Foreign Agents and Distributors: When and How to Use Them - April 2006 - Business Law
| Publication year | 2006 |
| Pages | 35 |
| Citation | Vol. 35 No. 4 Pg. 35 |
2006, April, Pg. 35. Foreign Agents and Distributors: When and How to Use Them - April 2006 - Business Law
April 2006
Vol. 35, No. 4 [Page 35]
Business Law
Foreign Agents and Distributors: When and How to Use Them
by Amy L. Hirter
(c) 2006 all rights reserved
This column is sponsored by the CBA Business Law Section to apprise members of current information concerning substantive law. It focuses on business law topics for the Colorado practitioner, including, but not limited to, issues surrounding antitrust, bankruptcy, business entities, commercial law, corporate counsel, financial institutions, franchising, nonprofit entities, securities law, and small business entities.
Column Editors:
David P. Steigerwald of Sparks Willson Borges Brandt & Johnson, P.C., Colorado Springs - (719) 475-0097, dpsteig@sparkswillson.com; Rob Fogler of Kamlet Shepherd & Reichert LLP, Denver - (303)825-4200, rfogler@ksrlaw.com; Curt Todd (Bankruptcy) of Lottner Rubin Fishman Brown & Saul P.C., Denver - (303) 292-1200, ctodd@lrflegal.com
This month's article was written by Amy L. Hirter, Of Counsel with Holland & Hart LLP in Boulder, where she specializes in international business transactions - (303) 473-2703, alhirter@hollandhart.com.
A Colorado company planning to sell its products or services overseas normally will consult its U.S. business lawyer to determine the best method of accessing foreign markets. This article is intended to help practitioners determine whether an agency or distributorship arrangement should be used and to identify issues unique to relationships with foreign agents and distributors. The topics addressed are covered briefly, and will require further research and consideration by the practitioner.(fn1)
Choosing the Right Relationship
Before deciding to do business in another country through a contractual relationship with an agent or distributor, the client or practitioner probably has considered and rejected several other possibilities. These possibilities may include any or all of the following.
Direct Investment or Sales
This often is accomplished by forming an entity under the local laws of the country where the U.S. company wishes to do business, hiring employees, and establishing a place of business in that country. Direct investment allows the U.S. business to retain control over its foreign business activities, but requires a significant commitment of resources, including management long distance from the United States, placing a U.S. expatriate manager in the foreign country, or hiring reliable local management.
Joint Venture
Joint ventures can be contractual, in which each party's rights and duties are established by contract; or structural, in which a jointly owned entity is formed under the laws of the foreign jurisdiction to operate the business. In either case, a contribution of cash or other property by the U.S. venturer may be required, which can give rise to tax issues, as well as issues relating to repatriation of funds, capital registration, and currency exchange considerations. Joint venturing with a local partner has the advantage of making the foreign partner's expertise and experience in that market available to the venture, but may lead to disagreements about business strategy, cash distribution versus reinvestment, and whether new investors should be admitted. In addition, some jurisdictions prohibit a foreign entity from controlling a joint venture, particularly in sectors such as media, communications, and natural resources.
Franchising
Franchising normally entails the U.S. company licensing intellectual property and providing training and goods to a foreign franchisee that sells products or services under the franchisor's name and under quality standards established by the franchisor. Typically used by large retail chains, franchising is recognized by some, but not all, foreign countries as a distinct form of business relationship. If franchising is not so recognized, the relationship may be treated as an agency or distributorship, and also may be subject to intellectual property licensing laws.
Licensing of Intellectual Property Rights
Under this approach, the foreign licensee carries on its own business using intellectual property rights licensed for a specified territory by the owner of the rights. The licensor normally retains little control over the licensee's business, except for aspects related to the use and protection of the licensed intellectual property. The licensee compensates the licensor by royalties or a license fee. A U.S. licensor may find it difficult to supervise a foreign licensee's use of intellectual property without frequent on-site visits, and may encounter difficulty terminating the license if the licensee breaches the agreement.
Using an agent or distributor as intermediary instead of one of the options described above has the benefit of incorporating the intermediary's local expertise, while minimizing the U.S. company's commitment of personnel, facilities, and capital. This article focuses on situations in which the U.S. company has chosen to use an agent or distributor to carry on business in a particular jurisdiction, having rejected the other possibilities.
Distinction Between Agents and Distributors
For most purposes, a U.S. supplier's legal relationship with its intermediary likely will be determined under the laws of the country in which the intermediary provides services. The provisions of the parties' contract will influence the outcome, although the name given the relationship in the agreement will not.
Agents
An agent identifies potential customers for the supplier, handles or assists with marketing on the supplier's behalf, and obtains orders for the supplier's goods or services on terms established by the supplier. The supplier then fills the orders.
The contract of sale is between the supplier and the ultimate customer. The supplier usually retains the risk of physical loss until the goods are delivered to the customer, as well as the risk of nonpayment by the customer. The supplier often has the right to accept or reject orders, and is not contractually bound by the agent's actions (although local law may deem the supplier bound, as discussed below). The agent sometimes acts as collection agent for the supplier and may provide after-sales warranty service to customers. An agent is compensated on a commission basis and usually is subject to significant control by the supplier.
Distributors
By contrast, a distributor is the supplier's customer, periodically purchasing products from the supplier, taking title to and possession of the goods, and selling them for the distributor's own account within a defined geographic territory. The distributor generally bears the risk of being able to sell and deliver the goods and to obtain payment from the final customer. The distributor's compensation is in the form of the resale margin over the price paid to the supplier. The supplier normally retains little control over the distributor.
Defining the Relationship
A particular contract may create an agency-distributorship hybrid rather than a simple agency or distributorship, or may fit a special niche created and regulated by the laws of the host country. Regardless of the form chosen, it is essential to obtain advice about applicable local laws from a reliable...
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