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Distributorships Agreements Best for Business With Latin America

By: Clayton J. Joffrion, Esq.

Those involved in international trade ideally want to have only one thing in a foreign country - Customers. As crude as that may sound, it's true! How then, you may ask, do you go about getting these customers? The usual answer is you let someone else do that for you.

Here in the United States where businesses cross state lines all the time, the mistaken belief of many is (1) they do not need to get permission and (2) they need not be concerned about the laws of the other state. This is not only a dangerous attitude for the United States, but potentially catastrophic.

First, one must get permission! If a Louisiana corporation goes to say, Texas, to do business, it may be surprised to learn that it does not exist in Texas. For example, if something went wrong and it resorted to the courts, then on motion of some party the case could be dismissed because the Louisiana corporation does not exist as far as Texas is concerned. Fortunately, the Louisiana corporation could file the proper papers to get permission to do business in Texas and bring the lawsuit.

In the international context, a Louisiana company certainly does not exist in Bolivia. It must get permission "be" in that country. This permission is usually not withheld, but one must register. After all, a corporation is not a person carrying a passport. So, its employees are working for something which does not exist. The fact that one must register is clear, but how and is that necessary?

The next question is are there any negative things which can come out of registering? The answer is absolutely yes! Once the Louisiana corporation is "registered" it falls under the jurisdiction of the foreign government. That means it can be taxed, required to comply with local employment laws, even laws which might forbid trade with other countries.

One way to ease the situation is to create a "subsidiary corporation" which would be a corporation of the foreign country although the Louisiana corporation owns the stock of the foreign corporation. Instead of being the sole owner the Louisiana corporation could enter into a joint venture with others. A partnership is also a way to have a joint venture, but again the Louisiana corporation has to get permission to do business in the foreign country and subjects itself to the laws of that country.

Another way to cause problems is to "hire" agents or employees who are nationals of the country. If you employ people in another country, except for short business trips to negotiate and buy and sale, you must get permission to do business in the country. Most Latin American countries issue "business visas which allow one to do business for a short time, but definitely does not allow them to be temporary employers. Furthermore, just because the customs and immigration officials issue a visa does not mean that you do not have to register. Repeated trips can be used to evidence an intent to avoid registration, taxation, and compliance with employment laws.

The best way around this problems is through a distributorship agreement. In such a case, the Louisiana corporation finds someone who will contract to provide sales, repairs, and customer support activities, usually for a percentage of the sale. The Distributor, usually already a national of the country, is responsible for compliance with the local law, pays taxes, handles the employees, and all of the headaches most companies do not want and cannot afford.

There are additional advantages. The Louisiana corporation can contract with the foreign Distributor to protect any patent, trademark, tradename, and copyright interests. Unlike in the U.S., the common law notions of first use does not apply with trademarks and tradenames. The first to register the name gets to us it. Thus, you can license the Distributor to use valuable tradenames and trademarks, with the condition that the rights return to the Louisiana corporation on termination or expiration of the distributorship agreement. Basically, one should contract with what we in the U.S. consider an independent contractor.

One of the best advantages is that the Distributor is responsible for collecting the money from the customer. Often the Distributor pays for the products directly and bears the risk that its "customer" will draft on payment, although agreements can contain provisions whereby the parties share the risks. Distributors also frequently bear the risks of currency exchange fluctuations given that it's in the best position to know how its currency and inflation can affect prices.

There are some potential problems, as many Latin countries have laws which protect the Distributor. These laws do not allow termination without good cause. But good planning, understanding, and a well-drafted agreement solves most problems. If not, many agreements call for international mediation and arbitration.

The strongest argument for distributorship agreements is many large international corporations use them. But, because they license the Distributor to use tradenames and trademarks, everyone simply assumes that the company is "doing business" in the country. Actually, all they have are customers in the country!

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