Agency, Distributorship and Franchise Arrangements
Since the liberalisation of the Trinidad and Tobago economy, tariff and non-tariff barriers to the importation of goods and services have been progressively removed. There are a number of ways in which products may enter into the country, and a foreign investor needs to be aware of the means by which his goods can be distributed.
In this Chapter, Giselle Romain, Senior Associate and Linnel Pierre, Associate, in Hamel-Smith’s Business Transactions Practice Group, give an overview of the legal and practical concerns regarding business relations with local entities.
Subject to what is stated below, there is no specific legislation governing conditions of agency, distributorship, licensing and franchise arrangements. Agreements for the appointment of agents are governed by common law principles by which the parties are virtually free to negotiate the terms of the contract, provided such terms are not in breach of public policy regarding restraint of trade. There are no statutory restrictions or regulations governing the length of the term of appointment, the period of notice required for termination or the level of commission to which an agent is entitled.
A foreign investor is free to enter into representation, agency, distribution and franchising agreements with local persons. Royalties and commission rates are not regulated and may be freely agreed upon by the parties, although their deductibility for tax purposes by the local representative may be subject to downward adjustment by the Revenue Authorities.
An agent does not acquire any additional rights as an employee beyond those stated in the contract. It is usual to specifically state that the agent is not to be regarded as an employee or partner of the principal. Commercial factors will assist in determining the type of representation most suitable, for instance:
• Where a mass produced item requiring no specialized skill or input by the seller is involved, a distributorship is most practical;
• Where the product involves highly specialized technology and requires in-depth knowledge or is to be tailored to meet the purchaser’s requirements then a greater degree of communication between purchaser and manufacturer is required, and a marketing agent may be the most appropriate representative;
• If, on the other hand, the market is unfamiliar to the manufacturer, it would be prudent to appoint a local distributor who is prepared to take the risk of operating in such a market, and who would be more familiar with the customers’ requirements.
Appointment of Agents
Sales Agency Agreement
A typical sales agency agreement would describe the extent of the agent’s field of operations and the extent to which the principal accepts limitations on its freedom of action thereby permitting the agent the opportunity to exploit the markets. Such limitation would however be subject to the right to withdraw exclusivity in certain circumstances, for instance, if sales targets are not achieved. The division of responsibilities between principal and agent presents a wide range of possibilities and requires skillful negotiation.
The provisions in a Sales Agency Agreement regarding payments of the agent’s commission and accounting between the parties should be drawn to minimise their tax liabilities including the expenses of VAT and to take advantage of applicable double taxation treaties.
Marketing Agency Agreement
The form and content of this agreement will be similar to the Sales Agency Agreement. However, in the Marketing Agency Agreement, no authority is vested in the agent to contract on behalf of the principal and therefore his function stops short of signing contracts and accepting orders.
In an appropriately drawn Marketing Agency Agreement, an overseas supplier will not be deemed to be trading within Trinidad and Tobago with the consequence that he incurs no liability to Trinidad and Tobago tax on sales of the product. Consequently it is important that the structure of the relationship be arranged in such a way as to minimize the tax liability.
Registration of Agency Contract
The Registration of Local Agents of Foreign Governments or Foreign Enterprises Act, Ch. 19:08. requires an agent carrying on business on behalf of a foreign government or a foreign enterprise to ensure that the contract is in writing, is subject to the laws of Trinidad and Tobago, and that a copy is lodged with the Board of Inland Revenue (BIR). In addition, the Agent must register with the Registrar General. The Agent must also make a declaration that there is no other contract between the parties, and this declaration is also lodged with the BIR. Where there is no written contract or where the contract is not subject to the laws of Trinidad and Tobago, the penalty on summary conviction is a fine of TT$20,000 and imprisonment for five (5) years. This law does not appear to be enforced by the BIR.
In appointing a distributor, the terms dealing with the extent of the territory of the distributor, the extent of his protection from competition from products supplied by the manufacturer to others, and the limits on the distributor's freedom to supply outside the specified territory will be the essence of the distributorship agreement. The supplier normally uses a distributor when it wants to enter into a new market with which it is unfamiliar. The terms of the agreement may also specifically address minimum sales targets, passing of risk, training and familiarization of the distributor with the product, after sales maintenance service (depending on the product), termination of the agreement and consequences of termination, for example, disposal of stock upon termination.
In the absence of specific terms addressing termination, a term which is usually implied is the one requiring the provision of reasonable notice of termination in accordance with public policy considerations regarding restraint of trade and the unfair contract terms provisions. This is however based on common law principles of contract because the Unfair Contract Terms Act, presently in force, does not address the issue.
It is common, though not essential, that the distributor holds stocks of the products. In the absence of a provision addressing the disposal of stock on termination whilst the distributor will not be entitled to any specific compensation he may generally be entitled, under common law principles, to any stock ordered and paid for prior to termination but not yet received. The distributor may even be able to claim for a reimbursement from the manufacturer in lieu of any stock ordered.
The same principles regarding taxation apply to a Distributorship Agreement as for a Marketing Agency Agreement, and therefore the agreement and the relationships should be so structured as to minimize the tax liabilities of the parties.
There are an increasing number of franchises in Trinidad and Tobago. Franchise agreements generally entitle the franchisor to exercise continuing control over the way in which the franchisee carries on the franchise business, and will usually oblige the franchisor to provide the franchisee with advice on such matters as location, training, advertising, sources of supply for products and equipment, negotiation with suppliers and financial management. In consideration of the rights so granted and the continuing advice and support given, the franchisee agrees to pay to the franchisor a continuing royalty on gross sales and often agrees to purchase products and services exclusively from the franchisor. The Franchise agreement will also grant to the franchisee certain rights of use with respect to the Franchisor’s trademarks and/or business names. In certain Franchise agreements, the Franchisee is also charged with the responsibility of registering the Franchisor’s trademarks, logos and business names in the territory where the franchise is being operated.
As an alternative to direct franchising, the proprietor of a franchise system may by means of a Master Licence delegate responsibility of recruiting, appointing and supervising franchisees to a master franchisee in Trinidad and Tobago.
Generally, royalty payments payable to non-resident franchisors will be subject to withholding tax. The rates are based on the country of residence of the franchisor and the applicable double taxation treaty (if any) between Trinidad and Tobago and that country. If there is no treaty, the statutory rate of withholding tax applies. The current rate is 15%.
An important consideration that should be addressed by every prospective investor is the issue of the ownership and control of intellectual property rights that may be associated with the proposed business activity. This issue should encompass the legal and regulatory regime relative to trademarks, service marks, patents, copyrights and trade secrets. For further details about the intellectual property regime in Trinidad and Tobago, see the chapter entitled Intellectual Property.
Restraint of Trade
In drafting agency, distributorship, licensing and franchise agreements, the common law doctrine prohibiting covenants in restraint of trade should be borne in mind. Under this doctrine, such covenants are prima facie unenforceable at common law as being in breach of public policy and enforceable only if they are reasonable with reference to the parties concerned and not injurious to the public interest.
If covenants are drafted in a manner that permits severance by the Courts, the offending clauses will be struck out and the remainder of the contract enforced by the Courts. The Unfair Contract Terms Act prevents a party from imposing on a consumer a clause which excludes liability from negligence on its part unless the term is justified as being reasonable in the circumstances. It also prevents parties from choosing the laws of another jurisdiction as the governing law of a contract, if the sole reason for doing such is to avoid the provisions of the Unfair Contract Terms Act.