Background
Profound political changes are occurring in Latin America. They will continue shaping the economic and legal landscape of the region. Economic populism is leading to contractual changes which will have unintended, damaging consequences for the stable growth of the region. Foreign investors might possibly decide not to enter certain countries, or refuse to renew contracts in some.
Argentina, Venezuela, Bolivia, and Ecuador are leading in rescinding and amending contracts with foreign investors in critical sectors, such as energy, telecommunications, and public services. Given that Argentina managed to walk way from repaying bondholders without short or long term consequences, it may not appear unreasonable for Venezuela, Bolivia and Ecuador to think they can do the same with other types of investments. But, we can’t forget that Argentina and Venezuela have benefited from an excess of liquidity in foreign markets. There is a search for high returns by foreign investors whose risk-evaluation decisions fly in the face of recent experience.
I don’t advocate that anyone is above the law, but contracts that were executed under the rule of law prevailing at the time of the contract must be honored to attract and retain the national and direct foreign investment needed if Latin America is to compete on a level playing field in the world economy.
The contracts Argentina, Bolivia, Ecuador, and Venezuela claim violate constitutional mandates or infringe on current economic needs were entered into, it seems, in good faith by foreign investors. These investors now find themselves caught in political situations they did not foresee, or for which they did not plan when the warning signals were loud and clear.
Argentina, Ecuador, Bolivia and Venezuela seem to be proving what many foreign and in-country investors fear: Contracts in Latin America are not worth the paper on which they are written. This apprehension increases as the proclamations of Peru’s leading presidential candidate, Ollanta Humala, indicate he will renegotiate existing contracts in energy, mining, and public services. Mexico’s likely presidential winner, Andres Manuel Lopez Obrador (AMLO) is claiming he will revise some articles of the North American Free Trade Agreement (NAFTA). Ecuador’s protesters are demanding a renegotiation of oil exploration contracts and threatening to depose President Palacio if he does not. Venezuela forced foreign oil companies to convert 32 existing operating contracts into joint-venture partnership agreements with state-owned, Petróleos de Venezuela (PdVSA), which has the majority interest in the revised contracts. Companies that enter the energy sector with new contracts in Venezuela will have to dedicate one percent, before taxes, to social investment, and pay 33.3% in royalties, compared to the 30% stipulated in the old contracts.
It is interesting to note that some energy companies that threatened to sue Venezuela and Bolivia have now decided to accept the new terms and continue operations under the changed conditions. This is understandable. It would be rather difficult to pack the La Paloma gas exploration field in a suitcase and leave Bolivia, or abandon a multimillion dollar investment in exploration in Venezuela when known oil reserves are dwindling around the globe and new exploration activities become more hazardous and costly.
What can you do to ensure the security of your forthcoming contract?
Foremost, keep your eye on the new political realities of the region. Latin America’s politics have a tendency to create unstable business environments. Don’t be fooled by the coming reelection of Colombia’s president Uribe, or by the election of Dr. Oscar Arias in Cost Rica. Dr. Arias won by a scant 1% over Otón Solis, who will be a formidable adversary in the congress that will ratify the US-Central America Free Trade Agreement (CAFTA-DR). Even Dr. Arias will govern a Costa Rica, which, although reasonably stable, is vastly different from the Costa Rica he governed 20 years ago. And Uribe is likely to confront massive demonstrations as Colombia moves to ratify its US-Colombia Free Trade Agreement, of which most Colombians disapprove in its current form.
This leads me to the rule I developed through the years for doing business the region: Do business in the Latin America that is, not the Latin America you, I, and many in Latin America wish to have, an orderly and predictable business environment. Chile is the only country that enjoys such conditions. Recognize that the Latin America of the 1940s to the mid-1990s is gone and will not return, whether we like it or not, and whether we approve of it or not.
Despite popular belief that sovereign governments don’t, and can’t, default, Argentina proved otherwise, and got away with it, without detrimental repercussions. Money has flowed into Argentina by the billions since the default.
Assume governments will change and every change brings new rules and regulations, and economic directives, Chile excluded.
Understand that large groups of previously dispossessed and silenced majorities have created powerful political movements whose members have taken to the streets to topple presidents, demand fair treatment under the law, and an equitable participation in their countries’ wealth and income. This is not a passing trend under the catchy label, Pink Revolution. It is here to stay although the label might disappear in the future. The leaders of these political movements, such as Venezuela’s Hugo Chavez and Bolivia’s Evo Morales, have little or no experience in governing, but they are savvy street fighters and survivors who have little to lose and a lot to gain. They will have to deliver on their promises of: housing; services; education; health care; and, legal employment above the poverty line, if they themselves want to escape the punishment they meted out to their predecessors: be thrown out of government. No contract with a foreign investor is going to stand in their way.
Contract Security
Many foreign companies that operate in Latin America have incurred heavy costs by disregarding, ignoring, or making light of legal and regulatory issues in their host countries. Therefore, it behooves you, the foreign investor, to perform your contract to the letter of the law. Not the law of the USA, Europe, Japan, or the foreign investor’s country, but the law of the Latin American country in which you operate.
Latin Americans are every bit as litigious as their counterparts in the USA. A handshake is not a contract there or anywhere. Every contract, from distributorship and joint-venture partnership to direct ownership, is, in its essence, a labor agreement. And the political moments have also made business contracts into social contracts, particularly in government or large project situations.
This means the contractor has a social responsibility toward the community in which it operates. It can be claimed that for-profit companies are not organizations established to mend social inequities. Be that as it may, all contracts rescinded in Latin America, all contracts modified in the region, have been subjected to the “community benefit” test established by the government or local community leaders. It therefore behooves you to understand the needs of the community and respond to them in a reasonable and timely manner, whether those needs are stated in the contract or not.
Neither I nor Latin Trade Solutions Inc. is licensed to give legal advice. But over the years the successes and failures in the contracts with which I have been involved have allowed me to develop a set of useful guidelines. I am passing them on to you, hoping they will save you headaches, money, and time.
Caveat emptor (buyer beware). If you are a foreign investor in Latin America, you must seek the advice of competent, licensed counsel to ensure the contract you have protects you to the full extent of the law now and in the predictable future.
A Handshake Does Not a Contract Make
This applies both to you and to whomever you are contracting with, particularly in government contracts where “personal promises of performance” might be made by a politician or bureaucrat eager to keep a job, or be posted to one. It also applies to your legal counsel. No matter the nature of the relationship, you would be wiser if you cement the handshake with a contract that reflects a win-win relationship among the parties, including your community organizations and local leaders.
There is no denying that all business is personal and based on mutual respect, trust, and loyalty. But mutuality, respect, and loyalty embed rights, duties and responsibilities which need to be equally understood and enforceable by all parties involved in the transaction. This is where contracts come in: they tell you and your national counterpart what each is expected to do, where, under which conditions, how, for how much, for how long, what needs to happen, and how, when, and under which conditions the contract can be terminated.
Once you operate in Latin America you are ruled by Roman Law, not case-based USA law. Roman law means cases are decided on the merits of each case, not on precedent. Chile is by far the Latin American country where the legal system functions similarly to that of the USA, even though it is still based on Roman Law.
Establish a Clear Contractual Relationship
There should not be any ambiguity about what type of relationship you have. A joint-venture partner is a partner; a distributor is a distributor, not a partner or a strategic ally. The relationship you have must be described with absolute clarity in the contract and in all subsequent correspondence and communications; a distributor is to be recognized and addressed as a distributor, an agent as an agent, etc. All parties to the contract must have the same understanding of the type of relationship they are creating. Businesspeople in the USA and the European Union are fond of referring to people they do business with as partners. Doing so, particularly in writing, places you on a legal slippery slope because it communicates the existence of a de facto partnership agreement, which might not be what you really want.
Protect Your Intellectual Property
This is the trickiest part of a contract. The enforcement of IP is becoming more and more difficult and costly. But it is most crucial if you are a small company without the financial power to seek remedies and injunctions in foreign jurisdictions. I have found that the best way to approach this is to make infringements of IP as costly for the other side as it might be for you. For example, you should consider having your IP contract IP include a protection clause that includes immediate termination of the relationship, without remuneration or benefits plus monetary penalties, due to infringement. If the other side balks at this clause, move on to someone who does not. Monitor your IP like a hawk and be ready to press charges in a local jurisdiction to protect it, if necessary.
Do not believe that a USA-(given country) Free Trade Agreement protects your IP. It does not. In this case, you need to become thoroughly familiar with your country of operation’s IP regulations and abide by them. You should retain counsel experienced in your IP in your industry. This is more important if you operate in sensitive sectors such as: energy exploration and commercialization; mining; forestry; food processing; education, particularly online; health-related services; the environment; and, pharmaceuticals.
Know What You Need to Exclude
If local law does not subject you to pay them, make sure to specify which taxes, fines, costs, registrations, and any other expenses are the sole and only responsibility of your in-country counterpart. In the case of royalties, service-provision tariffs, pension and social security contributions, and unemployment payments or benefits assume they will change according to political imperatives of the current government, or changed global economic conditions; they can change overnight. Do the same with regulatory guidelines and rules.
Make sure all claims made on behalf of your product or service conform to the host country’s consumer protection laws and language. You don’t want to be found liable for intent to commit fraud due to misguided or dishonest representations of fact made on your behalf in an effort to gain a contract or make a sale. If you can’t demonstrate with hard figures that you are the “world leader in....” don’t say it or allow anyone to say it.
Be especially mindful of claims such as “lifetime warranty” and clearly state what it really means. Latin American jurisdictions will not allow you to get away with such a claim if it is demonstrated that your “lifetime warranty” really means three years because such and such component was a consumable that was not indicated as such in marketing collaterals or in a presence-channel agreement.
Custody and Care
If your presence in the country requires that nationals, or foreign nationals, be responsible for machinery, equipment or demonstration samples that need special care or handling indicate what type of care or handling is required. Specify the penalties those in the field will incur for equipment or samples which might develop a tendency to disappear or go out of order for no apparent reason. Specify the quantities or equipment models those with direct responsibility over them must keep in working order to support your business. Pay unannounced visits to inspect your operations. I once terminated a distributor who was making product presentations with instruments that were not working. I found this out during an impromptu visit.
Should your product or service not be applicable or suitable to a particular market segment, say so and indicate which one(s). You do not want to be liable for misapplication or misuse of capital goods or goodwill.
You Are the Owner
Your intellectual property, that is, patents, trademarks, trade dress, copyrights, product names and specifications, and any other proprietary information is yours and yours alone unless you have entered into a licensing or technology transfer agreement, in which case you should be receiving royalties. Therefore, you are entitled to state that you are free to contact your end user or client at will to verify performance. If your in-country counterpart refuses, move on to someone who does not. I have done this and have never regretted it.
Renew on Time, as Stipulated in Your Contract
All contracts must have a termination date. Begin renewal or termination well before the expiration deadline. Contracts not renewed under the provisions of the contract may be construed to be renewed automatically, which means past performance was acceptable.
If there is change in government, begin thinking about how your contract might be terminated or amended, without cause. This will enable you to be prepared for any changes, and possibly move ahead of them. Never forget that good luck lies at the intersection of preparation and opportunity.
Termination
Ascertain which termination requirements you must meet before sending a termination letter or letting a contract expire. This is particularly important because, in general, no contract can be terminated at will, unless a sovereign government does so. The termination must be in writing. It is particularly important that you know your termination will not violate any labor law provisions. It is a wise move to consult your in-country legal counsel before terminating any contract.
It Is a Two-Way Street
Listen carefully to government statements; they are seldom made lightly. They give you the direction a given country will take in the remaining time in office of the government of the day. Suez’s Aguas Argentinas should have known the Kirchner Government was not going to accept requests for tariff increases, although they were included in the original contract, once Kirchner placed a freeze not only on water and sewage services but on telecommunications and banking costs.
The Laws You Must Obey
List in your contract the laws of the USA you and those who work with you, no matter where in the world, must comply with, such as the U.S. Foreign Corrupt Practices, Act, the US Patriot Act, the Economic Espionage Act, The Chemicals Diversion Act, and others. Indicate that any proven transgression, no matter how unintentional, is cause for immediate termination of contract, with remedies and compensation for damages due you, if applicable.
It Is Their Language
To be legally binding, contracts must be translated, by a court approved translator, to the host country’s language. Translation must be line by line, and side by side, and page-by-page. Many jurisdictions will require a special type of paper (papel sellado) and that signatures be notarized. Find which regulations apply to your contract and follow them to the letter. You don’t want your contract thrown out of court on a technicality should you need to resort to its legal enforcement.
Conclusion
Know that, if you contract with government entities, your contract can be rescinded or amended under the force of political winds.
If you understand and accept that Latin America is what it is, and nothing else, you will be able to contract based on reality, not on wishes or hope, which are not the basis for a sound business strategy.
Until then, Hasta Luego y Buena Suerte. Até Logo e Boa Sorte.
Maria Velez de Berliner, President, lat-intel@lat-intel.com Tel: 001-703-212-8586