Friday, June 6, 2014
Is an automobile manufacturer obligated to reimburse sales and use taxes (IVU) levied on repair parts used by the dealer in warranty repairs and maintenance services?
The case at hand, Autogermana, Inc. v. BMW of North America, 2014 WL 2159557 (D.P.R. May 23, 2014)(BJM), involves interesting issues of contract interpretation in the context of claims for impairment of contract under Law 75. Does a refusal to reimburse the dealer for IVU taxes impair contractually-acquired rights, the litmus test for an impairment claim under Law 75? Navigating the waters of the Civil Code, the canons at issue include: “contract terms are clear when lucid enough to be understood in one sense alone…”; “where a contract is ambiguous or silent on an issue, the intent of the parties at the time of contracting controls”; “the terms of a contract should be read as a whole…”; and where a contract dispute centers on the intent of the parties, summary judgment is disfavored but not precluded.
In 2006, Puerto Rico enacted the IVU of 5.5% for the Commonwealth and 1.5% for the municipalities. Under a closing agreement with the Treasury, Autogermana, a BMW dealer, paid to the Treasury over $728,000 in back IVU taxes for parts used in repairs and maintenance services between 2006 and 2010. Autogermana reached a similar agreement with the Municipality of San Juan and paid over $74,000. While BMW reimbursed Autogermana for IVU taxes prospectively after 2010, it refused to reimburse it for the prior years. And a lot of money was at stake.
That’s where the contractual documents come into play and the Court found competing and conflicting inferences that preclude summary judgment. For the dealer’s benefit, the manufacturer’s reimbursement policies provide that dealers are entitled to recover reasonable and justified costs associated with warranty repairs. The Court found an ambiguity as to whether the parties intended to reimburse IVU taxes on parts used for repairs and maintenance. For the manufacturer’s benefit, the documents provide that dealers receive a 40% handling charge (reimbursement or payment) for parts and warranty repairs and this reasonably could be meant to include sales and use taxes; and the IVU was not contemplated as a specific reimbursable item. The solution? Let the jury decide.
For its part, BMW moved for summary judgment relying on a quasi-statute of limitations in the contract for submitting warranty claims within a specific time frame, provisions that the Court also found to be ambiguous. The Court found ambiguity as to when the 30 day deadline began to run to submit the claim. If it was from the date of actually incurring the expense, as opposed to the last repair, then a jury could reasonably find that the 30 day period was not a bar because the claim accrued in 2011 with the closing agreement and by then, BMW had been on notice of the claim. All motions for summary judgment were, therefore, denied.
Wednesday, June 4, 2014
It has been judicially settled that Law 75 contracts, unlike civil contracts with indefinite terms, are not terminable at will by the principal unless there is just cause. Because of public policy considerations, a Law 75 contract does not expire automatically at the end of its term, unless there is just cause to refuse to renew or terminate.
These legal precepts under Law 75, as well as the variable standards for legal malpractice claims depending on whether those turn on pre-litigation advice or malpractice in ongoing litigation (applying doctrine of a case within a case), causation, damages and insurance coverage, are at the heart of the controversy in Citrus World, Inc. v. Ferraiuoili et. al., 2014 WL 1007744 (D.P.R. March 14, 2014)(JAG/SCC)(granting in part and denying in part cross motions for summary judgment).
The imbroglio began when the principal Florida Natural, a producer of fresh orange juice, unilaterally cancelled the Puerto Rico distributor’s non-exclusive contract. Not surprisingly, the distributor Méndez & Co. sued Florida Natural in federal court for wrongful termination and damages under Law 75. During discovery, the principal explained that the agreement had expired on its terms, so essentially it believed there was no agreement in effect and had no obligation to continue the relationship. As a backup affirmative defense, the principal alleged that the distributor had breached certain marketing obligations (that provided just cause) but those obligations had not been part of the four corners of the contract. On this contractual interpretation issue, Méndez prevailed on partial summary judgment and successfully persuaded the Court (J. Fusté) to strike the just cause defense for it relied on extrinsic evidence. Without proof of just cause, the termination of a non-exclusive contract, the entry of partial summary judgment, and proof of actual damages, the case fell into mediation and promptly settled a few weeks before trial.
After the settlement, Florida Natural went after its trial lawyers and its insurer in the now pending federal malpractice case. There, Florida Natural waived the attorney client privilege to put at issue counsel’s communications and claimed that it terminated the non-exclusive agreement after relying on an incorrect opinion of counsel that it had expired on its own terms. While the Court (Sylvia Carreno, U.S. Magistrate Judge) agreed in her report that litigation counsel gave negligent advice about existing Puerto Rico law on that issue, it determined that there were issues of fact as to whether Florida Natural contributed to the negligence by terminating the agreement and if the firm’s incorrect legal advice proximately caused the damages. The court also ruled that litigation counsel had been negligent by not filing a compulsory counterclaim for collection of monies based on the incorrect belief that it required an independent basis of subject matter jurisdiction. As to the insurer, it denied the MSJ to the extent there is coverage under the policy for the legal fees incurred by Florida Natural in the underlying litigation, but there is no coverage for the fees incurred in the malpractice case unless otherwise required by the policy. The parties’ respective MSJ’s were granted in part and denied in part.