THE SECOND ANNUAL AMERICAS BUSINESS FORUM
Creating Jobs Through Exports
LEGAL ISSUES IN GLOBAL MARKETS –
SALES AND DISTRIBUTION AGREEMENTS
Randolph G. Muhlestein
Musick, Peeler & Garrett LLP
One Wilshire Boulevard
Los Angeles, CA 90017
Phone (213) 629-7651
Fax (213) 624-1376
r.muhlestein@mpglaw.com
In this article, I will summarize some of the lessons I have learned over my 30odd years of practicing international law in the Americas. Of necessity, my comments
will be general, and will not apply to every country or every situation. It is inappropriate,
for example, to paint Chile with the same brush as Argentina, or Costa Rica with the
same brush as Nicaragua. And little of what I have to say will be relevant to Canada. If
you have a specific legal question, you should consult with appropriate U.S. or foreign
legal counsel.
FOREIGN CUSTOMER – GETTING TO KNOW YOU
Suppose that you run a business in Los Angeles, and would like to expand your
sales by catering to customers in Latin America. What advice can I give you?
1.
Know Your Customer. Many Latin American countries have weak legal
systems. Court officials can be corrupt. Sometimes it is corruption with a capital “C,” as
in judges who sell their rulings to the highest bidder. But more often it is corruption with
a small “c,” as in court process servers who, for a small fee, report that a complaint has
been directed to the wrong address. In either case, justice can be derailed. Also, Latin
American legal systems can be slow. In Mexico, for example, civil cases can take ten
years to be resolved.
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In the United States, you can do business with the devil if you have a good
lawyer and the devil has money: If the devil doesn’t perform, you sue him and make him
perform. As a consequence, business transactions in the United States tend to move
quickly.
But it is not generally a good idea to do business with the devil in a
country with a weak legal system. Nonetheless, in spite of their weak legal systems,
people do business in Latin America every day. How can they do it? They know the
people they do business with. Everybody knows that Don Roberto pays his bills, so they
feel comfortable doing business with Don Roberto. And Don Roberto is careful to
protect his reputation; if it ever got out that he doesn’t pay his bills, nobody would do
business with him. So if you are going to do business in Latin America, you need to
know your customers. The Department of Commerce can help.
2.
Get it in Writing. Even in the United States, it is important to get your
agreements in writing. Although verbal agreements are generally enforceable here,
writing helps to avoid misunderstandings and differences in recollections later on.
If it is important to get your agreements in writing when dealing with U.S.
customers, it is doubly important when dealing with Latin American customers. With
Latin American customers, the problem of misunderstanding is often compounded by
differences in language and culture. Also, Latin American laws tend to be more
formalistic than U.S. laws, and therefore less likely to enforce verbal agreements.
Incidentally, your Latin American customers will in all likelihood request
that you memorialize your dealings with them in writing. In Mexico, for example, if an
expense item is to be deductible for income tax purposes, it must generally be
memorialized in a formal “factura,” or invoice.
3.
Be Aware of the Governing Law. Many U.S. business people assume
that their business dealings with Latin American customers will be governed by U.S.
laws, or, if not by U.S. laws, by laws that are similar to U.S. laws. That is not always a
good assumption.
For example, unless otherwise agreed, the U.N. Convention on the
International Sale of Goods applies to sales of goods whenever the buyer and the seller
are both from countries that have ratified the Convention. Since the United States and
most Latin American countries have ratified the Convention, unless the parties otherwise
agree, the Convention will generally apply to sales of goods from U.S. companies to
Latin American customers.
While the Convention is similar to the Uniform Commercial Code (which
governs sales of goods in the United States), there are some important differences. For
example, the Convention (unlike the UCC) will never imply the pricing term of a sales
contract. Also, sales governed by the Convention (and international sales generally)
ordinarily use INCOTERMS, rather than the CIF, FOB, or C&F terms that are typical for
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domestic sales. The lesson for the U.S. exporter: Either educate yourself about the
Convention and INCOTERMS, or stipulate in your sales contracts that the Uniform
Commercial Code will govern.
U.S. law differs from the laws of most Latin American countries in many
important respects. For example, injunctive relief, which is key to the enforcement of
trade secrets and other intellectual property rights in the United States, may not be
available in Latin America. Instead, agreements for the licensing of intellectual property
rights in Latin America often provide for the payment of monetary penalties (in the event
of a breach), which penalties might not be enforceable in the United States.
Similarly, in Latin America it may be difficult to recover lost profits or
other consequential damages for breach of contract. Also, tort recoveries in Latin
America tend to be very low, by U.S. standards, and may be set by a statutory scale.
The lesson to a U.S. exporter: Be aware of the law that will govern the
various aspects of your relationships with your Latin America customers, and gauge your
behavior accordingly.
4.
Do Not Neglect the Notary. The role of the notary in Latin America is
very different from the role of the notary in the United States. In the United States, the
notary’s main function is to validate signatures. In Latin America, the notary is an
attorney, and a quasi-governmental official with the “fe publica,” or public trust. In the
United States, notaries are often legal secretaries; in Latin America, the numbers of
notaries are limited, and attorneys aspire to become notaries. In Latin America, notaries
form companies, approve corporate actions, search titles, register transfers of title,
register liens, and certify the truth of facts. Since the notary has the public trust, if the
notary says it’s true, then, for legal purposes, it is true. Many legal documents, in order
to be valid, must be approved by a notary and recorded in his or her registry.
5.
Be Careful About Issues of Corporate Authority. The U.S. and Latin
American concepts of corporate authority are very different. U.S. law generally
recognizes actual authority, inherent authority, apparent authority, and ostensible
authority, any one of which is sufficient to bind the company. But in Latin America,
corporate powers are carefully defined and recorded in the public registry, and a
corporate agent ordinarily either has actual authority or no authority to perform a
particular act. The lesson to a U.S. exporter proposing to contract with a Latin American
customer: Make sure that the person who is signing for the customer has the proper
corporate powers; otherwise, the contract may not be valid. Also, a U.S. exporter
proposing to name an agent in Latin America should define very carefully the powers that
are granted to such agent. For example, the exporter might be well-advised to grant its
agent powers of “pleitos y cobranzas” (lawsuits and collections) and “administracion”
(administration), but not a power of “dominio” (the power to dispose of assets).
6.
Choose the Forum for Dispute Resolution Wisely. I have already
alluded to the weaknesses inherent in many Latin American judicial systems. As a
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general rule, it is best to avoid litigation in a Latin American court, at least if you are the
plaintiff.
But there can also be problems with litigating with your Latin American
customer in a U.S. court, especially if you must take your U.S. judgment to Latin
America for enforcement. Although in theory, U.S. money judgments are enforceable in
many Latin American countries, as a practical matter, there can be many obstacles to
enforcement. For example, in order to enforce a U.S. judgment in Latin America, it may
be necessary to prove that service of process was effected in accordance with the rules of
the Latin American country. Unfortunately, U.S. service of process rules don’t mesh
well with Latin American service of process rules. In the U.S., service of process is done
through private process servers; in Latin America, it is often done through court officials,
and getting the Latin American court officials to serve a U.S. complaint can be a timeconsuming process, with many opportunities for derailment due to misunderstanding or
corruption.
In general, arbitration is a better alternative to litigation in resolving
disputes between a U.S. exporter and a Latin American customer. Arbitration can avoid
most of the delays, formalities, and opportunities for misunderstanding or corruption that
can plague a Latin American litigation proceeding, and arbitration awards are generally
enforceable in both the United States and Latin America. A number of reputable
arbitration bodies provide international arbitration services, including the International
Chamber of Commerce (based in Paris) and the American Arbitration Association.
Of course, getting an arbitration award or court judgment is one thing, but
enforcing it is another. Enforcing a judgment against a recalcitrant debtor can be difficult
in the United States, and more difficult in Latin America. However, reputable, solvent,
Latin American customers ordinarily pay the judgments they incur, so, again, it is
important to know your customer.
While it is generally best for a U.S. exporter to avoid litigating in a Latin
American court, there are some exceptions. For example, a U.S. exporter will generally
prefer that any product liability, breach of warranty, or breach of contract claims that are
asserted against it be litigated in Latin America, granted the limitations on damages that
are recoverable for these types of claims under Latin American law.
Also, Latin American law sometimes affords remedies that are not
available in the United States. For example, a private individual can sometimes pursue a
criminal claim in Latin America, with only limited involvement by government
prosecutors. If your Latin American customer has, in the course of cheating you,
committed a crime, pursuing a criminal claim against the customer can greatly facilitate
getting paid. Also, if your Latin American customer has signed a “pagare” (promissory
note) in your favor, you may be able to take that pagare to court and get what amounts to
a pre-judgment attachment on the assets of your customer—another powerful remedy that
may not be available in the United States.
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7.
Make Sure You Get Paid. Getting paid is always a concern. The safest
way to proceed, of course, is to be paid in advance, or through a trade letter of credit that
is confirmed by a U.S. bank. If you decide to be more accommodating to your Latin
American customers, you may decide to proceed on an open-account basis, wholly or
partially secured by a stand-by letter of credit. Later, you may decide to forego a letter of
credit entirely, but ask the customers to sign a pagare (promissory note) for each
shipment. Later, you may dispense with the pagares, and instead sell on an open-account
basis documented only with invoices.
How you proceed should depend on how well you know your customers.
Some Latin American customers, of course, are completely credit-worthy, and have
assets in the United States. For example, nobody should feel uncomfortable about
extending credit to companies like Cementos Mexicanos, TelMex, or Petrobras. With
other customers you should proceed with caution. If you feel uncomfortable taking the
credit risk with a particular customer, Ex-Im Bank may be willing to assume that risk (for
a fee).
8.
Protect Your Intellectual Property Rights. If you have a product that
you are considering exporting to Latin America, I strongly recommend that you
immediately register your trademarks there. Because if you don’t, you may find, once
you get there, that someone else has already registered your marks, and you may not be
able to secure the local rights to those marks, at least without paying a substantial sum of
money.
Unfortunately, there is no central registry for trademarks in Latin
America; you must register separately in each country. Fortunately, this is a relatively
simple process. Your intellectual property lawyer will have relationships with
international trademark counsel in each of the countries in questions who can handle the
registrations for you.
In general, the protection for intellectual property rights in Latin America
is weaker than in the United States, so you will need to take extra precautions to protect
your trademarks, patents, and trade secrets. Your intellectual property counsel can help.
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FOREIGN DISTRIBUTION – AGENT OR DISTRIBUTOR – GOING STEADY
Suppose that you have been exporting to Latin America for awhile, and would
like to expand your customer base by contracting with a local agent (who will represent
you in taking orders, dealing with customer complaints, etc.) or distributor (who will buy
products from you and resell them to your local customers). What advice can I give you?
1.
Choose Your Agent or Distributor Wisely. Your local agent or
distributor will be the face of your company to your Latin American customers, so it is
important that you choose him or her wisely. If your agent or distributor is dishonest,
you will be viewed as dishonest. If your distributor is insolvent, you won’t get paid. The
Department of Commerce can help you find a reputable agent or distributor.
2.
Make Sure That Your Agreement With Your Agent or Distributor is
in Writing. If it is important that your agreements with your one-time customers be in
writing, it is doubly important that your agreements with your agents and distributors,
with whom you will have a long-term relationship, be in writing.
3.
Check on Local Legislation Regarding the Termination of Agents or
Distributors. Some countries have enacted legislation that makes it difficult to terminate
a local agent or distributor. Make sure that you check with local counsel regarding such
legislation before you contract with a local agent or distributor in any particular Latin
American country.
4.
Make Sure That You Register Your Trademarks, and That Your
Local Agents or Distributors Do Not Register Them in Their Own Names. So long
as your relationships with your local agents or distributors run smoothly, it doesn’t matter
who has registered your trademarks. But if the relationship should ever come to an end,
you might have a difficult time getting your agents or distributors to assign to you any
trademark registrations they hold in their own names.
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FOREIGN SUBSIDIARY
RELATIONSHIP
OR
JOINT
VENTURE
–
COMMITTED
Suppose that you have made a lot of money selling in Latin America through
local agents or distributors, and that you have decided that you can enhance your position
even more by establishing your own distribution or manufacturing operations there, either
wholly-owned or owned with a local joint venture partner. What advice can I give you?
1.
Check the Local Investment Regulations. Some Latin American
countries limit the sectors in which foreign investment is permitted. For example,
Mexico prohibits all private investment in the production of oil and basic petrochemicals,
prohibits all foreign investment in radio and television broadcasting, limits foreign
participation in domestic air transportation, agribusiness, and certain financial
institutions, and restricts foreign ownership of land within certain areas of the country.
Also, even when foreign investment is permitted, certain governmental filings must be
made and/or approvals obtained.
2.
Select an Appropriate Entity for Doing Business. Latin American
countries typically offer several alternative legal forms for organizing your business.
Ordinarily there is a corporate form (“sociedad anomina,” or “S.A.”). There may also be
a limited liability company form (“sociedad de responsabilidad limitata,” or “S.R.L.”)
and/or a partnership form (“sociedad civil,” or “S.C.”). A variety of special-purpose
entities may also be available. You may also be able to organize your Latin American
business operations as a branch of your U.S. company. There are various advantages and
disadvantages to each different form, and you should consult with both U.S. and foreign
counsel before making a decision.
3.
Be Careful to Comply With Local Labor Regulations. Each Latin
American country has its own labor regulations, and they are often significantly different
from U.S. labor regulations. For example, Mexican law provides for mandatory profit
sharing, Christmas bonuses (“aguinaldos”), and severance pay. Also, much of the
Mexican workforce is unionized, so it is customary, when starting a new business, to
select a “safe” union (“sindicato blanco”) for your employees. And, of course, you will
need to get work visas for your expatriate employees who will be living in Latin
America.
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4.
Do Some Advance Tax Planning. Typically a Latin American country
will assess an income tax (“impuesto sobre la renta”), and may also assess a value-added
tax (“impuesto sobre valor agregado,” or “IVA”), a capital gains tax, various payroll
taxes, etc. It is prudent, therefore, to consult with a local tax advisor before finalizing the
structure of your Latin American operations. You should also consult with your U.S. tax
advisor, since the way you structure your Latin American operations can also impact your
U.S. tax liability. For example, if you structure your foreign operations as a limited
liability company, rather than as a corporation, you may be able to elect, using the U.S.
“check-the-box” rules, to treat the company as a “pass-through” entity for U.S. tax
purposes. Also, how you structure your Latin American operations can impact the
amount and availability of the U.S. foreign tax credit.
Note that the United States has entered into tax treaties with many Latin
American countries, which can modify the international tax rules that would otherwise
apply. Also, if your U.S. and Latin American businesses sell goods or services to each
other, transfer pricing issues can arise, both in the United States and in the Latin
American country in question.
5.
Be Aware of the Special Considerations That May Apply to
Infrastructure Projects. Like the United States, some Latin American countries are
trying to jump-start their economies by investing in infrastructure projects. These
projects can offer attractive export and investment opportunities for U.S. companies.
However, there are a number of special considerations that you should keep in mind
before participating in such a project. The project may, for example, require an elaborate
bidding procedure, may require that the bidder provide significant capital or financing
that can only be recouped over time, and may have significant local employment
requirements. Granted the complexity and political nature of many infrastructure
projects, you may be well-advised to associate yourself with a local joint venture partner
who knows the rules and the players.
6.
Be Sure to Comply With the U.S. Foreign Corrupt Practices Act. The
USFCPA makes it a U.S. crime to bribe a foreign governmental official, and carries
penalties of up to five years in prison for willful violations. However, the Act contains an
exception for “grease money,” or the money that is paid to a foreign governmental
official to expedite a ministerial task that the official is obligated to perform as part of his
or her duty. For example, it would probably not constitute a violation of the USFCPA to
pay a gratuity to a foreign court clerk to encourage him or her to speed the service of a
complaint on a party you are suing, or to make sure that he or she finds the correct
address.
Now, you might say, I can easily avoid violating the USFCPA by hiring a
third-party agent to handle all of my business dealings with Latin American
governmental officials; I’ll simply pay the agent for getting the job done and won’t ask
any questions. Unfortunately that won’t work. Although you won’t be held liable for
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violations you could not reasonably be expected to discover, you can’t ignore any “red
flags” you might see.
Among the “red flags” you should be concerned about are the country in
question (Paraguay and Venezuela have the reputation of being among the most corrupt
countries in the hemisphere, so you should take special precautions there), the reputation
of your agent, the amount of the commission you pay to your agent, your agent’s refusal
to warrant in writing that he or she will avoid paying bribes or otherwise violating the
USFCPA, the relationship of your agent to government officials (it’s not a good idea to
hire the cousin of the President as your agent), payments made to cash, to third persons,
or in third countries, unusual bonuses to foreign operational managers, or general
suspicious conduct.
The USFCPA also contains record-keeping and accounting requirements
for public companies. These requirements are designed to ensure that public companies
have no “slush funds” from which money can be disbursed for undisclosed purposes.
CONCLUSION
Let me conclude by giving my personal testimonial, based on almost 30 years of
doing business with Latin America. Although the legal systems are different, challenges
exist, and careful planning is essential, the opportunities are great. And the people (and
the food) are wonderful. So . . .
LET’S DO IT!
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