COSTA RICA: AT TERMINATION, INDEPENDENT REPS ARE ANYTHING BUT

U.S. businesses and other foreign companies seeking to engage a sales representative or distributor or to license a trademark to a company in Costa Rica should proceed with caution. Costa Rica provides significant legal restrictions on the termination of sales representatives and distributors of goods and services. The same restrictions protect Costa Rican manufacturers of goods made under a foreign trademark.I. Law for the Protection of the Representative of Foreign Companies.The Law for the Protection of the Representative of Foreign Companies (hereinafter “LPR”) generally prohibits foreign companies from terminating or refusing to renew a contract with a Costa Rican sales representative, distributor or manufacturer making goods under a foreign trademark (hereinafter collectively “Representative”) for reasons that are “beyond the control” of the Representative. For purposes of LRP, a foreign company includes a Costa Rican subsidiary or affiliate of a foreign company.Although Costa Rica has signed international arbitration conventions for the resolution of commercial disputes, the protections conferred by LPR, including the jurisdiction of Costa Rican courts, are matters of public policy and may not be waived by agreement.Termination or failure to renew a Representative’s contract without just cause subjects the foreign company to pay compensation equal to four (4) months of the Representative’s gross income for each year (or fraction thereof), up to nine years, that the contract was in force.In addition, the foreign company must purchase the existing products of the Representative at a price which includes the cost of the products, plus a “reasonable percentage” of the investment made by the Representative. This percentage is determined by Costa Rica’s Ministry of Economy, Industry and Commerce.A foreign company contracting with a Representative in Costa Rica should also know that the Representative has the right to the compensation previously described even if the Representative is the party terminating the contract, provided the Representative does so with “just cause.” A Representative has “just cause” to terminate an agreement with a foreign company for the following reasons:(1) criminal acts by agents of the foreign company against the property and good name of the Representative;(2) the termination of business activities by the foreign company, except if due to an act of God;(3) unjustified restrictions on sales which result in a reduction in the volume of sales;(4) untimely payment of commissions or fees earned by the Representative;(5) appointment of a new Representative when the original Representative acted in an exclusive capacity;(6) any unilateral modification by the foreign company of the contract which harms the rights and interests of the Representative, or(7) any other serious breach by the foreign company that injures the rights and contractual and legal obligations under the contract with the Representative.One item that bears repeating is that the Representative may terminate the contract and still claim compensation even when the foreign company stops doing business altogether, unless this stoppage is due to an act of God.Grounds constituting “just cause” for purposes of the foreign company’s terminating a Representative are more limited. These are the following:(1) crimes against the property and good name of the foreign company committed by the Representative;(2) the ineptitude or negligence of the Representative when so declared by a civil law judge of the Representative’s domicile;(3) the prolonged and substantial diminution or stagnation of sales for reasons attributable to the Representative. However, an official import quota or restriction will create a presumption in favor of the Representative that the reduction in sales was not attributable to it;(4) an infringement by the Representative of a trade secret or breach of loyalty by the disclosure of facts, know-how or techniques concerning the organization, the products or operation of the foreign company acquired during the commercial relations between them, or(5) any other serious breach by the Representative of the duties and obligations owed to the foreign company.A foreign company should note that a change in the company’s domicile or name, or a business reorganization (such as a division or divestiture) or change of business purpose is not just cause for terminating a Representative’s contract. In addition, a foreign company which becomes authorized to use a trademark that was previously licensed to a Representative is jointly and severally liable with the foreign licensor for a termination without just cause.Moreover, a person or firm which totally or partially replaces the Representative terminated without just cause is also liable to the Representative, unless the foreign company has previously paid the required compensation.A foreign company wishing to terminate a Representative without just cause must pay the entire compensation in one lump sum immediately upon terminating the contract or after rendition of a final Costa Rican court judgment, if any. If the Representative files suit, the foreign company must post a bond for the amount of compensation claimed by the Representative, which amount shall be set by a Costa Rican judge. If the foreign company fails to post the bond, the Costa Rican Ministry of Revenue, at the request of the plaintiff Representative, shall suspend all imports of any products by the foreign company.A Representative has two years from the date of unjustified termination to sue for its compensation.II. Conclusion.A foreign company seeking to sell or make its products through a Costa Rican firm under its trademark should perform careful due diligence on the firm. The law expects the relationship to endure and places a heavy burden on the foreign company seeking to terminate the agreement. Once a Costa Rican firm has been selected, the foreign company should closely monitor its relationship and be prepared to substantiate just cause for any future termination or refusal to renew that relationship.

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