MKTG Discussion Questions

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Chapter 5: International Contracts

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Chapter 5: International Contracts 

Chapter 5

International Contracts

lEARNINg oBJECTIVES

At the end of this chapter, YOU SHOULD:

1 Know about international sales contracts and the United Nations Convention on Contracts for the International Sale of Goods (CISG).

2 Know about legal issues regarding agency vs. distributorships.

3 Know elements of an agency or distributor contract.

4 Be able to determine the rights, responsibilities, and hazards of terminating foreign agents or distributors.

Preview

As will be seen throughout the course, there are complexities relating to international commerce. One of these is in the area of contracts. Given the misunderstandings that can result over the wording of and traditions surrounding domestic contracts, the problems can increase exponentially on an international basis when the potential for confusion is aggravated by different languages and legal systems and by discrepancies between the Uniform Commercial Code (UCC) of the United States and the United Nations Convention on Contracts for the International Sale of Goods (CISG).

Chapter Outline

Introduction

I. Firms in international business are involved in contracts

II. Contracts in a country governed by laws of that country

5-1 Lex Mercatoria

I. No specific law governing contracts between parties from two or more different countries except Lex Mercatoria, trade law

a. Lex Mercatoria is complex

b. Includes varied international agreements, treaties

5-2 International Sales Contracts and the CISG

I. Sometimes difficult to tell when a contract is “international”

II. Courts look at two criteria to see if a contract is international

a. Economic criterion:

i. Transfer of goods from one country to another

ii. Transfer of funds back to first country

b. Judicial criterion: is the transaction linked to laws of different countries?

i. Is then no longer under domestic law

ii. Is under the Vienna Convention also known as the United Nations Convention on Contracts for the International Sale of Goods (CISG)

1. Ratified by more than 74 countries (more than 80 percent of all world trade)

2. United States has not ratified all of the convention

3. CISG is substantially different than U. S. Uniform Commercial Code (UCC)

5-2-1 Contract Formation

I. UCC and CISG differ on terms:

a. Although there may be minor disagreement over terms of the sale (schedule of delivery or payment), the UCC says that when a seller makes an offer, and the buyer agrees to it, that is considered to be an acceptance, despite the minor differences

b. The CIGS says that when there are such minor differences between the seller and potential buyer, it results in a rejection of the offer and a counteroffer by the buyer

II. UCC and CISG differ on use of business forms:

a. Under UCC, standard pre-written contract forms between seller and buyer may not exactly match, but that is not relevant if they do not significantly affect the terms of the contract—courts can settle conflicts

b. Under CISG, terms of contract determined by business form of party “firing the last shot”

5-2-2 Creation of the Contract

I. Length of time an offer is outstanding:

a. Under UCC seller can withdraw an offer at anytime

b. Under CISG seller cannot withdraw an offer until an agreed-upon date that offer is good for

II. Written vs. oral contracts:

a. UCC requires written contracts

b. CISG allows for oral contracts, especially if witnesses can attest to the oral agreement

5-2-3 Breach of Contract

I. UCC applies “perfect tender” principle: goods and their delivery must conform exactly to terms of contract

II. CISG says buyer is obligated to contract unless nonconforming performance substantially denies the buyer that which was contracted for

a. Buyer may make price reduction in the case of nonconforming performance

b. There is a high threshold before the buyer can make such a price reduction and it must be timely

c. Issue is moot if a letter of credit (see Chapter 7) is involved

5-3 Agency versus Distributorship Legal Issues

I. There is no international agreement concerning relationships between exporters and their agents or distributors

II. Applicable law generally is that of the country where the agent or distributor is located

5-3-1 Contract Law versus Labor Law

I. In the absence of specifics, agreements between an exporter and an agent or distributor are called distribution contracts

II. Assuming an equality between the exporter and agent or distributor, courts will apply contract law to determine meaning of the contract in the event of a dispute

III. If the country’s laws assume an inequality between the exporter and an agent or distributor, labor law will be applied

a. Laws of country, not terms of contract, apply

b. Most countries protect agents, not distributors, although Belgium protects distributors, but not agents

5-3-2 Home Government Restrictions

I. Governments often feel a need to regulate agents and distributors in order to protect them from inequitable contracts with exporters

II. Many governments also want to regulate agents and distributors operating within their borders. They may require:

a. Agents and distributors to register with the government

b. Agents and distributors to be nationals of the country (typical in the Middle East)

c. Contracts to be inspected by the government

d. Commissions to be regulated

e. Exclusive agents and distributors in specific geographic areas

f. That there only be distributors, no agents allowed at all

g. That there be no agents or distributors, that exporters must establish a subsidiary that can be taxed for income

5-3-3 Other Issues in Agency and Partnership Agreements

I. Specific to U.S. exporters: since the agent or distributor acts as a representative of the U.S. exporter, the agent or distributor has to abide by the Foreign Corrupt Practices act

II. All exporters: an agency or distributor agreement should never be presented as a “partnership” agreement: some courts may interpret that each partner assumes the other’s liabilities

5-4 Elements of an Agency or Distributor Contract

5-4-1 Contract Language

I. Given the difficulties of accurate translations between languages, especially in a legal environment, one language in a distribution agreement is usually designated as the primary contract language and others are deemed to be translations

II. International agreements such as the CISG and the International Chamber of Commerce’s Incoterms are written in several languages. For political reasons each language is equally considered to be the original contract language

5-4-2 Good Faith

I. Distribution agreements contain a “good faith” clause

II. Operating in good faith, signers of the contract agree not to attempt to thwart the contract by seeking loopholes in it

5-4-3 Force Majeure

I. French term loosely translated as “overwhelming power” contained in all contracts

II. Exempts parties from requirements of contract in the event of some unforeseen catastrophe or major problem (ship sinking, strike, hurricanes)

5-4-4 Scope of Appointment

I. Usually first clause of contract which spells out if the distribution agreement involves an agent or distributor

II. Indicates products involved

III. Refers to territory of the agreement and corporate accounts

5-4-5 Territory

I. Defines geographical limits in which agent or distributor is authorized to sell

II. Designates whether agent or distributor is an exclusive representative in that territory

III. European Union has caused problems with assignments of territory

a. While an agent or distributor may by contract be limited to a single country, under EU anti-trust law it is difficult. The EU says a firm operating in one country may sell in another

b. It is difficult to grant exclusive rights to a territory when neighboring representatives also can sell there

5-4-6 Corporate Accounts

I. Corporate accounts are very large accounts of the exporter with negotiated terms that apply to all their purchases worldwide

II. Often an agreement with an agent or distributor will spell out the relationship of the exporter and the agent/distributor with corporate accounts in the territory of the agent/distributor

a. Too many corporate accounts in the agent/distributor’s territory may discourage the agent/distributor’s efforts to develop business

b. A policy that requires an account to switch from the agent/distributor to becoming a corporate account after it reaches a certain sales level can be counter-productive, as the agent/distributor, in order to keep the account, will not allow it to grow to the corporate sales level

5-4-7 Term of Appointment

I. Duration of appointment of representative

a. Must always be a definite period, usually dictated by market conditions, type of product sold

i. Time needs to be long enough to develop the market

1. “Pioneer sales” of new products need longer time

2. Market characterized by personal contacts and long-term relationships requires longer time to develop

ii. Time needs to be short enough to terminate ineffective performers

b. Must have possibility of renewal if performance criteria are met

i. Termination of contract is usually a bad solution

1. Need to find new representative

2. Ill will on the part of the old representative can cause problems for new representative

3. Customers can be alienated because they do not think exporter is committed to market

ii. Better solution is to renew contract, but indicate the terms of the original had not been met. Failure to include this language may result in a court considering the contract as an evergreen:

1. A contract of unlimited duration

2. Since the exporter earlier renewed the contract although performance was bad and did not point out the bad performance, the evergreen contract cannot be terminated for nonperformance

5-4-8 Choice of Law

I. Every international contract has a clause indicating which country’s laws will govern the contract

a. Usually the exporter chooses this rather than the agent or distributor

b. Sometimes courts in the importing country may override this and subject the agreement to the laws of their country

II. International Chamber of Commerce (ICC) “Model Contracts for Agency and for Distributorship” give the contract writer two choices:

a. Traditional choice of a specific country’s laws

b. Generally recognized international trade laws or Lex Mercatoria

5-4-9 Choice of Forum or Venue

I. Both parties agree on the location of the court to rule and the laws to apply in a dispute

a. Exporter prefer familiar courts, generally within the exporting country

5-4-10 Arbitration Clause

I. Increasing numbers of contracts call for use of an arbitration panel rather than a court to settle disputes

a. Decisions are binding

b. Arbitration panel can be decided at outset of contract or by following the “Rules of Conciliation and Arbitration of the International Chamber of Commerce”

5-4-11 Mediation Clause

I. There is also the possibility of a mediator stepping in to offer a solution in the form of a non-binding compromise

5-4-12 Profitability or Commission

I. Spells out amount of commission the agent earns:

a. Usually about 5 percent, although it depends on the industry

b. Agents usually get paid their commission when the buyer pays the exporter

II. Spells out price for which the distributor is expected to sell the product or the margin that it is expected to add to its costs

a. If distributor can set its own prices, it may result in different prices in different countries, resulting in parallel imports (see Chapter 4)

b. If exporter attempts to control distributor’s prices, it may be construed as “price fixing” in an attempt to reduce competition

i. Some companies set same price worldwide

ii. Some companies provide advertising and other support if distributors keep prices in line

iii. Some companies make threats about things like delaying deliveries if distributors do not keep prices in line

5-4-13 Intellectual Property

I. There will usually be a clause regulating the use of trademarks, patents, and copyrights, and a clause on confidentiality of trade secrets and strategic information

5-4-14 Miscellaneous Other Clauses

I. The facilities and activities clause spells out what the agent or distributor will have in terms of retail establishment size, inventory, training of employees, and handling of customer complaints

II. Advertising clause spells out obligations of both parties regarding advertising, trade show attendance, ownership of advertising/promotional ideas, and how promotional activities will be paid for

III. Competing lines clause spells out how agent or distributor will be allowed to handle competitor’s products

a. Usually agent cannot carry competing lines

b. Usually distributor can carry competing lines

IV. Ownership of customers’ list can be a sensitive issue between the exporter and the distributor

a. Some exporters demand to know who the distributor’s customers are

i. This is in the event the relationship with the distributor does not work out or if the exporter eventually wants to start a subsidiary in the future

ii. This usually does not represent a good way to start the exporter-distributor relationship

b. Some exporters choose not to know who the distributor’s customers are, although they often learn the identities through warranty registrations

c. This is not an issue with agents since the exporter ultimately bills the customer

5-5 Termination

5-5-1 Just Cause

I. Exporter may not be fulfilling contract (this tends to be rare)

a. Not providing prompt pro-forma invoices

b. Not shipping diligently

II. Importing agent or distributor may not be fulfilling contract

a. Not meeting sales performance objectives

b. Not spending enough on advertising

c. Not maintaining the required type of establishment

d. Selling competitor’s products

e. Applying for patents on improvements it has made on the exporter’s products

f. Keeping secret the customer list

III. Despite the breach and the fact the “guilty party” may not be contractually entitled to it, there may be a statutorily required minimum notice period and a minimum compensation to the offender

5-5-2 Convenience

I. A termination for “convenience” is a termination for any other reason than non-performance

II. Usually exporter seeks termination for convenience

a. Agent or distributor may be earning “too much” and exporter wants to replace them with its own subsidiary

b. Exporter may be changing strategy, including retrenching to its domestic market

III. To avoid litigation, convenience termination should include a lengthy notice of termination and a generous goodwill compensation package

5-6 Arbitration

I. Arbitration is fast becoming the preferred way of resolving disputes between international partners

II. Venues for arbitration:

a. International Chamber of Commerce Rules of Conciliation and Arbitration

b. United Nations Conference on International Trade Law (UNCITRAL) Rules of Conciliation and Arbitration

c. London Court of International Arbitration

d. The Stockholm Chamber of Commerce

e. The World Intellectual Property Organization

f. The American Arbitration Association

g. Individual law firms, many of which are in Switzerland

Key terms

acceptance

The second step in the formation of a contract. After an offer has been made by one of the parties, the contract is formed if the other party accepts the terms of the offer. Under the Convention on Contracts for the International Sale of Goods (CISG), the second party must completely agree with all the terms presented in the offer; otherwise, it is a rejection of the offer. Under the U.S. Uniform Commerce Code (UCC), however, the second party is considered to have accepted the offer if it generally agrees with its terms, even if it wants amendments to the quantity of the goods purchased, the delivery dates, and so on.

advertising

A marketing term that includes all of the techniques that a firm uses to promote its products by using communication media, such as television, radio, and print. In advertising, the company retains total control over the content of the communication.

arbitration

A process by which the parties to a contract can settle a dispute, involving a panel of arbitrators who will follow most of the rules of a court of law, but will render a decision in a short period of time. In an international contract dispute, the arbitrators will follow the laws specified in the “Choice of Law” clause. Arbitration tends to be much cheaper than litigation.

arbitration panel

A group of (generally) three arbitrators who are empowered by the parties involved in a contract dispute to reach a decision on the facts of the dispute and whose decision is binding on all parties. Generally, each of the parties chooses one arbitrator, and the third is chosen by a neutral party.

breach

In the event that one of the parties to a contract does not meet its obligation, that party can be found to have broken the terms of the contract, or to be in breach of the contract. If the party did not fulfill its obligations because of an event beyond its control, the nonperformance can be excused under the force majeure clause.

choice of forum

The court in which disputes regarding the contracts will be resolved.

choice of law

The national laws that govern the terms of the contract.

competing lines

In a contract between a principal and an agent or distributor, competing lines are products manufactured by a company other than the principal that compete with the products manufactured by the principal.

confidentiality

In a contract between two parties, the promise by each of the parties to not divulge what it has learned about the other party’s customers, manufacturing processes, and business practices.

contract language

The language in which a contract is written. If the contract exists in other languages, those versions are considered translations, and not the original contract.

contract law

The set of a country’s laws that govern relationships and disputes between the parties that have signed a contract. Contract law essentially dictates that the courts must settle the dispute by using the terms of the contract.

Convention on Contracts for the International Sale of Goods

A United Nations' treaty that acts as international sales law.

copyright

Ownership of an intangible good (intellectual property) by an individual or a firm. A copyright can be held on a work of art, a musical piece, or a written article. Copyrights, patents, and trademarks are protected by governments, preventing non-owners from using intellectual property without authorization.

corporate accounts

The customers to which the agent or distributor is not allowed to sell. These accounts are handled directly by the exporter.

counteroffer

An intermediary step in the formation of a contract. After an offer has been made by one of the parties, the other party may not agree with all of the terms of the offer and may want to modify them. Under the Convention on Contracts for the International Sale of Goods (CISG), this response is construed as counteroffer. Under the U.S. Uniform Commerce Code (UCC), however, it is an acceptance of the offer.

customers' list

The list of the customers to which the agent or distributor sells the principal's products.

distribution contracts

Agreements between exporters and intermediaries that can take the form of either agency or distributorship agreements.

evergreen contract

A contract that, by design or by default, does not have a specific term of appointment. If a contract lapses but both parties continue acting as if the contract were still in place, the contract then can be considered “evergreen.”

exclusive representative

An agent or a distributor that has been granted the right to be the sole representative of the exporter in a given territory.

facilities and activities

In a contract between a principal and an agent or distributor, a clause that spells out what specific facilities each will maintain (retail store, warehouse, repair facilities) and what specific activities each will engage in (trade show participation, after-sale service, promotion).

force majeure

An event beyond the control of any of the parties in an agreement that prevents one of the parties from fulfilling its commitment. The affected party is then not considered to be in breach of the contract.

good faith

The assumption that both parties signing an agreement want to enter that agreement and have no ulterior motives. Almost all contracts have a clause specifying that the parties are entering the contract in good faith.

labor law

A set of a country’s laws that govern relationships and disputes between employers and employees; it assumes that one of the parties (employee) needs to be protected from the other (employer). Labor law can be used in settling disputes between exporters and agents, at the discretion of the courts in the country in which the agent is located, regardless of the terms of the contract between the exporter and the agent. On occasion, labor law can be used to settle disputes between exporters and distributors.

Lex Mercatoria

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. Since some countries are signatories of some treaties but not of others, the complexity associated in determining which elements of Lex Mercatoria apply to a given transaction can be substantial.

litigation

A process by which the parties to a contract can settle a dispute, involving the courts of the country chosen in the “Choice of Forum” clause of an international contract. Litigation is considered a “last resort” option, when mediation fails and when the parties in dispute cannot agree to arbitration.

mediation

A process by which the parties to a contract can attempt to settle a dispute, generally involving a third, independent party who can suggest a compromise solution, acceptable to all concerned. Mediation is often preferred over litigation, which is an expensive and time-consuming process in which all judicial rules must be followed and which cannot offer compromise solutions.

offer

The initial step in the formation of a contract. When one of the parties to a potential sale contacts the other party, it does so with an offer to enter into a contract. Under the Convention on Contracts for the International Sale of Goods (CISG), the offer made by one of the parties is valid until its stated expiration date. Under the U.S. Uniform Commercial Code (UCC), however, an offer can be withdrawn at any time before its expiration date, without prejudice.

ownership of customers’ list

The list of the customers of a particular company is considered a business asset. A contract between a principal and a distributor spells out which of the two parties owns that asset.

patent

An intangible good (intellectual property) that an individual or a firm can own. A patent protects the rights to a process, material, or design. Copyrights, patents, and trademarks are protected by governments, preventing non-owners from using intellectual property without authorization.

ratification

The process by which a state fully accepts to be bound by an international treaty. It makes it part of its national legislation by having its Congress vote on it.

registration

A process whereby an agent or a distributor has to notify the government of the importing country that it has entered into an agency agreement or a distributorship agreement with a foreign manufacturer.

rejection

An intermediary step in the formation of a contract. After an offer has been made by one of the parties, the other party may not agree with all of the terms of the offer and may want to modify them. Under the Convention on Contracts for the International Sale of Goods (CISG), this response is construed as a rejection of the original offer, to which a counteroffer can be made.

scope of appointment

The scope [products, territory, customers] to which the contract applies.

full signatory

The acceptance of a treaty by a state. It signs it to indicate that it agrees with its premises, without further ratification.

simple signatory

The first step in the acceptance of a treaty by a state. It signs it to indicate that it agrees with its premises, but it will need to ratify it before it is bound by it.

term of appointment

The initial duration of the distribution contract, and the duration of its eventual renewal periods.

termination for “convenience”

The unilateral decision, by one of the parties to a contract, to end a contract before its term of appointment expires, for reasons unrelated to the performance of the contract by the other party(ies). The term is also used when one party decides not to renew the contract even if the preset criteria for renewal have been met by the other party(ies).

termination for “just cause”

The unilateral decision, by one of the parties to a contract, to end a contract before its term of appointment expires, because the other party has not met some of the terms of the contract that it had agreed to perform. The term is also used when one party decides to not renew the contract because the preset criteria for renewal have not been met.

territory

The geographical area in which the agent or distributor is restricted/expected to sell.

trademark

An intangible good (intellectual property) that an individual or a firm can own. A trademark represents the rights to a commercial name or slogan. Copyrights, patents, and trademarks are protected by governments, preventing non-owners from using intellectual property without authorization.

Uniform Commercial Code

The set of federal laws that govern commercial contracts in the United States.

Vienna Convention

Another name for the Convention on Contracts for the International Sale of Goods.

PowerPoint SLIDES – STUDY THEM – PRINT THEM OUT !

· Lex Mercatoria (1 slide)

· International Sales Contracts and the CISG (4 slides)

· Agency versus Distributorship Legal Issues (3 slides)

· Elements of an Agency or Distributor Contract (10 slides)

· Termination (3 slides)

· Arbitration and Mediation (3 slides)

Additional Resources

Lookofsky, Joseph M., Understanding the CIGS in the USA: A Compact Guide to the 1980 United Nations Convention on Contracts for the International Sale of Goods, 1995, Klumer Law International, Boston, The Hague, London.

The ICC Model Commercial Agency Contract, 1991, publication No. 496 of the International Chamber of Commerce, ICC Publishing, 156 Fifth Avenue, New York, NY 10010, USA and ICC Publishing SA, 38, Cours Albert 1er, 75008 Paris, France.

The ICC Model Distributorship Contract, 1993, publication No. 518 of the International Chamber of Commerce, ICC Publishing, 156 Fifth Avenue, New York, NY 10010, USA and ICC Publishing SA, 38, Cours Albert 1er, 75008 Paris, France.

Schaffer, Richard, Beverley Earle, Filiberto Agusti, International Business Law and Its Environment, South-Western, Cincinnati, Ohio, 2009, 7th Edition.