Expanding Into New Territories - Should You Appoint A Distributor Or An Agent?

Transcription

1 Chapter 9 Agency and Distributorship Pre-session task: Read the text below and decide if the following statements apply to agents, distributors or both: 1. Apppointing them helps sellers to enlarge their business. BOTH 2. They add a margin to cover their own costs. DISTRIBUTORS 3. They are appointed by a principal. AGENTS 4. They are paid a commission on the sales, usually on a percentage basis. AGENTS 5. They assume the risk of sales. DISTRIBUTORS 6. The supplier does not have a direct contact with the customers. DISTRIBUTORS 7. They can operate on exclusive or non-exclusive basis. BOTH 8. A supplier has a greater control of the terms of the sale. AGENTS 9. They act as middlemen between the supplier and customers. AGENTS 10. This option reduces administrative costs for the supplier. DISTRIBUTORS 11. The supplier can fix purchase prices. AGENTS 12. They buy products and then sell them to the customers. DISTRIBUTORS 13. Their appoinment has both advantages and disadvantages. BOTH 14. The supplier needs to pay an indemnity or compensation upon termination of the arrangement. AGENTS Expanding Into New Territories - Should You Appoint A Distributor Or An Agent? If you are seeking to expand sales, the appointment of agents or distributors can offer a relatively low-risk, cost-effective alternative to establishing a new business in an additional territory. There are, however, important legal and practical differences between a distributor and an agent, and before deciding which route to take, you need to be aware of the advantages and drawbacks of each relationship. What is the difference? Often the terms 'agent' and 'distributor' are used interchangeably, although there are distinct legal differences between the two arrangements. Both structures can be on a 'sole', 'exclusive' or 'non-exclusive' basis. A distributor buys products on his own account and sells them on independently at a profit. In a distributor relationship the supplier sells his products (usually on discounted terms) to the distributor, who then resells the products direct to his own customers, adding a margin to cover his own costs and a profit element. There is one contract for the sale of goods from the supplier to the distributor and then another between the distributor and the customer. The supplier has

2 no direct contractual relationship with the final customer and the distributor bears the risk of those customer sales. An agent, in contrast, does not buy the products himself, but introduces customers to the supplier. In an agency relationship, the agent does not usually enter into contracts with customers himself, but simply acts as an intermediary between the supplier (known as the 'principal') and the supplier's customers. Generally the supplier, as principal, contracts direct with customers introduced by the agent and the acts of the agent are treated as those of the principal. Usually the agent will act only as an introducer or 'marketing agent', with no authority to negotiate or conclude contracts. Some 'sales agents', however, do have full power to negotiate and conclude contracts, effectively standing in the principal's shoes. Typically the agent will assume no financial risk, but receives commission on the sales he has introduced to the principal as a reward for his efforts. Advantages and drawbacks of each relationship A key advantage of the distribution model is that the supplier passes a significant degree of risk to the distributor, who is responsible for customer debts and contractual liabilities to those customers. The supplier deals just with the distributor and not the end customers, thus administrative costs are reduced and the need to have an established place of business in the distributor's territory is removed. In a distribution arrangement, however, the supplier will have significantly less control over the activities of a distributor than over those of an agent. There is no direct relationship with the customer and the supplier. Credit risk in a particular territory will be concentrated in perhaps only one distributor, rather than in multiple customers. In addition, there are potential competition law implications of certain distribution agreements. The agency model is particularly beneficial where the supplier wishes to retain a higher degree of control over product sales, allowing the supplier to fix sales prices, which is usually unlawful in a distribution arrangement, and maintain closer control over brand image. The supplier can cultivate direct relationships with customers, particularly vital where specialised after-sales services are required. A key drawback of an agency arrangement, however, is that the agent may have the statutory right to a lump sum payment on termination of an agency agreement. This arises in many countries and in most of the EU, even if the agreement is terminated lawfully. There are complex provisions for 'indemnity' or 'compensation' payments in this context. text simplified from: ELM5L4wo Seminar work

3 1. Pre-session follow-up - compare your answers in pairs 1.1 Translate: agent {jednatel obchodní zástupce} to add a margin {přidat marži} commission { provize} beneficial {výhodné} to cover the costs {pokrýt náklady} to bear the risk {nést riziko } to have the power to conclude a contract { mít pravomoc uzavřít smlouvu} to act as an intermediary {jednat jako prostředník} to retain the control {ponechat si kontrolu} statutory right {zákonné právo právo ze zákona} lump sum of money {jednorázová částka paušál} indemnity {odškodnění } Created by the team of authors. 1.2 Comparing agency and distributorship. Based on your pre- session tasks make a list of advantages for appointing an agent and a distributor. appointing an agent higher degree of control over product sale fixed prices possible closer control over brand image direct relationships with customers (specialized service, ) appointing a distributor passing a risk to the distributor (e.g. customer not paying) dealing only with the distributor (reduced administrative costs) no need to establish a new place of business 1.3 Pair work, Exam Practice 1-minute talk. Speak for one minute on the following topics: Student 1 agent Student 2 - distributor Useful tip: structure the talk: introduction what you are going to talk about, which points are you going to cover main body content of the points conclusion

4 2. Work with a video. Listen for more information from an expert: Fill in the table: advantages disadvantages Agent Distributor 2.2 What is the main message of the video? There is no right or wrong answer, always look for the option which best fits your situation. 3. Discussion in pairs. You have a business and you want to enlarge it, you would like to start exporting - which do you appoint, an agent or a distributor? Choose the goods you are dealing in (drinks, food, furniture, toys, ) and the country/countries you would like to start exporting. Then discuss the advantages and disadvantages of appointing an agent or a distributor in relation to your goods. Agree on a solution. useful phrases: I think/in my opinion/in my view I don't think.../i don't believe that If you want my honest opinion I totally/fully/partly agree. The way I see it It seems to me that I wouldn't say that What do you think?/what's your opinion? / What are your ideas? Can/May I add something?

5 Created by the team of authors. 4. Pair Work - clips of paper with clauses - the key is Exercise 6 The following clauses are taken from two contracts: International Commercial Agency Contract and International Distribution of Goods Contract. The words agent and distributor have been deleted. Decide which clauses are from the Agency Contract and which from the Distribution Contract and which can be in both. Give reasons for your choice Obligations of the 2.1 In performing its activities, the shall look after the Principal's interests and act dutifully and in good faith. 2.2 The shall (introduce) [delete if not relevant] the product(s) (or service(s)) and promote the sale of such product(s) (or services) in the territory (and in the promotion channels) [delete if not relevant] in accordance with the terms agreed in this contract. The has no authority to make contracts on behalf of, or in any way to bind the Principal, but it shall pass any offer received to the Principal. Procedure for ordering the Goods 3.2 Each order for the Goods must be given in writing and shall be subject to confirmation in writing by the Supplier. The Supplier shall confirm the order in writing to the within [fifteen (15) days specify any other period] after it is given, unless the Supplier has a valid reason not to do so. Upon confirmation by the Supplier each order shall be final, but the Supplier may at its discretion accept an amendment to an order within [fifteen (15) days specify any other period] after it is given. Payment 5.1 The price of the Goods shall be payable within [thirty (30) days specify any other period] of the Supplier s invoice (which may be submitted at any time after the Goods are dispatched) or as otherwise agreed in writing between the Parties. Indemnity or compensation on termination 15.1 At the end of this contract, the will be entitled to receive a termination indemnity which will be equivalent to one or two years commission *specify] based on the average annual commission paid to the over the preceding 3 years. Exclusivity 10.1 The Principal grants exclusivity to the, which means that it undertakes not to appoint other within the territory for the duration of the present contract. s commission - right to commission 11.1 Unless when the right to commission has been expressly excluded by the Parties, the is entitled to the commission provided for in Schedule 4 on all sales of product(s) (or service(s)) made

6 within the territory throughout the duration of this contract, whether such sale was generated by the or not, in accordance with Article 10. Force majeure - excuse of non-performance 16.1 Force Majeure means war, emergency, accident, fire, earthquake, flood, storm, industrial strike or other impediment which the affected party proves was beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of this contract or to have avoided or overcome it or its consequences. Notices 20.1 Any notice under this contract shall be in writing (which may include ) and may be served by leaving it or sending it to the address of the other party as specified in Article 20.2 below, in a manner that ensures receipt of the notice can be proved. _of_contracts/7%20international%20commercial%20agency.pdf _of_contracts/6%20international%20distribution%20of%20goods.pdf 5. Language of contracts 5.1 What are the names of the parties in an agency/distribution relation? agent X principal distributor X supplier 5.2 What is the meaning and the use of shall in contracts? shall must, is obliged to 5.3 Contracts often include complex sentences. Complete the following gaps so that the transformed sentence has the same meaning as the original one. a) If the right to commission has not been expressly excluded by the parties, the Agent is entitled to the commission provided for in Schedule 4. Unless the right to commission has been/is expressly excluded by the parties, the Agent is entitled to the commission provided for in Schedule 4. b) The Supplier can make any changes in the specification of the Goods provided he promptly informs the Distributor in writing. The Supplier can make any changes in the specification of the Goods only if he promptly informs the Distributor in writing.

7 c) If the Distributor fails to pay the price, the Supplier may suspend any further delivery. If the Distributor does not pay the price, the Supplier may suspend any further delivery. d) Unless sooner terminated pursuant to Article 12.2, this contract shall continue for two years. If itis not terminated pursuant to Article 12.2, this contract shall continue for two years. e) Should any party wish to make any changes, they must do so in writing. If any party wishes to make any change, they must do so in writing. _of_contracts/7%20international%20commercial%20agency.pdf _of_contracts/6%20international%20distribution%20of%20goods.pdf 6. Contract Clauses. If time A) Study the following clauses from an Agency contract and translate the highlighted phrases. 1 Scope of appointment 1.1 The Principal appoints the Agent as its commercial Agent, to promote the sale of the product(s) (or services) within the territory (and in the promotion channels) hereafter defined. 2 Obligations of the Agent 2.1 In performing its activities, the Agent shall look after the Principal's interests and act dutifully and in good faith. 2.2 The Agent shall (introduce) [delete if not relevant] the product(s) (or service(s)) and promote the sale of such product(s) (or services) in the territory (and in the promotion channels) [delete if not relevant] in accordance with the terms agreed in this contract. The Agent has no authority to make contracts on behalf of, or in any way to bind the Principal, but it shall pass any offer received to the Principal. 3 Obligations of the Principal 3.2 The Principal shall in particular remunerate the Agent according to the commission and terms of payment provided for in this contract. 4 Minimum orders

8 4.1 The Agent will have to meet the annual minimum orders objectives set out in schedule Exclusivity 10.1 The Principal grants exclusivity to the Agent, which means that it undertakes not to appoint other Agents within the territory for the duration of the present contract. 11 Agent s commission - right to commission 11.1 Unless when the right to commission has been expressly excluded by the Parties, the Agent is entitled to the commission provided for in Schedule 4 on all sales of product(s) (or service(s)) made within the territory throughout the duration of this contract, whether such sale was generated by the Agent or not, in accordance with Article Indemnity or compensation on termination 15.1 At the end of this contract, the Agent will be entitled to receive a termination indemnity which will be equivalent to one or two years commission *specify] based on the average annual commission paid to the Agent over the preceding 3 years. 16 Force majeure - excuse of non-performance 16.1 Force Majeure means war, emergency, accident, fire, earthquake, flood, storm, industrial strike or other impediment which the affected party proves was beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of this contract or to have avoided or overcome it or its consequences. 20 Notices 20.1 Any notice under this contract shall be in writing (which may include ) and may be served by leaving it or sending it to the address of the other party as specified in Article 20.2 below, in a manner that ensures receipt of the notice can be proved. B) Now study the clauses from a Distributorship Contract and underline and translate other useful phases. 1 Appointment of the Distributor 1.1 The Supplier appoints the Distributor as the Supplier s Distributor for the resale of the Goods in the Territory during the period of this contract (the Term ), subject to the following provisions. 2 Supply of the Goods 2.2 The specification of the Goods shall be as set out in schedule 1, but the Supplier reserves the right to make any change in the specification of the Goods that is necessary in order for them to conform with any applicable laws, provided the Supplier promptly informs the Distributor in writing of any such change that it proposes to make. 3 Procedure for ordering the Goods

9 3.2 Each order for the Goods must be given in writing and shall be subject to confirmation in writing by the Supplier. The Supplier shall confirm the order in writing to the Distributor within [fifteen (15) days specify any other period] after it is given, unless the Supplier has a valid reason not to do so. Upon confirmation by the Supplier each order shall be final, but the Supplier may at its discretion accept an amendment to an order within [fifteen (15) days specify any other period] after it is given. 5 Payment 5.1 The price of the Goods shall be payable within [thirty (30) days specify any other period] of the Supplier s invoice (which may be submitted at any time after the Goods are dispatched) or as otherwise agreed in writing between the Parties. 5.5 If the Distributor fails to pay the price for any Goods in accordance with this contract, the Supplier may (without limiting any other right or remedy): Cancel or suspend any further delivery to the Distributor under any order; Sell or otherwise dispose of any Goods which are the subject of any order by the Distributor, whether or not appropriated to the order, and apply the proceeds of sale to the overdue payment; and Charge the Distributor interest on the outstanding amount (both before and after any judgment) at the rate of [specify] % from the due date until the outstanding amount is paid in full. 12 Duration and termination 12.1 This contract will take effect on the date of its signature by both parties or, if signatures do not occur simultaneously, when the latest signature is given. Unless sooner terminated pursuant to Articles 12.2, 12.3 or 12.4, this contract shall continue for a period of [specify period] The Supplier may (without limiting its rights under Article 5.5) terminate this contract with immediate effect by giving written notice to the Distributor, if the latter fails to pay any sum payable by it under this contract Within [specify figure] days of the due date for payment Either party may (without limiting any other remedy) at any time terminate this contract by giving written notice to the other if: The other party commits any breach of this contract and (if capable of remedy) fails to remedy the breach within [third (30) specify any other figure] days after being required by written notice to do so; or The other party goes into liquidation, becomes bankrupt, makes a voluntary arrangement with its creditors or has a receiver or administrator appointed. 13 Consequences of termination 13.1 The following provisions shall take effect upon the termination of this agreement for any reason The Supplier shall be entitled to repurchase from the Distributor all or part of any stocks of the Goods then held by the Distributor at their invoice value or the value at which they stand in the books of the Distributor, whichever is lower, subject to the following provisions 16 Force majeure - excuse of non-performance

10 16.1 Force Majeure means war, emergency, accident, fire, earthquake, flood, storm, industrial strike or other impediment which the affected party proves was beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of this contract or to have avoided or overcome it or its consequences. 20 Notices 20.1 Any notice under this contract shall be in writing (which may include ) and may be served by leaving it or sending it to the address of the other party as specified in Article 20.2 below, in a manner that ensures receipt of the notice can be proved. References: Contract clauses from _of_contracts/7%20international%20commercial%20agency.pdf _of_contracts/6%20international%20distribution%20of%20goods.pdf