Crossing borders - issues to be considered by UK principals and suppliers when appointing foreign agents and distributors

June 24, 2014

We live in a global village.  The trouble is that every street, road, and lane has its own laws.  

The world’s countries are no different.  But the situation is made more complex when a country decides that a particular law has mandatory effect.  As a result, a principal may specify that the English courts will hear disputes between it and its Spanish agent.  But this makes no allowance for the fact that it is a mandatory rule of Spanish law that the Spanish courts are to hear disputes between Spanish agents and their principals.  

This is important, not least as “playing at home” invariably puts the home party at an advantage in terms of costs and management time.  

Sometimes it is not possible to provide in your agency or distributorship agreement for English law to apply and for the English courts to hear disputes.  In this situation, consideration should turn to other possibilities rather than a simple acceptance of the law or court of the overseas agent or distributor.  For example, local law may prevent the English courts from hearing disputes, but would providing for arbitration provide a better way forward? 

Many UK companies will be aware that agents have a statutory entitlement to compensation and termination of the agency agreement. The fact that some countries provide the same mandatory entitlement for distributors can come as a surprise.  

If potential exposure is likely to be significant, is there value in ring fencing your main trading company through the use of a subsidiary incorporated for the purpose of trading with the country in question?  

Another reason for considering ring fencing is if the use of an overseas distributor (or even an agent) can give rise to a tax presence in the overseas country. 

Whilst there are examples of agency and distributorship agreements which have lasted for many decades, unsurprisingly these are the exceptions to the general rule.  Agents and distributors are often used as a stepping stone to the UK company establishing its own sales or trading presence in the overseas country.  Where this is not the situation, a change in an agent or distributor may occur where it is felt that a new agent or distributor can achieve more than the incumbent.  However, care needs to be taken in making this substitution in terms of:  Does national law impose a registration requirement on the new agent or distributor?  Can this requirement be satisfied discreetly before the change is made from incumbent to replacement?  

  1. Does the agency agreement allow for the successor agent to accompany the existing agent in order to be introduced to the customer base before taking over?  

  2. How easy or otherwise will it be under the terms of the distributorship agreement to require the transfer of stock from old to new distributor?

  3. Does the distributorship agreement require that the supplier be provided on a regular basis with details of the distributor’s customers? If not, how will the new distributor know what is the existing customer base?  

Careful consideration of these and other issues can help in using agents and distributors in overseas countries.  


Related pages:

Agency, Distribution and International Trade more

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