As soon as it comes into force, a number of common practices that have been a customary tradition in Colombia will have to change. As a consequence, several regulations now valid will have to be repealed and/or modified in order to adjust to the new policies regarding trade and intellectual property law brought in by the new FTA.
One of the most crucial and controversial changes that will come into force once the US Congress finally approves this FTA Agreement is the current regulation on commercial agency agreements. After an intense debate in Colombia, in which a number of legal arguments, commercial, social and even labor regulations were exposed, this type of contract will finally have to be amended in this jurisdiction’s Commercial Code.
Under the Anglo-Saxon law the agent is the person or corporate entity acting on behalf of a company in a certain territory. Under this premise, agency contracts are seen in a different light. As they deal with trust, agents are forbidden to receive part of the principal’s revenues or benefits, since they act only as ‘intermediaries’. As a result, US law guarantees a special protection to the principal rather than the agent, as opposed to Colombian law.
Pursuant to the Colombian Code of Commerce, an agency is deemed to exist when all of the following criteria established by the law are met:
- The agent acts on behalf of the principal.
- The agent acts independently.
- The relationship is of a permanent nature.
- The agent’s activities are aimed at promoting the products and/or services of the principal (as opposed to providing services of a technical or other nature).
- The agent carries out its activities within a defined territory.
- The agent is usually remunerated through the payment of commissions or fees for its work on behalf of the principal.
Therefore, any occasional intermediary not meeting all of the above-mentioned criteria, will not be deemed an agent for Colombian law purposes.
One of the main effects of being an agent in Colombia is the right to receive a severance payment upon termination of the agency agreement. Such payment is due by the principal, regardless of the termination cause. There is a substantial amount of case law where the question has been raised as to whether a distributor, licensee or sales representative were in fact agents and, therefore, had the right to the above-mentioned severance payment.
With the above background, one of the main interests of the US during the negotiation of the FTA has been to remove such legislation in order to grant more flexibility to US corporations wishing to do business in Colombia.
In the final text of the FTA executed between the US and Colombia, both countries agreed to the agency’s severance pay regulation changes in the FTA’s Annex E-11 from Chapter 11 on cross-border trade of services, as well as the nature of equal compensation and the non-exclusive agent clause unless otherwise agreed. This is utterly divergent to what is established in Colombia’s Code of Commerce.
Outwardly, the Colombian government will have to adjust its domestic legislation in order to establish a similar concept to what both countries agreed in the mentioned Chapter, since the ‘agency agreement’ in the Anglo-Saxon law is a contract that also includes the trade of goods and services and an assignment to work out certain management duties, although it does not imply any additional payments or benefits to the agent at the termination of the contract.
For the sake of this FTA, the Colombian Government has pledged to make such changes in its legislation within the six months following its entry into force. These changes will remove any clause that gives the agent the right to a severance payment upon termination of the contract. This would lead to repeal Article 1324 of the Commercial Code, to allow greater freedom for both parties when entering into this type of contract.
The FTA also establishes that, any regulation determining that a commercial agency agreement sets up an exclusive agent unless otherwise agreed, will have to be abolished. In this case an opposite provision will have to be in place: the principal can hire more agents for a geographic area for the same type of activity or product, unless the agency agreement provides the contrary. It is clear that this provision seeks to strengthen the autonomy of the will of the parties and allow more competition, which may arise between different players in the same market.
The above-mentioned changes are the consequence of Colombia’s integration process to the world trade, as it requires more flexible distribution standards, in line with the stipulations set in the General Agreement on Trade in Services (GATS). In that vein, different panels of the World Trade Organization (WTO) have spoken about the protectionist distribution policies’ inappropriateness when compared to the effectiveness of treaties regarding cross-border trade.(1)
Additionally, some experts in Colombia assume these changes are the result of the need to modify Colombia’s laws on dealers’ protection, because while this and certain types of indemnification for the unilateral termination of commercial agency agreements exist in several jurisdictions, comparatively speaking, in Colombia the situation is more complex.(2)
In contrast, quite a few sectors in Colombia are concerned for the effects these changes will have on the current state of affairs. While foreign investors in Colombia will benefit, several companies in Colombia who are now entitled to receiving a severance pay when the principal decides to terminate the contract unilaterally, will have to accept a new disadvantageous regulation once the agreement with the US finally comes into force. There will be consequences regarding employees dismissals and loss of investments performed by the contractor on behalf of the principal, in case company represented decides to terminate the contract before the stipulated time.
Gabriela Mancero, IDI country expert for Colombia and Melanie Home, Cavelier Abogados.
(1) GIBERGA, Ovidio M. ‘The legal pitfalls of negotiating with foreign agents’, Business America, July 21, 1986.
(2) ‘Algunos efectos del TLC sobre el contrato de agencia mercantil en la legislación colombiana’. Some effects of the United States’ FTA on the commercial agency agreement in the Colombian legislation, Legis, El TLC desde EEUU, 2006.