Published in Iowa Economic Development Authority, International Update, March/April 2012
When an exporter embarks on an export expansion campaign, it may do so
by appointing either a foreign sales representative or a foreign
distributor to generate sales in foreign markets. These methods of
generating export sales are wonderful tools, but the exporter should be
wary of pitfalls that could have detrimental effects on its long-term
marketing plans. It is important that the exporter and its advisors and
an agent of the exporter for the limited purpose of soliciting orders on
behalf of the exporter. Assuming the exporter accepts the order that
the sales representative forwards to it, the sales representative
receives a commission on the sales amount.
A comprehensive export plan should include a standard agreement for each
method. The agreement forms should provide the foundation for
negotiations with prospective sales agents or distributors in various
territories. The exporter should request that its US counsel oversee the
negotiation of the terms of these agreements and, where appropriate,
obtain any necessary advice from local counsel in the jurisdiction in
which the distributor or sales agent will be appointed. Distributors or
agents with a significant presence in a territory may insist on
beginning the negotiation process with their preferred form of
agreement. But the exporter should not adopt agreements proposed by
prospective agents or distributors, at least not without substantial
review by counsel.
The standard agreements must adequately address a number of items, and
failure to do so can lead to long-term problems. Among other things, the
standard agreements must clearly describe the relationship (agent
versus distributor); the intellectual property rights of the exporter;
performance expectations for the party who is appointed; the scope of
appointment (exclusive versus non-exclusive territory); the exporter's
right to sell products directly to customers in the territory (if
applicable); the term of the agreement (definite term versus indefinite
term); each party's termination rights; and each party's obligations
when the agreement terminates. If the agreement fails to clearly discuss
these items, then the seller's export strategy is at risk. Depending on
the jurisdiction, some of these alternatives may not be appropriate.
Moreover, the unwary exporter could limit its ability to further exploit
a territory if the scope of appointment is unclear or if its
intellectual property rights are not protected properly. The unwary
exporter could also find itself obligated to pay a substantial sum of
money to a distributor upon termination of the agreement, a problem that
might have been avoidable. This sum could even include amounts intended
to allow the distributor to recoup its lost investment or collect some
lost profits. Therefore, the seller's export plan should include a
proper set of agreements and a good understanding of potential risks in
each territory.
Jason M. Ross
Davis Brown Law Firm
(515) 288-2500
www.davisbrownlaw.com