When expanding business abroad, an agency contract is an efficient way to explore new markets. The hired agent facilitates transactions in the designated country, acting on behalf of the company.
To increase a manufacturer’s transactions, the agent, using location-specific knowledge and networking connections, can facilitate transactions for the company. By contrast, a manufacturer working alone would not yield the same results, or may have to invest more effort and cost into the expansion.
An agent may make opening an international branch or subsidiary more efficient for the company. An agent has competitive advantages over the company, an agent’s fees are relatively inexpensive, and the agent earns commission on successfully-yielded transactions. Economically, an agent allows the company to learn about the consumers’ behavior with minimal project risks, permitting the manufacturer to decide if it would be profitable to use a more aggressive business strategy in the expansion country.
An agent also minimizes the costs of conducting international business. The manufacturer maintains control in the home country, and the agent works in the expansion country, promoting the company’s interest to consumers. The company funds internment rights, which is reimbursed once the end product reaches consumers.
However, international agency contracts may be disadvantageous for some companies. For instance, the agent, even while working independently for the manufacturer, can tie the company in unwanted ways. For example, an agent may fail to declare and pay local, home-country taxes for the manufacturer’s assignment. In this instance, the organization is responsible for paying the agent’s taxes, and is liable for the agent’s failure to comply.
A company should also consider international agency legislation where the agent will be working. The country may have statutes to protect agents, generating unexpected obligations for the company. If the agent is considered an employee, labor laws become applicable. This may provide complications for the company, because certain countries, like Sweden, have known protective labor legislations.
A company is also responsible for the product produced. While this detail may not be explicitly apparent in the contract, product liability may cause unwanted risks for the manufacturer. The agent, a facilitator of the business, will not be liable for a product defect. In most legal systems, the company is responsible for any defective products.
The company also assumes the risk of not paying the customer by acting via an agent since the agent’s actions may negatively impact the company’s assets; the company is responsible for all business transactions, not the agent.
Fernanda Juppet, Corporate Attorney and MBA
