Puerto Rico’s commercial litigation boutique law firm launches a new website

Casellas Alcover & Burgos, P.S.C., one of Puerto Rico’s leading commercial litigation and alternative dispute resolution law firms, has a new face on the web. We are excited to announce the launch of our new website at www.cabprlaw.com

Our goal with this new designed website is to create a user-friendly browsing experience for our trusted clients, potential customers, and other visitors. As it concerns Puerto Rico’s relationship statutes, the news section of the site has links to articles on Puerto Rico Law 75, including a piece our Junior Partner Carla Loubriel and I wrote on Litigating Dealer Termination Cases in Puerto Rico published in the Franchise Law Journal of the American Bar Association, and a short piece I wrote on preliminary injunctions under Law 75 and federal rules preemption for the Puerto Rico Chapter of the Federal Bar Association.

We invite you to enjoy our website and let us know what you think.

P.R. Appellate Court affirms trial court’s judgment for agent in Law 21 case

In Ram-Rel, Inc. v. NCR International, Inc., 2018 WL 1941655 (TA Mar. 27, 2018), a panel of Puerto Rico’s appellate court affirmed the judgment of the Court of First Instance, San Juan Part, in favor of a sales representative after holding a bench trial and finding liability and awarding damages under Law 21, the special statute protecting sales representatives (who do not qualify for protection as Law 75 dealers).

For over 37 years, Plaintiff had served as an agent in Puerto Rico for NCR’s hardware and software computer products. In 1993, Plaintiff signed a new distribution agreement under which NCR agreed not to appoint other distributors or resellers to market the product to certain customers under specified circumstances. A claim arose after NCR sold directly the products that Plaintiff had a right to sell exclusively. And, in 2008, NCR terminated the distribution agreement.

Plaintiff’s complaint in the local court pleaded only a claim of damages and breach of contract under Law 75. The Pretrial Conference Report did not raise a Law 21 claim. During trial, the court determined that Plaintiff did not qualify as a Law 75 dealer. Based on the evidence admitted at trial, however, the court held that Plaintiff qualified for protection as a Law 21 agent and awarded the alternative compensation under Article 5 consisting of 5% of the total sales generated by the agent during 8 years prior to termination, for a total compensation of $243,319 plus taxable costs.

NCR did not contest the liability determination of lack of just cause on appeal but only the award of damages. The appellate court affirmed the judgment and the court’s rationale is significant in various respects. First, the appellate court held that Rules 42.4 and 71 of the P.R. Rules of Civil Procedure permitted the trial court to award any remedy at law permitted by the admissible evidence, including Law 21 damages that were not pleaded or requested in the Complaint and the Pretrial Conference Report.

Second, the court held that expert testimony was not required to prove the amount of damages permitted by the alternative compensation formula in Article 5 because there was admissible evidence of the total sales generated by the sales representative prior to termination.

Third, the court held that the alternative compensation formula does not require discounting any costs incurred in generating the sales, so that the calculation is based on gross sales as established by the statute. The court explained that this alternative compensation is meant to simplify the process and facilitate the agent, who lacks the resources, to be able to prove its claim.

Fourth, the court affirmed the trial court’s dismissal of the claims made by Plaintiff’s shareholders in their individual capacities and against officers or employees of the Defendant. The court reasoned that Law 21, as a special law, did not codify a right of action by or against anyone other than a sales representative against its principal.

Finally, the court affirmed the trial court’s decision to partially award taxable costs to Plaintiff as the prevailing party. Unlike Law 75 that has a special provision allowing attorney’s and expert witness fees to the dealer as prevailing party without a showing of temerity, Law 21 has no such provision, and there was no finding of temerity to award attorney’s fees against the principal in this case.

Law 75 case dismissed as a sanction for discovery abuses

In Skytec, Inc. v. Logistics Systems, Inc., 2018 WL 4372726 (D.P.R. September 12, 2018)(BJM), the dealer sued the principal for impairment under Law 75 and the principal counterclaimed both for breach of contract and implied covenant of good faith and fair dealing. The record supports multiple violations by the dealer of its discovery obligations to answer interrogatories and produce documents, including repeated missed deadlines by months and violations of court orders after warnings that failure to comply would result in severe sanctions.

The dealer's own doings fatally set it up for what was bound to happen: a dismissal of the Law 75 claims with prejudice and an entry of default on the counterclaim.

Mandatory forum selection clause in the Netherlands is held valid and enforceable to litigate Law 75 claims

In MD Distributors, Corp. v. Dutch Ophthalmic Research Center, 322 F. Supp. 3d 272 (D.P.R. 2018) (FAB), a Puerto Rico dealer sued a Dutch medical devices manufacturer in local court for termination of the dealer’s contract and damages under Law 75. The manufacturer removed the case to federal court and moved to dismiss under FRCP 12(b)(6) to enforce a forum selection clause providing for litigation in the Netherlands. After canvassing applicable federal jurisprudence and rejecting every conceivable argument that the dealer could make to escape litigation in the Netherlands, the court held that the dealer had failed to meet the “exceedingly high threshold” to invalidate the forum selection clause. Basically, the Netherlands provided an adequate forum to seek redress for the Law 75 claim. It was unlike Iran or South Korea that did not provide an adequate forum or did not recognize the validity of the claim.

The court also followed precedent in federal district court cases holding that the forum selection clause providing for litigation in a foreign country or in the States for that matter (with a connection to one of the parties or to the claims) was valid and enforceable despite Law 75’s express mandate for litigation in Puerto Rico. This aspect of the court’s ruling is more controversial as there is some authority in the Puerto Rico appellate courts invalidating a forum selection clause providing for litigation of Law 75 claims in a State (as there would be no FAA preemption issue concerning forum selection clauses within an arbitration agreement). This issue was not raised in this case and it may come up in a timely request for certification to PR’s Supreme Court.

Dealers beware! The forum selection clause in this case became part of an amended contract to the dealer's agreement. Seldom do dealers have a choice or leverage to negotiate amendments like this and face a difficult choice between a subtle or direct threat of termination or a refusal to deal if the amendment is not accepted. It should be clear by now that arbitration and forum selection clauses are amongst the few valid legal options available for manufacturers to minimize any Law 75 liability. But signing the agreement proves no solace to a dealer that eventually faces a termination and is forced to litigate its claims in a distant forum at a great cost and expense and before judges or arbitrators who have no clue about Law 75. Biting the bullet and refusing to accept a mandatory non-Puerto Rico litigation clause may be worth the business risk since that is the only real option to preserve litigation of a Law 75 claim in the local courts. This is particularly true when the manufacturer seeks to add the forum selection clause by an amendment to the established relationship. On the other hand, for the manufacturer, demanding arbitration and forum selection clauses as conditions to do business should be the standard protocol since the federal courts are more hospitable than ever to enforce the arbitration and forum selection provisions as written.

The FAA preempts Law 75 if applied to void an arbitration agreement

In Cooper Tire & Rubber Company v. Premium Tire & Parts Corp., 2018 WL 3047747 (D.P.R. June 18, 2018) (DRD), the principal sued the dealer and the individual guarantors for breach of contract and collection of monies of $736,000. The dealer counterclaimed for impairment and de facto termination of the dealer’s contract for alleged price discrimination and other unfavorable business terms and for “insidious machinations” to void the personal guarantees.

A stumbling block for the dealer’s suit in federal court was that the contract had a broad and mandatory provision compelling arbitration for arising out of or related to claims and disputes. To no avail, the dealer argued that the arbitration agreement did not apply to post-termination claims and disputes and that Law 75 rendered the arbitration agreement unenforceable.

After dissecting well-established precedent of the Supreme Court and the First Circuit, the court held that the Law 75 claims were arbitrable, the obligation to arbitrate survived termination of the dealer’s contract, and that the FAA preempted Law 75 to the extent that it nullified the arbitration agreement. Finding that it would avoid inconsistent determinations, the court stayed the claims pending arbitration against the guarantors as they were not bound by the arbitration agreement. See also Apindo Corporation v. Toschi Vignola, 2018 WL 718437 (D.P.R. January 31, 2018)(PAD)(enforcing arbitration agreement of Law 75 claim and also discussing issues of service of process and personal jurisdiction); Johnson & Johnson v. PRHS, 322 F.R.D. 439 (D.P.R. 2017)(denying principal's motion to reconsider order compelling arbitration and staying case).

What this case underscores is that, by now, a written arbitration agreement should be virtually fool-proof unless there is proof of fraud in the inducement of the arbitration agreement itself or the forum-selection provision is unreasonable as to make it unconscionable to arbitrate in a distant forum, usually in a foreign jurisdiction with little to no connection to the parties or the disputes. Even clauses compelling litigation or ADR in civilized or developed foreign countries are generally enforceable, unless the foreign state does not recognize the validity of the claim or does not provide adequate remedies (countries like Iran come to mind).

Abusing or misusing motions to dismiss and a case for a new standing order

It is no exaggeration that federal civil cases in the District of Puerto Rico have stalled on their tracks by motions to dismiss (“MTD’s”), especially Rule 12(b)(6) motions that have proliferated after Iqbal/Twombly (the Supreme Court’s plausibility standard).

Generally, because the Federal Civil Rules regulate when discovery can begin, the filing of an MTD will excuse a defendant from answering the complaint and will stay discovery. For some securities cases, federal substantive law stays all discovery pending a ruling on an MTD. With the existing Federal Rules in other non-securities civil cases, an MTD will de facto stay discovery unless the court enters an order setting a Rule 26(f) conference and the parties are bound to meet and confer to stipulate a joint discovery plan. With a pending MTD and no scheduling order in sight, all discovery will be stayed pending resolution of the MTD. So, if all that happens in the case is that the defendant files an MTD and the court does not decide the motion or enter a Rule 26 order pending a decision on the MTD, the case is stayed for how long it takes the court to decide the dispositive motion.

There is colloquially-speaking a "Cheo" rule (as in "estas en las paginas de Cheo" or like you are on a watch list) that requires district judges to report to the First Circuit all motions that remain undecided for three months or longer. Compliance with the Cheo rule varies depending on the judge or the case. In our district, with the clogged criminal docket and depending on the complexity of the case, we are talking about months if not years in some cases for the court to decide an MTD. If the MTD is denied, the defendant will have to answer the complaint, and this will trigger a scheduling order, the obligation to have the Rule 26(f) meeting, and finally, discovery can begin. By then, if a long time has passed without a ruling on the MTD, memories of witnesses will fade and proof may be lost (witnesses and parties include human beings who die). Delays take the wind out of the sails of dispute resolution. Parties also lose interest in prosecuting the cases. Lawyers are usually not working on those submitted cases. Nothing good comes from nothing happening in cases, for all those concerned.

You can argue one way or the other whether it is wise or even fair to stay discovery pending a ruling on an MTD. The argument is stronger for a stay when the MTD raises an objection to subject matter or personal jurisdiction because a case cannot move forward without jurisdiction over the complaint and the parties. It is another matter entirely when the MTD raises a failure to state a claim upon which relief can be granted because the legal sufficiency of the pleadings may depend on facts which have not yet been uncovered through discovery because the information is within the defendant’s possession or control or need to be explored or developed by full discovery. Iqbal/Twombly seem to have generated an increasing number of Rule 12(b)(6) motions challenging indiscriminately the sufficiency of the allegations in pleadings without the benefit of any discovery. As I reported in my previous blog, a few recent cases in both our district and the First Circuit are gaining traction in denying Rule 12(b)(6) motions to dismiss and postponing a decision on the legal sufficiency of plausible claims until a later stage (summary judgment, for example) after the benefit of discovery.

Perhaps one solution might be for the court to enter a standing order in civil cases that a defendant has to file an answer to the complaint and start discovery while an MTD based solely on Rule 12(b)(6) grounds remains submitted for decision. One way to accommodate competing concerns about wasteful and unnecessary litigation costs and fees if the MTD were to have merit would be to apply such a standing order in every civil case unless the defendant shows cause or proves prejudice from having to conduct discovery pending the MTD. This approach is consistent with long-established Supreme Court precedent in the "Landis" case requiring a showing of prejudice by a party moving to stay a federal case. This standing order approach would minimize incentives to abuse Rule 12(b)(6) motions.

Federal district court denies Rule 12(b)(6) motion to dismiss a Law 21 complaint

In Vilá del Corral v. D’Accord, Inc., 2017 WL 1184002 (D.P.R. March 28, 2017) (“D’Accord”) (Domínguez, J.), plaintiff filed suit for collection of unpaid commissions and injunctive relief, invoking Puerto Rico’s Sales Representative Act No. 21 (a special law modeled after Law 75). Plaintiff alleged that Defendant breached an exclusive agreement existing, for over “twenty-nine years”, that authorized him to represent D’Accord branded menswear clothing in Puerto Rico. Defendant attacked the sufficiency of the allegations under Rule 12(b)(6), Fed. R. Civ. P., arguing that “there are no contract documents” to support Plaintiff’s argument that he was an exclusive sales agent for D’Accord in Puerto Rico. Id. at *2.

The court noted that it was “unclear [from the Complaint’s allegations] whether the agreement was written or oral and whether it was later novated.” Id. at *4 n. 2. What is more, the court was “skeptical” on whether Law 21, enacted in 1990, applied retroactively to the alleged business relationship predating the enactment of Law 21, but lacked the “requisite clarity to reach a properly-founded conclusion” at the pleadings stage without the contract documents. Id. at *4 n. 3. Considering the well-established plausibility standard governing a Rule 12(b)(6) motion, the court denied the motion to dismiss holding that “Plaintiff has made a satisfactory showing of a plausible Act 21 claim, which the Court deems sufficient to level up and proceed to discovery.” Id. at *4 (quoting) Triangle Trading Co. v. Robroy Indus., 952 F. Supp. 75 (D.P.R. 1997) (Providing that determinations of whether a person is a dealer or exclusive sales representative is fact-intensive and should not be made on the pleadings).

The takeaway of the D’Accord decision is that, no matter how dubious a claim might seem on the pleadings without the benefit of full discovery, a plaintiff is not required to plead the particulars of a binding contract or establish an extinctive novation to state a plausible claim under Law 21 (or for that matter, Law 75) and survive a Rule 12(b)(6) motion to dismiss. This holding is aligned with recent First Circuit authority. APB Realty, Inc. v. Georgia-Pacific LLC, No. 17-1906 slip op. at 9 (May 7, 2018) (vacating Rule 12(b)(6) dismissal of breach of contract claim because “the complaint alleges facts from which the court can plausibly infer the making and breaking of a contract”). D’Accord applies correctly the plausibility standard governing a Rule 12(b)(6) motion to dismiss an action brought under any one of Puerto Rico’s representation statutes (Law 75 or Law 21).

Demystifying Juries

I've been invited as a panelist with a federal public defender and a federal prosecutor to speak to young members of our federal bar on the subject of "demystifying juries." I will speak about my experience trying federal civil cases to juries over the past thirty years.

Less than 1 per cent of the federal civil cases nationwide get tried by a jury. So, why care?

Because you should. Once in a blue moon the deposition that you took not anticipating that it would matter because the case won't get to trial, does get to trial and then it matters. You should take every deposition in every case planning for trial, because that deposition whether it is a 30(b)(6) or a cross is going to be an incredibly valuable tool to convince the jury to side with your client or improve your odds of winning.

What are your odds if you get to the jury? Jurors in P.R. tend to side with the Plaintiff roughly 75 per cent of the time. Why? Jurors seem to side with those parties they can identify with. It can be your client, an individual or a small corporation, a witness for your client, but rarely with a Fortune 500 company. Jurors also watch the news and how they think and react is influenced by the news. For example, this should not be a good time for the defense to try employment discrimination cases, in particular, sexual harassment cases (domestic abuse/sexual harassment are front and center in the news). To understand juries, you have to try to understand their environment and circumstances. When you try a case what's happening in the society around you matters. With the economy like it is in Puerto Rico, money is hard to come by, and juries generally tend to be more conservative in their awards, though they may be more inclined to find liability.

I've been on both the winning and losing sides of juries in civil cases many times and I have ten precepts that I find helpful to demystify juries:

1. Don’t be afraid of juries. Jurors do a great job in finding out what the facts are and what the truth is. Six minds in a civil case work better than one. Jurors work like a great lie detector machine. They are more focused on the facts and doing justice than finding our what the law is. Juries will do their best to apply the law in the instructions as they can remember them, and it helps when the judge gives them a copy after the charge. But to win, you must master the facts of your case.

2. Jurors are paying attention to more than the evidence admitted in the case. They pay attention to you and your client. Do you get to the court on time? Do you treat the court, the witnesses, and opposing counsel with dignity and respect? Are you organized in your presentation of the evidence? Are you prepared? Is your client making gestures while the other side testifies? They are watching everything.

3. Jurors tend to give more weight or remember the first witness and the last. First and last impressions count. Despite being instructed not to discuss the case until deliberations, do you really think they wait that long? Structure your case to be strongest at the beginning and end.

4. Jurors give more weight to eyewitness testimony that is backed up by contemporaneous documents. I've seen it with witnesses on the stand. Jurors pay close attention to both documents prepared before the litigation started and deposition transcripts used for impeachment.

5. Jurors give a lot of weight to expert witnesses that are not hired guns.

6. Don't be afraid to preserve the record when you absolutely have to. If you must object, object when it matters.

7. Don't try to pull a fast one with documents or witnesses. Concede weak points of your case, if you must, in the opening statement. Credibility is a virtue. Don't work to lose it.

8. Jurors dislike and distrust evidence kept from them. So don't object unnecessarily. You lose credibility points if you object just for the sake of objecting or every time you move to approach the bench. Choose your objections wisely.

9. Just be yourself. Don't pretend to be someone you are not when trying a case.

10. Don't sweat it to predict how the jury will come out in the case. Resist answering to your client if you think you are winning the case before deliberations have even begun. Predictions are an exercise in futility and often wrong. Do your best and enjoy the experience.

Ricardo

It may sound like a broken record, but yes, Law 75 claims are arbitrable

By now it’s firmly settled law that Law 75 claims are arbitrable. While the question whether the claim at issue in a case is or not within the scope of an arbitration provision in an agreement depends on the particular facts of each case, only in exceptional circumstances would a Law 75 claim not be arbitrable. First, there is a risk that claims may not be arbitrable where the written arbitration agreement is narrow in scope and does not provide for arbitration of claims arising out of or related to the agreement or its termination. Second, where a party has waived arbitration by actively litigating in court or consenting to litigation instead of arbitration. Third, where there is an allegation of fraud in the inducement of the arbitration agreement itself. Fourth, court intervention may be appropriate to issue preliminary remedies in aid of arbitration or determine whether a dispute or claim is arbitrable. For the first three situations I have described above, it is rare to find cases upholding objections to arbitration and more so if you weigh in the strong federal policy in favor of arbitration.

The latest case in the rather long line of cases granting motions to dismiss or compel in favor of arbitration is Crespo v. Matco Tools Corporation, ___F. Supp. 3d.___,2017 WL 3534998 (Aug. 15, 2017)(Gelpí, J.). This case is of the first variety described above. Plaintiff, a dealer of automobile products, alleged that the Law 75 termination claim was outside the scope of the arbitration agreement as were claims of fraud that fit an exception in the agreement from the obligation to arbitrate. The court found that the reason given for termination was lack of payment-not fraud-and the termination claim was, therefore, arbitrable.

Another case along the same lines is Johnson & Johnson International v. Puerto Rico Supply, Inc., 258 F. Supp. 3d 255 (D.P.R. 2017), where the court (Besosa, J.) held that claims by a supplier of medical products for collection of monies and declaratory judgment for termination of a non-exclusive distribution agreement under Law 75 were arbitrable; stayed claims for termination of other exclusive agreements that had no arbitration provisions; and denied a motion to compel arbitration by Defendant's affiliate and a non-signatory of the arbitration agreement. On reconsideration, the court denied the supplier's motion to lift the stay pending arbitration and the order denying provisional remedies in aid of arbitration. This author represents the Defendant Puerto Rico Hospital Supply, Inc. in that action.

Add another one to the list. In Air-Con, Inc. v. Daikin Applied Latin America, LLC, 2019 WL 2606881 (D.P.R. June 25, 2019), the distributor challenged the obligation to arbitrate arguing that the agreement was unsigned, and in any event, expired on its own terms. The supplier countered that the parties adopted the unsigned agreement in their course of dealings and the agreement continued indefinitely after its expiration date unless terminated without just cause. The court determined that there was an obligation to arbitrate and dismissed the case.

Absence of written agreement makes proving just cause under Law 75 “significantly harder”

In Yacht Caribe Corp. v. Carver Yacht, LLC, ___ F. Supp. 3d___, 2017 WL 4083549
(Aug. 23, 2017), the federal court (Gelpí, J.) granted in part and denied in part the Defendant-supplier’s motion for summary judgment. The court denied summary judgment on the Law 75 termination claim on grounds that there were issues of material fact as to whether Plaintiff, a boat reseller, qualified for protection as a Law 75 dealer and if the supplier had just cause for termination of the existing relationship for failure to sell any products. The court granted summary judgment and dismissed a separate claim for breach of a duty of good faith and fair dealings for the absence of an enforceable mercantile contract containing all the terms and conditions.

It would appear to be contradictory on its face that the court would find a genuine issue of fact as to whether a protected contractual relationship existed under Law 75 from a course of dealings but there would be no issue that there was no meeting of the minds for an enforceable contract to activate the implied duty of good faith and fair dealings at the Civil Law. The difference is subtle but not contradictory. Law 75 protects a relationship, whether verbal or written, that could arise from a course of dealings in performing certain but not necessarily all the obligations of a dealer. For a contractual claim, however, the elements are different because there must be the concurrence of an offer and an acceptance with all the elements of a binding contract. An enforceable mercantile contract from a course of dealings could exist under Law 75 but a final mercantile agreement may not necessarily or be premature.

More to be said about the facts of this dispute between a boat dealer and the manufacturer. In this case, the dealer made claims of damages for termination of contract under Law 75 and for breach of the duty of good faith and faith dealings. The dealer acquired the rights and obligations that a previous dealer had in the line before going into bankruptcy. After the acquisition, the Plaintiff-dealer performed certain of the functions of Law 75 dealers with Defendant’s knowledge or consent, including promotion of products, but never sold any boats itself. The Plaintiff sued when the manufacturer appointed another dealer in the Puerto Rico territory and terminated the existing relationship. The Defendant claimed that plaintiff was a “friendly broker”, that the bankruptcy extinguished the contract with the predecessor, and Plaintiff suffered no damages because it never sold any products. The court determined that there was an issue of material fact precluding summary judgment as to Defendant’s core argument that Law 75 provided no protection.

The court’s rationale for denying summary judgment on the separate question of just cause is interesting. Defendant argued that Plaintiff must have “clearly understood” that selling product was an essential obligation of a dealer’s contract whose breach would adversely and substantially affect its interests in Puerto Rico. The court highlighted the consequence of not having an integrated contract to define all the essential terms and conditions, holding that “the absence of a written dealer’s agreement makes their burden of showing just cause significantly harder…”. Further, “[t]he fact that a principal or grantor is in the business of selling a product does not necessarily imply that the sale of such product in a given period is an essential obligation of any dealer’s contract, especially one devoid of a specific agreement to that effect.” The court cited Section 278a-1(c) of Law 75 for the proposition that any provision in an agreement fixing rules of conduct or sales quotas or goals must be proven by the principal to be reasonable considering market conditions in Puerto Rico at the time of the non-performance or violation. The court determined that the principal had failed to meet its onus on summary judgment.

As to damages, the court held that Plaintiff had shown that the termination cut off potential sales of boats that were about to close until customers found out that Plaintiff had been removed from the supplier’s website as an authorized distributor and cancelled the orders. This implies that business opportunities, if a jury could find that they probably would have materialized in concrete sales, would cause actual damages or losses to the dealer. If so, those damages would not be speculative. This result is consistent with the principle at Civil Law that damages need not be proven with mathematical certainty.

As applied by the court to the just cause question, in a case where there was no contract defining the essential obligations, Section 278a-1(c) requires the principal to prove that compliance with quotas, goals, or sales expectations must be reasonable considering market conditions in Puerto Rico. This provision also applies on its terms to any “standards of conduct” fixed in a contract (a phrase not defined in Law 75) and is not limited to sales quotas or goals or to non-essential obligations. As a practical matter, with the presumption of lack of just cause activated in this case from the appointment of another dealer following the termination, this legal standard will prove to be a heavy burden for the supplier. The termination would have to be justified with proof that the standards of conduct or sales goals were reasonable at the relevant moment of the detrimental act considering the recessionary economic conditions in Puerto Rico affecting most industries across the board for over the past decade.

Distribution law predictions in Puerto Rico for 2018 from the wrath of Hurricane María

2017 was an abnormal year for us, that we soon hope to forget. Hurricane María devastated Puerto Rico’s infrastructure. Local businesses are now focused on surviving and dealing with their own emergencies. With courts closed to business for many weeks and businesses focused on their internal problems, litigation went to the back burner. As operations normalize, however, firms will or should prioritize their own risk management, including insurance claims-handling and dealings with supplier-distributor relations.

One can predict that there will be a rise in the long run of insurance claims for property losses and business interruptions from the aftermath of the hurricanes (Irma and María). We have not seen these claims filed in court yet but one can expect there will be a surge in litigation as insurers either delay in paying up the claims or deny coverage. As the courts resume more normal operations and businesses are able to run with more stability from power provided by public utilities, they will re-focus on claims management and litigation issues.
The wake of the hurricanes will raise a number of issues relevant to supplier-dealer relations and one can expect that unresolved disputes will lead to arbitration and litigation at some point during the last quarter of 2018.

First, these natural catastrophes aggravated “pre-existing conditions”, so to speak. Before the hurricanes, there would have been issues typical in supplier-dealer relations, such as, disputes about performance, market development, encroachment with exclusive territories, and compliance with contractual obligations. Surely, the hurricanes must have made matters worse. Supply of product and services was interrupted. FEMA is said to have taken control of supplies at the ports, which is said to have caused delays and out of stocks at the point of sale. Whose fault was it? Many retailers were closed for weeks on end. So, too, there must have been payment delays by customers to their dealers and from dealers to their suppliers. To what extent there would be just cause for termination of dealer’s contracts after an aggravation of pre-existing conditions remains to be seen. Precipitous termination decisions and other detrimental acts would be risky in these trying times.

Second, I would expect there would be a surge in distribution law counseling from the wake of the hurricanes. Is performance excused? Should there be an accommodation in compliance with contractual obligations and what should reasonable accommodations be? Is there cause and effect between the dealer’s performance and the damages caused by what are acts of God? To what extent can the supplier waive or modify strict compliance with contractual obligations or performance standards or goals without affecting contractual rights and legitimate business expectations?

Third, the hurricanes have altered the structure of Puerto Rico’s economy, not to mention external political forces that may prove unfavorable to building a healthy economic environment. Migration of workers and other Puerto Rico residents in the thousands of persons should lead to a decline locally in the demand for goods and services. Assuming that interest rates will rise, and so does inflation, credit will continue to be tight and capital investments in brand development will dwindle. Although there will be an upside from an increase in the demand in the short run for provisions and certain hard goods after the damages or losses caused by these natural events, the environment will remain challenging for local businesses- that already face high tax rates and burdensome regulations- to run their operations profitably and cost-efficiently. There will be tensions with suppliers. The strongest local businesses will survive. But competition will be fierce. With an emphasis in improving the bottom line to shareholders and these natural events provoking a reassessment of existing business relations, I would expect a rise in dealer-supplier disputes after the wake of the hurricanes, and eventually, more litigation.

Fourth, keep an eye on important dealer contract litigation under Law 75 making its way through the federal courts. Cases include a challenge in the First Circuit to a jury verdict finding no just cause for termination of a dealer’s contract for the sale of construction equipment and a case in federal district court involving a claim of successor liability following a divestiture and sale of assets of a branded product. CAB is lead counsel in both cases.

Word to the wise to savvy suppliers and dealers alike, now it’s more important that ever to consult with your lawyer before changing existing business relationships in Puerto Rico or restructuring commercial relationships to account for these new realities. Reach out now (to us!) before it’s too late.

At CAB we were one of the few fortunate law firms in Puerto Rico to be fully operational after hurricane María. We continue to be fully staffed with highly skilled lawyers and support personnel and are up and running from day one. We have our offices in a state of the art facility at the Banco Popular Center in Hato Rey’s banking district, which was one of the few business properties that was fully operational after the hurricane’s devastation.