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Selecting a Foreign Agent or Distributor in the European Union

Spring 1996

ABC Corporation, a Wisconsin manufacturer, has developed a good reputation in the Midwest for producing quality widgets at a competitive price. Within the last two years, a small number of European customers have learned about ABC Corpora-tion through trade shows, advertisements, or United States business associates and have placed orders for its widgets. As the number of export transactions completed by ABC Corporation gradually has increased, ABC has considered methods of developing foreign markets for its widgets and increasing its export sales. After weighing the advantages and disadvantages of each of its options, including indirect exporting, direct export-ing, using a traveling sales force, and forming a local branch or subsidiary, ABC Corporation has decided to use a foreign agent or distributor to sell its widgets in the European Union ("EU").

In order to select a foreign agent or distributor prudently, ABC Corporation, like other United States exporters, must address three issues. First, it must decide whether to use an agent or a distributor to sell its widgets. Second, it must establish business and legal criteria that it will use to evaluate potential candidates. Finally, it must research and select intermediary candidates using the established criteria. The remainder of this article briefly comments on each of these three issues.

Although many businesses use the terms "agent" and "distributor" interchangeably, the choice between using an agent or a distributor to distribute products in the EU has many important consequences. Local laws that protect business intermediaries against their principals generally only protect either agents or distributors, but not both. For example, while protective legislation in Belgium extends only to distributors, protective legislation in Austria extends only to agents. In addition, an exporter’s decision whether to use an agent or a distributor can affect a foreign government’s decision whether to subject the exporter to foreign taxation.

Another consequence of an exporter’s decision whether to use an agent or a distributor in the EU is that its relationship with an agent may be governed by the Council of the European Communities Directive 86/653 relating to self-employed commercial agents. With certain exceptions, the Direc-tive requires EU members to bring their domestic laws into compliance with its provisions by January 1, 1990. While some countries have not yet integrated the Directive into their internal laws, all members of the European Union are governed by its provisions.

The Directive establishes various rights and obliga-tions for commercial agents and their principals. An important element of the Directive defines an agent’s notice and termina-tion rights. An agent is entitled to a minimum termination notice of one-month per year of service up to three years, and countries can legislate a longer notice period for longer terms of service.

The Directive also states that an agent who is unlaw-fully terminated is entitled to either indemnification or damages as compensation from the exporter. Indemnity generally applies when an agent has brought new customers to the exporter or has significantly increased the volume of the exporter’s business and indemnification under the circumstances would be equitable. Damages generally are imposed either when an agent is deprived of commissions which the exporter’s proper performance of the contract would have generated or when the agent has not been able to amortize the costs incurred to perform the contract. The notice and termination rights described above cannot be waived by the parties in their agreement. As a result, before an exporter chooses a self-employed commercial agent to distribute its products in the European Union, the exporter should carefully review the rights and obligations imposed by Directive 86/653.

An exporter’s decision whether to use an agent or a distributor also must be grounded on an understanding of the role of each in the distribution process. Although agents and distribu-tors both serve as intermediaries in the distribution of an exporter’s products abroad, they have different responsibili-ties and characteristics. Agents enter contracts with customers on behalf of the exporter and subject to the exporter’s approval. The purchase price of the products is paid by the customer to the exporter. Agents generally are small companies and tend to be affiliated only with one exporter.

Distributors, on the other hand, purchase products from the exporter at a discount and sell them to customers on their own account and not on behalf of the exporter. The purchase price for the products is paid by the distributor to the exporter. Although the exporter can control the terms of the sale to the distributor, the exporter does not have absolute control over the terms of the sale to the customer. Distributors generally are larger companies with extensive sales facilities.

The unique roles of agents and distributors in the distribution process create both advantages and disadvantages for exporters. For example, while the use of an agent would give the exporter greater control over the terms of sales to foreign customers, it also produces a greater risk of nonpayment since the exporter must seek payment from the customers themselves and not from the distributor. In addition, under the Directive and in the absence of an agreement to the contrary, an agent may be entitled to receive commissions from an exporter on orders that the exporter has accepted even before the exporter’s customer has paid for the products. The agent also may be able to hold the exporter’s goods in its possession as security until the commission is paid.

Accordingly, while an exporter that uses a distributor does not need to evaluate the creditworthiness of its customers, a distributor’s assumption of extra risks and costs likely makes it more expensive than an agent. An exporter’s choice of whether to use an agent or a distributor or to draft an agreement so the intermediary has attributes of both depends on how the exporter weighs the advantages and disadvantages of each in light of its business objectives.

Once an exporter decides whether to use an agent or a distributor, the exporter’s second task is to establish business and legal criteria that it will use to select a candidate. The business issues that should be considered include the product’s characteristics, the nature of potential customers and the qualities of the market. For example, if the product is highly complex, the manufacturer may want to use an intermediary with technical expertise. If a broad base of customers exists for the product or if the market is unfamiliar with the product, the manufacturer may want to choose a large, established distributor that has a large sales network and sufficient resources to support a long-term marketing strategy. Legal issues that should be considered include whether the foreign country where the products will be sold allows noncompetition covenants to be included in intermediary contracts. In addition, if the exporter wants to establish an exclusive dealing contract with an inter-mediary, the relationship will be governed by Block Exemption Regulation 1983/83 issued by the Commission.

Once the business and legal criteria for selecting an intermediary to distribute products in a foreign country have been established, the exporter can begin the third task of evaluating intermediaries. Many resources can be used by exporters to research foreign agents and distributors. The International Trade Administration of the United States Department of Commerce has various sources of information available to manufacturers, including the Agent/Distributor Service and the Export Contact List Services. Industry trade associations, commercial sections of foreign embassies, consulates and trade offices in the United States, commercial banks, and interna-tional carriers all can provide useful information about agents and distributors. Many manufacturers also investigate and contact disgruntled agents and distributors used by their competitors in hope of obtaining their services.

Once an exporter compiles a list of candidates, the manufacturer should contact them in order to receive more information about the candidates’ strengths and weaknesses and to measure their interest. The information obtained from each candidate should include the candidate’s ideas and goals concern-ing the product, the competence of its employees, and the sophisti-ca-tion of its facilities. After the most appropriate candidate is selected, the exporter and the candidate then can negotiate an agreement governing their relationship.

While selecting an agent or distributor in the EU is a complicated and difficult task, proper selection is very important. An inappropriate choice of agent or distributor could retard sales increases, cause failures to pay for shipped products, damage the exporter’s reputation overseas, and trigger damages or indemnification duties imposed by contract, statute, or the Directive. Therefore, before committing to a business relationship with any foreign intermediary, a United States exporter should carefully consider all of the business and legal issues involved.

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If you have a media request or need an attorney with particular knowledge for comment, please contact Susan Steberl, Director of Marketing, at 414.287.9556 or ssteberl@gklaw.com.

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