This article is intended to identify issues unique to relationships with foreign distributors and agents. The topics addressed are covered briefly, and will require further research and consideration by the practitioner. Tax issues and conventions and treaties between the U.S. and the intermediary’s country may affect a number of the issues outlined in this article, and must be considered as each transaction requires.

Before deciding to do business in another country through a contractual relationship with an agent or a distributor, you or your client probably have considered and discarded several other possibilities, which may include direct investment or sales, joint venturing with a local partner and licensing of intellectual property rights. Using an agent or distributor as intermediary has the benefit of incorporating the intermediary’s local expertise, while minimizing the U.S. company’s commitment of personnel, facilities and capital.

Distinction Between Agents and Distributors

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, which orders are then filled by the supplier. The contract of sale is between the supplier and the ultimate customer. An agent is compensated on a commission basis and usually is subject to significant control by the supplier.

By contrast, a distributor is itself the supplier’s customer, periodically purchasing products from the supplier, taking title to and possession of the supplier’s goods and selling them for his 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 he pays to the supplier.

A particular contract may in fact be a hybrid of the two types of agreements, 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 and regulations from a reliable lawyer qualified to practice in the country at issue.

Issues Common to Both Kinds of Relationships

Local Requirements Regarding Intermediaries. Local law may require a contract with an intermediary to be registered with a government office, and in some cases translated into the official language of the country in which the intermediary will operate. Where both an English language and a parallel foreign language version of the contract are prepared, both should specify which version governs in case of a conflict between the two

Independent Contractor Status. Unless the terms and performance of the contract lead to a different result under applicable foreign law, both agents and distributors are normally independent contractors, rather than employees, of the supplier. However, if the supplier retains too much authority over the intermediary’s performance, particularly in an exclusive relationship, the intermediary may be deemed to be the supplier’s employee. That could lead to the supplier having unexpected liabilities, including for employee benefits mandated by the host country, and difficulty terminating the intermediary, as well as unforeseen tax consequences.

U.S. Export Compliance. Whether goods are shipped directly to the customer or to an intermediary, the supplier will need to comply with numerous U.S. export laws and regulations, including export licensing requirements. It is essential to consult an expert in this practice area to avoid non-compliance. The transmission of know-how by methods such as electronic communication, shipment of training manuals, making information available for computer downloading outside the U.S., travel abroad by a U.S. person having knowledge, and training of foreign persons abroad or in the U.S. constitute an export of that knowledge, known as a “deemed export.” Certain products are not permitted to be exported, and others may be exported only to certain countries. Exports to certain persons designated by the Office of Foreign Asset Control and the U.S. Department of Commerce, acting through the Bureau of Industry and Security, are prohibited or restricted. U.S. laws also restrict the export of any product or technology for specified end-uses including encryption, nuclear activities and weaponry. Technology and goods exported from the U.S. remain subject to U.S. regulation regarding re-export from the receiving foreign country to another.

Import Compliance in the Host Country. The other side of the export coin is compliance with the laws of the foreign country regarding import and sale of the supplier’s goods or services. This can be made the responsibility of the intermediary under the contract with the supplier, but the supplier is well advised to consult local counsel to verify compliance.

Compliance with U.S. Sanction Programs and Embargos. The supplier will be responsible for determining that its own activities and those of its agents comply with the U.S. government’s numerous sanctions and embargoes programs. Historically these were directed at nations such as North Korea and Iraq that were deemed by the U.S. government to be objectionable for political reasons, but currently they also include sanctions against certain entities and individuals, including designated terrorists and international narcotics traffickers.

U.S. Antiboycott Laws. In any cross-border transaction, including one with an intermediary, a U.S. entity or individual may encounter a request to cooperate with a boycott of a country that is friendly to the U.S. by another country or group of countries, such as the Arab League boycott of Israel. Such a request may be veiled as a requirement to certify that parts do not originate in a particular country or that controlling officers of the U.S. company are not nationals of that country, or simply a request for information from a boycotting country about the company’s business. U.S. antiboycott regulations prohibit United States persons from, inter alia, complying with or supporting such a boycott by refusing to do business with a boycotted country, discrimination based on race, religion, sex or national origin, furnishing information about another person’s race, religion, sex or national origin and furnishing information about the company’s business relationships with a boycotted country.

Intellectual Property Licensing. When trademarks or other intellectual property rights are licensed to an agent or distributor for purposes of marketing or selling the supplier’s products, attention should be given to local licensing requirements, including restrictions on exclusivity, updating requirements, terminability and damages payable upon improper termination. Certain countries assert the right to approve license agreements, and may cap royalty payments and impose significant withholding taxes on royalties. The supplier will want to consider including in a license agreement grant-back provisions covering translations, modifications and improvements, to the extent permitted by local law.

Data Privacy and Anti-Spam Laws. Many foreign jurisdictions, including the European Union, have more stringent data privacy requirements and prohibitions against unsolicited electronic communications than does the U.S. The collection, storage, processing and use of personal data, including information as to a user’s location, may be prohibited. Although an agency relationship is more likely than a distributorship to create liability for the supplier, situations such as software distributorships in which the ultimate customer is registered with the supplier and arrangements in which the supplier or its intermediary send electronic communications to customers or prospective customers can give rise to data privacy issues and prohibitions on sending unsolicited e-mail without the recipient’s consent.

UN Convention on the International Sale of Goods (“CISG”). If the countries in which the parties have their places of business, as determined under the CISG, are both signatories to the CISG, the convention will apply to their cross-border sale of goods transaction unless it is contractually excluded. The provisions of the CISG should be compared to laws that would apply if the CISG is excluded to determine whether or not the parties want their contract to be subject to the CISG and whether they wish to apply the CISG with certain derogations or variations.

De Facto Contracts. American lawyers assume that a contract is not formed until it is executed and delivered, but particularly in civil law jurisdictions, a de facto contract can be deemed to exist without a signed document, and sometimes without a written instrument even being drafted. Local counsel should be consulted to determine if this could occur in the country concerned and whether a principal could be bound by its agent’s actions in the absence of a signed contract.

Force Majeure Considerations. Due to the possibility of changes in government relations and policies, care should be given when drafting a force majeure clause in a contract with a foreign intermediary to include the effects of action or inaction by a foreign government or instrumentality among the events or circumstances for which the U.S. supplier will not be liable.

Governing Law and Dispute Resolution. A U.S. supplier often will want to select the law of some U.S. state to govern the contract with its intermediary, but in many jurisdictions that choice of law (particularly in an agency contract) will be unenforceable and the law of the intermediary’s domicile must be applied. Even if the foreign country permits U.S. law to apply, the jurisdiction may have mandatory provisions of its laws that cannot be escaped. In addition, while U.S. arbitral awards are likely to be enforceable abroad if the U.S. and the other country at issue both are parties to a treaty or convention providing for enforcement of foreign arbitral awards, the enforceability of a U.S. court judgment against a foreign intermediary probably will be subject to principles of comity and the public policy of the country in which the intermediary resides. Remedies such as injunction and specific performance may not be available, or may be more difficult or time consuming to enforce, in other countries.

Foreign Antitrust Principles. Contract provisions such as exclusive licenses, establishment of exclusive sales territory, non-compete clauses and restrictions on a distributor’s resale pricing may be regulated by antitrust laws in the intermediary’s home country. Those laws may prohibit certain provisions or require clearance from the antitrust authorities in advance.

Packaging and Labeling Requirements. Laws of the host country and conventions to which the U.S. and the host country are parties may include particular requirements with respect to packaging and labeling of the supplier’s product, including placement of trademarks. The intermediary may be given contractual responsibility to ascertain and communicate to the supplier such requirements, but ultimately it is wise for the supplier to verify them with experienced U.S. and local counsel.

Issues Relating to Foreign Agents

Regulation of Agents. Some countries recognize more than one type of agent, with specific requirements or restrictions applicable to each. Agents may be required to be citizens of the country in which they act as representative and to register with a government office.

Termination. The aspects of an agency relationship perhaps most commonly regulated by foreign law are the ability of the principal to terminate the arrangement and the compensation that must be paid to the agent on termination. Many countries impose obligations on the principal to compensate an agent whose contract is terminated, often based on the length of the term for which the agent has represented the principal, the amount the agent invested in developing the business and the goodwill created by the agent. Other countries impose mandatory notice periods prior to termination becoming effective. Often those compensation and notice protections cannot effectively be waived by the agent.

Non-Competition After Termination. Some countries have statutes that limit any non-compete covenant that survives termination of the agency relationship as to geographical scope, duration and universe of products covered by the covenant.

Scope of Agent’s Authority. Limitations on the agent’s authority to bind the principal by executing sales contracts or order forms should be clearly established in their contract. In addition, local law should be checked for provisions allowing the agent to bind its principal vis a vis third parties when the agent acts within the scope of his authority, and to ascertain whether the agent’s representations to customers constitute warranties by the principal.

Foreign Corrupt Practices Act. The FCPA is designed to prevent bribery of foreign officials and politicians by U.S. businesses and to require accounting records to be maintained that will allow the U.S. government to verify whether bribes are being paid. The FCPA broadly proscribes offers to give anything of value and authorizations of such gifts to foreign officials and politicians to influence their actions in an official capacity or secure an improper advantage. Employees and agents of “domestic concerns,” as defined in the FCPA, are subject to the antibribery provisions even if they are not themselves U.S. citizens or residents. Payments, promises of payment and authorizations of payment to any person, including an agent, while knowing that all or a portion of the value will be used directly or indirectly to bribe a foreign official or politician also violates the FCPA. Requests by the agent for extra compensation, for payment to be made in cash or to an account in a third country or in a nominee’s name or requests for reimbursement of undocumented expenses should be treated as red flags that merit investigation by the supplier.

If the supplier is an issuer of securities registered under the Securities Exchange Act of 1934, it should insure that its accounting records properly document payments to foreign agents in compliance with the FCPA’s recordkeeping provisions.

Issues Relating to Foreign Distributors

Exclusivity. The supplier often will want its distributor to sell only the supplier’s products, but in some jurisdictions exclusive distribution contracts may violate antitrust laws because they are deemed to limit free competition.

Payment Methods; Currency Conversion. A supplier normally will want its distributor to make payments in U.S. dollars, shifting any currency exchange risk to the intermediary. Assuming that is permitted at the time the contract is signed, unforeseen events such as a liquidity or monetary crisis in the distributor’s home country could cause that to be impossible. A letter of credit confirmed by a U.S. bank acceptable to the supplier often solves the payment concerns because the confirming bank’s obligation to pay the supplier will depend only upon the presentation by the supplier of specified documentation.

Duration and Termination. If the parties continue to perform a fixed term contract beyond its stated term, it may be treated by local law as having indefinite duration. As with agents, that could give rise to indemnities or damages payable by the supplier on termination of the distributorship.

Statutory Warranties. Many countries impose warranty provisions by statute. For public policy reasons such warranties often cannot be limited or waived. The supplier may want to require its distributor to maintain a product liability insurance policy issued by a carrier approved by the supplier in a specified amount, naming the supplier as an additional insured. The distributor also may be contractually required to indemnify the supplier for liabilities arising from the sale or use of the supplier’s products by the intermediary.

Conclusion

Agents and distributors can make valuable contributions to a U.S. company’s overseas business strategy when care is taken in selecting them, entering into a contractual relationship with them and monitoring ongoing compliance and business results. The assistance of knowledgeable U.S. counsel and advice from good foreign counsel are key to making the relationship work well.