The International Distribution of Goods
by Florentino Ramirez
Manufacturers continuously seek ways to expand the marketplace for their products in foreign countries. Some manufacturers experiment by investing and establishing a physical presence in foreign countries. Others develop a sales force consisting of independent sales persons who have the local contacts and are familiar with the local culture. This article is intended to generally address the second option and considerations in representing ‘Principals’ or ‘Sales Representatives’ when contracting with foreign counterparts.
In the United States and Europe, this type of independent sales force is known as a Sales Representative or “Rep.” In Europe it is known as an “Agent.” While the general objective of Reps and Agents is the same—to get sales for their manufacturers (known as “Principals”)—their authority, duties and rights are distinguishable based on their country’s laws.
In Mexico and other Latin American countries, parties are free to contractually define the authority of a sales representative, including setting the territory and the extent to which a representative may bind the Principal. However, in these countries a sales representative as an external business entity upon any termination of its agreements, if the termination results in a reduction in its personnel, will have to pay those terminated employees severance compensation based on their length of employment. Consequently, the representative will usually contractually provide that the Principal, upon termination of the sales representation will reimburse the representative for any resulting severance payments, which amounts can be shockingly high for the unfamiliar.
The European Union (EU) has adopted Directive 86/653/EEC (Directive) with the purpose of setting a minimum level of harmonization of the national laws of the EU States that are applicable to commercial Agents selling goods and their Principals. Each State retains the right to enact specific legislation concerning these relations, including setting the amount of compensation and the presumption of exclusivity of territory.
An important feature of the European Agent is that it has the authority to negotiate a sale and bind the Principal without the Principals’ express consent. Therefore, caution must be used when retaining a European Agent. This authority may also impact compensation because the commission becomes due as soon as the sales transaction has or should have been executed by the Principal according to the agreement signed by the Agent for the Principal, or, as soon as it has been consummated by the customer ( for example if pre-payment is contractually required).
Conversely, in the United States, the Sales Rep and Principal are free to contract as to when the commission is payable, which typically is after the customer pays the Principal.
Moreover, upon termination, the European Agent is entitled to be “indemnified” or to be “compensated” by the Principal, depending upon the manner prescribed by the legislation of each Member State. Indemnity refers to payment with respect to the goodwill the agent accumulated during the contract term to which the Agent would be entitled if and to the extent it has brought new customers to the Principal or significantly increased the Principal’s business with the customers.
Under the compensation rules, the European Agent is entitled to payment for the damage it suffers as result of the termination of the contract, in particular if the termination deprives the agent of the commissions which would have accrued to it while continuing to provide the Principal with the contractual benefit, or which have not enabled the Agent to amortize the costs and expenses it had incurred for the performance of the contract.
On the other hand, contracts dealing with the U.S. Sales Reps are governed by the general contract law of each State, The U.S. Principal and Sales Rep are free to spell out the duties and scope of the Sales Rep’s role. Unlike the European Agent, it is well-accepted that a U.S. Rep does not have the legal authority to bind the Principal. Instead, its role is to solicit customers and orders, subject to the Principals’ approval. Terms as to when commissions are payable, their amounts and accountings are generally matters left to the agreement of the parties, as are provisions for the payment of commissions upon termination of the relationship.
In the United States, 33 states have enacted legislation that protects Sales Reps in case of non-payment of commissions. Some states provide a remedy only upon the termination or expiration of the agreement, while others apply protection only to written agreements.
Texas’ commission protection law provides that a written agreement engaging a Rep to solicit orders within Texas must state the method of computation of the commission and when it is to be paid. The law sets venue in Texas, and provides that no provision of the law may be waived and that any contractual provision that attempts to subject the agreement to the laws of another state is void.
Failure to pay the commissions when due, or within 30 days following termination of an oral agreement, gives rise to damages equal to three times the amount of commissions due, plus attorney fees and costs. A non-Texan Principal appoints the Texas Secretary of State as its agent for service.
Florentino Ramirez is the founding Partner of Ramirez & Associates, P.C. and is a member of the 12-member Legal Working Group of the IUCABC Internationally United Commercial Agents and Brokers organization based in Amsterdam. He can be reached at firstname.lastname@example.org.