A Chapter in the new Civil Code of 2020 with Argentinian roots regulates distribution agreements protected by Law 75

By: Diana Pérez Seda, Esq. Principals and distributors alike should be looking very closely at their distribution agreements and course of business dealings along with their counsel as soon as practicable. Chapter XV- “La Concesión o Distribución” of Book Five of the New Civil Code of Puerto Rico enacted in 2020 includes a handful of provisions that potentially impact the rights and obligations of distributors and principals or grantors in the most significant way since the enactment of Law 75 fifty-nine years ago. A little dose of civil law 101 is in order. The purpose of a civil code is to generally prescribe what should happen in the absence of a special law or contract addressing a specific issue. A special law, in contrast, regulates a specific topic, like Law 75 does for distribution relationships. In fact, it is a basic law tenet that special laws supersede general laws when dealing with their specific subject matter. This was generally the case when dealing with distribution agreements, where Law 75 superseded the general principles of contract law laid out in the Civil Code of 1930. And that is still likely true now that the Civil Code of 2020 is in effect. Yet Articles 1439-1447 of the New Civil Code merit close study because the substance of these articles supplement Law 75 to a degree so substantial that they could be considered essentially an amendment to the special law. For starters, the last article in the chapter at issue, Article 1447, is perhaps the most interesting. It states that, “[t]he provisions of this chapter do not impair the rights of the concessionary or distributor under special laws applicable to distribution contracts.” On its surface this article declares what we described above as the basic law principle which states that special laws like Law 75 should supersede a general law like the Civil Code of 2020. Closer inspection of Article 1447’s language, however, potentially raises a myriad of questions: Why does it only expressly say that the rights of distributors are not impaired? Were these articles included in the Civil Code to benefit only distributors? Why not amend Law 75? One can speculate that amending Law 75 would have ruffled the feathers of many special interest groups that would have made its passage more difficult. One is left to wonder where this new Chapter came from. It appears to have been adopted, in part, from the “Código Civil y Comercial de la Nación”, Law 26.994 decree 1795/2014 of Argentina, which expressly applies to distribution contracts. The Argentinian Code also enacts a chapter to regulate franchises, but our Civil Code did not adopt those provisions. The Statement of Motives of the Civil Code of 2020 says that, “[t]he division between civil obligations and contracts and commercial obligations and contracts is a constant source of confusion. Such a distinction lacks, for the most part, justification in today's context, as it does not lead to substantially different regulations.” It goes on to say that several different commercial contracts—including distribution—are now specifically regulated in Book Five of the Civil Code of 2020. The Statement of Motives does little to shed light onto the reasons behind the inclusion of the articles at issue in the Civil Code of 202 and once again we are left with more questions than answers: Why does the legislator say that the division is a constant source of “confusion”? Confusion to whom? The courts? Distributors and principals? Article 1440 of the Civil Code of 2020 goes on to state that a concession may or may not be exclusive within the territory or convened zone of influence. Hence, unlike Law 75, the New Civil Code expressly recognizes exclusive arrangements and makes it patently clear that variations of exclusivity are all viable. Although exclusive relationships have certainly existed in multiple shapes and forms since before the enactment of Law 75, having the Civil Code of 2020 expressly recognize and, in a restricted sense, validate them, adds clarity. Article 1441(a) further states that “in absence of a contrary agreement: The concession includes all products manufactured or supplied by the grantor, including new models.” Subsections (b) and (c) states that no sub-concessions or assignments are allowed (in absence of a contrary agreement). Subsection (a) is, of course, the most interesting provision because it makes absolutely clear that, unless there is an express agreement excluding new products, distributors will have a right to distribute them. If the agreement is exclusive and, if new models of products are not expressly excluded, the distributor will have a right to exclusively distribute all new models of products. Given how a large proportion of disputes relates to the rights over the distribution of new products, these provisions should prompt both distributors and principals to look at their own relationships closely carefully. Furthermore, Article 1443 and 1444 list the essential obligations of principals and distributors, respectively. The lists include the typical and essential obligations of each type of actor and provide a baseline of what is expected from each side. If there is an ongoing relationship that has no written contract actors must carefully consider whether their business relationship has or should have the listed elements and whether perhaps formalizing the relationship in a written contract would be beneficial to all parties involved. A contract may, for example, specifically list each side’s obligations so that a breach can be readily identified. Historically, the breach of essential obligations was considered just cause under Law 75, but that could have changed with the Civil Code of 2020. For instance, Article 1445, lists the reasons for which a distribution agreement can be terminated. The article lists five reasons aside from “general contract termination reasons”: (a) the death or incapacity of the concessionaire; (b) the expiration of the agreed term; (c) serious or repeated breaches that reasonably cast doubt on the ability or intention of the non-compliant party to fulfill the remaining obligations; (d) the dissolution of either party, provided it does not result from a merger or split; or (e) in the event of dissolution through merger or split, if it significantly reduces the concessionaire's business volume. This list of causes for termination do not override the classic termination causes and presumptions listed in Articles 2 (just cause), 2A (presumptions) & 2B (just cause due to privatization) of Law 75. Of particular interest is subsection (c) of Article 1445 which states that termination is legal following “serious or repeated breaches that reasonably cast doubt of the ability or intention” of the other party to fulfil its obligations. There are several highly subjective and possibly ambiguous concepts in that subsection (“serious,” “repeated,” “reasonably,” “cast doubt,” “intention”) that will require careful documentation and consideration before action is taken to end a distribution relationship. Indeed, this new termination cause opens up a pandoras box for principals and distributors alike. All in all, the new Civil Code of 2020 provisions will likely create opportunity and concern depending on whose rights are at stake. They certainly demand that principals and distributors reflect upon their commercial relationships and whether they are in a stronger or more vulnerable position today than prior to the enactment of the Civil Code of 2020 and whether they should take prompt action. (Diana is a contributor of the blog and litigates Law 75 cases. CAB promoted Diana to income partner).