Cross Border Distribution Deal Termination's; A Brief Analysis
- Costa Rica
- 10/01/2000
- Quirós & Asociados
The Law of Protection to Foreign Houses Representative, Law number 6209, issued on March 9, 1978, governs the termination of the relationship between a foreign house and a national distributor.
Following, we present a general comment on the law:
Definitions
Article 1 of the Law under study, establishes the following definitions:
“Foreign House”: any individual or corporation who/that, domiciled abroad, performs commercial activities in the country, through himself/itself, or through his/its branch offices or subsidiaries.
“Foreign Houses Representative”: any individual or corporation who/that, in a continuous or autonomous manner, with or without legal representation prepares, promotes, provides or improves the sale or distribution of goods or services that the foreign houses sell or render in the country.
“Exclusive distributor or co-distributor”: any individual or corporation that/who, through an agreement with a Foreign House, imports or manufactures in the country goods to be distributed in the local market, acting on his/its own and at his/its own risk.
“Manufacturer”: any individual or corporation who/that prepares, bottles or manufactures in the country, products with the brand of a Foreign House that authorized him/it to do so, using the raw material and techniques indicated by such house.
The basic difference between a Foreign Houses Representative and an exclusive distributor or co-distributor, is found in the figure of the commissioner, since the Foreign Houses Representative is basically a commissioner acting on behalf of the Foreign House, while the exclusive distributor or co-distributor acts under his/its own risk.
The same law establishes in its article 2 the only indemnification formula for the Foreign Houses Representative in Costa Rica, which is to be treated as follows:
“If the representation, distribution or manufacture agreement is rescinded for causes beyond the representative, distributor or manufacturer’s intention, or when the agreement or period expires and is not prorogated for causes beyond their intention, the Foreign House must indemnify them in the amount to be calculated based on the equivalent to four months of gross profit, for each year or fraction of time served. The indemnification value shall in no case be calculated in a term exceeding nine years of service.
In order to establish the gross profit of each month, the monthly average received, during the last four years or fraction of the agreement’s legal term shall be taken, in the case of representatives and manufacturers, and the average of the last two years or fraction thereof, in the case of distributors.
As it may be seen, there is a difference for the calculation for representatives, manufacturers and distributors, reason why it is important to have clear which is the figure of the Costa Rican house that represents the Foreign House, and in which of the definitions previously mentioned the Costa Rican house fits; so as to clearly establish the amount to be canceled.
To the aforesaid, the article 2 of the Regulation of this law must be added, which establishes the following:
Article 1º. - The amount of the indemnification mentioned in article 2º of law Nº 6209, shall be determined:
a) For foreign houses representatives, by adding the commissions received during the four years or fraction of the agreement’s legal term, including the commission corresponding to the pending orders. This total shall be divided by the number of months that constitute the period of calculation in order to establish the monthly average of the gross profit, which shall be multiplied by the number of years or fraction of the agreement’s legal term, whose result shall be multiplied by four.
b) For distributors and co-distributors, by adding the gross profit received during the last two years or fraction of the agreement’s legal term. This result shall be divided by the number of months that constitute the period of calculation to determine the monthly average of the gross profit, which shall be multiplied by the number of years or fraction of the agreement’s legal term, and then multiplied by four.
c) For manufacturers, by adding the gross profit received during the last four years or fraction of the agreement’s legal term. This total shall be divided by the number of months that conform the calculation period, to determine the monthly average of gross profit. This average shall be multiplied by the number of years or fraction of the agreement’s legal term and then multiplied by four.
d) For the Foreign Houses Representative, which is in turn a distributor, co-distributor or manufacturer, by adding all the results of the calculations indicated in the previous sections a), b) and c).
e) For the distributor or co-distributor who is in turn manufacturer, by adding the results of the procedures indicated in the previous sections b) and c).
Article 2º. - In order to establish the gross profit mentioned in sections b) and c) of the previous article, the difference between the product’s sales price and cost shall be taken as such.
Article 3º. - Indemnification indicated in article 1º of this Regulation shall in no case exceed the total of 36 months.
Article 4º. - Upon the cancellation of the agreement, the Foreign House must:
Cover the amount of commissions pending payment and those that may eventually arise from businesses in progress at the moment of canceling the agreement.
b) Purchase the existence of products at their cost, including direct, local and importing expenses plus ten per cent (10%) to cover financial expenses.
It must be clear that in reiterated jurisprudence issued by the courts, it has been established that the indemnification previously mentioned is the only indemnification to which the Costa Rican house has a right to before the Foreign House. As an addition thereof, article 3 of the same comment law states:
“Whenever the cancellation of a representation, distribution or manufacturer takes place, the represented Foreign House must purchase the existence of its products from its representative, distributor or manufacturer, at a price that includes the costs of these products plus the reasonable percentage of the investment made by it. That percentage shall be determined by the Ministry of Economy, Industry and Commerce”.
The additional consequence for a distributor resulting from the agreement termination is that the Foreign House has to purchase the existence of products in Costa Rica.
The same law establishes in article four which are the just causes to determine the representation, distribution or manufacture agreement, with liability for the Foreign House, which are:
Article 4
Some just causes for the termination of the representation, distribution or manufacture agreement, with liability for the Foreign House are:
The crimes committed by its officers against the property and the good name of the representative, distributor or manufacturer.
The suspension of Foreign House activities, unless it is due to force majeure.
Unjustified restrictions in sales, imposed by the Foreign House that result in a reduction of the transactions volume that its representative, distributor or manufacturer used to have.
The lack of opportune payment of the commissions or fees received by the representative, distributor or manufacturer.
The appointment of a new representative, distributor or manufacturer, when the affected parties have exercised the representation, distribution or manufacture in an exclusive manner.
Any unilateral modification introduced by the Foreign House to its representation, distribution or manufacture agreement that damages the rights or interests of its representative, distributor or manufacturer.
Any serious fault on the part of the Foreign House that damages the contractual or legal rights and obligations they have with their representative , distributor or manufacturer.
Whenever a Foreign House modifies its domicile or corporate name, changes, subdivides, changes its object, merges or is absorbed by another one, that is not a cause of termination of the representation, agency or distribution agreement. The company, with which it merges, is absorbed by or has been entitled to use the brands, shall respond in a solidary manner in up to the indemnification amount in the same terms. Therefore, the licensee shall be entitled to exercise the same actions these law grants against the company with which it merged was absorbed by, it or against each one of the branch offices in which the company has divided into or has received the authorization to use of the brand.
Article five of the same law establishes the just causes for the termination of the representation, distribution or manufacture agreement, with no liability for the Foreign House:
Crimes against property and the good name of the Foreign House, committed by the distributor or the manufacturer
Ineptitude or negligence on the part of the representative, distributor or manufacturer, declared by one of the civil judges of its/his domicile, as well as the decrease or prolonged and substantial standstill of the sales, for causes imputable to the representative, distributor or manufacturer.
The establishment of quotas or official restrictions to the import or sale of the article or service shall make possible to presume the existence of the charge against the representative, distributor or manufacturer, unless otherwise evidenced.
The violation on the part of the representative, distributor or manufacturer of the professional secret and loyalty to the Foreign House, by means of disclosure of facts, knowledge or techniques regarding the organizations, products and functioning of the Foreign House, acquired during its commercial relations with the same.
Any other serious fault on the part of the representative, distributor or manufacturer with regards to their duties and legal and contractual obligations with the Foreign House.
Article six establishes a principle of solidarity with the new house that assumes the representation that has been taken away from a Costa Rican by the Foreign House without its consent and take the agreement as terminated with no just cause for it, consisting as follows:
Article 6
The individual or corporation that assumes total or partially any commercial activity previously performed by a Foreign House through a representative, distributor or manufacturer, shall respond for the continuity of the representation, distribution o manufacture agreement, unless the Foreign House had previously covered the corresponding indemnification.
Article number seven establishes that the jurisdiction of the Costa Rican Courts and the representative, distributor, and manufacturer rights, in virtue of this law, are not to be waived, since this is a principle of “erga omnes” application.
Article eight establishes the term for the statute of limitations for every right in accordance to this law, establishing a term of two years in favor of the Costa Rican and the Foreign Houses.
Article nine establishes that every payment made according to this law must be done in one sole installment immediately after the termination of the agreement or when the judicial judgement is final, if any. Establishing in turn that the Foreign House must render a guarantee on the total of the indemnification claimed by the Costa Rican house, which amount shall be determined by the Judge, and otherwise the Ministry of Finance shall suspend, at the plaintiff request, any kind of import of products of the mentioned Foreign House. Until recently, this article was not applied, because an unconstitutionality article was filed against the same. This article was already judged by the Constitutional Court leaving it as it was and of absolute application, and every Foreign House required in a judicial process by the Costa Rican house has to deposit an eventual indemnification estimated by a Judge, or else the import of its products shall be suspended through the Ministry of Finance in Costa Rica.
Comments on judicial resolutions
The jurisdictional process for this kind of discussions is the preliminary proceeding, being this a process that, in view of its application in Costa Rica, shall have a duration between three and seven years approximately. The experience that the Quirós & Asociados law firm has had in the past defending both foreign and local houses has been that the process is quite slow when it comes to its resolutions, and that at present time the Foreign House is obligated to deposit an amount that the judge prudentially estimates so as to continue with the litigation.
We have in our files all kinds of jurisprudence to this regard, which we shall proceed to analyze, if you consider it necessary.
Strategies to minimize the payment to the distributor
Due to the experience we have had in similar cases, it has been possible to determine that when foreign houses have decided to get rid of a representative in Costa Rica, the strategy used in the past, in order to minimize the indemnification calculation, is to start exporting less product to Costa Rica, so that the calculation on the last two or four years, depending on the figure that corresponds, starts to be less, with the corresponding imports reduction.
We have also observed how foreign houses have questioned any indemnification requested by the Costa Rican house, if the Costa Rican house has not reported in its totality the sales made in favor of the Foreign House to the Internal Revenue Service.
Calculation Formula
The indemnification calculation formula is the one established in article 2 of the commented law, in addition to the respective regulation article of absolute application to any case protected under this legislation. Cross Border Distribution Deal Termination’s; A Brief Analysis (Contracting)
Prepared by Quiros & Associados (Rafael A. Quirós B.)
September 2000
General Considerations
The Law of Protection to Foreign Houses Representative, Law n. 6209, issued on March 9, 1978, governs the termination of the relationship between a foreign house and a national distributor.
Following, we present a general comment on the law:
Article 1 of the Law establishes the following definitions:
“Foreign House”: means any individual or corporation who/that, domiciled abroad, performs commercial activities in the country, directly or through branch offices or subsidiaries.
“Foreign Houses Representative”: means any individual or corporation who/that, in a continuous or autonomous manner, with or without legal representation, prepares, promotes, provides or improves the sale or distribution of goods or services that the foreign houses sell or render in the country.
“Exclusive distributor or co-distributor”: means any individual or corporation that/who, by means of an agreement with a Foreign House, imports or manufactures in the country goods to be distributed in the local market, at the distributor’s own risk.
“Manufacturer”: means any individual or corporation who/that prepares, bottles or manufactures in the country, products with the brand of a Foreign House that authorized such individual or company to do so, using the raw material and techniques indicated by such house.
The basic difference between a Foreign Houses Representative and an exclusive distributor or co-distributor is found in the figure of the commissioner, since the Foreign Houses Representative is basically a commissioner acting on behalf of the Foreign House, while the exclusive distributor or co-distributor acts under its own risk.
Calculation Formula
The law also establishes in its article 2 the indemnification formula for the Foreign Houses Representative in Costa Rica, which is to be treated as follows, provided that such indemnification shall in no case exceed the total of 36 months:
“If the representation, distribution or manufacture agreement is terminated due to causes beyond the representative, distributor or manufacturer’s intention, or when the agreement or period expires and is not prorogated for causes beyond their intention, the Foreign House must indemnify them in the amount to be calculated based on the equivalent to four months of gross profit, for each year or fraction of time served. The indemnification value shall in no case be calculated in a term exceeding nine years of service.
In order to establish the gross profit of each month, the monthly average received, during the last four years or fraction of the agreement’s legal term shall be taken, in the case of representatives and manufacturers, and the average of the last two years or fraction thereof, in the case of distributors.”
As it may be seen, there is a difference for the calculation for representatives, manufacturers and distributors, reason why it is important to have clear which is the figure of the Costa Rican house that represents the Foreign House, and in which of the definitions previously mentioned the Costa Rican house fits; so as to clearly establish the amount to be canceled.
Termination Consequences
Upon the cancellation of the agreement, the Foreign House must:
Cover the amount of commissions pending payment and those that may eventually arise from businesses in progress at the moment of canceling the agreement.
Purchase the existence of products at their cost, including direct, local and importing expenses plus ten per cent (10%) to cover financial expenses.
Reiterated jurisprudence issued by the courts established that the indemnification previously mentioned is the only indemnification to which the Costa Rican house has a right to before the Foreign House. As an addition thereof, article 3 of the same comment law states:
“Whenever the cancellation of a representation, distribution or manufacturer takes place, the represented Foreign House must purchase the existence of its products from its representative, distributor or manufacturer, at a price that includes the costs of these products plus the reasonable percentage of the investment made by it. That percentage shall be determined by the Ministry of Economy, Industry and Commerce”.
The additional consequence for a distributor resulting from the agreement termination is that the Foreign House has to purchase the existence of products in Costa Rica.
Law n. 6209 establishes in its article 4 the fair causes for the termination of the representation, distribution or manufacture agreement, with liability to the Foreign House.
On contrary, article 5 of the Law establishes the fair causes for the termination of the representation, distribution or manufacture agreement, with no liability to the Foreign House.
Article 6 establishes that the individual or corporation that assumes total or partially any commercial activity previously performed by a Foreign House through a representative, distributor or manufacturer shall respond for the continuity of the representation, distribution o manufacture agreement, unless the Foreign House had previously covered the corresponding indemnification.
Article 8 of the Law establishes the term for the statute of limitations for every right in accordance to this law of two years in favor of the Costa Rican and the Foreign Houses.
Judicial Resolutions in Costa Rica
The jurisdiction of the Costa Rican Courts and the representative, distributor, and manufacturer rights, in virtue of this law, are not to be waived.
The jurisdictional process for this kind of claim is the so-called “preliminary proceeding”, which final judgment may only be achieved after three to seven years approximately.
Every payment made accordingly must be done in one single installment immediately after the termination of the agreement or when the judicial judgment is final, if any. It also establishes that the Foreign House must render a guarantee on the total of the indemnification claimed by the Costa Rican house, which the Judge shall determine amount, and otherwise the Ministry of Finance shall suspend, at the plaintiff request, any kind of import of products of the mentioned Foreign House.
Strategies to minimize the payment to the distributor
The strategy used by foreign houses that decide to terminate an agreement with a local representative in Costa Rica in order to minimize the indemnification is to export less to Costa Rica, so that the calculation on the last two or four years, depending on the figure, starts to be less, with the corresponding imports reduction.
We have also observed how foreign houses have questioned any indemnification requested by the Costa Rican house, if the Costa Rican house has not reported in its totality the sales made in favor of the Foreign House to the Internal Revenue Service.
