The defense of unclean hands defeats a motion for a preliminary injunction under Law 75 and force majeure does not apply to excuse the dealer’s anticipatory breach of contract

In Next Step v. Bromedicon,2014 TSPR 30, 190 D.P.R.__, the Supreme Court of Puerto Rico ratified the norm that equitable defenses, such as estoppel, laches, and unclean hands (“actos propios y manos sucias”), are affirmative defenses to a motion for a preliminary injunction under Law 75.

The case of Automatic Teller Machine Group Corp. v. Qualtex Corporation, 2014 WL 5024070 (TCA Aug. 29, 2014), cert. denied, (P.R. 2015),, aptly illustrates the application of the principle in Next Step and prior cases that a party who requests equitable relief must come to the court with clean hands. There, ATM Group, a Puerto Rico corporation dedicated to selling, leasing, and servicing ATM cash machines, sued Qualtex, a stateside corporation that provides electronic data processing services to the ATM machines and their customers and end-users. The parties signed a Distributor and Service Agreement in which, in relevant part, ATM Group was bound to use Qualtex’s data processing services exclusively during the duration of the agreement.

ATM Group sued Qualtex in local court under Law 75 for termination of the agreement and requested damages and injunctive relief. Plaintiff alleged that Qualtex terminated the agreement after plaintiff had “transferred” 131 ATM’s from Qualtex to National Link, a competitor of Qualtex that provides data processing services. ATM Group alleged that it was justified in breaching the exclusivity obligation in the distribution agreement because of alleged “force majeure” in which Cash Connect, a company that supplied cash to replenish the ATM machines, withdrew from the Puerto Rico market. This allegedly unforeseen market withdrawal had occurred at least 60 days before plaintiff unilaterally and without prior notice decided to convert the 131 machines to Qualtex’s competitor. Qualtex responded that the defense of unclean hands and exceptio non adimpleti contractus under Article 1077 of the Civil Code barred the request for a preliminary injunction because ATM Group repudiated the exclusivity provision and force majeure did not apply as plaintiff’s damages were of its own making.

After an evidentiary hearing, the trial court agreed with Qualtex and denied plaintiff’s motion for a preliminary injunction. The trial court held that plaintiff qualified prima facie as a Law 75 dealer, but that applying the factors in Next Step, the balance of the equities weighed against the granting of injunctive relief as plaintiff breached its contractual obligation before Qualtex terminated the agreement, the doctrine of unclean hands applied, and there was no force majeure.

The intermediate appellate court in a reasoned opinion denied certiorari, and plaintiff filed a cert. petition in the Supreme Court of Puerto Rico, which is pending to date.

Diana Pérez, CAB’s associate, and the undersigned as lead counsel, tried the case for Qualtex and are defending it in the appellate courts.

The Supreme Court of Puerto Rico grants certiorari to review important questions of contractual interpretation arising from an order granting a preliminary injunction under Law 75

The Court has decided to review another case granting a preliminary injunction under Law 75. In an earlier case, Next Step, the Court determined that a dealer had not clearly established the existence of an exclusive distribution agreement to claim a right to preliminary injunctive relief for impairment of contract under Law 75. In Caribe RX v. Grifols Inc. and Cardinal Health, Consolidated Nos. CC-2014-772, CC-2014-773, cert. granted, (P.R. Dec. 12, 2014), the main issue is similar: whether the Court of First Instance, San Juan Part (Hon. Giselle Romero, since then appointed to the intermediate local appellate court), abused its discretion in granting a Law 75 preliminary injunction.

After an evidentiary hearing and the posting of a bond of only $3,500, the trial court enjoined Grifols Inc., a global healthcare company, from selling and distributing any plasma-derived protein therapies for critical care patients in Puerto Rico through any distributor, hospital, or provider other than through plaintiff Caribe RX, a Puerto Rico distributor. The distribution agreement between Grifols and Caribe RX is expressly non-exclusive for certain products and expressly exclusive for others. The agreement has integration and completeness provisions that supersede prior verbal agreements and understandings. The intermediate court of appeals denied the petition for certiorari. See Caribe RX v. Grifols, Inc., 2014 WL 3831632 (TCA June 30, 2014).

Caribe RX claimed, and both the trial court and the intermediate appellate court agreed, that the parties had entered into a “verbal agreement”, before execution of the written agreement, in which Caribe RX would have exclusive full-line distribution rights in the future upon expiration of Grifols’ agreements with certain stateside resellers. This promise never materialized, and the parties knowingly, willingly and voluntarily signed the non-exclusive distribution agreement that expressly disavowed any such promise. The contract was renewed annually on the same terms and conditions. There was no claim in the action of fraudulent inducement of contract or any defect in the consent. No evidence was introduced at the hearing that Grifols had impaired the written agreement by selling to another distributor any of the products over which Caribe RX had written exclusive distribution rights. However, Caribe RX claimed that Grifols allegedly breached the verbal agreement by offering new products (over which it also claimed to have exclusivity and had never sold them before) to Cardinal Health for resale in Puerto Rico.

In the view of the lower courts, a verbal promise of exclusivity, especially when it is not rebutted by oral testimony, should have more weight than the clear and unambiguous terms of the valid non-exclusive contract. This is, of course, not the law. The lower courts appeared to side with Caribe RX for two reasons, first, because Caribe RX’s principal (who is also a lawyer) testified that the contract that he signed did not mean what it said and Grifols presented no witness at the hearings to rebut the lawyer’s account of the facts before execution of the contract (in effect, shifting to the respondent Grifols the ultimate burden of proof on a Law 75 claim). Second, the lower courts accepted Caribe RX’s argument that the Civil Code allows verbal evidence to find the “true intent” of the parties despite a clear and unambiguous written agreement.

The rationale of the lower courts clashes on its head with the holding in Marina Industrial v. Brown Boveri, where the Supreme Court of P.R. enforced an integration clause in an agreement governed by Law 75 to render inadmissible verbal evidence offered to modify or contradict the clear terms of a commercial agreement. The Grifols decision also raises an important question of public policy whether stateside investors, who are lured by government incentives and special laws providing significant tax advantages from transferring their wealth and fortunes to Puerto Rico, can reasonably expect to rely on our local courts to enforce the terms of clear and unambiguous written commercial contracts as the sole expression of the intent of the parties.

Giving effect to Marina Industrial, and the evidence presented at the hearings, the Court should conclude, after applying Next Step, that it was an abuse of discretion to grant a preliminary injunction in this case and remand for further proceedings.

Carla Loubriel, CAB’s associate and the undersigned, as lead counsel, tried the case for Grifols at the Court of First Instance and briefed the certiorari at the intermediate court of appeals.