Because of the growing representation of foreign entities by United States, Canadian, Mexican or South American sales representative firms (rep firms) it is important for rep firms to read and understand all of the terms of an agreement submitted by a foreign entity and for the rep firm to protect itself under the agreement. It is also important to understand the difficulties that may arise when suing and/or collecting on a judgment against a foreign entity. Some of these issues are highlighted below:
Payment Issues
There are often subtle, but critical, distinctions in the language used in and the ultimate terms of an agreement. Some of these critical terms relate to how payment to the rep firm will be handled, i.e., the currency that will be involved and the timing of the payment, i.e., upon sale or delivery of the products to a customer or on some other basis.
Jurisdictional Issues
If there is no contract designation, there is also the issue of what law governs the agreement and the dispute forum’s jurisdiction over a foreign entity. Resolution of the jurisdictional issue can be complicated and depends on a variety of factors, including the circumstances of the claim. But of great significance is the location of assets of the foreign entity that are available to attach if that becomes necessary. If the assets (i.e., payment by the customers for the products) are not located in the country of the rep firm, but rather in the country of the foreign entity, collection may be difficult.
Immunity Under the Foreign Sovereign Immunities Act
Another jurisdictional issue arises when the foreign entity is incorporated in and at least 50 percent is owned by a foreign state. In this situation, the Foreign Sovereign Immunities Act 28 U.S.C. §1602, et al (FSIA) may apply; thereby affording the foreign entity/foreign state immunity from lawsuits in the United States, unless an exception applies under the Act. One enumerated exception includes waiver, either “explicitly or by implication, notwithstanding any withdrawal of the waiver which the foreign state may purport to effect except in accordance with the terms of the wavier.” 28 U.S.C. §1605(a)(1). Because Courts narrowly construe waivers, rep firms entering into contracts with foreign states and their entities should negotiate the language of their agreement so it clearly indicates the foreign state’s express waiver of immunity [explicit waiver] and/or its agreement that the law of the jurisdiction of the rep firm should govern [implied waiver].
Another important exception under the FSIA is the Commercial Activity exception. Under this exception, a foreign entity/foreign state is not immune if the plaintiff’s action is “based upon commercial activity…”
- … carried on in the United States by the foreign state; or
- upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or
- upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States. 28 U.S.C. §1605(a)(2).
Under each of the three alternative bases listed in the box, “commercial activity” is critical and is defined as “either a regular course of commercial conduct or a particular commercial transaction or act.” 28 U.S.C. §1603(d). The commercial character of the activity is determined by referring to the nature of the course of conduct or specific transaction or act, instead of referring to its purpose. 28 U.S.C. §1603(d).
Under this “nature not purpose” criterion, the jurisdictional immunity of a foreign state is limited to suits involving sovereign or public acts and does not extend to commercial or private acts. Commercial acts include contracts for the purchase and sale of goods; the performance of services; contracting for the performance of services; and/or similar activities through which private parties engage in trade and traffic or commerce.
In litigation, it is not uncommon for a foreign entity to attempt to avoid liability by wrongfully asserting it is immune from liability under the FSIA. Unfortunately, even an unfounded assertion of immunity allows the foreign entity to make an argument. Moreover, the foreign entity has an immediate right of appeal on this issue. Effectively, the appeal stays the case in the lower court pending the appellate court’s ruling on immunity.
Other Issues
Finally, even when the rep firm has protection under the agreement in dealing with foreign entities, litigation may still become necessary. Litigation can be cost-and time-intensive. Some hurdles of litigation include, document translation, services of process (under the terms of the Hague Convention or otherwise), and/or completion of discovery and depositions of witnesses in other countries. That topic, however, could be an entire article in and of itself.
The subject of the enforcement of a contract with a foreign entity is expansive when taken in consideration with the multitude of circumstances that can occur when a domestic company is involved. This article barely scratches the surface of these important issues. Rep firms that are, or may be, confronted with a foreign entity or are presently in a contract with one should do all they can to make sure they are protected under the agreement.