In one of the most noteworthy Law 75 cases for suppliers since the Medina and Nike decisions of the 1980’s, the federal district court in Casco Sales v. Maruyama, No. 10-1145 (SEC)(D.P.R. Nov. 2, 2012), granted the supplier’s MSJ finding just cause for termination of an exclusive distribution agreement for the sale of landscape equipment.
The case is significant for respecting liberty of contract and sweeping aside multiple factors that in the past have been obstacles precluding summary judgment in Law 75 cases, such as: the materiality of essential contractual obligations, acceptance of late payments vs. acquiescence or tacit consent, the dealer’s knowledge of the grounds or basis of the termination and the sufficiency of the termination letter, cumulative effect of arguably non-essential breaches and the meaning of the statutory just cause prong of substantial and adverse effect to the principal’s interests, and whether looking for another distributor is sufficient to prove a pretext for the termination.
Endorsing the clear terms of the contract subscribed by the parties, the court found just cause for termination based on: 1) the dealer’s consistent breach of the payment terms; 2) the dealer's failure to provide inventory and sales reports as required by the agreement; 3) refusal to participate in the supplier’s “booking program”, and 4) the dealer’s failure to hire and train sales personnel to market the principal’s products and to maintain an adequate sales force.
Late payments. The court distinguished First Circuit precedent holding that summary judgment is inappropriate in “abnormal circumstances” where the supplier “does not care” about late payments. The court found that the contractual terms were essential obligations and the principal had not waived the payment terms or acquiesced to accepting late payments. According to the Court, accepting late payments is different from acquiescing or tacitly consenting to them. Failure to pay on time affected the principal’s ability to sell equipment and led to credit holds which satisfied the “independent ground” for just cause in Section 278. In sum, accepting late payments did not operate to novate the payment terms in the agreement. Nor does providing a payment plan proscribe the principal from terminating the agreement in the future. It certainly did not help the dealer that, at the time of termination, it owed the principal $57k in unpaid invoices.
Notice of termination. The Court rejected an argument that Law 75 or the agreement required a “warning” or “threat” that the dealer’s contractual non-compliance would be a ground for termination. Although the termination letter “could have been better drafted” to provide “a succinct explanation” of the breaches of the agreement, there is no requirement in Law 75 that the supplier send the dealer written notice detailing every possible basis for termination. The only requirement is the existence of just cause and the agreement provided notice of the grounds for termination. The court held that the “cumulative weight” of the dealer’s “other contractual breaches” even if deemed non-essential (besides failing to pay on time that breached an essential obligation), was detrimental to the parties’ relationship and adversely and substantially affected the principal’s interests (and proved just cause).
Pretext. The Court rejected the dealer’s argument that the termination was a pretext to switch distributors. The Court found nothing wrong that the principal, to avoid a serious disruption in sales, had been looking for other distributors at the time of termination. “Prohibiting such a sensible approach...would deal a severe blow to our free enterprise system.”
Note: Before discovery and the filing of the MSJ, the Author served as the mediator in the case.
