Updated: May 19, 2020
With more and more China-Foreign economic and trade cooperations, it is common for foreign companies to entrust Chinese agents to sell products in the Chinese market. Foreign companies can have tighter control over an agent than a distributor. Therefore, for companies with a high demand for control, the agency agreement is a better choice. When collaborating with Chinese agents, foreign companies should have a solid understanding of relevant Chinese laws to protect their rights and mitigate risks. This article provides two tips for foreign suppliers when entering into agreements with Chinese agents based on the provision of Chinese law.
Tip 1: Crucial clauses to include
Tip 2: The line between Agency Agreements and Distribution Agreements. It is decisive to make sure that the agreement can be recognised as an agency agreement to avoid unfavourable restrictions imposed by the Anti-Monopoly Law in China.
Crucial Clauses to include
In an agency agreement, to protect foreign principals' interests and regulate the behaviours of Chinese agents, the following two aspects are crucial. When entering the agency agreement, foreign principals must make sure these clauses are included.
Clauses that clarify the type and authority of the agent
In the agency agreement, it is necessary to make explicit provisions on the details of the type and authority of the agent. A precise agreement not only helps the two parties to understand their rights and obligations better but also provides a firmer legal ground for foreign principals to hold the agents liable when the agents take unauthorised actions.
In general, there are three types of agents:
The above classification is the legal interpretation of different agency relationships. The application of such classification is often confusing. In practice, it is the specific contents of the agency agreement that determine the type and authority of an agent. Both parties of the agreement can make detailed arrangements on how to share rights and obligations to specify the designated area, agency period, and the authority of the agent.
Clauses that define the authority of an agent
In terms of the authority of the agent, the agency agreement must specify the following aspects:
the specific goods for the agent to sell,
the designated area in China for the agent to conduct sales,
the duration of the agency,
the price of the goods, and
Clauses that stipulate the obligations of an agents
Sales Promotion Chinese agents are responsible for promoting products actively to obtain sufficient orders. Foreign clients can regulate and supervise sales activities to avoid false propaganda or infringement during the promotion.
Minimum Sales Target By setting a minimum sales target, foreign principals have more leverage to urge Chinese agents to perform sales duties diligently.
Following Up with Buyers' Payment Chinese agents should actively make sure that buyers perform the obligations required in the sales agreement. For example, the agents may issue a letter of credit in time when the sales agreement is established.
Obligation to inform the principals Chinese agents are obliged to provide the principals with relevant market reports and information on a regular basis (e.g. monthly or quarterly). Such information includes but is not limited to sales revenue, prices, packaging, marketing strategies, advertising, client feedback of/on similar products. Agents should inform the principal timely and adequately when there are changes in the market.
Commitment not to compete The agents are prohibited to conduct or assist in sales of the same or similar products on behalf of another party. Selling products to a region other than the designated ones is also prohibited.
Protection of Intellectual Property Rights The agency agreement should include clauses regarding the protection of Intellectual Property Rights and trade secrets. Infringement liability should also be specified. The foreign principals should clarify the ownership of relevant trademark and patents. The agreement should also explicitly mention that the agents can only use the trademark, logo as allowed and should strictly perform the duty not to disclose patents or trade secrets.
Clauses regarding incentive policy
A good incentive policy can encourage agents to unleash the full potential for sales. Apart from the commission and the payment, we advise foreign principals to agree on extra commissions as an incentive. For instance, principals can agree on paying a bonus besides the commission for extra sales, when Chinese agents exceed the minimum sales target.
Clauses regarding the termination of the agreement
Any inappropriate act of an agent may have a negative impact on the principal’s reputation, assets and financial gains. To mitigate such impact, a comprehensive termination clause is necessary. Foreign principals should specify several conditions that trigger the termination of the agreement. For example:
when the agent acts beyond authority,
if the agent is liable for infringement or other violations of the agreement, or
in the event of force majeure or change of circumstances that renders the agreement impossible to fulfil.
The Line Between Agency Agreements and Distribution Agreements
The business modes of agency and distribution have been mixed up quite often in practice. They are, however, different from a legal perspective. Taking the Chinese Anti-Monopoly Law into consideration, the legal nature of an agreement will lead to different consequences. For example, if a foreign principal wants to set a fixed or minimum resale price, such arrangement of a distribution agreement may end up being invalid because it constitutes a vertical monopoly agreement which is restricted by the Chinese Anti-Monopoly Law. On the contrary, the same arrangement of an agency agreement does not suffer from such restrictions.
If an agency agreement is recognised as a distribution agreement, relevant clauses foreign principals include will be invalid. To avoid this situation, we advise foreign investors to pay attention to the following Three Risks and Seven Noes when entering into an agreement.
The court will analyse the real legal relationship between two parties before deciding on the nature of an agreement. Regarding vertical agreements, the sharing of three types of financial and business risks is the key to acknowledge the existence of an agency relationship.
risks directly linked to sales of products (e.g. risks of financing of stocks),
risks associated with specific investments, and
risks associated with activities besides sales of products in the same product market.
There are seven types of costs/risks/responsibilities that the agent of an agency agreement should not bear:
the cost of supplying products (including product transportation costs),
the cost or risk of storing products (including the cost of stock finance and inventory loss) unless the agent is at fault,
the product liability that covers damages caused to a third party unless the agent is at fault,
the liability caused by the principal failing to perform the contractual duties (except for the loss of commission) unless the agent is at fault,
direct or indirect obligations to invest in promotion,
specific investments in equipment, venues, or personnel training, and
the cost of activities in different product markets required by the principal.
Foreign principals are advised to adjust the agreement taking into consideration the Three Risks and the Seven Noes. By doing so, even if the agency agreement includes clauses such as a fixed or minimum resale price, or restrictions on sales territory and clients, it is not likely that these clauses will violate the Chinese Anti-Monopoly Law.
Connect Flow International is here to help you handle the following matters:
Comprehensive legal consultation on agency matters
Consultation on the selection of agents
Agency agreement negotiating & drafting
Distribution incentive mechanism planning
If you have any questions or feedback, contact us.