The distribution contract: competition issues and its regulation in the new Code of Commerce

distribution-contract-ana-samudio

From 1997 and until the Code of Commerce came into effect last May 29, 2019, the distribution contract did not have a specific regulation. It was governed by the general rules applicable to trade acts, contracts and regulations on jurisdiction.

On December 31, 1976, the Law for the Protection of Agents or Distributors of Foreign Companies (Distributors Law) was enacted, which regulated the commercial relationship between an entity not based in Ecuador and a person – be it natural or legal- designated as representative, agent or distributor. This Law mainly provided a special protection regime for the distributor / agent. Thus, among the most relevant provisions included, the grantor was not authorized to unilaterally terminate the contract even by expiration of the term established in the contract itself, save for specific causes established in the Distributors Law, which in turn had to be qualified by the competent judge, and established a method of calculating large compensation for damages.

On July 5, 1996, the Distributors Law was amended, fundamentally limiting the compensation amount, and on September 19, 1997, it was repealed. Even so, the rights and obligations born while the Distributors Law was in force were maintained. The Antitrust Law, enacted on October 2011, introduced concepts such as exclusivity – of products, territories, customers or types of customers – that a priori seemed to be in conflict with the free competition regime, which required a robust support – from the economic and market techniques – that would legitimize its stipulation.

Since May 29, 2019 the new Code of Commerce (Code) clarified the picture, clearly tracing the rules governing the distribution contract. The most prominent are:

  • The distribution contract is the authorization in which a party called the grantor or principal confers on another party called concessionaire or distributor the possibility of selling products, providing services, or a combination of both, in a given territory.
  • In general, it leaves to the will of the parties the conditions of these contracts, such as: exclusivity of territory, exclusivity of product, minimum volumes and periodicity in purchases, among others; and establishes rules that will be applied in the absence of stipulation by the parties or that are contrary to the Antitrust Law.
  • Establishes the obligation of the supplier to deliver commercial and technical information necessary for the best distribution of the goods or services stipulated in the contract.
  • Allows the supplier to make direct sales without the participation of the distributor, unless otherwise agreed.
  • Prohibits the supplier from limiting the possibility of the distributor to make sales, through the internet, except for reasons of public health, consumer safety or legal prohibition.
  • Determines that, if a term of validity is not established, distribution contracts are considered as indefinite and may be terminated by either party, prior a 90-day notice. The Antitrust Law states that termination without a cause with no prior 30-day notice, could be considered as abuse of market power in an economic dependency relationship.
  • The serious or repeated breach of the contract that is not remedied within 15 days from the notification of the breach, will result in its termination, and the compliant party will be entitled to compensation for damages.

Ana Samudio
Senior Associate at CorralRosales
asamudio@corralrosales.com

Delayed or Canceled Flight? What the passenger does not know

flight-delayed-canceled

Your luggage was checked, you boarding pass is at hand, you pass through the security filters, waiting for the call to board, and suddenly, you look at the information panel in the waiting room and see the message nobody likes to get: “delayed or canceled flight”.

Although the passenger does not know the causes of flight delays and cancellations and everything is in apparent normality at the airport, the operation of a flight implies the existence of several factors that must be perfectly aligned.

The following are the most common causes of flight delay or cancellation.

1.- Weather conditions

Heavy rains and snowfall during the winter months are well known; these can delay ground operations and hinder landing or take off maneuvers. The sunny summer arrives and the season of greatest passenger traffic begins: family vacations, meetings with friends, sunny days to enjoy, and a climate that would seem pleasant to fly. However, the combination of high temperatures and summer winds can surprisingly result in a storm that may result imperceptible at ground level.

During the summer months, the hot air rises and interacts with the cold air that is in the upper atmosphere. This mixture causes water vapor to condense and storm clouds with lightning to form at great heights; the lighting cannot be seen from the surface.

In general, airlines coordinate with Air Traffic Control if a change in landing or take-off routes is needed to avoid these thunderstorm clouds. But the operation could continue to represent a risk for ground workers who are on the platform carrying out activities prior to the departure or arrival of flights, such as aircraft fueling, luggage transfer, inspection and cleaning of aircrafts, etc.

Then, due to weather changes, delays or cancellations of scheduled itineraries occur. In these cases, the airline is exempt from the obligation to compensate passengers for the damages that they could have suffered as established in the regulations of “Provisions for Compensation to Users for Flight Delays”, because the facts are not attributable to the company.

2.- Operational modifications

For the optimization of operations and greater efficiency in fuel consumption, an aircraft may be scheduled to fly to several destinations. In this case, a delay in another station could cause what is called “drag delay”; that is, a problem in another airport could result in a delay in the operation of the next flight in some other point.

Likewise, there are operating conditions that must be met to ensure flight safety, such as checking that the crew has complied with the mandatory rest time stated in the aviation technical regulations or ensuring that the members responsible for the flight operation are fit to embark. It is uncommon, but there have been cases in which there is an unforeseen health problem in an officer or senior cabin crewmember, which represents a decrease in the crew that is impossible to cover immediately.

Ecuadorian aeronautical regulations control the operation in cases of early departure or delays in the time of takeoff / landing. Resolution 120/2017 determines the obligation for the airline to notify, with due justification, any change in the time of departure and arrival, applying international processes and standards.

Unscheduled Maintenance:

The airlines comply with an aircraft maintenance schedule, previously approved by the local Aeronautical Authority, who, as the controlling body, will verify compliance. These are called scheduled maintenance. But aircrafts are machines and therefore susceptible to unforeseen damage, which may cause inevitable delays in the operation of a flight. Each technical problem must be documented and recorded in accordance with the protocol established in the manuals of each company; this is done to ensure the safety of passengers, crew and ground personnel.

The airlines that operate in Ecuador have programs, policies and manuals that govern each operational process of their flights. In the case of international airlines, these procedures are subject to a certification process carried out by the Directorate General of Civil Aviation based on the Technical Aviation Regulations, known as RDAC. For international operators it is the RDCAC 129 and for domestic airlines the RDAC 121.

Airlines publish constant and first-hand information in their social networks when events like these happen, and seek to offer the passenger immediate solutions, to the extent possible, so that they arrive safely at their destination.

Finally, for airlines, the security of their operations will always come first. Therefore, when conditions are not safe for a flight, delays and cancellations, even if they are annoying for users, are unavoidable for the benefit of the passengers themselves, crew, and the ground workers.

Verónica Olivo
Associate en CorralRosales
volivo@corralrosales.com

Ecuadorian Intellectual Property office upholds the distinctiveness of the three-dimensional trademark registered by Crocs, INC.

three-dimensional-crocs

Through Resolution No. OCDI-2019-0618[1], the Ecuadorian Intellectual Property Office confirmed that the design of CROCS footwear is capable of being recognized by consumers, and also allows consumers to differentiate it from the products of competitors, since it has its own special elements that give the product a different appearance, and is not common or ordinary.

With this decision, the distinctiveness of the three-dimensional design of CROCS footwear in Ecuador was upheld, and it is confirmed that only CROCS, INC. may market goods under such design, having the exclusive right to prevent third parties from using and marketing the same or similar goods.

In 2015, CROCS, INC. obtained the registration of the mark THREE-DIMENSIONAL DESIGN (3D BAYA SHOE DESIGN) to protect “footwear”.

The three-dimensional mark has its own characteristics, which differentiate it from the traditional denominative, figurative and mixed mark, since with this specific type of marks, an object that occupies a volume in space is protected; that is, it is the shape of a product or its packaging. Therefore, the distinctiveness of this type of marks rests in the shape and relief as a whole, among other distinctive elements that are added into its configuration.

In 2017, JHON ALBERTO FIGUEROA VIVANCO applied to the Ecuadorian Intellectual Property Office for the nullity of the mentioned registration, claiming that it was a generic shape for footwear and therefore not for exclusive appropriation by one entity. Additionally, the claimant pointed out that the design granted a functional or technical advantage to the product, and so could not be protected as a trademark according to the law.

Article 135 of Decision 486 of the Andean Community establishes that the following signs cannot be registered as trademark:

“(…)

  1. those that lack distinctiveness;
  2. those that consist exclusively of usual forms of the products or their packaging, or of shapes or characteristics imposed by the nature or the function of the product or service in question;
  3. those that consist exclusively of a shape or other elements that give a functional or technical advantage to the product or service to which they apply; (…) ”

During the proceedings, CROCS, INC. was able to show that the contested registration did meet the requirements to be considered a three-dimensional design, even filing evidence of registrations obtained over the same design in several other countries, in which, as in Ecuador, the distinctiveness of their unique designs had been recognized.

With regard to the functional advantage claimed by the plaintiff, the IP Office determined that the arbitrary elements of the design are not dictated by function, since the exclusion of such shapes, reliefs, crevices and holes does not prevent the natural use of the product.

Katherine González H.
Associate at CorralRosales
katherine@corralrosales.com


[1] Proceeding No. 17-1679-RV-2S dated 18 July 2019.

Recognitions: Chambers and Partners & LACCA

CorralRosales has been recognized once again as a leading firm in Ecuador according to the prestigious international legal directory Chambers and Partners and the Latin American Corporate Counsel Association (LACCA).

The English legal directory Chambers and Partners has recognized CorralRosales in the practice areas listed below:

  • Intellectual Property (Band 1)
  •  Corporate/Commercial Law (Band 2)
  •  Competition Law (Band 2)
  • Labour Law (Band 2)
  • Dispute Resolution (Band 3)

In this latest edition of Chambers and Partners, our Partner, María Cecilia Romoleroux renews her national leadership as an expert lawyer in the practice of Intellectual Property. On the other hand, our Partner Xavier Rosales, for the second year in a row is recognized as the only Ecuadorian lawyer to obtain Band 1 for the corporate practice. Also, he has been recognized as one of the best lawyers in competition law obtaining in this way Band 2 in this area. On the other hand, our Partners Edmundo Ramos and Santiago Palacios maintain their position as leading lawyers in the areas of labour law and dispute resolution, respectively. While our Partner, Andrea Moya, leader of the of the firm’s tax area, stands out on the board less than a year after of her appointment as a partner of the firm. Finally, our Senior Associate, Martha Villagomez, stands out as one of the best senior lawyers in Ecuador’s labour practice.

Finally , our Partners, Xavier Rosales and Maria Cecilia Romoleroux have been again highlighted as lawyers of reference in Ecuador, according to the latest edition of the prestigious Latin American Corporate Counsel Association. Once a year, the members of this Association (top general counsels of the region) nominate those who consider the best lawyers in their respective specialties.

Update of customs regimes in the Andean Community

The Andean Community Commission approved Decision 848, through which the alignment of Customs Regimes is updated to facilitate foreign trade operations in the region.

With the purpose of simplifying the operations carried out in the customs of Bolivia, Colombia, Ecuador and Peru, countries member of the Andean Community, the regulatory alignment was updated on the following topics:

– Form and deadlines for submission, transmission, correction and modification of the cargo manifest.

– Authorization for the creation of temporary deposits and term of permanence of merchandise.

– Opportunity and deadlines for submission, correction and documents that accompany the customs declaration of goods.

– Presence of the declarant in the physical examination.

– Deadlines for:

  • Re-importation in the same State;
  • Temporary admission for re-export in the same State;
  • Temporary admission for active improvement; and
  • Final export.

– Incorporation of the concept of Special Economic Development Zone: A duly delimited part of the national territory of each Andean Community Member Country, in which the goods entered there, are considered as if they were not within the community customs territory, with respect to import duties and taxes along with surcharges that may apply.

Decision 848 repeals Decisions 671 and 716, and entered into force on Friday, July 26, 2019, date of its publication in the Official Gazette of the Cartagena Agreement No. 3699. However, in accordance with the Fifth Final Provision, this norm will enter into force in the Republic of Colombia forty-eight (48) months following its publication date.

On the other hand, through Decision 846 of July 26, 2019, the Andean Community Commission stipulated that free zone products or merchandise will benefit from the tariff relief stipulated in the Cartagena Agreement Release Program, as long as they comply with the rules of origin of the Andean Community.

Gustavo García
Attorney of Counsel at CorralRosales
ggarcia@corralrosales.com

The scope of protection of a brand facing the discretion of the Intellectual Property Authority. Case PROZOL vs. PREZOIL.

The Ecuadorian Intellectual Property Office rejected an opposition filed by the owner of PROZOL, thereby allowing the registration of the PREZOIL, based on the finding that the respective goods were not the same.

On its way to reaching its conclusion, the IP Office’s reference was information found on the opponent’s web page, instead of the information contained in the registration certificate issued by the same authority.

Any sign that is capable of distinguishing goods or services in the market can be registered as a trademark.  The protection that such registration provides is directly related to the goods or services covered.

Ecuador aheres to the International Classification of Goods and Services for the Registration of Marks —Classification of Nice—, which serves to differentiate and to delimit the protection of a mark according to the class in which the specific applied-for goods or services are included.

The scope of protection of a registration is directly related to the goods or services it covers. Such relationship is so fundamental that a specific requirement with which every application must comply, in accordance with Decision 486 of the Andean Community Commission, is to list the specific goods or services that will be protected and the corresponding international class.

The opposition filed by the owner of the PROZOL mark:

The company IMPORTADORA PEREZ JURADO ASOCIADOS CIA.  LTDA. applied for the registration of PREZOIL at the Ecuadorian Intellectual Property Office. Subsequently, PROTÉCNICA INGENIERÍA S.A. filed an opposition claiming that the similarity with its PROZOL mark would confuse consumers and cause a risk of association.

In this case, the Ecuadorian IP Office expressly recognized that the goods specifications were similar. However, it decided to reject the opposition, since it did not consider that there was a relationship between the goods, despite relating to the same international class, and despite the fact the PREZOIL application included goods specifically protected by PROZOL, as shown in the following table:

Brand International class Protected products
PROZOL (registered) 01 Products: Chemical products for the industry.
PREZOIL (requested) 01 Products: Chemical products for industry:

– Brake fluids

– Liquids for hydraulic circuits

– Coolants

In its analysis, the Office did not take into account the information contained in the registration certificate for PROZOL, which clearly identifies the goods for which the registration was requested and obtained.  Rather, the IP Office surprisingly and in direct violation of the Andean legislation and jurisprudence, decided that the rights in PROZOL were only applicable to one type of product: “emulsifying agents for pastry.”

To reach this conclusion, the Intellectual Property Authority reviewed PROTÉCNICA INGENIERÍA S.A.’s web page and considered that the information obtained from that source was sufficient to determine that the product above (emulsifying agents for pastry) was the only one protected by the PROZOL mark, completely omitting the considerations above on the scope of protection of a registration.

Within the resolution at issue, there was no analysis that justifies the legal criteria used to determine that the scope of protection of a trademark falls solely on a product mentioned on a web page; neither does it explain why the goods protected by the PROZOL registration were not taken into account, in accordance with the registration granted by that same authority.

This result could cause a series of adverse effects and generates legal uncertainty for trademark owners, since if the position stated in the case examined stands, it would not be possible to have assurance about the scope of protection of a registration.  In an even more delicate scenario, it would imply that the Ecuadorian IP Office could consider that some goods are outside the protection of a registration without greater support than the information that appears on the Internet or any other sources outside the procedure.

Katherine González
Asociatte at CorralRosales
katherine@corralrosales.com


[1] Article 139, literals f) & g) form the 486 decision of the CAN Comission.
[2]  OCDI-2019-524 resolution dated june 10th 2019. Case file: 15-5435-RA-1S-RR-2017.

How are the prices of drugs fixed and controlled in Ecuador?

drugs-price

This article summarizes the system for setting and controlling the prices of drugs for human consumption[1] and points out some observations made by the pharmaceutical sector to such system with regard to the possible reform of Executive Decree 400.

Pricing

The pricing of drugs corresponds to the National Council for Fixing and Reviewing the Prices of Drugs for Human Use and Consumption (hereinafter, the “Council”).

The Council sets the prices in accordance with the Regulation for the Pricing of Drugs for Human Use and Consumption (hereinafter, the “Regulations”). This Regulation foresees three pricing regulations: regulated, direct, and released as explained below.

1. Regulated Pricing Regulation

This regulation establishes a ceiling price for each market[2] segment of strategic[3] and new drugs[4].

For registered[5] drugs considered strategic, the ceiling price shall be the equivalent to the median of the retail prices of the private market of the participating drugs in the corresponding market segment, excluding those prices considered atypical. Drugs with retail prices lower than the ceiling price will not be able to increase their prices.

For new drugs, the Council must decide beforehand whether it is a strategic drug or not. If the drug is strategic, the therapeutic advantage of such shall be analyzed:

  • If there is no therapeutic advantage, the ceiling price shall be determined based on a drug-economic analysis between the drug and the existing therapeutic alternatives.
  • If the drug has a therapeutic contribution, the marketing price of the same drug in other countries (at least three) shall be considered, and its ceiling price shall be the equivalent in national currency to the average price of the three lowest reference prices adjusted by the purchasing power parity.

In this case, the Council has a maximum term of sixty (60) days from the submission of the request to issue a reasoned resolution determining the market segment to which the drug belongs and the maximum price at which it may be marketed.  If this is not done within that period of time, the price proposed by the applicant[6] is deemed fixed until the Council comes to a resolution.

2. Direct Pricing Regulation

The Direct Pricing Regulation is an exception and consists of the Council’s unilateral determination of the prices of drugs for human use and consumption.

The Council applies this regulation in the following cases:

  • When the sale prices to the public to which the drug is marketed have exceeded the ceiling for the corresponding market segment established by the Council.

The new price shall be calculated according to the formula below, where P * is the price fixed directly by the Council, A is the ceiling price according to the market segment to which the drug belongs, and B is the effective price at which the drug was marketed.

P * = A2 / B

In this case, the drug will be subjected to Direct Pricing Regulation for a period of three (3) years.

  • When the sale prices to the public to which the drug is marketed under the regulated pricing have been increased annually in a higher percentage than the accumulated inflation of the year.

If this is the case, the Council shall set as the new selling price, the price at which the drug was already being marketed minus the last annual increase recorded for that drug. The drug will be subjected to Direct Pricing Regulation for a period of two (2) years.

  • When drugs classified as new and strategic are marketed without prior fixation of ceiling prices by the Council.

To calculate the ceiling price, It shall be considered if the current sale price of the drug exceeds or not its price defined by its market segment.  In the first case, whenever it is a new drug, the new price shall be obtained based on the formula indicated in letter a); in the second case, the price at which the offender was marketing the drug shall be set as the sale price.

In both cases, the drug being the cause of infringement will be subjected to Direct Pricing Regulation for a period of three (3) years.

  • When the prices and information provided to the Council are not true and there is an intention to hide, omit and / or falsify information with the purpose of deceiving the State and / or obtaining any particular benefit.

In this alternative, the price to be set will be the one corresponding to its market segment as per the last price revision carried out by the Council. If the Regulated Pricing had been applied, the price shall be reduced by ten percent (10%) for each year or period in which the drug was sold at a price set based on non-truthful information, or up to a maximum of 70% reduction.

The offender will be subjected to Direct Pricing Regulation for twice as much the time he committed the infraction.

In the event of committing the same offense again in any of the aforementioned cases, the Direct Pricing Regulation will be applied to the importer, national laboratory or distributor for an additional period of five (5) years.

3. Released Pricing Regulation

This rule applies to those drugs that are not classified under the Regulated Pricing or the Direct Regulated Pricing. Their prices will be freely determined; the holder of the health registry must notify the Council the price of the respective drug on a bi-annual basis.

Pricing Control

No drug can be marketed at a retail price above the ceiling price set by the Council.  Therefore, the retail price of all drugs must be printed in their secondary packaging permanently.

To ensure compliance with the ceiling prices set by the Council, the National Agency for Health Regulation, Control and Surveillance – ARCSA performs field checks on a regular basis.  When a breach is identified, the ARCSA notifies the Technical Secretariat of the Council which will issue a reasoned report to the Council, so that the latter may apply the Direct Pricing Regulation as appropriate.

Additionally, when the Council receives a complaint about the breach of ceiling prices, it will notify its Technical Secretariat to verify its existence.  In the event that such breach was verified, the Council will apply the Direct Pricing Regulation.

Observations

The Regulation has been object of commentaries and questions on the part of the pharmaceutical sector because it considers that the regulation does not respond to the reality of the market, to the development of the pharmaceutical industry, and/or to the interests of the consumer.

In 2017, PhRMA[7] concluded that the Ecuadorian government’s price control represents a barrier to access the market.  According to PhRMA, the Regulation might have caused uncertainty in the pharmaceutical industry because, among other things, the scope of its application or the criterion according to which medicines will be categorized as strategic under the Regulated Pricing Regime is not clear.

PhRMA also pointed out that in respect to drugs classified within the same therapeutic area, the price system does not adequately take into account differences in quality, efficacy or safety. These factors would affect the quality of medicines in Ecuador, threaten the patient’s safety, and reduce the incentives to introduce innovative medicines in the Ecuadorian market.

The observations made by PhRMA are not alien to the local opinion. Several representatives from the pharmaceutical sector consider that the term “strategic medicine” should be eliminated and another simpler and clearer term should be included; one that stablishes directly when the price of a drug must be regulated or released.  In addition, PhRMA proposes to recognize pharmaceutical technological innovation as an element to differentiate the prices of drugs that, although sharing the same active ingredient or fixed dose of active ingredients or pharmaceutical form with other medicines, they include, for example, new devices that facilitate their posology and administration.

In relation to the Regulated Regime, it was pointed out that drugs with sale prices to the public lower than the ceiling price set by the Council cannot increase their sale price. The effect of this provision is the “creation” of two groups of medicines that must compete in the market with different ceiling prices, despite sharing the same active ingredient or combination of active ingredients, the same pharmaceutical form up to the first level of disaggregation and the same concentration.

This provision has caused the industry to maintain the existence of a “double ceiling” and to question the convenience of applying different prices to drugs that correspond to the same market segment, “punishing” those who offered a drug at a price lower than the one fixed by the Council subsequently.

Regarding the application of the Direct Pricing Regulation, specifically when a drug is sold at a price higher than the one set by the Council, it is highlighted that the holder of the health registration of the drug only finds out about the alleged breach when notified with the Resolution that unilaterally fixes the new ceiling price, without having the opportunity to exercise its legitimate defense and present the corresponding discharges before the application of the sanction regime.

In view of the above, the willingness of the Presidency of the Republic and the Council to hold meetings with the pharmaceutical sector in order to analyze the reforms needed to the Regulation is commendatory.

Mario Fernández
Asociatte at CorralRosales
mfernandez@corralrosales.com


[1] Decree 400 (Second Supplement to the Official Registry 299, 29-VII-2014).
[2] According to literal n) of Art. 2 of the Regulation, the market segment refers to medicines that correspond to the same active ingredient or combination of active ingredients, to the same pharmaceutical form up to the first level of disaggregation and to the same concentration.
[3] Strategic medicine is considered to be one that meets the criteria established by the Council through Resolution No. 07-2014. Through Resolution No. STLM 16-660, the Council authorized the publication of the FAITH OF ERRATAS of Resolution No. 07-2014.
[4] According to literal l) of Art. 2 of the Regulation, a medicine is considered new when: (i) a drug whose active ingredient or fixed-dose combination of active ingredients is not commercialized in the Ecuadorian pharmaceutical market; and, (ii) a drug whose active ingredient or fixed-dose combination of active ingredients is commercialized in the Ecuadorian pharmaceutical market and it requests pricing in a concentration or pharmaceutical form different from those already commercialized in the country.
[5] According to literal k of Art. 2 of the Regulation, a registered drug is understood to be those whose active principles or combinations of active principles have already been registered with the Health Authority and / or previously commercialized in the national market, under any pharmaceutical form, pharmaceutical concentration, commercial presentation, denomination or brand.
[6] According to the literal or Art. 2 of the Regulation, an applicant is understood to be a duly authorized natural or legal person who requests the Council to set the price of a medicine for human use or, when that is not possible, notifies the price for sale to the public.
[7] Pharmaceutical Research and Manufacturers of America (PhRMA). “Special 301 Submission 2017”. En: http://phrma-docs.phrma.org/files/dmfile/PhRMA-2017-Special-301-Submission.pdf. Pages. 121 a 124. Ibidem.

What you need to know about purchase orders

purchase-orders

The purchase process, especially in large companies, has become a complex process in which it is necessary to give specific answers that are legally supported in the shortest possible amount of time. It is usual to require a contract for each transaction, but this delays the purchase processes. Purchase orders used effectively can contribute to run a more dynamic business and to save time and money.

But, what is a purchase order?

A purchase order is a document that a buyer sends to a seller in which the scope and details of the services or products required and accepted by the parties are specified. Generally, pre-established forms or documents are used to better specify data and references. They usually have the title “Purchase Order” printed.

The legal value of a purchase order

When a buyer generates a purchase order by formally accepting an offer or proposal from the seller, a binding contract is generated for both parties.

For this reason, it is important to know that the purchase order protects both the buyer and the seller, against any eventuality or controversy, depending on the terms and conditions established in the offer and the purchase order.

Electronic purchase orders

Many companies are now using electronic purchase orders, where the whole process is carried out through a platform. This platform is a centralized system in which the purchase documents are registered. This system is convenient because it saves time and paperwork.

For this type of transactions, it is recommended to have an Electronic Transaction Agreement[1].

What must a purchase order contain to be valid?

The more specific and detailed the purchase order, the more secure the transaction will be. It is recommended that at least it contains the following:

  • Identification of the parties (buyer and seller);
  • Detail of products and / or services;
  • Quantity;

Electronic Transaction Agreement: its purpose is to establish the principles and rules applicable to those cases in which the contractual parties offer or accept products and / or services electronically. The recently published Commercial Code regulates electronic transactions, indicating that they are fully valid and effective (Arts. 238 to 247). Regarding contracts, Art. 76 defines the Electronic Services Commercial Contract as: “(…) the agreement of wills between a provider and a user for the authorization of an electronic system or platform that allows the performance of any activity, commercial, financial, or service transaction to be provided by the same provider or a third party ”.

  • Price;
  • Payment form;
  • Delivery details (when and where).

How do purchase orders facilitate business?

  • They generate fewer complications in the negotiation of a contract.
  • Legal representatives save time since the purchasing department has been designated to issue such documents.
  • They are an excellent mechanism to maintain proper monitoring of transactions.
  • They allow having a better control of the budget.
  • With electronic purchase orders you save time, paperwork and signatures, in addition to having an electronic record of all transactions.
  • Provides both vendors and buyers with a supporting contractual document with full legal effect.

Should a contract be signed after a purchase order has been issued?

It is not necessary or convenient. The purchase order is a full value contract; signing a contract duplicates documents unnecessarily.

Should the purchase order contain contractual terms and conditions?

The purchase order may or may not contain contractual terms and conditions. However, when the offer presented by the seller is solely economic and no previous contractual terms and conditions have been agreed, it is convenient to include at least basic terms and conditions in the purchase order.

However, if there is a proposal by the seller that contains contractual terms and conditions, it would be advisable to negotiate the conditions in that document and not include others in the purchase order, thus avoiding having two documents with different terms and conditions.

When you are going to start a business relationship with a new supplier, it is recommended to agree on the terms and conditions that apply to all transactions from the beginning, so it is not necessary to establish new terms and conditions in each transaction.

What problems could the purchase orders generate?

Incomplete or defective purchase orders can generate conflicts as exemplified in the following cases:

  • The content of the purchase order contradicts the terms and conditions of the offer or proposal.
  • The document is not specific enough in the basic content and there is no clarity in the scope of purchase.
  • The terms and conditions of the purchase order differ from those of the offer without determining the ones that prevail.
  • A purchase order is used as an award letter and the signing of a contract is subsequently required.

What are the differences between a purchase order and an invoice?

They are totally different documents. However, both contain similar characteristics and information since they contain the details of the commercial transaction carried out.

  • The purchase order is issued by a buyer and contains the details of your request.
  • The invoice[2] is issued by the seller and indicates all the details of the merchandise or service and its payment.

María Isabel Torres
Asociate at CorralRosales
mtorres@corralrosales.com


[1] Electronic Transaction Agreement: its purpose is to establish the principles and rules applicable to those cases in which the contractual parties offer or accept products and / or services electronically. The recently published Commercial Code regulates electronic transactions, indicating that they are fully valid and effective (Arts. 238 to 247). Regarding contracts, Art. 76 defines the Electronic Services Commercial Contract as: “(…) the agreement of wills between a provider and a user for the authorization of an electronic system or platform that allows the performance of any activity, commercial, financial, or service transaction to be provided by the same provider or a third party ”.

[2] Invoice: proof of sale that proves the transfer of goods or services. In addition, the invoice serves in the tax law to establish the tax base of certain taxes.