Legal Factors
A prudent exporter will usually want a written contract with the agent or distributor. The contract will set out the terms of the business and legal relationship agreed to by the two parties.
Foreign and Canadian law affects agency and distributorship contracts in a variety of ways:
- Certain formalities may be required to create and maintain legally enforceable and binding obligations between the parties.
- Provisions may be required to address imposed warranties, product liability, business practices and other matters governed by relevant law.
- Certain provisions may be automatically included in the legal relationship even when not specified by the parties or unless specifically excluded by the parties.
- Income tax laws may make one type of business and legal relationship preferable to another. An agent or distributor could constitute a "permanent establishment" making the Canadian exporter subject to the income tax provisions of that country.
Relevant foreign and domestic law should be considered before deciding whether to use an agent or distributorship. Look at the laws before defining the relationship between you and your representative. The laws may have a large say in who sells your goods and who imports them.
Foreign duties and taxes imposed on imported goods may vary according to the type of business arrangement used. If you sell direct to the end user, duties and taxes may be imposed on your selling price. If you sell to a representative or maintain an inventory in the foreign market, the base for import duties and taxes will be different than the direct price.
When determining the most suitable type of relationship, remember that you can usually choose which country's law will be applied to interpret the contract, and whether the courts or an arbitrator will be used to settle disputes.
When you are ready to draft a contract, the following points should be considered:
- Define the merchandise to be represented.
- Specify which present and future goods are to be covered by the contract.
- Clarify whether or not the representative will have exclusive lights to distribute your line in the territory.
- Determine the length of the contract.
- Define the circumstances under which the contract can be terminated.
- Consider foreign laws requiring compensation to terminated representatives or to representatives not granted renewal of the representation.
- Determine which laws apply to your relationship.
- Establish which country's law will govern the interpretation of your contract.
- Define the extent of the representative's signing authority for you.
- State whether the representative is an employee or an independent contractor.
- Who, by law, is responsible for product liability claims, compliance with business practices legislation, and labeling and packaging laws?
- Is there any provision for arbitration in your contract?
- Define the territory. What are the boundaries of the territory that will be covered by the representative?
- What exclusivity will be granted the representative or the exporter? Foreign laws may limit exclusivity.
- Define the terms of business.
- Set out the terms of sale between you and your representative.
- Specify the payment terms.
- State the currency in which your business transactions will be settled, sales service, advertising, writing quotations, collections.
