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.