To organise goods distribution in foreign countries, the agency is the simplest form used by many multinationals. Therefore, this commercial agency form is frequently used for international trade practices. To have agents abroad and to work with them, it is required to have a well-drafted agency agreement. In light of different laws applying to various jurisdictions and absent any uniformly applying set of rules in international transactions, it is commonplace to be baffled about what kind of agreement should be drawn while appointing an agent for the sale/ distribution of goods or services in a foreign jurisdiction.
This article aims to provide preliminary information that may be helpful for Foreign Corporations to appoint an ‘Agent’ in India for selling products in India and for Indian Corporations that desire to appoint an ‘Agent’ in overseas jurisdictions for selling products or services. Specific laws applying to the principal’s and agent’s country of residence will be required to be examined at the time of drafting an agency agreement. Devising an International Agency is not simply a matter of Commercial Contract drafting. Apart from the same, it has issues about International Taxation and Planning which should be properly addressed to ensure that tax litigation does not arise and can be dealt with properly. This guide may be treated only as a general piece of advice, and for specific advice, a tax lawyer and a firm dealing in matters of Commercial Contract Drafting must be consulted. Should your needs arise from areas of Ahmedabad, Delhi, Mumbai or Bangalore, we may be able to help you directly.
Amongst others, aspects about (1) Point to be covered in the International Agency Agreement, (2) the Risk of creating a Permanent Establishment that may expose the foreign corporation to unwanted tax obligations in India and (3) Rights of Representative Assessee (Agent) to retain any sum payable to Foreign Principal, are specifically relevant while devising an International Agency and covered in this Article.
Points required to be addressed while drafting an International Agency contract:-
While clauses to be incorporated at the time of the drafting of a commercial contract will generally depend on the needs of businesses, we aim to provide broad pointers about what usually should be included; these pointers are in no way exhaustive; boilerplate clauses that don’t require special attention are deliberately not addressed in this article but must be incorporated in agreement as per needs. Also, suggestions about what could be included in clauses are models, and actual clauses could be much more detailed or more straightforward depending on the needs of businesses. The suggested points and clauses are narrated hereunder:-
(1) Agent’s general obligations-
This is a subject matter of negotiation between Agent and Principal; extent of agent’s obligations, e.g. communication and updates to Principal, specific duties, avoiding conflict of interest, remittance of sums and time frame for the same, not competing with the principal etc. may be delineated in such clause. Additionally, it may be proper to mention whether the agent has the authority to delegate his functions further should be made clear, as also the level of skills and diligence required from the Agent along with proper narration of the same.
(2) Principal’s general obligations-
Again, this is a subject matter of negotiation between Agent and Principal; the clause can provide specific issues covered in Agent’s obligations clause. More important in this clause, however, is any indemnities to be provided by the Principal to an agent for any loss, injuries sustained during the performance of his functions, payment of agent’s remuneration and dues and time frame for the same and an indemnity against any proceedings for product liability or deficiency in services.
(3) Extent of territory for agent-
(4) Agent´s commission-
Like any other agency contract, agent’s commission, when and how it becomes due, rights of the principal to retain such amount under specified circumstances, could be mentioned in the clause pertaining to Agent’s commission.
(5) Intellectual property-
In the case of specialised products/ services involving IP rights, the principal might want to be clear about IP rights engaged by incorporating a separate schedule enlisting and narrating all IP rights. Also, it may be fruitful to describe the extent of authorisation for an agent to use such IP rights while performing his duties as an agent.
To prevent the issues of taking over the market share by the agent himself, it is always advisable to develop an understanding from the beginning itself for non-competition for a definite period after termination. Mere prescription about non-competition may not suffice as many legal issues will be involved and must be addressed separately. To read more about the same, you may refer to a separate article written by us captioned:- “Are Restrictive Covenants – Non-Compete Clauses Commonly put in Contracts Enforceable ?”
What information must be treated as confidential, and why must it be captured in this clause? Due care should be exercised not to make the clause appear unnecessarily onerous, e.g. by incorporating an unqualified undertaking by an agent to ensure compliance from third parties, as the same might affect enforceability.
(8) Resolution of disputes and governing law-
This is a crucial clause that would determine the future course of action and jurisdiction in case of a dispute. In international contracts, Indian law permits the choice of foreign substantive law and foreign seated arbitration and such clauses are considered enforceable by Indian Courts. Similarly, various other jurisdictions allow choice of foreign substantive law governing the contract and foreign seated arbitration.