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.