Wednesday, December 24, 2014

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.