Friday, November 20, 2009

Is a constructive termination actionable under Law 75?

Law 75 contemplates liability in three circumstances, one, when the principal terminates the relationship for lack of just cause, two, when the principal refuses to renew the relationship (in effect, a termination), and three, when the principal impairs the relationship. The difference between impairment and termination is significant as it influences the measure of damages.

The underpinning of impairment is a breach of contractually-acquired rights. This means that the relationship continues but some essential and material contractual right of the distributor has been prejudiced by the principal’s actions. The notion of termination, however, presupposes on its face a rupture in the relationship. Conceivably, an impairment could be a termination when the essence of the agreement vanishes from the unjustified act by the principal, such as the unilateral conversion of an exclusive agreement into a non-exclusive relationship. At least one appellate decision has held that some types of impairments, for example, a principal’s termination of an exclusivity provision, are constructive terminations. “Constructive” in the sense that an essential component of the agreement has been canceled, but the relationship continues albeit in an impaired or lesser form. In these situations, the distributor has been able to claim the full measure of Law 75 damages from a termination. The impairment component of damages comes in by reducing the compensation by the benefits realized by the distributor from sales of the lines or products that continue despite the termination of the exclusivity.

In a related context, the U.S. Supreme Court in Mac's Shell Service Inc. v. Shell Oil Products Co., a franchise termination case brought under the federal PMPA (originating in the First Circuit) granted certiorari to consider whether the PMPA contemplates a claim for constructive termination and constructive non-renewal. Oral argument will be heard in January, 2010.

Is constructive termination actionable under Law 75, and if so, the scope of what it means, are unanswered questions by the federal courts and the Puerto Rico Supreme Court.