program 14 best practices in international distribution...

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Program 14

Best Practices in International Distribution Contract Drafting:

A Guide to Key Contract Provisions

Prepared for the New York State Bar Association International Section Seasonal Meeting

Vienna, Austria, October 2014

By Hernán Pacheco O., LL.M.

Partner PACHECO COTO

mailto:[email protected]

http://www.pachecocoto.com/

Pacheco Coto Costa Rica

Introduction

Often times, the decision to penetrate new markets abroad or expand presence in a given foreign market implies the assessment of the best strategy to accomplish said objective from economic, practical and legal perspectives. This analysis involves amongst others, the design of marketing and business plans, budgeting and the analysis of the available legal structures in order to launch or expand products and services in the target market in the most efficient way.

While there is always the alternative of setting up your own operation, starting from scratch or acquiring an existing business operation whether totally (acquisition) or partially (joint venture), it is not always the most convenient model to follow. Legal barriers, unfamiliar legal, tax or labor systems, legal framework incompatible with company policies or possibilities, costs of doing business, regulatory limitations or simply business risk factors, are some of the elements that may call for the consideration of other options for cross border sales. Distribution, sales agencies or representatives, licensing or franchising are amongst the most traditional tools used for this purpose. On the other hand, the evolution of technology and e business has also opened the doors for other options to commercialize in a foreign market.

Nevertheless, the appointment of a distributor or sales agent on a foreign market carries on challenges and risks, some of which will be addressed in this paper.

During the late 60's and early 70's most of the Latin American countries adopted special legislation to regulate the relationship between foreign companies and domestic distributors, agents, sales representatives and dealers. Some countries also incorporated within said special legislation provisions to regulate the relationship when both distributor and supplier are local companies. Many of the countries in the region enacted legislation aimed at protecting the rights and interests of the local distributor, agent, sales representative or dealer, particularly in cases where the foreign supplier terminated the commercial relationship without just cause or attempted to impose unilateral changes in detriment of acquired rights or interest of the local counterparty. The consequence of termination or the imposition of unilateral changes to contractual conditions under those circumstances was the activation of an indemnification mechanism, the characteristics and particularities of which vary from one country to the other.

However, with globalization and modernization of the legal systems in most of the countries in Latin America, distribution rules were amended and most countries decided to abolish or amend the special set of rules governing distribution and agency. The “flat world” placed by the global trade along with the new advances in transportation and telecommunications represent major driving factors in globalization and precipitate

2

http://en.wikipedia.org/wiki/Transportation

http://en.wikipedia.org/wiki/Telecommunication


further interdependence of economic and cultural activities as well as the need to create and deploy new distribution forms and structures.

Antitrust legislation is also relatively new in Latin America. Most of the countries adopted special laws starting in the early 80s in the understanding that markets have traditionally been concentrated, lacking competition and with a business culture that enabled the emergence of practices that lead to market power and concentration. The economy was largely characterized by public service monopolies. However, with market liberalization, privatization or opening of public monopolies, the influence of foreign direct investment and other factors, the economic atmosphere changed, propelling more competitive markets throughout the region.

Significant progress has been made in the last decades in antitrust legislation. However, there are still some countries, particularly the smaller economies, with important challenges to resolve on this subject. Some countries have modern laws with inefficient or weak regulators, others poor laws and weak regulators and a few, poor laws and strong regulators. Nevertheless, those differences have narrowed considerably in the past several years, as there is an emerging consensus on best practices in competition law enforcement and in applying competition policy principles to regulatory systems. Countries now co-operate regularly in such areas as anti-cartel enforcement and international mergers. The OECD has been active in promoting competition policy among countries in Latin America and the Caribbean and in recent years it has formed a partnership with the Inter-American Development Bank for this purpose.

One of the main challenges the countries in the region face is the implementation of national regulations in a borderless Internet world. Most regulations still apply existing, physical-world rules to cyberspace, and do not address properly the possibility that essential parts of an electronic transaction might lie outside national borders. The Internet increasingly made borders superfluous, and the full potential of the Internet, particularly for commerce, is based on this characteristic. This fueled the growing calls for international regulatory bodies to oversee developments in cyberspace and insure legal security to consumers.

This paper analyses the legal framework of distributorship in selected Latin American countries and provides a practical approach to distribution agreements from the perspective of the foreign supplier and of the local distributor or sales representative. It also touches upon the repercussions that anti trust legislation has on distribution agreements and aspects of such legislation that both suppliers and distributors shall take into account for purposes of their commercial relationship, in particular the so called “black provisions” in distribution relationships, such as: resale price maintenance; alternative pricing constraints (suggested pricing, minimum advertised price (MAP)

3

http://en.wikipedia.org/wiki/Interdependence


programs); exclusive territories and customer allocation; restrictions on active or passive selling out of assigned territory; restrictions on internet sales; restrictions on parallel (grey market) imports and, restrictions on sales of competing products.

The selected jurisdictions are: Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Panamá and Perú and they have one common denominator, that is, all of them have signed a Free Trade Agreement with the United States.

I. Chile A. Generally. International distribution agreements in Chile are not regulated by any particular statute. Freedom of contract is a basic principle of Chilean law, so that contracting parties are free to agree the terms and conditions of their commercial relationship, provided these terms and conditions do not infringe Chilean public policy.

On the other hand a sales representative is normally viewed in Chile as an agent, although sometimes it takes the form of a broker. In the first case, the sales representative is usually viewed as someone who represents the manufacturer in the country and, therefore is empowered to carry on sales on behalf of the principal. In the second case, the sales representative is deemed as an independent contractor or broker that does not have the right or authority to act on behalf of the principal . 1

B. Distribution Agreements. In general terms, distribution agreements under Chilean law shall be subject to the specific terms and conditions agreed upon by the parties. However, the parties must observe and abide by several rules such as: (a) general Chilean statutory provisions applicable to commercial and civil agencies; (b) laws governing civil and commercial sale and purchase agreements; (c) Chilean antitrust legislation; (d) Chilean Consumer’s Protection Act; (e) United Nations Convention on Contracts for the International Sale of Goods; and, (f) Chilean jurisprudence, business practices, and domestic and foreign doctrine. According to Chilean law and doctrine, distribution agreements are defined as those under which the producer or manufacturer agrees to deliver certain products to the

1 Chilean Code of Commerce of 1865. Titles III and IV, Book I regulating brokerage and commercial mandate

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distributor who agrees, in turn, to sell them directly in the market place at its own risk and expense. A distributorship agreement has the following general characteristics under Chilean law:

• The distributor is not linked through employment to the manufacturer. • The distributor is not a partner of the manufacturer or producer, as its

profits accrue exclusively to itself. • The distributor is generally autonomous in the marketing of the products

received from manufacturer. • The distributor's earnings are usually the difference between the purchase

price and the resale price, even though the parties may agree on bonuses should the distributor reach certain sales targets.

• The distributor sells on its name and for its own account and invoices the client directly.

C. Applicable law and choice of forum. There are no restrictions on choice of law and of forum under Chilean law, except when such choice of law or forum is against Chilean public policy. Although not imperative, a connection with the chosen forum or jurisdiction (i.e., home country of one of the parties, place where distributorship will take place or where the goods are to be stored, etc.) is desirable to reduce eventual litigation in cases of fraud of law allegations or Chilean public policy violations. The submission by the parties to the jurisdiction of any foreign federal or state court with respect to their obligations, liabilities or any matter under or arising out of, or in connection with a distribution or agency agreement, as set forth in such agreement, will be valid and effective under the laws of Chile, to the extent set forth below. Chilean courts recognize as a valid and binding judgment any final, conclusive, and enforceable monetary judgment rendered in any such foreign court in matters arising out of an international distribution agreement or agency agreement provided that the Supreme Court of Chile verify that the following conditions have been met:

• If any treaties are in effect between Chile and the country where the judgment is issued, the provisions of such treaty apply;

• In the absence of a treaty, the rules of reciprocity apply to the enforcement of judgment. If the country where the judgments were adopted does not recognize the judgments of Chilean courts, then such foreign judgment

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may not be enforced in Chile; and,

If the previous rules cannot be applied, the judgment of a foreign court will have the same effect in Chile as the judgments given by Chilean courts, provided that:

• the foreign judgment do not contain anything contrary to the laws of Chile; • the foreign judgment do not rule on matters which, under Chilean law,

belong to the jurisdiction of Chilean courts. The judicial construction of this requirement is such that foreign judgments will not be enforced if they are contrary to the public policy of Chile or if they affect properties situated in Chile, which are subject exclusively to the jurisdiction of Chilean courts;

• the defendant against whom the enforcement is sought has been given due notice of the proceedings, and has been afforded a real opportunity to appear before the foreign court and defend his case. In this regard, service of process by mail may not be recognized as a valid service of process by Chilean courts; and,

• the foreign judgment is final, conclusive and enforceable under the laws of the country where it was issued.

A foreign judgment meeting these requirements, duly legalized and translated into the Spanish language, must be presented to the Supreme Court of Chile. Said Court will hear the defendant against whom the enforcement is sought and, if it concludes that the aforesaid legal requirements have been met, it will order enforcement of the foreign judgment in Chile in accordance with the rules of the Civil Procedure Code. In case of foreign arbitration, in particular with countries not a party to the New York Convention, Chilean law requires that the arbitration award is certified as valid and final by an approval of a high court of the country where the arbitration award was rendered. In some countries such certification or approval may not be available. This requirement has been made by Chilean Courts even in respect to countries that are signatories of the New York Convention. D. Antitrust legislation. The principle of freedom to contract in distributorships finds a limitation pursuant to the doctrine of the Resolutory Commission on Anti- Trust. According to said authority a distribution contract may not:

• Fix distribution territories within which only one distributor may sell, • Prohibit the marketing of other brands of products,

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• Fix prices for the distributor's sales to third parties, • Set minimum sales targets for sales to third parties, • Provide for an exclusive distributor, particularly in cases of a single

distributor for similar articles manufactured by different producers, • Establish quotas regarding the market for the product, • In general, provide for any arrangement whose purpose is to eliminate,

restrict or interfere with free competition in a given market. Contractual provisions of this nature have been traditionally construed as infringement to Antitrust law regardless of the market participation of the product or parties involved. 1. Resale price maintenance (supplier control of reseller’s pricing) Supplier control of reseller’s pricing is not permitted under Chilean competition rules. 2. Alternative pricing constraints (e.g., suggested pricing, minimum advertised price (MAP) programs) In Chile, alternative pricing constraints such as price suggestion is permitted. Minimum advertised pricing imposed by suppliers is not permitted. 3. Exclusive territories and customer allocation Exclusive territories are permitted except if they cover the same article from different manufacturers. There is abundant case law antecedents to this respect in resolutions issued by the Chilean competition authority. 4. Restrictions on active or passive selling out of assigned territory Chilean antitrust law does not make a distinction between active and passive selling, and it is generally permissible for a supplier to prohibit all out-of-territory sales by a distributor, both active and passive, in the absence of market power. 5. Restrictions on Internet sales The Chilean laws do not contemplate antitrust restrictions on internet sales per se. 6. Restrictions on parallel (grey market) imports In Chile, parallel importing of genuine products is not viewed as an antitrust issue. This issue has been dealt with by the competition authority.

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7. Restrictions on sales of competing products A supplier is free to restrict a distributor’s sales of competing products and this is not deemed anti competitive conduct under Chilean laws. II. Colombia A. Generally. Colombian commercial legislation distinguishes between Commercial Agency and Distributorship. The rules of engagement, the duties and prerogatives of the parties and the consequences of termination vary depending on the type of relationship. B. Distribution Agreements Under Colombian legislation in a distribution relationship the parties enjoy flexibility to define the terms and conditions of their commercial relationship and the freedom of contract prevails. For instance, there is absolute freedom to agree the consideration to be paid to the distributor. Exclusivity is not an essential element of the contract, but may be agreed in favor of one or both parties. Nevertheless, exclusivity is usually agreed in favor of the company which products are being distributed. In distribution agreements the parties may agree upon the applicable law and jurisdiction, albeit the general principle is that contracts performed in Colombia are subject to Colombian Law.2

The grounds for termination of the distribution agreement with just cause are not specifically mentioned in the law and its termination does not cause additional payment such as a severance payment. Termination of distribution agreements follow the general rules applicable to contracts:

• There is freedom to agree on causes of termination. • Parties may provide for termination for cause. • Agreements may be subject to a fixed term and terminate upon expiration

of term. The focus of discussion has been whether a commercial relationship falls within the

2 Article 869 of the Colombian Code of Commerce

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category of an agency agreement or not, and if the compensation and indemnification provisions found in the law for agency agreements may be waived or not. There are two landmark cases that set the rules to determine whether the nature of the relationship is of distribution or of commercial agency: the Shell decision and the L’Oreal award. Termination of an agency agreement (not qualified as a pure distributorship) is subject to payment of compensation and indemnification. This is precisely the source of most litigation in this subject, as often times there is discrepancy between the parties in respect to the amount of indemnification. Termination of the agency contract without cause by the principal gives rise to indemnification consisting of a sum equivalent to one twelfth of the average of the commission, royalty or profit received in the last three years, for each year the contract was in force, or to the average of all sums received if the term of the contract was less than three years. The law regulates just causes for termination and consequences thereof, depending on the party involved. On the part of the principal:

• Serious breach of contract by the agent. • Any action or omission of the agent seriously affecting the interests of the

principal. • Mandatory liquidation of the agent. • Liquidation or termination of activities.

On the part of the agent:

• Breach of contract by the principal. • Actions or omissions of the principal seriously affecting the interests of the agent. • Mandatory liquidation of the principal. • Termination of activities by the principal.

C. Antitrust Legislation

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Colombia is one of the first Latin American countries to adopt an antitrust Law, back in 1959. While the Constitution of 1886 contained provision that guaranteed the right to private property, freedom to exercise an economic activity or profession and the possibility for the State to intervene in economic affairs of general interest and the constitutional reforms of 1936, 1945 and 1968 reaffirmed these concepts, it was with the approval of Law 155 that an specific set of rules regarding competition was established.3 Law 155 established a rule of reason system of evaluation of anticompetitive conducts. However, further amendments clarified the application of rule of reason parameters for the analysis of general conducts and a per se system for specific conducts.4 Under the original text of Law 155 emphasis was made on the intended practice but with the reform of 2009 the law sanctions not only the intention of the investigated party, but alto the effect that certain conduct has or may have in the market. Both Law 155 and the amendment under Law 1340 of 2009 include the ex-ante and ex-post rules. Law 155 contemplated exceptions in block when certain anticompetitive agreements are aimed at defending the stability of a particular economic sector or of interest for the economy in general. The reforms of 1992 and of 2009 added and clarified the regime of exceptions in cases of research and development, technical norms and common facilities and, further established special mechanisms of intervention in regards with the agricultural sector. Law 155 regulated the concept of dominant position and market power and stated that there is market power if the market share allows to unilaterally control the price of product or service in a given market. Article 50 of Decree 2153 established a catalog of conducts that constitute abuse of dominant position. Further, Law 155 explicitly prohibits the monopolization of distribution.5 It is also important to mention that the system of penalties and sanctions under Law 155 and reforms thereof range from cautionary measures, intervention, de-listing or declaration of nullity, to the imposition of heavy fines, but there are no criminal consequences for the violation of free competition rules.

3 Another antecedent is found in Law 27 of 1888 that prohibited the creation of companies for monopolistic purposes in industry or subsistence activities. 4 Decree 2153 of 1992 and Law 1340 of 2009. 5 Article 8 of Law 155.

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The most relevant changes introduced with the reform through Law 1340 of 2009 are the following:

• The Colombian Competition Authority (SIC) is the single competition authority. • The SIC is also the general authority for the control of business integrations or

mergers. There are exceptions to integrations in the financial sector and in the aeronautic sector. There are also rules that reduce the time for the SIC to resolve.

• Sectorial or special provisions to regulate competition are of preferential application. In case of gaps, the general regime of free competition applies.

• It reinforces the principle of collaboration amongst entities, under which the SIC shall seek the opinion of public entities with interest in the economic sectors subject to investigation.

• It contemplates rules for a more ample participation of third parties interested in cases under investigation by the SIC.

• The statute of limitations for anti competitive conducts was increased from 3 to 5 years.

1. Resale price maintenance (supplier control of reseller’s pricing) The SIC, has not adopted important decisions regarding resale price maintenance. Nonetheless, the matter has been addressed in a shallow manner by SIC and a definitive position has not been issued yet. In this regard, ruling No. 99050593 of September 27, 1999 issued by SIC stated: "Although sale prices of products may be suggested provided that the conduct does not involve the violation of the provisions on promotion of competition and restrictive business practices, according to the above and taking into account that in Colombia there is freedom of prices, the retailers and suppliers are free to set prices according to their cost structure and profit margins. Pursuant to the above, those who are involved in the distribution chain have the autonomy to set the price charged for the sale of product, without being subject to the consensus or aquiescense of third parties. Accordingly, it is understood that price fixing to distributors, retailers or suppliers is contrary to the provisions on free competition." Under the above terms, in Colombia it is conceivably possible to suggest prices, but illegal to fix them under the terms of free competition provisions. On the other hand, ruling No. 99025015 of June 15, 1999, issued by SIC stated:

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"(…) Under this understanding, if distributors, retailers or wholesalers accept maximum price fixing made by the producer, they are considered to be acting under a consciously parallel conduct, by allowing them to set prices, which translates into a competition restricting agreement." Additionally, ruling No. 02067355-02067622 of September 17, 2002 of SIC established: "(...) In accordance with the above, it is possible to suggest retail prices, provided that the conduct does not involve a violation of the competition regime, considering that in Colombia there is free pricing. In any way, it must be clarified that the suggestion should be free from any connotations implying a contract, covenant, agreement, concerted practice or consciously parallel practice between the producer and its distributors or retailers, which has as its object or effect direct or indirect fixation of prices and which may constitute a competition restrictive practice. This suggestion, neither may be an influence for distributors or retailers to increase prices of its products or to desist from their intention to lower them, an act which, under paragraph 2 of Article 48 of Decree 2153 of 1992, is considered to be restrictive of competition” Thus, despite SIC has not developed in depth the figure of resale price maintenance, as a general principle it is understood that such practice contradicts the provisions on free competition. The possibility that the manufacturer or producer imposes to the distributor resale prices, is contrary to the current laws on the matter, because according to SIC, since in Colombia free enterprise rules apply, the dealer who purchases the product for resale becomes the owner, in consequence nobody, not even the manufacturer, can impose the resale price, and if it were an agreement between the manufacturer and the distributor about the second price at which to sell the product, such agreement would be unlawful under Article 47-1 of Decree 2153-92 or could be considered an anti-competitive act.6

6 Thus, SIC has understood that the practice of resale price fixing could be against the following legal provisions: “Article 1 of Law 155 of 1959: Agreements that directly or indirectly aim to restrict the production, supply, distribution or consumption of raw materials, products, goods or services of national or foreign origin, are forbidden as well as generally, all kinds of practices, procedures and systems designed to limit competition and maintain or fix unfair prices.” “Article 47 of Decree 2153 of 1992: For the performance of the functions referred to in Article 44 of this Decree, the following agreements are considered contrary to free competition, among others:

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2. Alternative pricing constraints (e.g., suggested pricing, minimum advertised price (MAP) programs) Under the previously mentioned laws and the jurisprudence developed by SIC, in Colombia it is lawful for a supplier to suggest resale prices, as long as this suggestion allows the final retailer to set its own prices according to their cost structure and profit margins. 3. Exclusive territories and customer allocation Under the terms of article 1 of Law 155 of 1959 and article 47 of Decree 2153 of 1992, any agreement which has as its purpose or effect allocating markets between competitors, no matter if the allocation is addressed to customers or territories, is considered per se illegal and is an infringement to competition provisions, as long as the conduct has significant effects on markets or on competition. 4. Restrictions on active or passive selling out of assigned territory As a general principle, any practice aimed at restricting the competition is illegal. However, regarding this particular matter Colombian provisions do not make any difference between active or passive selling, nonetheless it is permissible for a supplier under an exclusive distribution agreement to prohibit the distributor all out-of-territory sales. 5. Restrictions on Internet sales

1. Those whose purpose or effect is directly or indirectly fixing prices. Article 48 of Decree 2153 of 1992: For the performance of the functions referred to in Article 44 of this Decree, the following acts are considered contrary to free competition: 1 (...)

2. Influence a company to increase the prices of its products or services or to desist from their intention to cut prices.

3. Refusing to sell or provide services to a company or discriminate against it when this

may be understood as retaliation to its pricing policy. "

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There are no specific regulations or precedents regarding restrictions on internet sales. Nonetheless, this conduct may be considered anticompetitive under article 1 of Law 155 of 1959 and could be considered as an anticompetitive agreement, pursuant to article 47 of Decree 2153 of 1992, if a group of competitors prevent third parties from market access or marketing channels through restricting internet sales or set the marketing or sales conditions to third parties by restricting their internet sales. It is important to bear in mind that the conduct must cause significant effects on markets or in competition to be considered illegal. 6. Restrictions on parallel (grey market) imports Decision 486 of the Andean Community, expressly provides in article 158, that the owner of a trademark registered in Colombia may not prevent a third party from selling products under such trademark, provided the owner of the registration, or a third party with the consent of the owner, or a party subject to decisive influence of the owner regarding exploitation of the rights over the trademark, has made the product available for trade in any country in the world. Thus, grey market products may be imported into Colombia as long as the use of the trademark is made by someone with the consent of the owner of the trademark, directly or indirectly through a third party subject to the influence of the owner. 7. Restrictions on sales of competing products

Under the terms of article 1 of Law 155 of 1959, all the agreements that directly or indirectly restrict or are intended to restrict the production, supply, distribution or consumption of raw materials, products, goods or services of national or foreign origin, are prohibited. In this sense, restricting the sales of competing products may be considered an infraction to competition provisions. On the other hand, under the terms of articles 47 and 48 of the Decree 2153 of 1992, refusing to sell or provide services to a company or discriminate against it when this may be understood as retaliation to its pricing policy, is considered an act contrary to free competition and is per se illegal. In the same sense, if a group of competitors make an agreement to prevent third parties from accessing markets or marketing channels, this will be considered an infraction to competition provisions and is per se illegal, as long as the conduct has significant effects on markets or in competition. III. Costa Rica.

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A. Generally

Costa Rica is one of the few countries in Latin America that still has special legislation to regulate the relationship between local distributors, dealers or agents and foreign suppliers. This set of rules is contained in Law number 6209, the Law for the Protection of Representatives and Distributors of Foreign Companies, of 24, February1978, and its regulations, found in Executive Decree number 8599 of 9, March 1978. Law number 6209 was recently amended by Law number 86297, which implemented the commitments assumed by the country under the Dominican Republic Central American Free Trade Agreement (DR-CAFTA).

According to Article 1, Paragraph a) of Law 6209, a foreign company is defined as:

Any individual or company domiciled abroad which carries on commercial activities within the country, directly or through branch offices, agents or subsidiaries.

A “distributor” is further defined as:

Any individual or company, which, by means of an agreement with a foreign company, imports or manufactures in the country, goods for distribution within the national market, acting at its own expense and risk.

A “representative” or “agent” is defined as:

any individual or company which in a continuous and autonomous manner —with or without legal representation— prepares, promotes, facilitates or accomplishes the sale or distribution of goods or services which foreign companies sell or render in the country.

Before the amendments, Law 6209 contained particular features that tended to over-protect the rights and interests of those individuals or entities qualified as representatives or distributors of foreign companies under Costa Rican Law. The current regime brings more balance between the foreign companies and the local distributors or representatives.

Law 6209 has been declared of Public Order, which means that it is paramount to the free will of the parties. Therefore, the parties cannot include in a distribution or representation contract any term or condition that would conflict with the provisions of Law 6209, nor can they take exception to any one of the law’s provisions based on their private

7 Published in the Official Gazette No. 243 of 18 December 2007.

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agreement., those provisions of the distribution agreement that contradict the Law 6209 are deemed null and void.

For example, there is abundant jurisprudence which in no uncertain terms establishes that the existence of a distributorship need not be documented in a formal written contract. To the contrary, Costa RicanCourts have ruled that when Law 6209 makes reference to a “contract” or an“agreement,” it includes not only a formal written instrument, but also an undocumented commercial relationship between the parties. In other words, the mere fact that a commercial relationship between a foreign supplier and a local individual or entity conducting business in such capacity exists suffices to constitute a distributorship, thus rendering the parties subject to the provisions of law 6209.

Costa Rican Courts have been very flexible concerning the evidence acceptable to demonstrate the relationship Thus correspondence, witnesses, purchase or supply orders etc. have been accepted by Costa Rican Judges as sufficient to substantiate such a commercial relationship.

The Courts have also ruled that, even if it not explicitly provided for in the corresponding agreement, a relationship established with a local representative or distributor can become exclusive in nature, if the foreign company maintains contact solely with that distributor or representative for an extended period of time. Nevertheless, the concept of presumptive exclusivity has been changed upon enactment of the DR-CAFTA amendments8 and the amended text of the law establishes that the local distributor or representative is entitled to terminate a relationship with a foreign company, with liability to the latter, if the foreign company appoints another distributor or representative when the existing relationship is exclusive, provided such exclusivity has been explicitly agreed upon in the agreement.

Before the DR-CAFTA amendments, the scope of the protection of Law 6209 went so far as to force the parties to submit disputes to the jurisdiction of the Costa Rican Courts . As a result, Costa Rican Civil Courts traditionally sustained the exclusivity of the Costa Rican courts over the handling of disputes under law 6209.

However, the Costa Rican Constitutional Court declared this provision partially unconstitutional, thereby changing the traditional position of the Courts. The

8 In addition, such presumption was contrary to the Law for the Promotion of Competition and Consumer Protection (Law 7472 of 20 December, 1994) prohibits any and all types of monopolistic practices including exclusive contracts that may be against free competition.

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Constitutional Court held that the provisions contravened a number of international conventions and in resolutions number 10352 of 22 November 2000 02655-2001 of 4 April 2001 and 12712-2001 of 14 December 2001 allowed the submission of a dispute under a distribution relationship to arbitration, even if the forum for such arbitration is abroad, provided the applicable law is Law 6209.

The DR-CAFTA amendments implemented the Constitutional Court’s resolutions by amending Article 7 as follows:

The rights of the representative, distributor or manufacturer by virtue of this Law cannot be relinquished.

The absence of an explicit provision for the resolution of controversies in the representation, distribution or manufacturing agreement shall be considered a presumption of the parties intention to resolve any dispute by binding arbitration. Said arbitration may take place in Costa Rica. Despite the foregoing, said presumption shall not apply if a party objects to the arbitration.

The Law 6209 also regulates the causes for termination of a distribution or representation relationship.

B. Termination

Under Article 5 of Law 6209, the only grounds for termination which will not result in liability for the foreign company are:

• Offenses and misdemeanors committed by the representative or distributor against the property and reputation of the foreign company committed by the representative, by the distributor or by the manufacturer.

• Incompetence or negligence attributable to the representative, distributor or manufacturer, declared by one of the judges of the Civil Court of its domicile, as well as a decrease or a prolonged and substantial stagnation in sales, due to causes attributable to the representative, distributor or manufacturer. The establishment of quotas or official restrictions on the importation or sale of the product or service shall presume the non-existence of the relationship, unless proven otherwise.

• Violation on the part of the representative, distributor or manufacturer of the trade secret and loyalty due to the foreign company, by the disclosure of facts, knowledge or techniques relative to the organization, the products and the operation of the foreign company, acquired during its commercial relations with the foreign company.

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• Whatever other serious fault on the part of the representative, distributor or manufacturer relative to its contractual or legal duties and obligations with the foreign company.

• Termination of the agreement upon the expiration of the term or giving the prior notice established in the agreement.

• Termination of the agreement notified in advance to the representative, distributor or manufacturer within at least ten months, when the agreement does not indicate an expiration date or in the absence of a provision regarding prior notice.

Termination for any other cause will render the foreign company liable to pay compensation, which includes re-purchase of the inventory, plus ten per cent to cover finance charges and, if taken to litigation, an importation ban on its products may be ordered by the judge until a guarantee bond is placed to satisfy the court that the obligations will eventually be fulfilled9.

The Law also allows the local distributor or representative to rescind the agreement for causes attributable to the foreign company, in which case, the foreign supplier would be held liable to pay an indemnification, even though the local distributor or representative terminated the relationship.

Accordingly, Article 4 contains an exhaustive list of instances construed as just causes for termination of the distributorship by the local distributor, representative or manufacturer, for which the foreign company is liable:

• Offenses and misdemeanors by the company’s officials against the property and the reputation of the representative, distributor or manufacturer.

• The termination of activities of the foreign company, unless it is due to causes beyond their control.

• The unjustifiable restriction on sales, imposed by the foreign company, which may result in a reduction in the volume of business carried out by the representative, distributor or manufacturer.

• Lack of payment of commissions or fees earned by the representative, distributor or manufacturer.

• The appointment of a new representative, distributor or manufacturer, when the affected ones have exercised the representation, distribution or manufacture on an exclusive basis and such exclusivity has been explicitly established in the agreement.

9 Pursuant to article 242 of the Costa Rican Civil Procedures Code, the judge may order an injunction relief under special circumstances.

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• All unilateral modifications introduced by the foreign company to the contract of representation, distribution or manufacture, which impair the rights and interest of their representative, distributor or manufacturer.

• Whatever other serious fault committed by the foreign company which impairs the contractual or legal rights and obligations that it maintains with its representative, distributor or manufacturer.

• Termination of the agreement before the expiration term or without giving the prior notice established in the agreement.

• Termination of the agreement without giving a notice to the representative, distributor or manufacturer at least ten months in advance.

According to Article 3 of Law 6209 if the distribution agreement is terminated, the foreign supplier must purchase the inventory of its products from the distributor, at a price including the cost of the products, plus a reasonable percentage for the investment made. This percentage is to be determined by the Ministry of Economy, Industry and Commerce.

The foregoing is further regulated in the Regulations to Law 6209, which, establish the following additional obligations of the foreign company in the event of termination:

• Pay all outstanding commissions, as well as those that may eventually arise from business in process of formalization at the moment of cancellation of the contract.

• Purchase the inventory of products, at cost, including direct and local expenses plus taxes, plus ten percent (10%) to cover financial expenses.

If the foreign company terminates the agreement for reasons not contemplated in the list of just causes for termination contained in Law 6209, the local company is entitled to sue, and claim damages according to Article 10 bis of Law 6209, as amended under DR-CAFTA.

It is relevant to point out, that prior to the DR-CAFTA amendments, the Law contemplated a fixed indemnification mechanism based on average gross profit over a period of time.

Article 10 bis, now states:

Damages and losses: When, pursuant to the provisions of this Law, a claim seeking damages and losses is filed, the damage caused or which can necessarily be caused as a direct and immediate consequence of the violation of the provision or the right, must be

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fully compensated in accordance with principles of fairness. The Civil Code applies to this matter…

Moreover, Article 10 bis provides that the judge may order a prudential guaranty bond, which shall be proportional to the amount of indemnification claimed, when the interested party demonstrates that the defendant does not have sufficient assets in the country to respond to an adverse ruling10.

C. Antitrust Legislation.

Despite the fact that the Constitution has prohibited cartels since 1949, Costa Rica only introduced competition laws in the 1990’s as a result of the transition to a free market economy. 11

Law No. 7472 on the Promotion of Competition and Consumer Protection was enacted on 20 December 1994 (the “Law”).

The main areas within the scope of the Law are:

• Promotion of Competition: anti-cartel rules, merger provisions and unfair competition practices.

• Deregulation: elimination of excessive regulations and restrictions of access to markets, trade barriers and price regulation.

• Consumer Protection: enhancing consumer rights and defending consumer welfare.

10 Article 9, repealed by Law 8629 under the DR-CAFTA stated that the foreign company was required to render a guarantee covering the total amount of the indemnities claimed by the representative, distributor or manufacturer, and that amount was determined by the judge.

11 Article 46 of the Constitution states:

“Private monopolies and acts, even if originated in a law, that threaten or restrict freedom of commerce, agriculture and industry are prohibited. The action of the State directed to prevent all practice or monopolizing tendency is of public interest. In order to establish new monopolies in favour of the State or of the Municipalities the approval of two thirds of the total members of Congress will be required…”

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As a general prohibition Article 10 of the Law prohibits monopolies and monopolistic practices that hinder competition. The Law does not penalize monopolies for the mere reason of their existence. The purpose is to forbid monopolies that actively restrain competition.

1. Resale price maintenance (supplier control of reseller’s pricing)

In the Costa Rican market companies are free to set the price of the product from the manufacturer to the retailer. This principle has been picked up by the legislator in various statutory provisions, such as the Promotion of Competition and Effective Consumer Protection, Law number 7472 (Law 7472").

However such freedom is limited and deemed contradictory to competition if: a) used with the aim of eliminating or reducing free competition; b) in cases of predatory pricing; c) when used to distort the functioning of the competitive market through dishonest practices. In all of the mentioned exceptions there would be an abuse in the right to freely fix prices, opposite to the principles of good faith, fair competition and thus, contrary to provisions of Law 7472.

Another exception, but in the other direction are the extraordinary circumstances under which the government is able to set the final price of goods to final customers or establish mandatory profit margins.

Resale price maintenance is deemed a relative monopolistic practice (“vertical agreement”) and is assessed under the rule of reason. Article 12.b of Law 7472 explicitly considers as relative monopolistic practice, the imposition of prices or other conditions to dealers or suppliers, when selling or distributing goods or providing services12.”

2. Alternative pricing constraints (e.g., suggested pricing, minimum advertised price (MAP) programs)

The suggested price is not forbidden per se, provided it stays at the level of suggestion or recommendation. When the suggestion becomes mandatory or results in an imposition of the price, that conduct infringes the Costa Rican antitrust law.

On this subject, the Commission to Promote Competition ("COPROCOM"), stated:

12 To consider the practice as infringement to the rule of reason, it is necessary to verify if a) the party presumed responsible of the conduct has a substantial power on the relevant market, and b) refer to goods or services related to the relevant market.

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"Those communications between producers and retailers, or between distributors and retailers of an internal nature, and that simply have an intention of guiding in regards to the price at which a product could eventually be sold, is considered to have a serious anti-competitive effect13." (Highlight is ours)

Likewise, on possible sanctions for non-compliance to the suggestion, COPROCOM has indicated:

"The Commission to Promote Competition finds that just when the suggested prices come accompanied by duress or coercion, resulting in such suggestions or recommendations becoming binding, they are considered imposition of price. It is obvious that suggestions are made between independent entities in the chain of production and distribution, that is, between economic agents who do not belong to the same economic group, or without including any sort of integration or vertical arrangement that could require the coordination of prices.

It is concluded that, provided that there is no coercion, manufacturer or supplier is allowed to suggest minimum prices ... These prices, as recommendations, can be varied when the manufacturer considers that its costs of production or distribution change or because of market conditions 14." (Underlined is ours)

Suggested price must be of an internal nature, and must not be of the knowledge of the public, because in those cases, it causes pressure from consumers to retailers, to sell the product at the price suggested. Cost structure by the retailer my increase the price, so selling the product to the price suggested would be limiting, contrary to free competition and with an negative impact on market conditions.

3. Exclusive territories and customer allocation

Exclusive territories and customer allocation are not permitted in presence of market power and if the conduct is among economic agents, which are not competitors. Article 12, subsection a) of Law 7472 regulates as relative monopolistic practice: “Fixing, imposing or establishing an exclusive distribution of goods or services, based on the subjects, geographical location, or for specific periods of time, including the division, the distribution or the allocation of clients or suppliers, among economic agents which are not competitors.”

13 Commission to Promote Competition, Article Seven, Ordinary Session No. 19-97, June 17th 1997. 14 Commission to Promote Competition, Article Five, Ordinary Session No. 33-98, November 10th, 1998.

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However, if the practice is between or among competitors who operate at the same market level, this is deemed a horizontal agreement (“absolute monopolistic practices”) and is per se illegal”

4. Restrictions on active or passive selling out of assigned territory

The Costa Rica antitrust law does not make a distinction between active and passive selling. In absence of market power the supplier can prohibit all out-of-territory sales by a distributor.

Further, distribution laws in Costa Rica do not prohibit the supplier to forbid all out-of-territory sales to a distributor; therefore the provision can be part of a distribution agreement.

5. Restrictions on Internet sales

The use of the Internet generally and of the World Wide Web in particular have exploded in recent years. Thousands of companies use E-Commerce as their main vehicle to do business, including distribution of products and services. Often, purchases and contracts may be made directly on line. This has brought a large number of normative challenges that touch banking, invoicing, taxation, contract infringement, jurisdictional issues, some of which are not regulated in many of the countries in the region.

In Costa Rica restrictions on Internet Sales among competitors who do not operate at the same market level are viewed as a territory division and judged under the rule of reason and generally permitted, in the absence of market power in accordance with Law 7472 article 12. a), k)

6. Restrictions on parallel (grey market) imports

Parallel importing is allowed in Costa Rica, and is not viewed as an antitrust issue; but it can be challenged as unfair competition for reasons of undue use of a given product, imitation, unauthorized reproduction, substitution of trademarks, trade names, denominations of origin, advertising slogans, if it generates confusion to consumers. It has also been challenged on the basis Public Order infringement with the argument of defense of safety products, quality, warranties andviolation of economic and social interests.

7. Restrictions on sales of competing products

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In the absence of market power, a supplier is generally free to restrict a distributor’s sales of competing products, but if the economic agent has market power15 the conduct will be judged under the rule of reason.

IV. The Dominican Republic.

A. Generally.

Since 1966 the contractual relations between the parties in any distribution agreement in the Dominican Republic, properly registered in the Central Bank, are regulated by Law No. 173 on Protection to the Importer Agents of Goods and Products and its amendments. Nonetheless, since March 1st 2007, distribution relationships between a Dominican party and an American party are regulated by what is stated in Section B Chapter 11 on Cross- Border Trade in Services of the DR-CAFTA.

Section B of the FTA establishes the guidelines of this new regime and distinguishes two scenarios:

a. Distribution agreements signed after the date of DR-CAFTA,

and

b. Distribution agreements signed before the entry into force of DR-CAFTA.

In addition, it also defines what shall be understood by covered contract, Law No. 173 and date of termination.

i. Distribution Agreements signed after DR CAFTA According to DR CAFTA, the Dominican Republic shall not apply Law No.173 to any covered contract signed after the date of entry of DR CAFTA, unless the contract explicitly provides for the application of Law No. 173.

However certain principles still apply to this type of commercial relationships:

• The principles of the Civil Code of the Dominican Republic apply to the covered contract;

• The covered contract is treated in a consistent manner with the obligations set forth in DR-CAFTA and the principle of freedom of contract;

• Termination of the agreement for expiration of the contractual term is now deemed just cause;

• If the covered contract has no termination date, any of the parties may seek

15 The power to raise and maintain prices above a competitive level.

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termination by giving six months advance notice; • Indemnification in case of termination of the contract without cause; • Disputes arising from the covered contract can be resolved through binding

arbitration; and • The parties are allowed to establish in the contract the mechanisms and forum

available in case of disputes. ii. Distribution Agreements signed before DR-CAFTA

If a contract is covered by Law 173, based on articles 46 and 47 of the Dominican Republic Constitution the DR CAFTA rules provide that:

• The amount of any indemnification for termination of a covered contract based on the factors listed in Article 3 of Law No. 173 shall be no greater than would be available to the claimant under the Civil Code of the Dominican Republic;

• The parties to a contract may agree to resolve the dispute through binding arbitration; and

• The Government of the Dominican Republic and the conciliation authorities shall take all appropriate steps to encourage the resolution of disputes arising under covered contracts through binding arbitration.

Finally, under DR CAFTA provisions were taken which establish that goods or services suppliers shall not be required to pay damages or an indemnification for terminating a covered contract for just cause or allowing such a contract to expire without renewal.

A contract shall be interpreted as establishing an exclusive distributorship only to the extent that the terms of the contract explicitly state that the distributor has exclusive rights to distribute a product or service; and the requirement that the parties to a contract seek a negotiated settlement of any dispute through conciliation, shall retain all their validity and force for all contractual relations signed before the date of entry into force of DR CAFTA.

B. Antitrust Legislation.

The main body of rules to regulate competition in the Dominican Republic the General Law for the Defense of Competition, law No. 42-08. Its primary objective is to promote and defend the effective competitiveness of all industries with the purpose of increasing economic efficiency of the market. The law also applies to acts or activities which may have originated abroad, but restrict competition within the Dominican Republic, as well as to acts, contracts and administrative regulations that may have a negative effect on the market or affect the interest of consumers.

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The National Commission on the Defense of Competition is an independent entity in charge of supervision of the market, investigation and imposition of sanctions. It forms part of the Ministry of Economy and Industry and is subject to the financial control by the General Comptroller.

Violations of the Competition law are sanctioned with monetary fines established by the National Commission for the Defense of Competition, without prejudice to civil and criminal penalties available through ordinary proceedings. Individuals found to have participated directly, as accomplices or as abetters of anti-competitive practices, personally or as executives, or acting in representation of legal persons, are sanctioned under the Criminal Procedure Code.


Article 6 of General Law No. 42-08 establishes that price fixing between suppliers and resellers constitute an unlawful conduct to the extent that the price fixing does not have a commercial reason that justifies it and creates unjustified market barriers for third-parties. Taking into consideration that the Law for the Defense of Competition is relatively new, and that the Dominican competition agency is not up-and-going, there are no legal precedents that can be cited regarding the scope of the regulatory agency’s criteria for the implementation of this legal disposition.


General Law No. 42-08 does not prohibit the mere suggestion, as opposed to the imposition, of resale prices and it is, thus, not considered as anticompetitive conduct. Dominican antitrust legislation, however, does stipulate price fixing to be unlawful. This means that, to the extent that the suggestion of prices does not constitute price fixing or abuse of dominant position, price suggestion is lawful.

The spirit of Dominican antitrust and consumer protection regulations in regards to advertisement, which would include minimum advertised price programs, is to protect consumers from receiving misleading or confusing information with respect to the product that is being advertised.


Customer allocation and territorial exclusivity agreements by competitors are unlawful under Article 5 of General Law No. 42-08. Dominican antitrust regulation, however, does

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not make a distinction with regards to vertical arrangements pursuant to territorial exclusivity.

Taking into consideration that General Law No. 42-08 is relatively new, and that the Dominican competition agency is not up-and-going, there are no legal precedents that can be cited regarding the scope of the regulatory agency’s criteria regarding vertical arrangements for the purposes of territorial exclusivity and customer allocation.


The assignment of territory per se by competitors, is considered to be unlawful under antitrust law, thus, Dominican antitrust law does not regulate aspects related to active or passive selling out of “assigned territory”.


In general, restrictions on sales are considered to be unlawful, however neither Law No. 126-02 on Electronic Commerce, or Digital Documents and Signatures, nor General Law No. 42-08 for the Defense of Competition, include specific restrictions to internet sales in the Dominican Republic.


Parallel importing is not generally viewed as an antitrust issue under Law No. 42-08, however, when referring to non-genuine products, Article 11 Law No. 42-08 describes as an antitrust conduct, any act that lends itself to confusion with the activity, products, names, services, establishment and intellectual property rights of others.

In that order, Law No. 20-00 on Intellectual Property Rights establishes in its Article No. 88 that the registration of a trademark does not confer on its holder the right to prevent third parties the use of the trademark in relation to products lawfully marked when the owner or any other person with his consent or economically linked to him, had introduced into commerce in the country or abroad, subject to that such products and it containers do not undergone any modification, alteration or deterioration. Therefore, parallel imports could be somehow restricted by registered intellectual property rights when goods imported have not been previously sold by the trademark holder or the licensee authorized to this.

On other note, Law No. 173-66 on Protection to Import Agents of Merchandise and Products, protects those agents that have a registered exclusive right to distribute a certain product in the Dominican Republic. Therefore, even though local regulations do not

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expressly restrict parallel imports, foreign suppliers could be found liable when permitting other distributors to parallel import the products already exclusively distributed.


As well as for the Resale price maintenance, Section D of Article 6 of General Law No. 42-08 establishes that when a sale or transaction is subject to the condition of not engaging services, acquiring, selling or providing goods distributed or commercialized by a third party, this could be considered as an unlawful conduct to the extent that these actions do not have a commercial reason that justifies them, and create unjustified market barriers for third-parties. Currently there are not legal precedents on this matter.

V. El Salvador

A. Generally

While El Salvador does not have a special law that regulates distributorship or agency agreements, it has incorporated provisions in its Commerce Code to regulate such commercial relationships. Chapter III of the Commercial Code regulates commercial agents, such as:(i) Dependent agents (articles 384- 391); (ii) Representative agents or distributors (articles 392- 399-B) and (iii) Intermediary agents (Articles 400-410).

In general terms the law establishes that the parties may freely negotiate the terms and conditions of their contractual relationship. However, the law contains certain provisions that tend to protect the distributor or representative agent. Thus the section related to Representative Agents or Distributors in the Commercial Code includes articles that contain specific rules to establish just causes for termination; proceedings for the calculation of the indemnification; payment of commissions if there is no written agreement; and other relevant aspects of the commercial relationship between a distributor or representative agent and its supplier or principal.

B. Termination

The Salvadorian Commercial Code also stipulates some the following causes that allow the Principal to terminate, modify or refuse to prolong the relation of distribution:

• Breach of the agency, representation or distribution contract. • Fraud by the agent, representative or distributor, without prejudice of the

criminal prosecution. • Serious ineptitude or neglect of the agent, representative or distributor.

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• Continuous decrease in the sale or distribution of the articles for reasons attributable to the agent, representative or distributor.

• Disclosure of confidential information, without prejudice of prosecution or claim for indemnification .

• Actions taken by the agent, representative or distributor that jeopardize the introduction, sale or distribution of the products.

The El Salvadoran Commercial Code also contains provisions to protect the Distributor from unilateral acts of the Principal such as the termination, modification or refusal to renew the relation of distribution without reasonable cause, and granting the Distributor the right to sue the principal for indemnification. This indemnification could extend to the following:

• Expenses incurred by the distributor to benefit the distribution business and that, as a result of the termination of the relationship, cannot be recovered

• Value of the investments made in equipment or facilities, acquired solely with the purpose to carry on the distribution.

• The value of existing merchandise that could be difficult or impossible to sell due to the termination of the relationship.

• The amount of the gross income obtained by the distributor, during the last three years of the relationship.

• The value of the credits that the distributor had granted to third parties, in order to facilitate the distribution of the merchandise

For example, Article 395 states that if there is not any specific agreement on commissions, the agent or distributor is entitled to receive a commission proportional to the magnitude of business concluded through its activities, in accordance with the customary practices of the territory.

If a business transaction is not completed for reasons attributable to the principal, the agent or distributor will still be entitled to the full commission. Furthermore, if the agent or distributor has exclusive rights over a specific territory, it will be entitled to receive a commission for any and all business conducted by the principal in that territory, whether or not the agent participated directly in the business transactions.

Pursuant to Article 399 A, disputes generated by the application of these provisions will be handled through an abbreviated proceeding at the competent courts of the domicile of the representative agent or distributor.

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In the event that the principal is a foreign company and it is sentenced to pay compensation to a local distributor or representative agent for breach of contract, the Code establishes that the Principal will not be allowed to perform business in the country until it pays the indemnification or until it places a guarantee in court to secure payment thereof.

Article 397 establishes that either party may terminate the contractual relationship through written notification to the other party three months in advance. In the event of termination of the contractual relationship, the representative agent or distributor will be entitled to the value of the pending commissions earned during the term of the contract.

However, if the principal does not terminate the agreement based on any of the just causes for termination listed in article 398 of the Commerce Code or if the principal unilaterally modifies or does not renew the term of the agreement without just cause, the distributor can request an indemnification that can extend to recovery of promotion costs, non-recoverable investments, re-purchase of stock, payment of accounts receivable and payment of gross profits during the last three years or fraction thereof.

Article 399-B further establishes that the distributor or agent is entitled to terminate the commercial relationship, with liability of the principal, when the latter unilaterally modifies the agreement in detriment of the distributor’s or representative agent’s rights and interests. In such case, the distributor or agent is entitled to the same indemnification and compensation established in Article 397.


By Legislative Decree No. 528, El Salvador enacted is first Competition Law in effect as of 1 January 2006. Reforms to the law were introduced in 2007 granting the authority more powers for the enforcement of the legislation.16

The law imposes the obligation to the State to promote economic and social development through the increase of production and productivity, the rational use of resources and the defense to consumers. It further guarantees economic freedom, fostering and protecting private initiatives, to the extent it does not harm public interest and prohibits monopolistic practices to insure entrepreneurial freedom.

It is important to stress that El Salvador is one of the most open economies in Latin America.

16 It is likely that amendments will be introduced, as the Superintendency of Competition is preparing a ‘White Book’ containing amendments to improve the enforcement of the Law, based on recommendation resulting from the OECD.

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Legislative Decree 528 regulates agreements amongst competitors, such as horizontal agreements, cartels and absolute anticompetitive practices and also agreements or arrangements amongst non competing parties, such as vertical agreements and relative monopolistic practices in general. It also contains provisions regulating abuses of dominant positions and market power.

The law also contains broad regulations concerning economic concentrations and the work of the competition authority lately has been focused on improvement of this aspect of the law.17

VI. Guatemala

A. Generally.

Guatemala repealed Decree 78-71 that formerly regulated agency, distribution and license agreements. These commercial relationships are now regulated by the Commerce Code and the corresponding agreements can be negotiated and executed in accordance to the free will of the parties.

B. Termination.

The mechanisms and consequences of termination of agency or distribution agreements vary depending on whether the agreement existed or not prior to 11 November, 1998. Under Decree 78-71 an agreement of this nature could be terminated only upon the occurrence of the following triggering events:

• Mutual consent of the parties • Expiration of the term • Just cause • Decision of the agent, distributor or representative, subject to 3 months advance

notice • Unilateral decision of the supplier or principal, provided proper compensation for

damages is paid.

17 Some of the recommendations included in the White Book are related to implementation of a clemency program, the improvement on the application of the law on cartels, procedures to control anti-competitive mergers that fall below the notification thresholds, change on thresholds, etc.

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As a result of the abrogation of Decree 70-71 and the adoption of Congressional Decree 8-98, the causes and consequences of termination (with or without just cause) are now regulated in article 290 of the Commerce Code. Therefore, depending on the termination scenario, different outcomes and consequences can be considered. Termination may take place by mutual written consent of the parties or by expiration of the term (only applicable to agreements with definitive term). In case the commercial relationship is terminated by the distributor or agent, it has to notify the principal at least three months in advance. At the principal’s request, the agent or distributor is obligated to render accounts information and reimbursement of goods/merchandise at CIF price. Termination under the foregoing scenarios does not trigger any responsibility or liability for any party and neither of them incurs in any severance/indemnification obligation. Principal’s termination decision In the event the principal decides to terminate the relationship, it becomes liable for all damages and losses caused to the agent, unless a just cause for termination exists. No requirement of prior notice exists if the principal wants to terminate the agreement. Just cause for termination The party responsible for termination with just cause is liable for damages caused to the other party. To that effect, the following are regarded as just cause for termination: In regard to any of the parties:

• Lack of fulfillment or infringement by the other party, of the duties agreed upon;

• Crimes against the property or person of one of the parties by the other; and

• Refusal to issue the reports and accounts relative to the business, in the time and manner agreed upon.

In regard to the principal:

• Unauthorized disclosure to third parties of any fact, data, password or formula classified as confidential; and,

• Unjustified decreases in the agreed sales average.

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In regard to the agent, distributor or representative:

• Whenever the principal performs acts that directly or indirectly prevent, or tend to prevent, the agent from fulfilling or complying with the agreement.

If indemnification is not established in the relevant agreement, the local distributor can request damages (which include promotional costs, non-recoverable investments, stock, labor obligations, etc.)

With the enactment of DR-CAFTA, through Congressional Decree 11-2006, two main innovations in regard to the relationship with a local distributor or agent were introduced. The first is the possibility to submit disputes of this nature to arbitration, whether in Guatemala or abroad. The second is the obligation for distributors, agents or representatives to register themselves with the Mercantile Registry.

C. Antitrust Legislation

In Guatemala, there is no special law in regards to competition, however, there is legislation scattered in different legal bodies, which refer to aspects of competition law, such as monopolies and restrictive practices, among others. While there is no specific law on competition, the government created the following institutions on the subject: a) Vice Ministry of Investment and Competition of the Ministry of Economy; and (b) Directory of Competition Promotion, which is responsible for the study, design and proposal of appropriate policies of free competition for Guatemala.

As indicated supra, Guatemalan legislation regulates competition in different legal bodies, among them:

1. POLITICAL CONSTITUTION OF THE REPUBLIC OF GUATEMALA: regulates the fundamental aspects of competition and market economy, such as:

Article 43. Freedom of industry, trade and labor. Recognizes the freedom of industry, trade and labor, except for the limitations that are imposed by the laws for social reasons or national interest.

Article 118. Principles of Economic and Social Regime. The economic and social regime of the Republic of Guatemala was founded on principles of social justice. It is duty of the State to guide the national economy to achieve the use of natural resources and human potential, to increase wealth and try to achieve full employment and the fair distribution of national income.

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When necessary, the State will act complementing the initiative and private activity, for the achievement of the purposes expressed.

Article 119. Obligations of the State. Fundamental obligations of the State are the following (...) h. Prevent the operation of excessive practices that lead to the concentration of property and means of production to the detriment of the community;

Article 130. Prohibition of Monopolies. Monopolies and privileges are prohibited. The State will limit the function of enterprises which absorb or tend to absorb, to the detriment of the national economy, the production in one or more branches of industry or the same commercial or agricultural activity. The laws will determine in regard to this matter. The State will protect the market economy and will prevent the associations that tend to restrict the freedom of the market or tend to harm consumers.

2. COMMERCIAL CODE: Decree 2-70 from Congress of the Republic of Guatemala, contains several articles devoted to defining, prohibiting and punishing all those behaviors and acts which affect the rights of competitors and consumers.

Article 361. Prohibition of Monopolies. All companies have an obligation to contract with any who requests products or services, observing equality of treatment between different categories of consumers.

Article 362. Unfair competition. Any act or event contrary to commercial good faith or any normal and honest development of commercial activities, shall be considered unfair competition and, therefore, unjust and prohibited.

3. CRIMINAL CODE: Decree 17-73 of Congress of the Republic of Guatemala, penalizes with pecuniary fines and imprisonment, a series of practices harmful to competition.

Article 340. Monopoly. Who, for unlawful purposes, commits acts with apparent damage to the national economy, absorbing the production of one or more branches of industry, or of the same commercial or agricultural activity, or who takes advantage thereof through any privilege, or using any other means, or who carried out maneuvers or agreements, to sell goods at fix prices in clear detriment of the national economy or individuals, will be sanctioned with imprisonment from six months to five years and a fine of five hundred to ten thousand quetzales.

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Article 341. Other forms of Monopoly. The following are also considered acts of monopoly contrary to the public economy and social interest: • Monopolization or removal of consumption necessities, with the purpose of causing

the rise in prices in the domestic market.

• Any act or procedure which prevents or proposes to prevent the free competition in production or trade.

• Agreements or pacts formalized without prior government authorization, which are

aimed to limit the production or processing of any article, in order to establish or sustain privileges and profit from them.

• The sale of goods of any nature, below cost, that aims to prevent the free competition

in the internal market. • Export necessities without the permission of the competent authority, when required,

if this can produce scarcity or shortages.

The person or company responsible of one of the circumstances listed above, shall be punished with imprisonment from six months to three years and a fine of two hundred to five thousand quetzales.

4. OTHER REGULATIONS, such as Law for the Marketing of hydrocarbons, the Law of Banks and Financial Groups, Law of Telecommunications, contain provisions for the protection of competition in their respective markets.18

VII. Honduras

A. Generally Honduras has a specific set of rules to regulate distributorships under Supreme Decree 549, entitled “Law of Agents, Distributors and Representatives of National and Foreign Companies. “However, upon enactment of DR-CAFTA for Honduras, that is, as of 1 April 2006, a new set of rules introduced relevant reforms to the rules set forth in the Supreme Decree.

18 There are also competition provisions in the Free Trade Agreement between Guatemala and the Dominican Republic and provisions to insure free market conditions in the Free Trade Agreement between the United States and Central America and the Dominican Republic (DR-CAFTA).

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B. Termination. The just causes for termination are established as follows:

• Distributor’s failure to abide by the essential obligations of the contract; • Fraud or abuse of trust in the fulfillment of the agent’s (distributor’s)

obligations; • Negligence of the agent/distributor resulting in the loss of market share; • Refusal by the distributor to provide reports and accounts or to exercise

liquidation pertaining to the business within the time frame and fashion agreed upon;

• Disclosure of confidential information without authority; • Bankruptcy, insolvency, inability to make payments or any other legal

disablement according to normal business practices; • Any action initiated by the distributor that jeopardizes the business or

level of sales. If the foreign company terminates the agreement without just cause, it may be forced to pay an indemnification to the distributor pursuant to article 14 of the Law. The indemnification obligation includes the following components:

• All expenses incurred by the local distributor that cannot be recovered due to the modification, non-renewal or termination of the agreement

• The value of the investments made by the agent or distributor for the benefit of the foreign company, as long as the Agent or Distributor is not able to use them, in accordance with the depreciation schedules applied for the payment of income tax for machinery

• The value of the merchandise and spare parts in stock that will not be used as a result of the termination or non-renewal

• The amount of the annual gross profit obtained by the distributor, agent or representative during the last five years of the distributorship, agency or representation agreement, and if the agreement has a shorter term; five times the amount of the average annual gross profit for the number of years the agreement has been in force

However Upon approval of the law to implement DR-CAFTA, several modifications were introduced:

• The expiration and non-renewal of the term of the agreement is now considered just cause for termination. Under Supreme Decree 549 the supplier

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who refused to renew the contract without just cause was subject to pay a significant pecuniary compensation to the local dealer or agent.

• The parties may freely agree on forms of indemnification in case of termination by the supplier without just cause

• If the indemnification is not established in the agreement, to allow the parties to submit the issue to arbitration .

The implementation Act of the DR-CAFTA , which entered into force on 24 March 2010, states that for every written contract of representation, distribution or agency signed after the Treaty’s entry into force, Articles 4, 6, 14, 15 and 22 of Decree 549 will be applied.- In other words, in order to be a concessionaire, it is no longer a requirement to be Honduran or for the Company to be Honduran .- The amendment further eliminates the concept of presumptive exclusivity, the compensation for termination of contract, the right to impound the supplier’s goods, as well as the quality of preferred creditor. The Conciliation and Arbitration Act (Decree 161-2000) reformed Article 21 of Decree 549, which now reads: The controversies that arise between the grantor and the concessionaire will be solved by conciliation at first instance, if there is no agreement, or if there is a partial one, the controversy will be submitted to arbitration or to judicial proceedings.

C. Antritrust.

In Honduras, Antitrust Law is ruled by Legislative Decree 357-2005 of February 4th 2006 and by internal resolutions of the Antitrust Commission.

The aim of the Law is to promote and protect the free exercise of free competition to procure an efficient performance of the market and consumer welfare.

1. Resale price maintenance (supplier control of reseller’s pricing) Suggested pricing policies are not forbidden, provided such policy remains at the level of suggestion or recommendation. When the suggestion becomes mandatory or an imposition of the price, that conduct normally violates antitrust laws. 2. Alternative pricing constraints (e.g., suggested pricing, minimum advertised price (MAP) programs) There is no regulation concerning MAP programs, but seems permissible in so far as it does not become mandatory. The same applies for suggested pricing. I seems that it is

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permissible to the extent it does not become mandatory. 3. Exclusive territories and customer allocation The establishment of an exclusive distribution of goods or services, in regards with line of customers, line of products or geographical location, is not explicitly prohibited, but subject to the scrutiny of the authority if it has anti-competitive impact or the potential to have anti-competitive repercussions. Given the influence of distribution laws in Honduras, it is not uncommon to find exclusive provision in this type of agreements. 4. Restrictions on active or passive selling out of assigned territory Honduran law does not make a distinction between active and passive selling, and it is generally permissible for a supplier to prohibit all out-of-territory sales by a distributor, both active and passive, in the absence of market power. 5. Restrictions on Internet sales The Honduran laws do not contemplate antitrust restrictions on internet sales per se. 6. Restrictions on parallel (grey market) imports This has been the object of abundant dispute as, under distribution laws the tendency has been to accept the prohibition of parallel imports if the importer does not appear as the registered distributor. However, it is clear that under the letter of competition laws, there should be no prohibition on parallel imports, provided the source of the product is legitimate. 7. Restrictions on sales of competing products. In the absence of market power, a supplier generally is free to restrict a distributor’s sales of competing products, but if the economic agent has market power the conduct will be analyzed under the rule of reason.

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VIII. Nicaragua

A. Generally.

Nicaragua regulates distribution and agency agreements in the general provisions contained in its Commerce Code. It has no special law to regulate this type of commercial relationship. The relationship between the parties is ruled by the terms and conditions of the distribution, agency, licensing or dealership agreement, so as the causes and consequences in case of termination.

B. Antitrust Legislation.

In Nicaragua, the antitrust legal regime is relatively new. This legal regime is regulated mainly by Law No. 601, Competition Promotion Law, published on October 24th, 2006. Even though, the competition law was published in 2006, the same did not enter into force until 2009, with the conformation of the regulatory authority, “Instituto Procompetencia” (“PROCOMPETITION).19


Setting a Resale Price is not illegal per se. Resale prices are not regulated different than vertical price fixing, which is a practice that is allowed by the law if upon review under a set of guidelines provided by the law and its regulation20, said conduct does not harm the competition between the different economic agents in the same relevant market or does not affect the consumer rights and interests.

According to article 19, paragraph “b” of the Competition Promotion Law, all practices among not competitors (whether expressly agreed upon or implied, written or verbal), which effects might include vertical price fixing, or other conditions that a reseller shall comply with before providing goods and services to its customers, are not considered a violation to the antitrust laws per se, but subject to the scrutiny and investigation by the competition authority.

19 Before the Competition Law entered into force, some anticompetitive conducts were specifically regulated by special laws in economic sectors such as telecommunications, consumer´s defense, energy and intellectual property.

20 Article 20 of the Competition Promotion Law and article 21 of the Regulation of the Competition Promotion Law

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Furthermore, article 21 the Regulation of the Competition Law, establishes the guidelines in order to establish if the practices between economic agents who are not competitors, are in violation of the antitrust laws. In order to consider if such practice are in violation of the antitrust laws among others the following criteria must be considered.

• The practice excludes a current or potential competitor from the market.

• The questioned practice significantly hinders the access to production inputs, the admission of goods or services or causes an artificial increment in the competitors’ cost structure or obstructs their productive or commercialization process, or substantially reduces their demand.

• The suspected offender derives their allegedly anticompetitive activity by

misusing the powers or prerogatives conferred to them by a legal or administrative authorization.

• In the case of predatory practices, as stated in paragraph h) of article 19 of

the Law, the systematic sale of goods or services, under their average total cost or the occasional sale under the average variable cost during a continuous period of time, and once the competitor is out of the market, there is an increase in the prices, which cannot be explain as a consequence of increased costs.

• An economic agent unreasonably sets different prices or conditions of

purchase or sale to different buyers or sellers on equal terms.

• The economic agents involved give discounts to buyers with the requirement of exclusive distribution or marketing of products or services, without it being justified as economic efficiency and consumer welfare.

• There are no economic agents capable of influencing the behavior or the

alleged offender.

• The abuse of economic dependency. Article 21 of the law also establishes the criteria in order to determine if an economic agent has a dominant position in the relevant market.

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• The existence of barriers of entry to the goods or services’ market, whether they are economic and/or legal, and the elements that could foreseeably alter those barriers and other competitors’ supply.

• The possibilities of access of the economic agent and their competitors to sources of input.

• The recent behavior regarding supply and demand in the relevant market • The possibility of substitution or of competition between brands, products, or

patents in the relevant market. • The economic, financial, or technological power of the competing economic

agents involved in the operation.


In Nicaragua it is legal for a distributor to suggest a resale price and enforce minimum advertised prices programs. Suggested pricing and MAP´s in Nicaragua are regulated as Resale Price Maintenance, which means that the same are reviewed under the set of guidelines (under the rule of reason) provided by the law and its regulation. Therefore, the regulatory authority (PROCOMPETITION) will review said actions taken by the Distributor under the guidelines established on article 20 of the Law and article 21 of the Regulation of the Competition Law.


Exclusive territories are generally authorized when such practice is conducted by non competitors. The regulatory authority (PROCOMPETITION) will consider an exclusive territory agreement between non competitors as a non exclusive distributorship agreements, and will review and analyze such practice under the guidelines and criteria provided by articles 20 of the Competition Law and article 21 of its regulation. After having reviewed such conduct, PROCOMPETITION will conclude if such agreements are harming the competition between the different economic agents in the relevant market and/or the interest of consumers.

Moreover, according to article 19, paragraph “a” of the Competition Promotion Law, all practices among not competitors (whether expressly agreed upon or implied written or oral), which effects might include exclusive distribution agreements between no competing economic agents, are not considered a violation to the antitrust laws, provided that such conduct does not fall within the evaluation criteria established in the law for this type of actions.

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Article 18, paragraph “b” of the Competition Law establishes that any agreement (whether expressly agreed upon or implied, written or oral) between economic agents which has as its main purpose to divide, distribute, assign or impose portions or segments of an actual or potential market, by assignment of clients, sellers, suppliers, distributors, or by means of assignment of areas, time schedules, or by any other means, are considered unlawful per se.


The Nicaraguan Competition Law does not make a difference between passive or active selling. In practice suppliers do not authorize to local distributors the sales of products abroad Nicaragua.


The Nicaraguan Competition Law does not regulate the restriction of sales through internet. Such practice will have to be evaluated as an exclusive distributorship, based on the allocation of territory and as so analyzed under the guidelines and criteria provided on article 20 of the Competition Law and article 21 of the regulations to the competition law.


Parallel imports are not regulated under the Competition Promotion Law. Such practice will be regulated by the contracts laws of the country who has jurisdiction over the agreement. The agreement executed between the owner of a trademark, patent or products and its licensee or distributor in Nicaragua will regulate restrictions regarding parallel markets and/or the right of the supplier to have different distributors or licensees in the country or an exclusive distributor. Any violation to such agreement will be considered a breach of contract and resolved as such.


In Nicaragua is not illegal per se for a supplier to restrict its distributor´s sales of competing products.

Article 19, paragraph “d”, of the Competition Promotion Law, allows all practices among not competitors (whether expressly agreed upon or implied, written or oral), which effects might include the purchase or sale agreement of a product under the condition not to use, acquire, sell or supply products or services, are not considered a violation to the antitrust laws, provided that such conduct fails to comply with the evaluation criteria

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established in the law for this type of actions and do not affect the competition between economic agents or the final interest of the costumer.

IX. Panama

A. Generally.

Panama does not have specific legislation to regulate distributorship and agency. The terms and conditions of such commercial relationship are left to the free will of the parties as negotiated in the relevant agreement. In the absence of contractual provisions, the relationship is governed by the provisions contained in its Commerce Code. The Code of Commerce does not explicitly regulate nor does it define these types of relationships, although it has provisions common to commercial contracts, which are applicable to distribution and agency in regard to those aspects not contemplated by the parties in their agreements. Further, the Code of Commerce does regulate the Commercial Mandate, some of which principles could be applied to distribution or agency relationships.

For over twenty years, Cabinet Decree No. 344 of 31 October 1969 regulated agency and distribution in Panamá. However, on 2 August 1989 the Supreme Court declared that Decree No. 344 was unconstitutional, based on the arguments that it infringed competition rules, due process, granted disproportional benefits and privileges and violated the Constitutional Principle of no confiscation of goods, freedom of choice and market access. The exclusive nature that said the Decree vested upon distribution and agency relationships was viewed as a restriction to free competition, with negative monopolistic effects in detriment of consumers and the freedom to choose.

Law 45 of 31 October 2007 regulates consumer protection and competition. This law has as its primary object to insure and protect free economic competition and free market access, thereby eradicating monopolistic practices and other restrictions to an efficient operation of the market of goods and services, to preserve the superior interest of consumers.

While it is generally accepted that the above Supreme Court decision did not eliminate the possibility for an agent and its principal or for a distributor and its supplier to agree on certain exclusive terms and conditions of their relationship, the effects on the market of such exclusive covenants are subject to review at any time, in accordance with the provisions of Law 45.

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B. Termination.

The consequences for the parties in the event of termination are those established in the relevant agreements and, in lieu thereof, the right to seek indemnification for damages to the extent contemplated by law in the event of a termination that violates contractual obligations.

Under Panamanian law it is perfectly acceptable to submit a dispute involving a distribution or agency relationship to arbitration in Panama or abroad and to regulate the relationship between the contracting parties pursuant to foreign law.


The Supreme Court has held that Constitution provides for a free trade system for all those persons who are involved in commercial or industrial activities (Decision of August 2, 1989, In re Cabinet Decree 344 of 1969, filed by Samsung Electronics). Articles 277 of the Constitution provides that the exercise of said activities is still subject to the orientation, direction, and regulation by the State, according to social needs. Therefore "the arrangement of any combinations, contracts or actions which tend to restrict or make impossible free trade and competition" protected under Article 290 of the Constitution, with negative anti-competitive effects on the consumer public are deemed unlawful per se by the Supreme Court. Article 293 of the Constitution expressly prohibits any private monopolies not protected under other constitutional provisions, such as trade unions, intellectual property and copyright grants.

General provisions have been enacted as part of a consumer protection and competition law, meant to protect and ensure the free competition, by erradicating monopolistic practices and other restrictions in the efficient exchange of the markets of goods and services, to preserve the superior interest of the consumer. Special commerce courts hear disputes under an agency, distribution and representation procedure.

Current Panama Consumer Protection and Competition Law of 2007 deems as absolutely unlawful anti-competitive practices among competitors aimed at artificially fixing prices and arranging markets, even before they actually affect the market. However, the competition system considers vertical agreements to be relative practices. Article 16 of the Law details these types of practices. A vertical arrangement is unlawful if its object or effect is to unreasonably displace economic agents from the market, unreasonably impede their access to the market, or unreasonably confer exclusive advantages in favor of one or more of the economic agents. The law expressly mentions as a relative practice agreements among economic agents which are not competing, the imposition or determination of the exclusive distribution of goods or services, by party or location or

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for a specific period of time, including the division, distribution or assignment of clients or suppliers, as well as imposing the obligation of not producing or distributing goods or services for a specific period. The Law also mentions resale price maintenance, tying, and predatory pricing. There is also a general provision stating that the Law prohibits “every act that unreasonably damages or impedes the process of free economic competition and free concurrence in the production, processing, distribution, supply or commercialization of goods and services”.

However, economic concentrations with restrictive effects on competition may obtain clearance from the Authority if the restrictive effects of the arrangement are outweighed by its contribution to obtaining further efficiencies, such as:

• improvements in distribution and production systems; • fostering technical and economic progress; • improvements in the competitiveness of the industry; and • contributions to consumer interests.

A Guide for Lawful Collaboration among Competitors was enacted by the competition authority which serves guidelines to avoid agreements which may be deemed as anti-competitive.


The maintenance of prices by the manufacturer or supplier for the resale of goods or services is deemed a relative anti-competitive practice and therefore unlawful under certain conditions.


Arrangements among competing economic agents to impose a pricing condition are absolutely unlawful.


Law 45 of 2007 deems as a relative practice agreements among economic agents which are not competing, the imposition or determination of the exclusive distribution of goods or services, by party or location or for a specific period of time, including the division, distribution or assignment of clients or suppliers, as well as imposing the obligation of not producing or distributing goods or services for a specific period.

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4. Restrictions on active or passive selling out of assigned territory.

The unilateral action in refusing to sell or provide to certain persons, goods or services available and normally offered to third parties are deemed as vertical agreements.


No specific regulation exists on Internet sales, and is therefore subject to general competition provisions.


Parallel market imports are not unlawful, except when intellectual property provisions are infringed.


The sale or transaction subject to the condition of not using or acquiring, selling or providing goods or services produced or marketed by a third party is deemed as a relative practice agreement among economic agents which are not competing.

X. Peru

A. Generally.

Peru does not have specific legislation to regulate distributorship and agency. The terms and conditions of such commercial relationship are left to the free will of the parties as negotiated in the corresponding agreement. In lieu of contractual provisions, the relationship is governed by the general provisions of commercial contracts contained in its Commerce Code or by the provision of international conventions in force in Peru.

B. Antitrust Legislation


According to the Peruvian Antitrust Law, resale price maintenance is judged under the rule of reason, since it is understood that vertical agreements in general are efficient. Thus, these agreements are only punishable if the conduct has the objective or effect of harming competition (for example, is not justified in efficiency reasons) and at least one of the parties that participate in the agreement holds a dominant position in the market.

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That is to say, if the existence of (i) restrictive effects exceeding the efficiencies generated by the agreements and (ii) negative effects on competition and in detriment of consumers, are verified. Otherwise, the competition authority may understand that the conduct is not able to harm competition. Nevertheless, it is important to stres that the Peruvian Competition Authority has not solved cases regarding resale price maintenance.


Suggested pricing and minimum advertised price programs are qualified by the Peruvian Antitrust Law as vertical restrains and, as such, are not per se illegal and must be analyzed under the rule of reason.


Exclusive territories and customer allocation (understood as vertical agreements) are permitted and are judged under the rule of reason. If none of the parties hold a dominant position in the market, the conduct (even if its proven it has the objective of restricting competition) would not be punishable. Nevertheless, please note that customer allocation by competitors (horizontal agreements) is per se illegal.


The Peruvian Antitrust Law does not make a distinction between active and passive selling.


These restrictions are also qualified as vertical restraints and, as such, are permitted and do not imply any risk as long as none of the parties hold a dominant position in the relevant market.


Parallel importing is not viewed as an antitrust issue. Nevertheless, parallel importation is permitted in Peru, as long as the products have been introduced into the market by the owner of the trademark or by a third party economically related to the trademark owner or with its authorization.


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This conduct is generally permitted, in the understanding that the supplier is free to restrict distributor’s sales of competing products so that they direct their efforts to sell the supplier’s products. Nevertheless, if one of the parties involved in this vertical restraint holds a dominant position in the market, this conduct could be challenged by the competition authority. In that case, the parties will be required to prove that the efficiencies generated by the agreement exceed its restrictive effects.

XI. Practical Recommendations when considering distribution in Latin America from the perspective of the supplier.

Irrespective of whether there are special regulations governing the distribution relations it is critical that the terms and conditions be set forth in a clear documented contract, with a full understanding of the business relationship intended, the rights and obligations of the parties, defining the rights and obligations of the parties, their goals and expectations.

a. Always document the relationship in a formal agreement, with clear language of the terms and conditions of the relationship between the parties. Traditional contractual provision include payment conditions, business volumes, territory, reporting obligations, parallel imports, transshipment, among others.

b. Special care shall be given to sub distribution provisions, as often times, lack of regulation hereof causes a foreign supplier to end up in an unwanted relationship.

c. If the intention of the supplier is not to grant exclusive rights, include an explicit provision in the agreement in that sense.

d. If the agreement includes performance valuations or the relationship’s continuity is contingent on the accomplishment of levels of performance by the parties, it is necessary that these levels be clearly established. In most Latin American legislations it is also recommendable that said performance levels be the result of common negotiations between foreign supplier and local distributor, otherwise a clause of this nature could be considered null and void or deemed abusive.

If lack of accomplishment of performance standards lead to termination of the relationship, this needs to be clearly spelled out, normally as a material breach of contractual obligations, the acknowledgement and acceptance of which is clearly stated by the local distributor. It is also important that performance levels be adequate for the market in which the distributor operates.

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e. Make sure the list of products the local distributor is entitled to commercialize is clear in the agreement, in particular if there are co-distributors with different lines of products. Product specification avoids problems of interpretation.

f. It is normally permissible under Latin American laws to establish territorial limitations in distribution agreements, although subject to rule of reason analysis under existing competition rules.

g. The same applies for the scope of products to be commercialized by a given distributor. If the intention of the supplier is not to allow a particular distributor to handle all its lines of products, it is fundamental that this be so regulated in the agreement. This is also critical if there are co-distributors with different lines of products.

h. Verify whether the product or service requires registration with local authorities; in such case, review the rules to determine who the registry shall be issued to, what are the consequences of registration in the name of the local distributor or sales representative, for instance, in case of termination.

Some Latin American countries have a tendency of requiring registration of products with health and ministry of economy authorities, for instance, food products, other human consumption products, cosmetics, pharmaceuticals, agro chemicals, medical devices and hospital equipment, etc. (some times challenged as non tariff barriers to trade) Be prepared to spend money and time to satisfy the requirements established by local authorities for registration purposes.

Another area to be careful is in government procurement. It is not uncommon for governmental entities to require the participation of a local distributor or sales representative in case of the sale of products or rendering of services to state entities.

i. Payment and delivery conditions shall be clearly spelled out, as well as the consequences of default by the parties of these type of provision. j. Regulate the circumstances for product recall and how are the costs of recall allocated between supplier and distributor. What costs should be covered? Are there local laws, for instance in consumer protection legislation that regulate product recall? k. Take into account all applicable privacy and consumer protection laws and particularly make sure the distributor is compelled to disclose to consumers that their information will be shared with the supplier and obtain their consent when necessary.

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l. Take into account consumer protection legislation as in many countries there are objective liability provisions that carry responsibility all the way to the manufacturer or supplier of product.

m. Regulate as detailed as possible the causes and consequences of termination. From the perspective of the foreign supplier it is always recommendable to include provisions limiting the scope of liability in case of termination with our without cause, to the extent the local laws or the law the agreements is subject to, so permits. In case of termination it is indispensable to regulate whether there are economic consequences for the parties should termination of with or without cause.

Another area of importance is the handling of existing inventory, whether there is an obligation to repurchase by the supplier, or an authorization to continue selling until liquidation of inventory by the distributor.

Also take into consideration the effect of termination upon customers. For instance in regards with maintenance and repair services. Of particular importance to the foreign supplier is to have access to customer information throughout the life of the agreement or upon termination thereof.

n. It is common practice and generally acceptable, given the “personal” nature of this type of relationship to include provision in the agreement to restrict assignment or transfer of the agreement or to regulate change of control on the distributor. Normally the local distributor is not authorized to assign its right under the agreement. It is also common practice that the distributor accepts the imposition of supplier consent in the case of assignment or in the case of change of control, but that the supplier’s consent to a change not be unreasonably withheld.

o. Verify if there are any tax issues under the distribution or sales representation contract. Sometimes there are withholding taxes to payments to beneficiaries abroad.

p. Non compete clauses have been treated in a very restrictive manner by courts throughout Latin America, as they have been interpreted as limitation to constitutional rights. Regulate the distribution of competing products by the local distributor.

q. It is recommendable to execute fix term agreements without automatic renewal. If that is not the case, try to establish a mechanism that will allow the supplier not to renew under certain circumstances, without liability. While there is not limitation to establish the possibility of terminating a distribution relationship with prior notice, normally local distributors prefer that said type of provision be not included or accompanied by an indemnification clause should the party chooses to exercise such right.

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r. Make sure IP rights are properly protected in the country and include contractual provisions in this regard. Review if it is necessary or mandatory to grant license agreements or not. Define who is responsible for the costs of intellectual property infringement. It is also advisable that the IP remain in the name of the principal.

s. Confirm and verify distributor's or agent's sufficiency to perform and fulfill obligations under the agreement. Clauses allowing periodical inspections by supplier or the obligation by distributor to render periodic reports may also be in order.

t. Make sure there is plenty of understanding of the consequences in case the distributor goes bankrupt or enters into financial distress, leading to bankruptcy or similar condition.

u. Verify whether there are statutory or other legal restrictions on choice of law and whether there are certain provisions of local law that will be applied irrespective of a choice of other law. v. Verify if arbitration is available in case of dispute and whether there are any limitations to the enforceability of arbitral awards, whether under a domestic or international arbitration. w. Include clear provisions indicating place and method for service of notice to the parties and computation of terms provisions. This will certainly add legal certainty to the relationship. Computation of time to satisfy an obligation is often the source of discussion between supplier and distributor. x. Make sure that there is full understanding of warranty regulations applicable in the jurisdiction where the product or services is commercialized and insure that contractual provisions and the scope of liability established therein does not infringe the applicable laws, which are normally public order law and admit no contractual exceptions. y. It is important too to require the distributor to carry civil liability insurance, although it is crucial too to review the recommended scope and amount of coverage on the basis of the incumbent market. z. Make sure that proper post sale support provisions are included in the agreement. It is of utmost importance to regulate the scope of responsibility the parties have once a sale closes or a service is rendered vis a vis the customer.

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