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Analysis of the Legal Relationships

Question:

Discuss about the Economic and International Business Law.

Running a business in the home nation is still easy when compared to running the business operations overseas. This is because the environment of the nation is known to the company and the majority of changes can be easily foreseen (Grünig and Morschett, 2017). Most importantly, the fine details of running the business in a successful manner are easier to comprehend in home nation. These details are often difficult to comprehend in case of international market. As a result of this, the companies often rely upon forming temporary relations in the target market and only after the success or failure of this venture, are further steps taken. The three key legal relationships which can be utilized for this purpose include agency, distributor and joint venture (Schlegelmilch, 2016).

Regina Plc (fictitious company) is amongst the top five tourism companies in France. However, off late, it has come to the notice of the company that there are a high number of tourists attracted towards Brazil, due to Christ Redeemer Statue in Rio de Janeiro, which is one of the 7 Wonders of the World (Edney and Poirier, 2012). And this is also due to the popularity of carnival festival (JustLuxe, 2014). In order to tap this market, the company looks forward to establishing a permanent base in the long run, to be able to take advantage of the demographics. But before that is done, the company is looking forward to establish a temporary base in the nation, for which, the three legal relationships, as options would be evaluated. Once that is done, the terms which has to be included in the best option would be presented.

As stated in the introductory segment, Regina Plc has the option of agency, distributor and joint venture. The three options have been analysed in this segment, based on their suitability for the company.

Agency is such a legal relationship in which there are three key parties, i.e., the principal, the agent and the third party. In agency, the agent works on behalf of the principal, as per the authority that is given to the agent by the principal and the transactions are undertaken by agent with the third party (Noonan, 2010). As the agent works on behalf of the principal, he effectively represents the principal, which makes the principal liable for the acts done by the agent towards the third party. In every jurisdiction, there is the applicability of common law and agency law is a part of the common law. Under this law, the agent can hold three kinds of authorities, i.e., express, implied and ostensible (Morse, 2010). So, even when the agent has not been specifically asked to do a particular thing, the principal can be made liable where the third party is made to believe through actions or through conduct that the agent has the required authority to carry on the work. This would make the principal liable even when the agent breaches their express authority. Due to these reasons, the agency form is deemed as an unfavourable option in general (Nguyen, 2007).

Agency Model

There are other characteristics of agency as well, which make it as an attractive option before the parties. The biggest advantage is the control of the party (principal) over the work of the agent (O'Kelley and Thompson, 2017). This is in terms of the agent selling only the products of the principal and offering their express services only. This allows the principal to train the agent and their employees and also regulate the manner in which the product would be sold by them. Unlike the other forms, the cost of agent does not put an additional burden on the costing of the product and the agents are paid on commission basis (Boundy, 2016). Hiring an agent of the target nation helps in bringing the knowledge of the local market, which can help the company in expanding its business in a successful manner. Also, the principal retains the ownership of the product and so, the services of the company are offered in the name of the company only (Cahn and Donald, 2010). This would allow the name of Regina Plc to continue while running the business in Brazil.

However, agency form is not preferable for Regina Plc owing to the high liabilities associated with this form, particularly in the context of ostensible authority, which could result in a misuse of powers by the agent. This is also because the allegiance of an agent can still shift, and there can also be a lack of efforts by the agent.

The next option available with Regina Plc is to opt for a distributor model. In a distributor form of legal relationship, the company hires a distributor who sells the product or offers the services of the principal but under his own name. This results in the ownership of the product being transferred to the distributor. The distributor purchases the product from the principal and sells it in the target market under his own name, resulting in the identity of the principal being lost (Mullet, 2017). This is amongst the leading disadvantages of this legal relationship as the company can profit from the sales but losses its brand value. Another problem with this method is that the principal has no control over the operations of the distributor. They cannot train the staff of the distributor or ask them to sell the product in a particular manner (Alliance Expert, 2017). Also, the distributor sells different products at a single time period which means that focus on the product of the principal is divided, if not lost (Murphy Marketing, 2016).

Distributor Model

In this very feature lies the merit of distributorship as the company does not have to risk its name in a new market and the feasibility as well as acceptability of the product can be checked without putting the name of the company at a risky position. The distributors often provide after sale services and the other supporting services, which makes a product more attractive to the customers (Salzano, 2014). Also, there is no liability as is present in case of agency model, as there is no applicability of express, implied or ostensible authority in such cases. Though, the demerits outweigh the merits of this option. The costs of the product are raised as the distributors add their own margins to the product which results in higher costs. In order to avoid this from happening, the companies have to absorb their costs which results in their margin of profit being reduced (Scotter, 2017).

Due to these reasons, even a distributor model proves to be unattractive for the company. This is because the work of the company is attracting the tourist and the brand value for the company is important if the company wants to establish a long term establishment in the nation. And so, the company needs to look at the other alternatives for expanding the business in Brazil.

The third and possibly most substantial option present before Regina Plc is to form a joint venture with a company of Brazil, which is also engaged in tourism industry. A joint venture is formed when two or more business entities come together to carry on a specific project and unite their resources for the fulfilment of such project (Morschett, ‎ Schramm-Klein and Zentes, 2011). Once the purpose of the joint venture is attained, the joint venture comes to an end. So, it is a limited time pooling of resources for attaining a common project, where there is a commonality in the risks, ownership, profits and the control over the operations of the joint venture (Yeniyurt and Carnovale, 2017).

In comparison to agent and distributor model, the joint venture is quite different. And there are more benefits of it in comparison to the two models. Joint venture allows the entities to venture out a new project in which both the entities are interested and where each one contributes to the pool of resources required for attaining this purpose. Through a joint venture, the individuals can try out new markets and try out new projects particularly when both of these are risky prospects on going solo. The costs for the entities are thus saved as a new project and a new market can be assessed without having to bear high costs (Killing, 2012).

Joint Venture Model

Though, this model too has components which make it a not so attractive option owing to the demerits this option has. A leading one in this regard is that in a joint venture, a dispute can be raised on the exit strategy particularly when one party does not want to continue with the joint venture, resulting in the purpose of the venture not being met (Wolf, 2011). This can result in a dispute when the party leaves due to it finding a more attractive alternative with another entity. Also, even though there is a division of powers and common pooling of resources, often one party is left to bear the burden of the venture and continue the operations as the other business entity fails to reciprocate such commitment. Choosing the right partner for the venture also becomes a tough task to do, particularly when the venture is to be created with an entity from the target market (Campbell and Netzer, 2009).

Despite the demerits of a joint venture, the best option for Regina Plc is to form a joint venture with a company from Brazil, particularly the ones who have access to tourist, to pool in the audience of the joint venture. A joint venture could be created where a joint tour for France and Brazil is chalked out in a more attractive manner, due to the pooling of resources for the two entities. This would also help Regina Plc in establishing a place in Brazil as a future growth prospect.

From the analysis of the features, merits and demerits of the three legal relationship options before Regina Plc, it becomes clear that a joint venture is the best option available before the company. And in this context, the MD has already negotiated a joint venture agreement with XYZ Incorporated. However, it is crucial that while this agreement is being drawn, certain key terms are included in the agreement. The reason for emphasizing on the terms is that if these terms are not properly included, it can result in dispute being raised due to ambiguities regarding the rights and liabilities in the agreement (Morais, 2014). Some of these terms, which have to be included in the joint venture agreement have been explained below.

  • The joint venture agreement has to begin with the basic details of the venture where the name of the parties, the name of the venture, the details and addresses of the venture, have to be properly stated.
  • The next step is to clarify the purpose of the joint venture. In this term would be contained the objective for creating this venture, the scope of the joint venture, the proposed activities to be undertaken, the resources to be transferred and the like.
  • There is a need to state the applicable laws on the joint venture and this is in context of state based laws, nation based laws and the international based law, in addition to the laws surrounding the business of the company under the common law.
  • The dispute resolution clause is probably the most important term of any joint venture agreement without which the venture cannot be said to be completed. Even when the parties work in an amicable manner and everything has been properly covered, there are chances of disputes being raised in the joint venture. As a result of this, it is crucial that the joint venture agreement covers a dispute resolution clause. This clause would state the jurisdiction of the court with which the dispute has to be filed. And can also cover the use of alternative dispute resolution modes to solve the dispute. Arbitration is a common clause in joint venture agreements and has to state the manner in which an arbitrator would be appointed, the applicable law for the arbitration and the other details of it (American Bar, 2017).
  • As a joint venture has pooling of resources, the agreement clearly needs to state the contributions of each of the joint venture party. This is in addition to the manner in which profits would be shared, the rights and liabilities of the parties, and the other details of the resources which have been contributed along with their percentage of contribution. This helps in clarifying what each party has to do and what can be expected from the other party of the joint venture.
  • The exit strategy forms another crucial part of the joint venture agreement. This is in terms of the parties being given an option that they can still exit from the joint venture, based on certain conditions, before the purpose of the joint venture is met. This clause also needs to provide the manner in which the joint venture would be wrapped up, once the purpose of the joint venture is met. Thus, the details of sharing the profits, the proceedings, the assets of the joint venture, upon its conclusion, have to be provided in the joint venture agreement.
  • The confidentiality term is also a major part of the joint venture agreement, which cannot be left out at any instance. This is necessary for protecting the interests of the parties in terms that during the joint venture, each party might gain confidential or sensitive information of the company, which has to be kept secret. Thus, this clause cannot be left out at any costs.
  • The financial breakup of the joint venture in terms of the tax applicable, the budget of the venture, the costs of the project and other finance related details also need to be referred in the joint venture agreement. However, instead of including the entire financial details, the same can be attached as an annexure of the joint venture agreement and a reference to the same can be mentioned in a term of the joint venture (Saracens Solicitors, 2015).

Conclusion and Recommendations

On the basis of the analysis provided in this report, it can be concluded that for Regina Plc, the best option is to create a joint venture with a tourism company from Brazil, to pool in the resources and get the best results. In order to do so, the company needs to enter in a joint venture agreement. This is due to the various disadvantages of agent and distributor as available legal relationships and the attractiveness of a joint venture in context of the company. For this, the company needs to consider the points which have been highlighted in the second part of this discussion. So, there is a need to include the basic details of the venture, the applicable laws, confidentiality term, the dispute resolution terms and the others elucidated above. Thus, it is recommended to Regina Plc to form a joint venture and include the key terms highlighted above in the joint venture agreement which it proposes to form with XYZ Incorporated. This would allow the company to test the waters in Brazil and use this knowledge in the context of future and permanent expansion in the nation.

References

Alliance Expert. (2017) What is a franchise, distributorship or agency arrangement?. [Online] Alliance Expert. Available from: https://www.allianceexperts.com/en/knowledge/difference-between-an-agent-distributor-and-franchisor/ [Accessed on: 14/11/17]

American Bar. (2017) Model Joint Venture Agreement. [Online] American Bar. Available from: https://apps.americanbar.org/buslaw/newsletter/0049/materials/book.pdf [Accessed on: 14/11/17]

Boundy, C. (2016) Business Contracts Handbook. Oxon: Routledge.

Cahn, A., and Donald, D.C. (2010) Comparative Company Law: Text and Cases on the Laws Governing Corporations in Germany, the UK and the USA. Cambridge: Cambridge University Press.

Campbell, D., and Netzer, A. (2009) International Joint Ventures. The Netherlands: Kluwer Law International.

Edney, L., and Poirier, S. (2012) A Visit to Christ the Redeemer in Rio. [Online] The Rio Times. Available from: https://riotimesonline.com/brazil-news/rio-travel/a-visit-to-christ-the-redeemer-in-rio/ [Accessed on: 14/11/17]

Grünig, R., and Morschett, D. (2017). Developing International Strategies . Berlin: Springer Berlin Heidelberg.

JustLuxe. (2014) 20 Things You Need To Know About Brazil. [Online] Huffington Post. Available from: https://www.huffingtonpost.com/justluxe/20-things-you-need-to-kno_b_5381855.html [Accessed on: 14/11/17]

Killing, P. (2012) Strategies for joint venture success (RLE international business) (Vol. 22). Oxon: Routledge.

Morais, L. (2014) Joint Ventures and EU Competition Law. Portland: Hart Publishing.

Morschett, ‎D., Schramm-Klein, H., and Zentes, J. (2011) Strategic International Management: Text and Cases. 2nd ed. The Netherlands: Gabler Verlag.

Morse, G. (2010) Partnership Law. 7th ed. Oxford: Oxford University Press.

Murphy Marketing. (2016) Differences Between Agents and Distributors. [Online] Murphy Marketing. Available from: https://www.murphymarketing.ie/differences-between-agents-and-distributors/ [Accessed on: 14/11/17]

Nguyen, N.T. (2007) Agent and Multi-Agent Systems: Technologies and Applications. Poland: Springer Science & Business Media.

Noonan, C. (2016) Sales Management. Oxford: Butterworth Heinemann.

O'Kelley, C. R., and Thompson, R. B. (2017) Corporations and other business associations: cases and materials. The Netherlands: Wolters Kluwer Law & Business.

Salzano, L. (2014) 4 key differences between trade agents and distributors. [Online] TRSM. Available from: https://therightsocialmedia.novertur.com/international-trade-2/4-key-differences-trade-agents-and-distributors/ [Accessed on: 14/11/17]

Saracens Solicitors. (2015) All You Need To Know About Joint Venture Agreements. [Online] Saracens Solicitors. Available from: https://saracenssolicitors.co.uk/commercial/all-you-need-to-know-about-joint-venture-agreements [Accessed on: 14/11/17]

Schlegelmilch, B. B. (2016) Global Marketing Strategy. London: Springer International Publishing.

Scotter, L. (2017) Sales Agent Vs. Distributor. [Online] Chron. Available from: https://work.chron.com/sales-agent-vs-distributor-19944.html [Accessed on: 14/11/17]

Wolf, R.C. (2011) The Complete Guide to International Joint Ventures with Sample Clauses and Contracts. 3rd ed. The Netherlands: Kluwer Law International.

Yeniyurt, S., and Carnovale, S. (2017) Global supply network embeddedness and power: An analysis of international joint venture formations. International Business Review, 26(2), 203-213.

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