international distribution contracts: pros and cons

DIFFERENT INTERNATIONAL DISTRIBUTION CONTRACTS: PROS AND CONS

Roberto Luzi Crivellini

Case study Italian SME in the fashion sector willing to export its products to the Chinese market

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Main compe1tor? The “fake market”

Trademark registra1on

(denominaAve – figuraAve – transliFeraAon in chinese carachters)

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Step 0

Step by Step Sales contracts + Agency agreement

" Sales framework agreement / Distribution

" Franchising / Flagship – monobrand stores

" Representative office

" Joint Venture + related agreements

Sales contract

• Simple agreement, bilingual • Terms of payment and delivery • Inspec1on of products (on –site) • Liability limita1on • Choice of forum / arbitra1on and/or media1on • Applicable law


Does Vienna Conven1on of 1980 on Contracts for the Interna1onal Sale of Goods apply? (do not opt out)


Sales contract

✗  No local presence – difficult after sale service on complex products

✗ No saying in sales

strategies – target clients – distribution channels

✗  No watchdog on competitors /counterfeiters / unfair competitors


✔ No network needed ✔ No up front - marketing investments in the local market ✔ Good entry test in the Chinese market

General CondiAons of Sale

✔ Helpful tool to set the rules of the game, applicable to all future transac1ons ✗ Drafted also in a language known to the counterpart ✗  Proof of acceptance ✗  Uncertainty in case Buyer uses of General Conditions of Purchase (last shot vs. know out rule) ✗ Covenants related to single transaction prevail ✗ Forum / Arbitration clause is not a “catch all” provision © Roberto Luzi Crivellini. All rights reserved. 15

LoI – MoU: why bother?

✔Not binding, it lays down the milestones of future contracts or negotiations ✔Normally sets long term goals ✔Can be used to interpret the content of future agreements ✗  Often used as a soft contract insted of a proper / complete agreement ✗  Non binding = “I do not really care”*

*(true comment)

Sales framework agreement

• Used to nego1ate a one 1me agreement on the terms and general con11ons of future buyer-‐seller rela1onships • From that point, the par1es will just exchange commercial orders and confirma1ons • AVen1on to the dura1on of the term of the agreement /termina1on no1ce • Important to set supply volume / right to refuse orders in the case of insolvency • Liquidated damages / contractual penal1es


Commercial Agency

'Commercial agent' shall mean a self-‐employed intermediary who has conAnuing authority to nego1ate the sale or the purchase of goods on behalf of another person, hereinaYer called the 'principal', or to nego1ate and conclude such transac1ons on behalf of and in the name of that principal.(Eu Direc1ve 86/653)

Agency contract

✗  No local presence -

difficult after sale service on complex products

✗ Limited control on target

clients – distribution channels

✗  Indemnity for termination (atypical contract in China)


✔ Limited up front marketing investments in the local market

✔ Good entry test in the Chinese market ✔Commercial risk is spread

on a number of clients, which are generally covered by credit insurance

Eu DirecAve 85/653 -‐ Art. 17

•  2. (a) The commercial agent shall be en1tled to an indemnity if and to the extent that: •  -‐ he has brought the principal new customers or has significantly increased the volume of business with exis1ng customers and the principal con1nues to derive substanAal benefits from the business with such customers, and •  -‐ the payment of this indemnity is equitable having regard to all the circumstances and, in par1cular, the commission lost by the commercial agent on the business transacted with such customers. Member States may provide for such circumstances also to include the applica1on or otherwise of a restraint of trade clause, within the meaning of Ar1cle 20;

Sales framework-‐ distribuAon-‐distributorship-‐

concession of sale What are we talking about and what are the pros and cons of these agreements? Sales framework – “pure” distribuAon = The contract of sale is the hardcore of the agreement, which aims at defining the main obliga1ons (price, delivery terms, currency, term of the agreement, etc.) and avoid repeated nego1a1ons on single transac1ons © Roberto Luzi Crivellini. All

rights reserved. 21

DistribuAon contracts

✔Integrated distribu1on = not only supply but also sales promo1on ✔Distributor acts not only as a reseller but as a partner of the Producer’s network (core provision: permission to use the producer’s IP at certain given condi1ons) ✔Enables shared promo1onal and marke1ng strategies ✔Can be first stage for future further integra1on © Roberto Luzi Crivellini. All rights reserved. 22

BELGIUM CZECK REP RUSSIA PANAMA GUATEMALA HONDURAS PARAGUAY PUERTO RICO OMAN TUNISIA LEBANON

© Roberto Luzi Crivellini. All rights reserved.

Distribution agrements are regulated only in a few Countries

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SPAIN Decreto Real 201/2010 (Franchising)

(art. 2.3) “(…) The contract of concession of sale or exclusive distribu1on is the contract by which an enterpreneur commiVs to buy, at certain condi1ons, products – generally branded – from another enterpreneur, who grants to him exclusivity in a certain territory, and to resell the products at certain condi1ons, as well as, to provide aYer sale service”

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Concession of sale: “a distribu1on agreement which has as its primary aim the commercializa1on of the products in a certain territory, according to the expecta1ons of the grantor …


… which entails a priviledged posi1on for the distributor (generally but not necessarily, an exclusivity in the territory) and requires in compensa1on certain investments and a binding non compete covenant (prof.Fabio Bortoloo)


DistribuAon agreements

✗  difficult negotiations –long

term and exclusivity hard covenants to agree upon ✗ Under performing distributor

can be very harmful ✗ End Clients’ portfolio

controlled by distributor ✗ Commercial risk is concentrated in one client ✗ Atypical contract

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✔ Presence of the market ✔ Limited investments ✔Joint promotion and marketing

– shared commercial strategy ✔ Distributor can be the

watchdog on IP rights ✔First step of penetration in the

market

How a (too) good distributor can become a problem…*

• Many cases of market development from zero / protected with exclusive rights • Distributor is Producer’s face on the market • He alone controls the end Clients’ porpolio • Business risk grows together with the increase in sales volume – difficult to re-‐nego1ate performance bonds • Performance -‐pending termina1on period no1ce-‐ is usually very risky

*(h/t prof. Fabio Bortolotti). 28

Contractual exclusivity

• China : con1nental dimensions and very limited infastructure • Pre-‐contractual disclosure of the distributor’s network and business plan • Advisable to limit exclusivity to a certain the zone or product • Contractual minima of sales volume with a possibility of forfeiture / op1ng out •  carefully draYed non compete covenants (must include shareholders and key managers)


TerminaAon: plan long term

• Prior no1ce: minimum 6 months + • Regula1on on orders placement during termina1on no1ce (maximum value per period) • Right to refuse new orders in case of outstanding previous transac1ons • Media1on clause + arbitra1on • Contractual penal1es for delayed return of materials, signs, closing of stores, etc. • Well mo1vated exclusion of any sort of good will indeminity


Choice of Forum

Two main criteria: • Follow the money and the assets: best solu1on is to li1gate in the Country where the court decision can be enforced right away (or to arbitrate if 1958 NY Conven1on is applicable) • Avoid fora where jurisprudence applies by analogy to distribu1on agreements certain provisions of agency laws, with par1cular reference to terminaAon indemnity (Germany, France, Austria, Switzerland, Spain, Portugal)

Spain

Applica1on by analogy of Ley 12/92 on commercial agency with right of indemnity of termina1on if: -‐ Termina1on was abusive or in bad faith -‐ The Manufacturer will benefit of the network of clients created by the Distributor -‐ Termina1on was not due to an infringment by the Distributor


Law applicable to distribution

agreeements

(Services no CISG) +

SALES CONTRACTS (Sales CISG)

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Choice of Law: ROME I Regulation

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(recital 17) Although franchise and distribution contracts are contracts for services, they are the subject of specific rules. art. 4 (f) a distribution contract shall be governed by the law of the country where the distributor has his habitual residence;

RepresentaAve office

✔combined with import +distribution agreements ✔light structure/low costs allows networking and client management ✗  no legal personality – no direct transactions allowed ✗  taxation can be difficult to figure out

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… what about e-‐commerce?

“The sale or purchase of goods or services, conducted over computer networks by methods specifically designed for the purpose of receiving or placing of orders”.

-‐ OECD defini1on

E-‐commerce, Online 2 Offline (O2O) distribuAon and social media markeAng:

largely underesAmated Standard clauses in distribu1on agreements: • Who sells via internet? Distributor or Manufacturer? • Using what channels? • What is the allowed ra1o between off and online sales? • How to deal with passive and passive sales


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The world has changed: November 11, 2014


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The world has changed: November 11, 2014


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Taobao >95% (2013)

Paipai >4% (2013)

Eachnet <1% (2013)

C2C

B2C Multichannel

O2O

E-distribution in China


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50.000 brands

180 mln consumers

+50 % market share B2C


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Taobao >95% (2013)

Paipai >4% (2013)

Eachnet <1% (2013)

65% market share < 20% “organic” results 80% pay per click Foreign webs. discriminated

A market dominated by local players


We chat

500 mln active users

5 new accounts per second

Online shops with direct transactions and payments (Amazon + Paypal)

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O2O distribuAon

•  Who sells what on which plaporm (social – generic – ver1cal)

•  Recommended prices •  Outsourced Logis1cs •  Supply Chain Management •  Warehousing •  Delivery and Distribu1on •  Pick & Pack •  Transporta1on •  Courier and Post shipping •  Returns •  Promo1onal ac1vi1es (Baidu,

wechat, etc.)

Off shore e-‐commerce: a few important limitaAons

Forex Tax

Access © Roberto Luzi Crivellini. All rights reserved.

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USD 50,000/

year

Customs +

Import VAT Consump1on

Fire Walls Delivery timing Returns

Internet Content Provider License (备案 )

Ministry of Industry and Informa1on

(MIIT)

Ministry of Commerce (MofCom)

General Administra1on of

Customs

State Administra1on of Foreign Exchange

State Administra1on of Industry and Commerce


Joint Venture + On shore e-‐commerce


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(WFOE)

Stand –alone website

Ver1cal palporms T Mall

Società a capitale straniero

international distribution contracts: pros and cons

Law

sale service

proper complete agreement

milestones of future

future transac1ons

interna1onal sale of

case buyer

soft contract

commercial orders