UNWINDING COMMERCIAL RELATIONSHIPS IN LATIN AMERICA

1. UNWINDING COMMERCIAL RELATIONSHIPS IN LATIN AMERICA

2. Franchising, agency and distribution agreements are commonly used by U.S., European and Asian companies to do business throughout Latin America.  • To be successful in these relationships, however, franchisors, principals and suppliers must be aware of the legal particularities commonly found in the regulation of franchising, agency and distribution agreements in Latin America. • Unless these special legal features and issues are considered when structuring contracts, suppliers may run into legal difficulties and unexpected expenses. Carey y Cia., August 17, 2009| 2

3. Generally Speaking: • Distributors: Buy and sell independently and for their own account, and their sole consideration is the markup they charge on the merchandise they purchased from their suppliers. • Agents and Representatives: Do not buy for their own account, but instead provide certain services and act on behalf of their principal in exchange for a commission or fixed fee. • Franchisees: Are granted the right to independently engage in the business of selling goods or providing services under the marketing plan or system prescribed or suggested in substantial part by the franchisor, in exchange for a franchise fee. Carey y Cia., August 17, 2009| 3

4. To prevent termination problems and reduce termination costs, it is essential to consider the degree to which local legislation protects local distributors, dealers, agents, or franchisees.  • This is particularly problematic in Latin America, where various jurisdictions have highly protective laws and regulations. Carey y Cia., August 17, 2009| 4

5. CHILE: A FEW USEFUL CONSIDERATIONS

6. The 1980 Constitution ensures the right to develop any economic activity that is not opposed to moral, public order or national security, respecting legal norms that regulate it. • There are no special laws in Chile protecting local agents, distributors or franchisees, or otherwise regulating the termination of agency, distribution or franchising agreements. • Termination will be largely governed by the contract itself and by applicable contract law, as provided in the civil code and commercial code. • Chile has a very strong protection of property rights, including secured interests in property, and the legal system safeguards investments of Chileans and foreigners alike. • In protecting intellectual property rights, however, shortcomings have kept Chile on the U.S. Trade Representative’s watch list of countries with deficient intellectual property rights protection regimes since 1989. Carey y Cia., August 17, 2009| 6

7. Termination Rights Generally: • Fixed Term Contract: Unless the other party has breached the contract, a party cannot terminate it prior to its expiration date. • Indefinite Term Contract: Parties are free to terminate the relationship at any time, but the termination must be in good faith. • While depending on the type of relationship it may not be strictly necessary to specifically include a termination provision or clause, it is nevertheless highly recommendable to do so in order to regulate the parties’ rights and effects of termination. • For example, the parties’ rights upon termination with regard to unsold stock should be contractually regulated—e.g., “Distributor may sell the remaining stock within the 90 days following termination; upon the expiration of such term Principal shall buy back the remaining inventory from Distributor, at cost. • Compensation for termination of local agents or distributors (other than as specifically provided in the contract) could eventually include investments made in reasonable reliance or inducement from the Principal regarding future expansion of the business or contractual territory, and the like. Carey y Cia., August 17, 2009| 7

8. Some Issues: I.P. Protection • Chile is a member of the World Intellectual Property Organization, and a party to the International Convention for the Protection of Industrial Property (Paris Convention), but its intellectual property regime is not fully WTO/TRIPS compliant. • In the past, some foreign companies found individuals or companies had already registered their trademarks in Chile.Chilean courts have been supportive when trademarks have been "stockpiled" but gone unused, but less so in cases where investments were made in use of the trademark.Relevant proceedings have been lengthy (2-4 years) and costs can exceed USD 10,000 per trademark. some firms have preferred to negotiate with the infringer in lieu of going to court. • Hence, a prior careful review and protection of a Principal’s I.P. assets is recommended in order to avoid a local distributor’s misuse of such rights upon an unfriendly termination. Carey y Cia., August 17, 2009| 8

9. Some Issues: Local Courts and Arbitration • The Chilean judiciary while generally fair and independent, is not suited for speedy commercial dispute resolution. • Foreign principals and suppliers should consider international arbitration clauses in their commercial contracts. • While ICC and UNCITRAL are commonly used, Chile has reliable arbitration institutions and rules (e.g., the Arbitration Branch of the Santiago Chamber of Commerce). • If a non-Chilean seat of arbitration (e.g., Miami) is not agreeable to the local party, Santiago should be an acceptable option. Carey y Cia., August 17, 2009| 9