The Independent Counsel

International Sales


Overseas Reps--Sales Agents or Independent Resellers?


BY JEFFREY A. LEVINE

Many U.S. companies choose a network of local distributors as their channel into the international marketplace. Local distributors enable the U.S. exporter to deal with matters such as registration, import, or foreign exchange controls, and may give better access to customers within the local market. However, the laws of many foreign countries can create legal traps for the unwary exporter.

Legal questions to consider are (i) should the distributor be a sales agent or an independent reseller, and (ii) what is the U.S. exporter's liability in the event of a termination in each case? Since local laws affecting these questions vary from country to country, the purpose of this article is to identify the issues involved.

Sales Agent. The local sales agent sells on behalf of the U.S. exporter and, typically, brings local sales opportunities to the exporter for acceptance or rejection. The sales agent's contract must limit his authority in order to prevent the exporter from becoming subject to unwanted commitments by the agent. The agent is compensated with commissions on actual sales.

Independent Reseller. An independent reseller buys product at a discount from the U.S. exporter and resells it at a mark-up. The ultimate purchaser, the reseller's customer, looks only to the reseller in the event of a problem.

Termination of a Sales Agent. Since the exporter exercises more control over the activities of a sales agent than over an independent reseller, in many countries the termination of the agency can result in the exporter's paying statutory severance to the agent unless it can be demonstrated that the termination was for cause or the distribution agreement expired by its own terms. Treatment of the agent in these countries is the same as if the agent is a local employee of the exporter.

Termination of an Independent Reseller. Effective reseller terminations also require careful drafting of the distribution agreement. In the absence of a written agreement for termination (and sometimes even in spite of such an agreement), local indemnity laws can entitle resellers as a matter of public policy to a percentage of the value of prior and/or future sales as compensation for having established the exporters' goodwill within the country. Thus, termination may entitle the independent reseller to far greater payments from the exporter than the severance payments that a sales agent would receive.

Conclusion. When selecting whom you want to distribute your products in a foreign country, you must also determine whether your distributor should be either a sales agent or an independent reseller.. Making the right choice will require an evaluation of the relative rights enjoyed by each entity under local law, and the company's business goals relative to these rights.

Comment: U.S. companies can reduce the risk of unforeseen liabilities arising from oversees distribution arrangements through a basic awareness of local law, together with the appropriate drafting of distribution agreements.

© ASSOCIATION OF INDEPENDENT GENERAL COUNSEL 1994; (all rights reserved). This article is not intended as legal advice. Consult a qualified attorney for assistance concerning a specific issue or problem.