The recurring professional experiences in the field of international distribution and agency in France, Belgium and Germany, of Italian goods intended for export, give us the opportunity to recap the most important legal aspects of these typical commercial relationships and to focus on their frequent advantages and risks, as well as on the appropriate contractual precautions.
2. Entry strategies in foreign markets
First of all, it is common ground that the international distribution of goods, as well as the recourse to an agency agreement, are usual indirect strategies for an exporter to entering into a foreign market; this implies that, even if the producer loses part of the profits otherwise generated by the sale of goods in the target country, in favour of intermediate players , there will be for him a considerable advantage, in terms of costs saving due to the absence of a direct commercial structure abroad, and also in terms of lower risks due to investments that could not be immediately profitable in case of sale results not in line with initial budgets.
In facts, indirect entry into a foreign market can take place by commercial agreements with foreign partners, typically agency, distribution and franchising contracts, or through production agreements, including sub-contracting.
3. Foreign distributors or agents
The use of agents and distributors abroad and the wide territorial area that often characterizes such commercial agreements, imposes a clear delimitation of the effective powers and faculties reserved to the foreign commercial partner.
Generally speaking, a foreign distributor will purchase the products from the Italian producer in order to resell them on the foreign territory, applying a mark up, while an international agent will promote the sale of imported foreign goods on the territory, gaining a commission on sale revenues but the purchase price will be earned by the producer.
4. International distribution agreement
International distribution agreements usually provide for: bilateral exclusivity rights (or, more often, in favour of the distributor only); guaranteed minimum targets of sales in favour of the producer; bilateral or unilateral non-competition undertakings ; selected type and timing in relation to the transport of goods ; specific terms of delivery of the goods (ICC Incoterms ©); moreover, even if not as often as it would be necessary, international commercial contracts contain the choice of the applicable law and of the competent jurisdiction or arbitration chamber to resolve any disputes.
5. Frequent risks
However, in addition to the management of the usual risks associated with international contracts and implied by the choice of applicable law and of the competent jurisdiction, as well as by international transport, by customs procedures and by international tax issues, there is also often the possibility that the commercial relationship negotiated by the parties consists of an unclear contamination of agency and distribution.
It is common experience of international trade practice that this may occur if agent’s powers and faculties are not properly described in the contract, or when, by way of example, strict restrictions on resale powers are imposed on the distributor, so to subvert the distribution contract into an agency; sometimes, on the opposite, the agent is vested with faculties so wide that the latter can be considered as a reseller. Such is often the case of the sale of goods intended for large retailers in whose supplier directory the seller is not yet included, while the foreign agent is, which is a frequent situation with supermarket chains.
This confusion, determined by commercial needs or by contractual lacks, are able to give rise to unexpected risks and costs; in facts, despite the choice of the applicable law, if the contract is not precisely drafted, the application of “mandatory” or “imperative” rules of laws of the foreign country may arise, very often offering a wider protection to the foreign agent/distributor then that offered by the rules of the chose law, with a significant unforeseen increase of costs to be borne by the producer, for commissions and/or substantial indemnities for termination of the contract and/or for the final loss of customers by the intermediary.
6. Regulatory framework
Within the EU territory the legal framework is based on the application of the Rome 1 Regulation, of the Council Directive 86/653/EEC and of the Commission Regulation no. 330/2010, but national law of each Member State may be significantly different, therefore, it must be deeply examined also in connection with the national rules of Private International Law and with the rulings of the national courts and of the EU Court of Justice as well. Furthermore, the strength, in the competent jurisdiction, of the judicial orientation establishing that the International Sale of Goods (CISG- Vienna 1980) is not to be applied to international distribution contracts should be verified in advance, when drafting a distribution agreement; finally, in relation to contracts including an arbitration clause, the complex issues arising out of the reference to the lex mercatoria or the Unidroit Principles.
International distribution and international agency agreements are certainly the most common ways to enter into a foreign market; immediately afterwards, once consolidated the commercial network in the Target Country, the Italian exporter may wish to grant its clients with a more stable presence, also by means of contractual or corporate joint ventures, up to the establishment of its own foreign branch.
Landolfi & Associati corporate lawyers are available for any further insight and information on internationalization strategies both in EU or extra EU countries, either of Civil Law or of Common Law, and on international commercial contracts in English, French and Spanish.