Import Export Manual: Trade partner, commercial agent, distributor

2. HOW TO CHOOSE YOUR TRADE PARTNER

HOW TO APPROACH FOREIGN MARKETS: COUNTRY RISK ASSESSMENT

Obtain as much information as possible about both the market you are interested in and your prospective partner in order to avoid risk.

What information to obtain about the country: key questions

• Do you have enough information about the economic system of the country? If not, what are the main sources of information about foreign markets?
• How safe is the country (efficiency of the judicial and of the banking systems)?
• How reliable is the prospective foreign partner?
• In the foreign country, who should I contact to obtain adequate assistance?

Information about the economic systems of foreign countries

Before looking for a partner, whether for a trading or for a manufacturing business, it is essential to identify the market of reference. ITA (Italian Trade Agency), Unioncamere (Italian Union of Chambers of Commerce, Industry, Handicrafts and Agriculture) and the Italian Chambers of Commerce abroad can provide you with reliable and precise information.

Information about foreign market risk

To obtain information about country related risk (systemic events and risks concerning the political, social, economic and financial systems of the country where you are planning to operate), it is advisable that you rely upon official and institutional sources such as the Sace Group, which is an insurance-financial group which operates in the areas of export credit, credit insurance, investment protection, financial guarantees, sureties and factoring.

INFORMATION ABOUT THE JUDICIAL SYSTEMS OF FOREIGN COUNTRIES

It is also important that you examine the judicial system in force in the country where you want to operate so that you can carry out your business safely. Different countries have different judicial systems in terms of speed, effectiveness and cost of trials.

INFORMATION ABOUT PROSPECTIVE FOREIGN PARTNER RELIABILITY

In order to assess the risk of poor financial reliability of your foreign trade partner, it is important that you obtain as much information as possible about liquidity conditions, goods or real estate he/she owns, payment habits and any lawsuits in which he/she may be involved.

DIFFERENT FORMS OF COMMERCIAL COLLABORATION

Commercial and manufacturing collaboration with a foreign partner may have different forms in terms of types of businesses, products or services, foreign markets, opportunities. Below are the most common forms of collaboration:

THE COMMERCIAL AGENT

The agency contract is that in which an independent party (the agent) has the authority to promote the conclusion of contracts on behalf of another party (called “the principal”) in a particular area.

It is a relationship between an Italian business and an intermediary, who does not purchase the products, whose task is to promote the sales of the products in return for a pay which is usually in the form of a percentage on the concluded transactions.

The agency contract is the subject of the Directive 86/653 EEC of the European Union. The main aspects of an international trade agency relationship are:
• area, i.e. the geographical area which is entrusted to the agent (e.g. a country/state);
• products concerning the task;
• exclusive right for the agent. Italian law (Art. 1743 of the Italian Civil Code) establishes that, unless otherwise stated, the agent has an exclusive right upon the task. In other countries this right shall be agreed contractually;
• non-competition clause . The agent agrees not to promote any businesses that are in competition with the business he/she represents.
• obligation of promotion, (minimum turnover required and consequences of failure to reach it), compliance with the conditions of sale of the principal in carrying out the task;
• powers of representation: Italian law (Art. 1745 of the Italian Civil Code), unless otherwise stated, establishes that the agent does not have any power of representation. In other countries, this aspect must be agreed contractually;
• informational duties of the agent with respect to promotional activities, solvency of customers, information about the market, applicable laws and regulations concerning the products, competitors’ activities counterfeiting of trademarks, and violation of industrial property rights.
• commission the agent is entitled to a commission only after the conclusion of the transaction.
• reimbursement of expenses duration of the contract: the contract may be temporary or permanent. In the first case, the contract may not be terminated before the final date, unless there is just cause; in the second case, the contract may be terminated any time, without cause, except for the obligation to comply with minimum notice requirements.
• severance pay: within the European Union, in accordance with the Directive 86/653 EEC , under some conditions, the agent is entitled to a severance pay which shall be paid by the principal. Italian law (Art. 1751 of the Italian Civil Code) establishes that the pay shall not exceed the amount equivalent to the commissions for one year which shall be calculated from the average annual earnings of the agent over the previous five years or a shorter period of contract. In France, severance pay is the equivalent of the earnings of the agent for two years. Always be sure to ascertain the law applicable to the contract and the competent judge. In several non-EU countries, there is no obligation to give a severance pay to the agent.
• post-contractual non-competition clauses and guarantees for specific deals are subject to specific restrictions.
• applicable law and court which has jurisdiction (or arbitration), may be chosen by the parties in the contract.

THE BUSINESS BROKER

In Italy, the business broker is a person who is not in charge of facilitating the deals of an Italian business on a regular basis (as opposed to the agent), but he/she simply informs the company about possible deals; the business broker is then entitled to a commission under the terms agreed by the parties.

The business broker is usually engaged in different activities other than brokerage, and, while carrying out such activities, he/she may have the opportunity to recommend possible deals with no promotional duties. The business broker is not entitled to a severance pay. The type of relationship (agency or “brokerage”) is not determined by what is stated in the contract, but by the actual relationship between the parties.

THE DISTRIBUTOR

The distribution agreement is one between two businesses: the grantor or manufacturer and the grantee or distributor. In such an agreement, the manufacturer grants the distributor the right to distribute and sell, on behalf of the distributor, the products of the manufacturer in a given territory.

EU countries do not regulate this type of agreement (with the only exception of the Belgian law of 1961). Case law protects some rights of the distributor. Distribution agreements are subject to European anti-trust regulations (Regulations EC 330/2010) which make agreements with clauses restricting competition (resale price maintenance clause, clauses on the duration of the non-competition obligation for the distributor, clauses on a non-sale obligation outside the assigned area) unlawful. Below are the main aspects of an international distribution agreement:

• distribution area i.e. the assigned territory for example a country;
• products to which the agreement refers, either all of them or just some types of products;
• exclusive or non-exclusive relationship: usually distributors want an exclusive right in order to ensure a return on their investment. Some Islamic countries (Saudi Arabia, Egypt, UAE, Indonesia, Lebanon and Pakistan) protect the local distributor;
• non-competition obligation for the distributor: the distributor shall not distribute, manufacture or deal in competitors’ products, except as provided for in EU anti-trust regulations (Regulations EC 330/2010)
• powers of representation abroad; especially in the case of English-speaking countries and of countries in the middle east, you should specify contractually that the distributor does not have any power of representation.
• obligation of promotionminimum turnover required and consequences of failure to reach it (e.g. termination of contract), participation in trade shows, advertising and related expenses, regulations for the use of the trademark.
• purchases of the distributor: procedure for sending orders, order confirmation, conditions of sale, payment guarantees, right to suspend delivery; obligation to provide technical assistance to the customers in the given territory;
• the distributor’s information about the market: laws and regulations applicable to the products, activities of competitors, infringement of trademark and of the manufacturer’s intellectual property rights;
• duration of the contractthis may be temporary or permanent. In the first case, the contract may not be terminated early (unless for just cause); in the second case, the contract may be terminated without cause, but businesses must comply with the agreed notice requirements;
• applicable law and court which has jurisdiction (or arbitration) shall be chosen by the parties in the contract.

HOW TO FIND A FOREIGN TRADE PARTNER

Italian businesses may find foreign trade partners via:

- The services provided by the Enterprise Europe Network (mainly for Research and Development projects and technological projects);
- the Italian Chambers of Commerce abroad, recognized with the decree of the Italian Minister Economic Development with the assent of the Italian Ministry of Foreign Affairs (law 518/70);
- the Italian Diplomatic Representatives abroad, Embassies and Consulates, which report directly to the Italian Ministry of Foreign Affairs.

5. PAYMENT AND ANY COLLECTION OF AMOUNT DUE

The payment phase in international sales is a necessary condition for the deal to be successful, and it is important to study two aspects of it, which are interconnected:
• the choice of the methods of payment or of guaranteeing the payment.
• the choice of how to resolve any dispute that may arise, which includes collection of amount due. These aspects must be analysed and negotiated in the pre-contractual stage so as to include them in the contractual agreement.

All this applies both when the Italian business is selling abroad and when it is buying abroad.

THE METHODS OF PAYMENT AND THE GUARANTEES

The choice of the methods of payment and of the guarantees must be made in the light of considerations about the political risk of the country where the foreign partner is based, as well as on the efficiency and accessibility of the judicial system of the country (the cost of justice and of defence in not very efficient countries).

The most important payment methods include:

• documentary credit or Letter of Credit;
• CAD (Cash Against Documents);
• COD (Cash on Delivery).

DOCUMENTARY CREDIT, LETTER OF CREDIT

This method of payment is regulated by the Uniform Customs and Practice for Documentary Credit UCP 600. It is the safest method of payment in international trade provided that it is irrevocable and confirmed either by an Italian bank or by an EU bank. The letter of credit entitles the beneficiary to have, for a certain amount of time corresponding to the duration of the credit, a person/entity who undertakes to pay the sum of money corresponding to the price of the contract. This subject/entity is more solvent and reliable than the foreign buyer since it is an Italian or an EU bank (therefore the Italian business may undertake lawsuits).

CASH AGAINST DOCUMENTS

In the case of Cash Against Documents (CAD), once the goods have been shipped, the seller hands over to his bank the documents representing the goods (these documents are indispensable to the buyer to clear goods at customs) so that the buyer collects the documents through a bank in his country, once he has made the payment. The seller’s instructions establish the methods according to which the entrusted bank hands over the documents to the buyer.

There are also other means to guarantee the payment such as personal sureties. If provided in good time, these means may be used should the buyer fail to pay. Below are the standby letter of credit and the clause of reservation of title.

THE STANDBY LETTER OF CREDIT

The standby letter of credit is regulated by the publication no. 590 issued by the International Chamber of Commerce (ICC) known as the International Standby Practices ISP98. In a standby letter of credit, the issuing bank undertakes to pay to a sum of money to the beneficiary on behalf of the buyer, should the buyer fail to pay in accordance with the agreed terms and with the conditions set out in the standby letter of credit. In order for the standby letter of credit to be executed, the beneficiary must hand over to the bank a declaration of failure to meet the obligations by the buyer, as well as a copy of the shipping documents.

THE CLAUSE OF RETENTION OF TITLE

This tool to protect credit is a contractual provision which enables the seller to retain ownership over the goods sold until such time as the agreed price has been paid entirely. If the full price is not paid, the seller is entitled to the return of the delivered goods of which he has always retained ownership.

SACE CREDIT INSURANCE

The Sace Group is a financial-insurance group which is very active in the field of Export Credit, i.e. credit insurance and investment protection, as well as in the field of financial guarantees, surety bonds and factoring.

COLLECTION OF AMOUNT DUE

What to do if, despite the contractual protections, the debt you are owed remains unpaid? If the parties are based in different countries, this will be more difficult than in domestic transactions. This is because two different countries have two different judicial systems. Before focusing on how to resolve the dispute, it is necessary to address some important preliminary matters:
- Which court should you apply to? The Italian court or that of the country of your foreign partner?
- Which law is applicable to the dispute? The Italian law ]or the law of the country of your business partner?
- How long will the dispute last? What will the cost be for the business?

It is advisable that the business examine these matters before closing the deal and the contract with the foreign partner so as to negotiate the best solution in terms of speed, cost and protection of the business’ own interests, should a dispute arise in the future. If the business fails to do so because of low bargaining power, it will consider this aspect as part of the business risk connected to the transaction.

Within the EU, the path has become smoother thanks to the following regulations:

• Regulation EC 44/2001 that establishes the recognition and enforcement of judgements in civil and commercial matters delivered in all the other states of the EU. The regulation also establishes rules for the determination of the competent court in the case of dispute.
• Regulation EC 805/2004 which creates the “European Enforcement Order”, which enables the enforcement of judgements and acts concerning credits in another state of the EU without any proceedings needed for recognition.
• Regulation EC 1896/2006 which creates a “European order for payment procedure”.

DETERMINING THE COMPETENT COURT

Regulation EC 44/2001 establishes that the parties to an international contract have total freedom in choosing the competent court to settle any disputes, including collection of amount due (Art. 23). The choice must be clearly expressed; this implies that the business must pay attention to the negotiation phase and to the final phase of the contractual deal which often consists of the exchange of several documents (offer, order, order confirmation) during which the parties run the risk of being inaccurate about the terms and conditions which they previously agreed.

THE EUROPEAN ENFORCEMENT ORDER

With Regulation EC 805/2004 the European Union aims to facilitate the resolution of disputes in civil and commercial matters, and the collection of amount due. The regulation establishes that the following the enforcement titles can be certified as a European Enforcement Order:
• judgements given by a judge of a EU Member State;
• court settlements;
• authentic instruments (the authenticity of which has been established by a public authority of a Member State) on uncontested claims (Art. 3).

To benefit from the European Enforcement Order, if the competent court has not explicitly been expressed, businesses must comply with the rules on jurisdiction laid down by the Regulation EC 44/2001. Please note that, in this respect, the choice of the INCOTERM is an important aspect.

THE EUROPEAN ORDER FOR PAYMENT

In order to simplify and speed up the collection of amount due in other Member States in civil and commercial matters, the European Union issued the Regulation EC 1896/2006 which regulates the European order for payment.

This Regulation has some innovative aspects aimed at facilitating the collection of amount due, especially for businesses who may organise their activities internally since:
• representation by a lawyer is not required;
• procedure is based on simple pre-printed forms;
• expiry for payment or for opposing the order is shorter than that of the ordinary injunction (30 days instead of 50);
• it is possible to terminate proceedings in advance if the debtor lodges a statement of opposition

ALTERNATIVES TO ORDINARY PUBLIC COURTS: ARBITRATION AND CONCILIATION

Arbitration and conciliation are two methods of resolving commercial disputes which are parts of Alternative Dispute Resolution (ADR). ADR refers to any method of resolving disputes other than by litigation in courts. ADR procedures may be chosen for various reasons including shorter times and more confidentiality.

ARBITRAL AWARD OR INTERNATIONAL ARBITRATION

In Italy, ritual administered arbitration is a viable procedure for resolving disputes among SMEs. This kind of arbitration is managed by specific bodies in accordance with a regulation set out by these bodies. Ritual administered arbitration leads to a ruling, known as the arbitral award, which is directly enforceable as a normal judgement and therefore has the same power as ordinary public courts.

Arbitration is a viable option for resolving disputes if the parties agreed to choose this method when concluding the agreement by inserting a specific clause in the contract. The clause for administered arbitration should be of the following form:

“Any dispute arising out of this contract shall be settled by ritual arbitration under the rules of the Chamber of Arbitration of […]

The arbitration shall be conducted in accordance with the procedures of ordinary arbitration based on law or of expedited arbitration in equity depending on value, as provided for by the regulation”.
The proceeding ends with a ruling (award) which has the same value as a court ruling and is also enforceable abroad.
Arbitral awards are enforceable due to an international convention which received a global consensus: about 200 countries ratified the 1958 New York Convention committing themselves to the mutual recognition and enforcement of arbitral awards.

CONCILIATION AND MEDIATION
In the case of a dispute, besides public courts and arbitration the business also has another option. Indeed, it can decide to start a negotiation with the foreign counterpart in order to try to resolve the dispute.

For greater effectiveness, instead of entering into a negotiation directly, the parties may agree to appoint a neutral third party to help them communicate with each other and find a satisfactory agreement going beyond the logic of “right or wrong” which is typical of traditional courts, and would lead the parties to an impasse.

Mediation is an informal and confidential procedure in which the closing of agreement is entirely subject to the will of the parties. The parties may withdraw from the negotiations at any time or may decide not to conclude any agreement. It is also possible to address to an ordinary public court or to an arbitrator, if the mediation attempt is unsuccessful. The Italian Legislative Decree 28/2010 establishes that the record of the agreement may be enforceable subsequent to the approval by the Presiding Judge of the competent Court.

Legal Advice – An outline of international contracts

Legal advice: why is it crucial to have well drawn-up contracts in international trade?

The early stages of a start-up or a project in a foreign market are characterised by great motivation and enthusiasm. However, at a certain point in the life of your business or project, you may end up having different views from those of your counterpart. In such cases, having a contract that clearly identifies one’s responsibilities and obligations, and which was designed to protect one’s own interests, is vital for the sustainability and the survival of your business.

First of all, what is an international contract?

The contract is the main legal instrument by which the circulation of wealth occurs and national and international trade is governed.

There is not a real definition of International Contract. However, all contracts that have foreign elements with respect to a national legal system are considered as such. Some of these elements constitute the structure of a contract. These elements are:

1. The nationality of the parties;

2. The registered office of each party;

3. The place where the contract was signed;

4. The place where the contract is to be carried out;

5. The place where the object of the contract is located;

6. The currency of payment;

7. The place of payment.

Oral or written contract?

An oral contract is binding; however, it creates evidentiary problems. Moreover, some essential clauses must be laid out in written form. Therefore, a written contract is highly recommended.

In what language should a contract be drafted?

A contract may be drafted in several languages. However, in order to avoid reaching an impasse due to different interpretations of some clauses, it is necessary to insert clauses in the contract that establish what the official language of the contract is, and which version shall prevail in case of dispute.

What law is applicable to the contract?

Contracts are legally binding between the parties. In the case of an International contractual relationship, it is necessary to establish the law which is applicable to the contract. The applicable law must be clearly stated in the contract or must be clear from the provisions of the contract or from the circumstances.

This must be done when concluding the contract; the parties, however, may agree to change the applicable law which governs the contract at any time.

In the case of an agency contract, and the relevant pay to be given to the agent in the event of termination of contract, for example, the aspect of the applicable law is extremely important. This is because, sometimes, there are significant differences between the various legal systems. Therefore, if the agent has worked for many years, and has generated considerable sales, the impact on the principal, who is obliged to pay a considerable sum of money, may be catastrophic.

If the applicable law has not been identified, or it cannot be deduced from the circumstances, for the countries which are party to the Rome 1 Regulation, Art. 4 establishes that: “the contract shall be governed by the law of the country with which it is most closely related”.

If that is not the case, i.e. for the countries which are not party to the Regulation, regulations concerning private international law have the goal of identifying the law which is applicable to those legal situations which have an international nature.

What is the competent court in the event of a dispute arising between the parties in an international contract?

Another significant problem concerning international contracts is the competent jurisdiction.

Having the competent court in your country is not always the best solution. Sometimes, due to the absence of a bilateral agreement that enforces the rulings of a foreign country at a later stage, or due to high costs, or to the sluggishness of a particular judicial system, it is better to choose the competent judge in the country of the other party or in a third country.

It all depends on the interests and the assets you wish to protect, the expected scenarios in relation to your business, and the evolution of the regulations both in the European Community and worldwide.

As to Jurisdiction, for the member countries, EC Regulation 44/2001, which replaced the 1968 Brussels Convention, governs the jurisdictional competence, the recognition, and the enforcement of judgements in civil and commercial matters.

FOR FURTHER INFORMATION ON LEGAL TOPICS/INTERNATIONAL CONTRACTS, OR FOR A FREE CONSULTATION, PLEASE POST A QUESTION ON “THE EXPERT ANSWERS” SECTION, OR CONTACT US VIA E-MAIL BY CLICKING ON THE LINK BELOW

Legal Advisory – Ordinary Courts or Arbitration – ADR Alternative Dispute Resolution

What is Arbitration

Arbitration may be defined as a “private trial”

- It is a “trial” since it ends with a ruling called the arbitral award which is final, as the possibilities for an appeal are limited and vary from country to country; and they are enforceable. Please bear in mind, however, that in Italy, for example, arbitral awards become enforceable following approval by an Italian Court.

- It is “private” since the arbitrators are not judges but they operate as such, on the basis of powers which have been given to them contractually by the parties.

What to choose in the case of a dispute? Arbitration or ordinary courts? strong>

In the case of disputes arising out of the contract, parties may choose between ordinary court and arbitration.

The parties of an international contract may refer to one or more ARBITRATORS to decide upon one or more disputes, by inserting an arbitration clause in the contract. Disputes must concern disposable rights.

This choice may be made when signing the contract or at a later stage, after the dispute has already arisen.

The principle that the competent judge is the one appointed by the parties is internationally recognised. The choice depends upon the parties, and, if they have not written anything on the matter on the contract, all disputes arising out of the contract will be resolved by an ordinary court. However, the validity of the choice and the rules for its implementation also depend upon the international private law of the state where the appointed judge is based.

What are the advantages of arbitration?

Neutrality: in international contracts, the parties are usually from different legal cultures (e.g. Italy – China); therefore, the choice of a national court would bring an advantage for one or the other party;

Confidentiality: arbitration is confidential not only with respect to the documents, but also with regards to the existence of the case;

Duration: on average, arbitration is usually faster than litigation in the courts, also because the possibilities of an appeal are limited and vary from State to State;

Specialisation: provided that they are appointed by the parties, arbitrators are usually professionals with an expertise in international commercial law or international corporate law.

What are the disadvantages?

– Costs: arbitration may be very expensive. Costs vary depending on whether the parties opt for ad hoc or institutional arbitration; in the latter case, the costs depend upon the institution chosen. Please bear in mind, however, that the courts’ timescales entail indirect costs that may be higher.

– Interim measures of protection: In accordance with the Rules set out by the Chamber of Arbitration of Milan, arbitrators do not have the power to issue interim measures of protection.

– Enforcement: arbitrators do not have enforcement powers, therefore, on the basis of the arbitral award, the parties will have to refer to the competent judicial authority of the place where they want to ask for the enforcement of the arbitral award (should the losing party not comply autonomously).

In how many countries is the arbitration award recognised?

The New York Convention of 10 June 1958 on the recognition and enforcement of foreign arbitral awards and of the various types of arbitration has been ratified by 143 countries so far.

Example of an arbitration clause, the Chamber of Arbitration of Milan:

Any dispute arising out of, or relating to this contract shall be resolved under the Rules of the Chamber of Arbitration of Milan, by a sole arbitrator/three arbitrators, in compliance with the aforementioned Rules. The arbitration shall be held in……. The language of the arbitration shall be:

What is Alternative Dispute Resolution (ADR)?

Lengthy timescales and the high costs of litigation in courts and of international arbitration have led to the spread of Alternative Dispute Resolution methods in international trade. ADR has its origin in the British and North-American practices.

Main forms of ADR

- Conciliation: the parties appoint an impartial and independent third party who has the role of assisting the parties and, if necessary, once he has heard the positions of both parties, both together and separately, he may express his opinion and propose a solution. The suggested solution is not binding and must be accepted and signed by both parties.

- Mediation: the parties ask a third party, called the Mediator, to assist them in the resolution of the dispute or in avoiding future controversies. The Mediator is independent and impartial. The aim of the mediation is to facilitate the exchange of views between the parties and encourage them to find solutions which are acceptable for both of them.

NB: the mediator does not express his opinion, nor does he propose solutions.

Positive aspects of ADR

Unlike arbitration, the aim of ADR is not to “say that one of the parties is right”, but to “weigh up” the arguments of both parties and then, help them to find a compromise which represents a fair balance between the interests of the parties.

ADR leads to a reasonable and out-of-court resolution and avoids any reputational risk that may result from losing a lawsuit or an arbitration award.

Business reasons prevail on the solutions offered by the law in the specific case; the costs are insignificant if compared to those of arbitration and litigation in court. Finally, ADR is carried out privately and is strictly confidential.

Example of an ADR clause

If any dispute arises out of, or relates to this contract, the parties agree to try to settle the dispute in an amicable manner by mediation to be carried out under the ICC ADR Rules. If the dispute is not settled within 45 days or a further term agreed in writing by the parties, the dispute shall be resolved by arbitration and the arbitration award shall be final and binding on the parties.

FOR FURTHER INFORMATION ON DISPUTES RESOLVED IN ORDINARY COURTS/BY ARBITRATION/ADR, OR FOR A FREE CONSULTATION, PLEASE POST A QUESTION ON “THE EXPERT ANSWERS” SECTION, OR CONTACT US VIA E-MAIL BY CLICKING ON THE LINK BELOW