MKTG Discussion Questions
Jena43421
David_IL_5e_Chapter05.pptxChapter 5 International Contracts
International Contracts
Lex Mercatoria
International Sales Contracts
Agency vs. Distributorship
Distribution Contracts
Termination
Arbitration
Mediation
Lex Mercatoria
Lex Mercatoria is the sum total of all the international agreements, international conventions, and other international trade customs that complement the domestic laws of any given country, and to which all international trade transactions are subject.
It is difficult to comprehensively grasp Lex Mercatoria because it can include agreements from many different areas, such as the United Nations, World Trade Organization, multinational conventions, free trade agreements, and any number of bi-lateral agreements.
Convention for the International Sale of Goods
The United Nations’ Convention for the International Sale of Goods (CISG) was adopted in 1980 as a way to oversee international contracts.
The CISG allows parties from different countries to enter into contracts with reasonable assurance that the provisions of the contract will be enforced.
More than 60 countries have ratified this agreement. Trade between these countries represents 80 percent of all word trade.
Uniform Commercial Code
The Uniform Commercial Code (UCC) is the commercial law of the United States. This is the law that is used to form contracts in domestic transactions.
The UCC and the United Nations’ Convention for the International Sale of Goods (CISG) differ in several respects.
For several reasons, including the fact that its provisions are different from the UCC, the United States has only partially ratified the CISG.
CISG vs. UCC
CISG
A positive response asking for change is considered a rejection.
A contract is not been accepted until both parties agree to all terms. An offer is open until a certain date and cannot be withdrawn until said date.
The buyer is allowed to unilaterally apply a price reduction to the amount in the contract for nonconforming or damaged goods.
UCC
A positive response asking for change is considered an acceptance.
Offer can be withdrawn at any time.
The buyer cannot change the terms of the contract unless the seller performs
a fundamental breach.
Contract Formation (CISG)
Offer
Initial step in the formation of the contract when one party contacts another and offers to sell or purchase something.
Acceptance
If the second party accepts all the terms of the offer, the contract is formed.
Rejection
If the second party does not accept all the terms of the original offer, it is a rejection of the initial offer.
Counter-offer
If the second party reject the first offer, it may make a
counter -offer with new terms.
Distribution Contract
The contract between an exporter and its representatives abroad is called a distribution contract. It is a contract between the exporter and an agent or a distributor.
There is no uniform international agreement mandating how these relationships should work. However the parties often agree to abide by the model contracts of the International Chamber of Commerce.
Contract Law and Labor Law
An important point to note when entering into a contact with a foreign distributor or agent is whether this relationship will be considered a “contract between equals” or a “contract between unequal partners” by the courts of the country in which the agent or distributor is located.
In the first case, the contract will fall under contract law. Under the second, it will fall under labor law.
The way this relationship is viewed could have a significant impact on the way a court will resolve a dispute. Under contract law, the court will settle disputes by following the terms of the contract. Under labor law, the court will protect the agent.
Home Government Restrictions
Some governments make special efforts to ensure agents or distributors working in their countries are protected from deals that are not fair or equitable, and generally place all distribution contracts under labor law. Others use contract law in all cases, but most treat agent under labor law, and distributors under contract law.
Some countries may require the agent or distributor to be a national of the home country and/or register with the government.
Some countries also do not allow distributors, or agents, at all. The company must have a sales subsidiary.
Termination of a Contract
A contract can be terminated under two scenarios:
Just cause
One of the parties to the contract did not perform what it was expected to do under the terms of the contract.
Convenience
One of the parties to the contract wants to end the contract for reasons other than non-performance. Most often, it is the exporter/principal who wants to end the contract.
Termination for Just Cause
Termination for “just cause” is triggered when either of the parties is not honoring the terms of the contract.
It is generally quite easy to end a contract this way.
However, if the contract had been renewed under similar circumstances in the past (inadequate performance), there is a possibility that a court will consider that the contract is evergreen, which means that there was an expectation it would never be cancelled.
It is therefore important for either party to notify the other than the contract is renewed despite the non-performance, and to include a warning that future non-performance will result in termination.
Termination for Convenience
A contract is terminated for “convenience” when it is for any reason other than just cause. It can be initiated by any of the parties (but it is normally the exporter that seeks to terminate the agreement in such a way).
This is typically a painful way to end a contract, as the opposite party feels slighted.
In most instances, the opposite party should be given some form of compensation by the party seeking the termination, despite the terms of the contract that may call for no compensation. Otherwise, it is possible that courts will side with the slighted party, and impose significant compensation under the terms prescribed by labor law.
Arbitration (I)
Arbitration is a form of dispute resolution in which a panel of arbitrators is asked to reach a decision on the facts of the dispute. The decision of the arbitration panel is binding on the parties to the contract.
Many arbitration panels are made up of three arbitrators: one selected by each of the party, and one selected by another party, such as the International Chamber of Commerce.
Arbitration is perceived as fair, even-handed and independent.
It is also much quicker and more efficient than litigation through the courts, by using a more flexible process to accept evidence, for example.
Arbitration (II)
Arbitration has other advantages as well:
It is more “creative”
Arbitrators can find solutions to the dispute that a court would not be allowed to use.
It is very efficient
Arbitrators are professionals who know the industry and are able to quickly understand a situation.
It is private
Unlike court proceedings, arbitration decisions are not open to the public, and the facts of the dispute are not made public.
Mediation
Mediation is a process by which an independent mediator will attempt to find a middle ground between the parties who are having a dispute.
Mediation is less formal that court proceedings or arbitration, and its recommendations are not binding on the contract parties, unlike court decisions or arbitration outcomes.
Mediation is more practical for small disputes that have arisen from a misunderstanding, or when parties are interested in keeping a business relationship.
Mediators tend to be trade professionals with a wealth of experience in solving such disputes and who can quickly determine a solution acceptable to both parties.
Elements of a Contract
Choice of Law
Choice of Venue
Force Majeure
Contract Language
Scope of Appointment
Good Faith
Territory
Corporate Accounts
Term of Appointment
Arbitration Clause
Mediation Clause
Profitability or Commission
A number of other clauses
Elements of Contract
Choice of Law
This clause specifies which country’s laws will be used in the case of a dispute between the exporter and the agent or distributor.
Choice of Venue (Choice of Forum)
This clause specifies the location of the court that will be used to render a judgment in the case of a dispute. It is generally in the country whose laws are specified in the “Choice of Law” clause.
Elements of Contract
Force Majeure
A French expression meaning roughly “overwhelming power.” This is a clause releasing all parties from their obligations due to events outside of their control.
Contract Language
The contract is signed by parties who speak different languages. This clause specifies the official language of the contract. If a copy of the contract exists in the other language, it is considered a translation.
Elements of Contract
Good Faith
A contract is entered into under “good faith” and assumes that neither of the parties has an ulterior motive. This clause states that both parties entered the agreement in good faith: neither party will attempt to distort the terms of the agreement.
Scope of Appointment
This clause defines the functions that the representative will perform; it is the clause that spells out whether it will be an agency or a distributorship agreement.
Elements of Contract
Territory
This clause defines the geographical limits within which the agent or distributor is authorized to sell. It can be a region, a country, or a group of countries.
Corporate Accounts
This clause specifies which customers will remain corporate clients, customers to which the exporter will continue to sell directly, and to which agents or distributors are not allowed to sell.
Elements of Contract
Term of Appointment
This clause defines the period for which representative will be appointed. This must be a specific time period and is generally renewable, as long as the agent or distributor performs adequately.
Profitability or Commission
This clause spells out the amount of commission that the agent will earn or the price at which the distributor is expected to sell the product.
Some countries do not allow the exporter to dictate the prices or profitability of a distributor.
Elements of Contract
Arbitration
This clause identified the process of arbitration. Arbitrators are empowered by the parties involved in a contract dispute to reach a decision on the facts of a dispute. Their decisions are binding.
Mediation
This clause identifies the process by which the parties to a contract can attempt to settle a dispute, generally involving a third independent party, a mediator, who can suggest a compromise solution.
Elements of Contract
Facilities and Activities
A clause that spells out what specific facilities an agent or a distributor will maintain (buildings, store, inventory) , and what specific activities each (exporter and agent or distributor) is authorized and expected to perform.
Competing Lines
This clause outlines which competing products the agent or the distributor is allowed to represent or sell.
Elements of Contract
Confidentiality
A clause that binds all parties to promise not to reveal what is learned about the other’s business practices for the duration of the business relationship and often after the relationship is terminated.
Ownership of Customers’ List
This clause outlines who owns the customers’ list, which is considered an asset. Generally, the exporter is aware of the customers’ list of an agent, but does not know who the distributor’s customers are.
.
Elements of Contract
Trademarks, Patents, and Copyrights
In the event that an agent or distributor creates intellectual property, this clause determines the ownership of that intellectual property.
