Doing Business in Puerto Rico Blog: Business Coaching, News & Developments

NEW REGULATIONS ON DECEPTIVE ADVERTISING

Merchants doing business in Puerto Rico need to be aware that the Consumer Affairs Department (“DACO”) enacted comprehensive regulations on deceptive advertising. These became effective on November 12, 2006. You can obtain a copy in Spanish by clicking here: Downloadreglamento_unico_y_final_contrapracticas_y_anuncios_enganosos_final.doc

Some of the key provisions include:

• ADVERTISING: 

• The smallest type allowed in a published ad is 8 points.

• No signs, technical or incomprehensible abbreviations are allowed if they may tend to create an erroneous impression of the price, terms of sale or other characteristic of the product or service advertised.

• Any expression qualifying, clarifying, or providing additional details of the ad must be included in a box below the ad.

• In television commercials, the qualifications and conditions of the promotion must be presented through visual and audio means and may not use words, sound effects or other means that tend to obscure, confuse or distract the attention or lessen the meaning or importance of the expressions that clarify or qualify the offer.

• Any expression clarifying, modifying or conditioning an offer though television or other audiovisual means will be shown in a clear and legible manner; in the safety zone of the screen; and for a sufficient period of time so that a reasonable and prudent person may understand it. The letters used must be of a color that will contrast with the background. The background may not contain color or images that will distract or obscure the attention, or lessen the meaning or importance of the expressions that clarify or qualify the offer.

• All visual representations used in an ad must correspond to the real characteristics of the good or service. Phrases such as “item offered not as illustrated” are not allowed to justify compliance with this rule.

• RAIN CHECKS:  When the item advertised is not available, the merchant will be required to offer the consumer an alternative consisting of a similar item of equal or superior quality.

• If the consumer insists on the item on sale, the merchant will offer a rain check which shall mean that the merchant will : (1) have the good available for the consumer within 30 calendar days; (2) notify the consumer via phone or through regular mail that the item is ready for pickup; (3) maintain the item for pickup during a period of fifteen (15) days following the notice ; (4) offer a similar item of equal or superior quality if the item is not available within the thirty (30) day period. In this case the price will be the same as the item on sale and the merchant must be able to show that it complied fully with these provisions.

• SHOPPERS:  Unless the period is fixed on the ad, the duration of a sale advertised via shoppers or leaflets included in daily newspapers will be- 30 days from the date of the publication.

• REBATES: Merchants may not advertise a final price applying a rebate to an item unless the rebate can be discounted instantaneously at the register.  If the discount is not available at the time of purchase, the price advertised will be the regular price and in a separate area the merchant may indicate the discount available through the rebate. However the print can never be larger than half the size of the letters used to advertise the regular price.

• RECEIPTS: All merchants must issue receipts for payment of goods and/or services.  The receipt must include the date of the transaction, the nature of the service or product, the person or entity receiving the payment and the amount and method of payment. In addition, the information must be printed in durable format, legible for a minimum of one (1) year or for the duration of the warranty issued whichever period is longer.  For example thermal paper usually fades before that time.

• WARRANTIES: All Advertising that claims to have a warranty must indicate whether the warranty is full or limited. Limited warranties must explain the nature of the limitations and the time during which the warranty will be valid.

• MANDATORY POSTERS: All merchants operating in Puerto Rico must publish in a visible area and in clear and legible words a poster containing the following notice:

En una venta especial, cuando no se encuentre disponible el bien anunciado, el comerciante escogerá y vendrá obligado a ofrecer al consumidor en sustitución otro bien similar, de igual o superior calidad al anunciado, por el precio del bien anunciado. Si el consumidor insiste en la entrega del bien anunciado, el comerciante deberá ofrecerle un vale (“rain check”). Esto no incluye ventas especiales de liquidación por temporada o inventario, ni ventas especiales en donde se limita el tiempo y la cantidad a cincuenta (50) artículos, siempre que dicha salvedad quede claramente incluida en el anuncio. Publicar anuncios engañosos es ilegal. Incurrir en tal práctica conlleva pena de multa de hasta un máximo de $10,000. El consumidor podrá someter una querella ante el Departamento de Asuntos del Consumidor (DACO). Ley Núm.5 de 23 de abril de 1973, según enmendada”.

• All posters must be at least 8 ½ x 11 inches with letters printed in a font not smaller than 20 points.

• The posters must be placed in a visible area in each of the points of sale (not farther than a distance of five (5) feet of the point of sale and a height between four (4) and seven (7) feet from the floor. 

Puerto Rico's Sales & Use Tax News

The new Sales & Use Tax (‘IVU’ in Spanish) which became effective November 15, 2006 includes a 5.5 percent sales tax  for the central government and up to 1.5 percent for  local governments which can impose their own sales tax. This tax applies to most consumer goods- sold, used, stored or used- but does not apply to fresh food (unmixed, served without utensils, unheated) or cars (already subject to a different tax).   Services are taxable unless specifically excluded. For example, funeral services are not exempt but educational, insurance, medical and legal are. Manufacturers are excluded.  Merchants selling goods subject to the tax are deemed withholding agents and must collect and remit tax along with the filing of monthly returns.

All merchants doing business in Puerto Rico must register with the Treasury Department (regardless of whether they are exempt or not) and request a Certificate of Merchant Registry. This can be done over the phone by calling 1 888 721 5551,  by e-mail - ivuconsultas@hacienda.gobierno.pr or online at: http://www.hacienda.gobierno.pr/ivu/.

The Merchant Certificate (or Certificate of Exemption, as the case may be) will be issued by the Treasury Department and it will be the merchant’s  authorization to do business in Puerto Rico and sell taxable goods subject to the ‘IVU’. Of course this is just one of many authorizations and permits a business must have before it can lawfully operate in the Island.  The Certificate of Exemption identifies a Merchant as a re-seller or manufacturer exempt from payment of the IVU in purchases related to its business activity. 

All withholding must be informed in a monthly return that can  be filed over the phone,  online (www.hacienda.gobierno.pr ) or via mail:

DEPARTAMENTO DE HACIENDA PLANILLA MENSUAL IVU PO BOX 9024140 SAN JUAN, PR 00902-4140

It must be done no later than the 20th day of the following month of the date the transaction took place. Depending on the method of filing, payment can be made through a variety of means including check or money order or electronic transfer of funds. Merchants with a volume of sales exceeding $500,000 must file the return and pay through electronic means. You will need your Sales and Use Tax Registration Number (IVU) to file and pay your business taxes online. However as of this article,  it seems that the Treasury’s online paying system is still in the testing phase.

NOT ALL BONDS ARE CREATED EQUAL

A recent case illustrates the vital importance of the wording used in a performance bond. When two separate contractors engage in a joint venture and things go awry, performance bonds linked to their work will come into play. Failing to procure a proper bond can create financial chaos. So before signing above the dotted line, the contractor needs to read beyond the title of the document and learn what are the actual duties and obligations under the bond. See, Constructora Andrade Gutierrez v. American International Insurance, Court of Appeals 1 Cir.

The case involves Puerto Rico law, an insurer and two construction companies; Constructora Andrade Gutierrez (CAG) from Brazil and C&M based in the Dominican Republic. The controversy centered around a performance bond for  construction in Haiti. C & M and CAG originally joined forces to bid on a highway project and - “In the event that their joint venture won the contract, CAG agreed to provide 100% of the guarantees for performance and payment to the Republic of Haiti and C & M agreed to provide a counter-guarantee to CAG for C & M's participation in the project."

Owners of a project typically require from construction companies several types of bonds. To bid, the construction company must post a bid bond guaranteeing it will comply with the terms of the bid if awarded. With the performance bond, the constructor pledges that it will complete the awarded contract faithfully and according to its terms. As required, CAG provided  Haiti with a performance bond. To cover C& M’s obligations with CAG, C & M purchased a bond with American International Insurance Company (AIICO). AIICO’s bond provided in its wording  that  "it was an irrevocable and unconditional guarantee . . . for the completion by the contractor (C&M) of its obligations to (CAG) pursuant to the stipulations of the contract dated May 6, 1996."

AIICO and C&M later entered into a side agreement regarding the performance bond it had issued to the benefit of CAG. It stipulated that C& M had to indemnify AIICO for all losses incurred if CAG executed or demanded payment under the bond. Furthermore, C & M was automatically liable to AIICO for any losses as soon as CAG asserted a claim against AIICO; regardless of whether or not AIICO had made payment. C & M further agreed that AIICO could recover from C & M any disbursements made to CAG it in good faith; whether or not such liability existed.

As the court adeptly defined it – “The sweeping language [could] be reduced to five words: "If we pay -- you pay." With the contract, C & M forfeited whatever possibility it had to control - in some way-   how and when AIICO would pay the bond; at the same time remaining fully accountable for all payments made. SO, if CAG made a claim to AIICO and AIICO decided to pay, C & M had to pay back AIICO; even if C & M understood it had fully complied with its obligations.

During the course of business C & M and CAG tried in vain to settle disputes that ensued. At the end, CAG notified AIICO that C & M was in default and demanded payment. AIICO initially denied payment. CAG sued AIICO  in the U.S. District Court for the District of Puerto Rico, under diversity jurisdiction to recover the amounts that AIICO  refused to pay. AIICO filed a third-party complaint against C & M who in turn asserted cross claims against CAG (later dismissed because of contractual arbitration requirements).

On February 26, 2003, the Court entered summary judgment, against AIICO for $1,407,000, plus other assessments “finding that the bond issued by AIICO was in actuality an unconditional guarantee essentially payable on demand.” AIICO appealed but eventually settled and paid CAG $1.6 million. C & M filed for appeal.

The AIICO bond stated that “We the undersigned, American International Insurance Company of Puerto Rico, hereby establish in the name and for the account of C.M. Constructora, S.A., an irrevocable and unconditional guarantee in the amount of FIVE MILLION SIX HUNDRED NINETY-SIX THOUSAND THREE HUNDRED TWENTY-TWO and 42/100 United States dollars (US$ 5,696,322.42). " The court viewed the phrase "irrevocable and unconditional" not as a performance bond but as  "the typical language of a letter of credit designed to serve as a guarantee to the beneficiary against harm caused by a contractual default, and completely independent of any other contractual obligation."

The court reasoned that “the only conditions for payment [were]. . .: (1) that CAG provide AIICO with “written notification ··· prior to the expiration date” of May 6, 1999, and (2) that such written notification “contain[ ] the amount to be paid” and “stat[e] that the contractor [C & M] ha[d] not performed its contractual obligations."

Never assume the contents  of a performance bond.   While bonds may share a similar purpose, the specific provisions, rights and obligations vary.  Read the fine print. For example some bonds may call for opportunities to  cure before  default can be declared. Others require that a particular procedure be followed. 

The language of the AIICO bond  crippled C & M because, it did not matter whether CAG complied with its end of the deal. If CAG declared C&M in default, AIICO had to disburse the funds automatically; this despite an audit revealing that “CAG was responsible for cost overruns. . .  and that C&M's resulting losses far exceeded the amounts C&M had agreed to pay. . . .” Even under these seemingly lopsided circumstances, C & M could not prevent the Surety from paying the amounts demanded.

Summary Procedure Trips Employers

Even though, the legal process was enacted more than forty years ago, employers regularly get hammered with its provisions. I'm refering to the  summary process of labor claims, Act No. 2 of October 17, 1961. This law sidesteps ordinary civil procedure for a streamline process which contains what I call a "sudden death" provision. If an employer fails to answer a complaint filed under Act No. 2 within 10 days of being summoned, the court must enter judgment in favor of the employee.

A recent case illustrates my point.  In Teresita Cabrera v. Zen Spa, 2006 TSPR 150, a plaintiff sued its former employer  for wrongful discharge, accrued sick leave and vacation, Christmas bonus, Cobra and other violations. When the employer failed to answer the complaint within the allowed 10 days, plaintiff moved for summary judgment. The court then entered judgment against the spa.

It did not matter whether the claims were valid; or that the answer to the complaint  was filed just four days after the prescribed period; or that there were a series of complex claims joined in one process that required considerable time to respond; or that there was some confusion as to the wording of the process (giving reason to think it was an ordinary case).  The only thing that mattered was that the employer answered the complaint after the tenth day. Period.

I personally think that this provision does more harm than good and lends itself to abuse.  The ten-day limit was enacted as a counter measure to ruthless delay tactics by employers. Unfortunately, once employers pass the initial time hurdle, the case is not much  different from the regular civil process.

Of course, there are exceptions and not all employment claims can be included in the process but the law exists and employers need to be aware of it.  Rather than explaining all the ins and outs, I just want the reader to realize the severity of the processs and talk -immediately- to an employment lawyer upon receiving a summons and/or complaint of a former employee.