Monday, March 21, 2016

Federal court grants supplier's motion for summary judgment dismissing Law 75 case for lack of timely payment

There are a number of permutations for when lack of timely payment may or may not be just cause as a material breach of contract under Law 75. The legal proposition is that paying on time is "normally" one of the dealer's essential obligations, the breach of which may be just cause for termination. But that proposition has never been an absolute rule because paying on time is not always an essential obligation. Saying otherwise that, as a matter of law, paying of time is always essential would lead to absurd or unjust results (for example, is late payment by one day of one invoice automatically just cause to terminate a long-standing business relationship?) or may ignore the commercial reality of the relevant industry, the terms of the contract itself, or the course of conduct of the parties.

Any notion that paying late or making incomplete payments is always or automatically just cause when the supplier protests, is legally incorrect and misguided. Paying on time is not essential and may not be just cause in at least three situations: when an integrated contract specifies all of the dealer's essential obligations and excludes timely payments (the Casco vs. John Deere contract was of this mold) or in the unusual situation where the supplier is not serious about or accepts late payments. To add to the mix, a dealer may also allege and prove to the trier of fact (as in Casco vs. John Deere) that the dealer's alleged breach of contract was a subterfuge or a pretext to terminate the agreement for ulterior motives or that the supplier contributed to payment problems.

But, when the dealer's contract clearly specifies that paying on time is essential and there is no evidence of a subterfuge or pretext and nothing on record indicates that the supplier has not cared about late payments (and what it has meant to "care or not" depends on the facts of each case) courts have uniformly granted summary judgment in the supplier's favor.

Kemko Food Distributors Inc. v. Schreiber Foods Inc., 2016 WL 814833 (D.P.R. Feb. 29, 2016)(Hon. Pedro Delgado, J.), is one of those cases where the contract and the facts hurt the dealer.

There, a supplier of food service products appointed the Puerto Rico dealer as its exclusive distributor, but the contract expressly made the appointment contigent on both making timely payments and making sales efforts. For 18 consecutive months before the termination, the dealer paid late and it became a serious concern to the supplier. Judge Delgado recognized situations where timely payments are not essential obligations and found them to be inapplicable to the facts of that case. With undisputed evidence of a breach of an essential payment obligation in the contract and absent any proof of a pretext or subterfuge, the court granted the supplier's motion for summary judgment.