MONDAY EXPORT CLASS

MONDAY EXPORT CLASS

With

GODWIN OYEFESO (SUCCESSEDGE EXPORTERS NETWORK)

Topic: INTERNATIONAL CONTRACT (Part 2)

Agency Vs Distribution Agreement

Scope of agency and distribution agreements is different. In both the cases, exporter enters into a contract with a third party from the country, where business is to be promoted and developed. The basic differences are:

(A) Title of goods

This is the basic distinction between the two. In case of agency agreement, title to the goods vests with the exporter even though goods remain in the possession of the agent.

Normally, goods are sent on consignment basis to agent. In case of distributorship, distributor purchases the goods on his account from the exporter and so title remains with the distributor.

(B) Scope of Services

In case of agency agreement, agent procures the order only. After the procurement of order, subsequently, exporter deals with the potential buyers directly. So, contractual relationship exists between the principal (exporter) and final buyers directly. In case of distributorship, goods are sold to the buyers by the distributor and identity of the buyers may not be known to the exporter, unless distribution agreement so provides. So, the contractual relationship is between the exporter and distributor and no contract exists between the exporter and ultimate buyers. So, title and risk lie with the distributor while it is not the case in case of agency.

In case of agency agreement, credit risks are to be borne by the principal only. Agent is not responsible for realisation of sale proceeds, unless Del credre clause exists. In case of distribution agreement, distributor is only responsible for credit risks as goods are, already, sold to him.

(D) Third Party Liability

In case of agency agreement, principal is liable to third parties directly as agent states that he is acting as agent only and discloses the name of principal. Responsibility does not go back to the principal and only distributor is responsible, in case of distribution agreements.

(E) Control

In case of agency agreement, principal enjoys absolute control on the business and buyers. So, principal can manage the business as he desires and agent’s control over the principal is rather difficult. Control of principal is always weak as distributor acts independently, buying and selling goods on his account. Once, distributor becomes powerful, he exercises more control and, at times, dictates his own terms due to proximity and control on the market.

Common feature in both Agency and Distribution

Warranties: Only principal is responsible both in case of agency and distribution agreements.

The above picture shows clearly that the extent of legal liabilities is more to the principal, in case of agency, compared to distribution agreement. It may be possible to get a good agent, but virtually impossible to secure a reliable distributor in International Marketing.

(iii) Relating to Products

Trade Marks: Trademarks are words or designs or combination of both. Names of trademarks may be coined for the purpose of trademark only. Those words are not presently existing and are created that may not convey any meaning. When we hear the word KODAK, we recall photography products and XEROX relate to photocopiers. Trademarks are intended to perform marketing functions. While choosing those names, emphasis is given for;

(1) Creating or enhancing distinctiveness of the product;

(2) Identifying the products which it manufactures or markets;

(3) Symbolizing the quality of the product; and

(4) Stimulating the desire to buy.

Protection of Trade Marks: Any person can apply for registration of trademarks to the registering authority of the country where the product is exported or planned to be exported. The registering authority publishes the request for allotment of trademark in its official journal inviting the objections for grant of registration. In case no valid objection is received, the registering authority accords approval for the registration of trademark.

However, names, surnames, geographical places, numerals, descriptive words are not allowed as trademarks. Registration of trademarks is a specialized field and so it is prudent for the exporter to seek the professional services of an attorney who is a specialized in that field.

Product Liability: Product liability can be defined as the responsibility borne by the manufacturers, distributors and retailers for any consequential injuries/damages from the products they make or sell. If the user of the product suffers, he has the right to sue.

(A) In case of Negligence on the Part of the Manufacturer: Negligence in manufacturing makes him liable. The user has to establish negligence on the part of manufacturer in designing or making the product.

(B) Principle of Strict Liability: This is an important principle established by the U.S. Supreme Court in 1953. Even if there is no negligence on the part of the manufacturer, still, the manufacturer is responsible to the aggrieved user if the user sustains injury from a defective product.

(C) Express/Implied Warranties: In some contracts of sale, there are express or implied warranties in respect of merchantability of the product which make the manufacturer liable. Exporter must be conversant with the laws and regulations of the country to which the product is exported to ensure their compliance. In case any suit is filed, even though the exporter may plead that the foreign country does not have the jurisdiction over him and may succeed even. Still, he has to incur legal charges. Any penalty imposed on the distributor for the fault of exporter spoils the business relations and, finally, ruins the prospects of business. It is desirable for the exporter to take product liability insurance.

Laws relating to Packing and Promotion: Most of the countries have laid down rules in respect of packaging. Rules insist to declare the composition of product, gross/net weight, date of manufacture/ expiry and precautions to be taken while using the product. Even rules of advertisement are strict in many countries. Unsubstantiated claim in respect of the product, while advertising, makes the manufacturer liable for legal action. Exporter has to remember that he can get away with false advertisement in India, but not in overseas market!

(iv) Laws relating to Letters of Credit

Every exporter wants to enjoy the payment before the physical possession and title to goods is passed on to the importer. This becomes possible when the importer opens letter of credit in favour of exporter through the medium of bank. By opening a letter of credit, bank makes a commitment to the exporter to make payment once the documents contained in the letter of credit are presented and, on scrutiny, found to be in order. Opening and negotiation of letter of credit are governed by the International Chamber of Commerce Brochure No. 500 entitled ”Uniform Customs & Practice for Documentary Credits” commonly known as UCP. Though letter of credit is based on the sale/purchase contract, the letter of credit transaction is independent of the physical transaction of goods. Article 3 of General Provisions and Definitions states:

“Credits, by their nature are separate transactions from the sales or other contracts on which they may be based and banks are in no way concerned with or bound by such contracts”.

Parties and Relationships in Letter of Credit

(A) There is a contractual relationship between the importer and exporter, evidenced by sales contract.

(B) Banker customer relationship exists between the importer as applicant to the letter of credit and opening bank. Similar relationship exists between the exporter and advising/negotiating bank.

(D) Relationship between the exporter and opening bank. Credit contract is established as the opening bank opens letter of credit in favour of the exporter.

DISPUTES SETTLEMENT

Causes for Disputes

Reasons for disputes, in international trade, between exporter and importer can be many. Generally, the primary reason for disputes is quality of the goods exported. Under contractual terms in many export contracts, importer gets the opportunity to inspect the quality of goods only when the consignment reaches him. In many cases, by that time, the exporter would have got money. Even if the consignment is sent on collection basis, importer can check the quality only after retiring the documents. Other reasons for the disputes can be delayed shipment or non-shipment due to change in government regulations or market conditions, restricting exports, etc.

Methods: There are two basic methods for disputes settlement viz. Litigation and arbitration. Litigation is highly unsuitable due to the proverbial delayed process, prohibitive costs and uncertainty of decision.

Basic Limitations of Litigation

Slow Process: Court process is proverbially slow, time consuming and formalistic.
Avoidable Necessity of Expert Witness and other Evidence: In international contracts, practices, procedures and customs are different. A judge however well versed may be, in law, can not be expected to know all these intricate matters. So, in courts, to educate the judge about these practices, witnesses who are experts and having knowledge in the field have to be produced to prove the practices, even before the evidence is established.
Inconvenience to the Parties: Court timing and date of hearings may not be convenient to the litigants. Most of the time, cases are postponed and in that process months drag on even for completion of one witness. Even after day’s long waiting for hearing, one may know, at the end of the day, that the case is adjourned for two months due to non availability of the other advocate!
Adverse Public Image: Court proceedings are never secret. Media always covers the developments in important cases. Even the superior court judgments are published. Matters, which have been confidential till the case is brought to a court of law, become topics for public discussion that may bring notoriety, loss of goodwill and long-standing reputation.
Bitterness and Disruption of Trade Relationships: When a matter goes to a court of law, it is immaterial which party may win as the age old established relationship, after the case is brought to litigation in a court, comes to an end with only acrimony and bitterness.
Different Laws and Procedures: International trade laws and procedures are more complicated. Litigation in foreign courts is more expensive and difficult in comparison to the domestic courts.

Basic Advantages of Arbitration

In comparison to litigation, the basic advantages of arbitration are:

Quickness: Definitely, arbitration is quicker than litigation. Process of arbitration can be completed as fast as the concerned parties’ desire. Under Arbitration Act, the arbitrators have to make the award within four months from the date of completion of all proceedings. Usually, arbitration is settled within a period of four months to one year.
Inexpensiveness: Total incidental expenditure in arbitration is always much lower than litigation. Arbitration fees is around 2% of the claim value or less in institutional arbitration.
Promotes Goodwill: As the arbitrator is chosen by both the parties, based on their faith and his competence, arbitration becomes a normal process of goodwill.

Arbitration proceedings and its outcome do not disturb the existing friendly relations between the exporter and importer.

Choice of Appropriate Arbitrator: As the arbitrator is chosen by both the parties and name incorporated in the contract, who has the knowledge of customs and procedures of international trade, so separate expert witness for educating the judge does not arise.
Privacy: Arbitration proceedings are not open to public. Arbitrator’s award is not published in any newspapers. This preserves privacy of the parties. So, trade secrets as well as disputes arising from the contracts do not become public.

HOW TO RESOLVE AND SETTLE DISPUTES?

Inclusion of Future Dispute Clause: While entering into export contract, suitable arbitration clause for referring the future disputes indicating the name of arbitrator, venue of arbitration and applicability of law may be incorporated to protect mutual interests. In case the arbitration clause is not included in the export contract, originally, a subsequent written agreement may be entered into, referring to the earlier contract. The later agreement is called ‘Submission agreement’.

Law for Enforcement of Foreign Awards in India

India is a party to International Conventions. Countries, which are members to the International Conventions, have to pass the necessary legislation for enforcement. Accordingly, Foreign Awards (Recognition and Enforcement) Act, 1961 has been passed.

Procedure for Enforcement in India: Any person interested in the award can pray the court, having jurisdiction, for filing the award. After giving notice to the parties why the award should not be filed, court pronounces the judgment according to the award, if the court is satisfied that the foreign award is enforceable under the above Act. Upon the judgment so pronounced, decree shall follow. No appeal can lie except when the judgment is in excess or not in accordance with the award.

Enforcement of Indian Awards in Foreign Countries

It is understood that awards made in India are enforceable in Foreign Countries, similarly, if the other country is a member of International Conventions. Where the other country is not a member of the International conventions or does not adhere to similar international regulations, enforcement of arbitration is beset with more difficulties.

CHECK YOUR UNDERSTANDING

State whether the following statements are TRUE or FALSE.

To ensure uniform interpretation of specific terms, International Chamber of Commerce has developed Incoterms.
Arbitration is inexpensive and it maintains privacy.
In FOB contracts, risks associated with freight escalation have to be borne by the importer.
Selling under FOB contract are good for the country as a whole.
In a CIF contract; it is not the responsibility of the seller to procure a contract of insurance for the shipped goods.
Oral contracts are legally binding if the contract is for sale of goods in India.

7 In export business, the parties involved in the contract agree mutually about the applicability of particular country’s law.