In the current context of reconfigured globalization, securing international trade operations is a major challenge.
International sales and supply chain operations (of commodities, manufactured goods, etc.) can take many forms, and thus obey different rules. It is differences of nature, and not simply of degree, that separate intermediation methods. As a result, intermediaries’ obligations, and hence their civil liability, can differ completely.
We will concentrate here on one specific form of intermediation: international brokerage. As an integrated, but streamlined form of intermediation, the broker’s role is to “introduce” the parties, without being entrusted with any mandate to represent them.
We will look at the main clauses to be included in an international brokerage agreement, and some of the problems that should be anticipated.
1°) Definitions and legal classification
It is essential to well define the purpose of the contract. Qualification is achieved by both selection and exclusion.
For example, it should be specified that the contract relates solely to the provision of intermediation services, in the form of brokerage: i.e. seeking out, identifying and introducing potential buyers or sellers (depending on the angle chosen).
The conscientious parties will also specify:
– That they act towards each other as independent businesses, without it being possible to consider that one of them is acting as the representative, agent, employee or otherwise of the other, or that any joint venture, partnership, company, trust or comparable arrangements exists between them;
– That the contract does not create or imply any relationship of subordination between the Parties (for example, a contract of employment);
– That it does not create or imply any subcontracting relationship, whereby one party would perform certain tasks or missions for, in the name of or on behalf of the other;
– That it does not create any franchise, concession, commercial agent relationship, branch management, management mandate, or business lease management, etc..
2°) Preliminary checks and declarations
Before signing a high-stakes international contract, it is always advisable to verify the identity of the parties (e.g. by obtaining certificates of incorporation) and confirm that the signatories have the powers to act in the name and on behalf of the entity they represent.
But preliminary checks don’t stop there. When the transaction concerns sensitive products or commodites, or involves jurisdictions marked by political instability, armed conflict, corruption, human rights violations or other forms of irregularity, this research needs to be taken a big step further.
It is in the intermediary’s best interest to ensure that their co-contractor declares (and, if possible, to personally verify) that the sourcing is regular, that the supplier is authorized to carry out its activity and that it complies with all standards (local and international) …
Compliance is fundamental and deserves the utmost attention!
3°) Respective obligations of the parties
The broker’s obligations are light. His duty of best effort rather than duty of result implies that he must simply, but actively, seek out, identify and introduce buyers or sellers.
Proof of introduction will determine whether the broker’s commission is payable. The introduction process must therefore be defined. What does, or does not, constitute an introduction will be usefully described in concrete terms (even giving examples). A contrario, the concepts of existing and on-going business relationship, or notorious commercial dealings may be invoked, as an exception, to contest the introduction.
In addition to the mere introduction, nothing prevents the broker from offering certain additional services. He can therefore play a decisive role in structuring the underlying sale from a legal standpoint. In this role, he will, with the help of his lawyers, promote the legal coherence of the operations, by subjecting all contracts to the same legislation and suggesting a single method of dispute resolution. The key is to clearly define the additional services and their remuneration.
The more the broker gets involved in the sale (particularly in terms of legal structuring), the more he will reduce the risk of being squeezed out. By making himself indispensable, he will also, and above all, retain control over his remuneration.
The obligations of the seller or buyer are more numerous and significant. In addition to the general obligation to act and perform the contract in good faith (which obviously implies regular and transparent communication), this party will, above all, undertake not to evict the intermediary. In short, eviction consists of entering deals behind the intermediary’s back, in order to deprive him of his commission. Combined with a dissuasive penalty clause, this prohibition lies at the heart of the international brokerage contract. It therefore deserves careful contractual definition.
The parties will also need to consider :
- exclusivity (or lack of thereof); and
- volumes: must a minimum be reached, or not? Will crossing certain thresholds have a financial impact?
4°) Financial aspects: commission, payment methods, etc.
As soon as an introduction is made, leading to the conclusion and execution of a sales contract, the broker’s commission must be paid. This commission generally corresponds to a percentage of the sale price (determined using a benchmark index).
This remuneration must be protected. As soon as the broker has validly introduced the parties and a sale has been concluded, he must be paid. The commission must not be affected by the occurrence of events over which he has no control. For example, the fact that the seller ultimately receives only part of the sale price, after products or commodities inspections, should not affect the broker’s remuneration.
In order to secure the transaction and ensure that the commission is received, certain methods of payment are preferable. Letters of credit, in particular, protect the broker against the risk of arbitrary changes.
5°) Confidentiality and intellectual property
The information exchanged during the negotiation or performance of an international brokerage contract is often sensitive. This is why it is essential to include a robust confidentiality clause, backed up by a dissuasive penalty clause.
Sellers and buyers generally own their own brands, logos, etc. Their respective intellectual property rights should therefore be preserved and their use regulated. For example, the broker may be authorised to use certain distinctive signs of the buyer/seller to market the products, provided he has prior authorisation to do so.
6°) Exclusions of liability and dispute resolution
Insofar as brokers facilitate the conclusion of costly transactions involving products or raw materials sold in large quantities, it is imperative that they protect themselves against legal action by their co-contractors.
In a broker’s dealings with buyers, he will be anticipating problems of quality, quantity, conformity and sourcing, matters over which he has little objective influence.
The legality and enforceability of any exclusion or limitation of liability must be verified beforehand. It will therefore be necessary to study the standards (local or international) applicable to the broker in relation to the type of product or raw material concerned.
Here is a standard example of a disclaimer:
The Intermediary shall not be liable to the Buyer for any acts, deeds, failures, faults, breaches or negligence attributable to the Seller(s) (including their representatives, agents, employees, directors, etc.). This exclusion of liability covers in particular the origin, quality and method of extraction, production, cultivation or refining of the Commodities, as well as the degree of compliance, legality or regularity of these operations, which are the sole responsibility of the Seller(s) and/or the Buyer. The Buyer understands and acknowledges that the Intermediary, acting solely as a broker (limited to the Introduction process), does not offer any guarantee in respect to these matters. The Buyer shall be personally responsible for all verifications in this respect, both prior to and subsequent to the conclusion of any contract for the sale of Commodities.
Because of the financial stakes involved and the nationality of the parties, disputes arizing out of or in connection with international brokerage contracts are generally subject to arbitration. The electio juris (choice of law) and electio fori (choice of jurisdiction) clauses should not be overlooked!
Conclusion
International brokerage activity is very lightly regulated under French law. If it is to be carried out safely and effectively, it must be the subject of well-drafted contracts that take account of the issues raised above.
As international business law is our firm’s area of expertise, our team would be happy to answer any questions you may have on the subject.
