

board

Third party Third party

Voluntary Voluntary Voluntary

Forced

execution

after

exequatur

Forced

execution

Enforceability

Abroad: New

York 1958

Abroad:

treaties

Brussels I

Debate Yes Yes and no Yes (and no) Yes Yes

Proof finding Ad hoc Ad hoc Ad hoc Flexible rules Strict rules

Guilt question Secundary Tertiary Secondary Primary Primary

Truth finding Secundary Tertiary Secondary Primary Primary

Contractual

basis

Yes Yes Yes Yes Not required

Litigation - EU

No choice made Regulation 44/2001 10/01/2015: Regulation

1215/2012 art. 2.1. Defending party

Subject to this Regulation, persons domiciled in a Member State shall, whatever their nationality, be sued in the courts of that Member State.

art. 5.1.(b) Services: place service

A person domiciled in a Member State may, in another Member State, be sued: in the case of the provision of services, the court for the place in a Member State where, under the contract, the services were provided or should have been provided

National Law: Defending party (+ Place of execution)

71

Court competence - EC

Agent Principal

(factory)

Boilerplate” Clauses

Place – date – number of originals – n° schedules – tax obligations – entire contract – governing language – procedural references – entry into force – severance clause – assignment (permitted or not) – Force Majeure -

72

Summary

A properly drafted agreement should:

be balanced

set forth fully and clearly as many of the rights and responsibilities of the parties as can be reasonably anticipated and

serve as a governing charter of the relationship of the parties

73

74