Monday, February 27, 2012

Puerto Rico Supreme Court issues order to show cause as to why it should not reverse appellate court’s refusal to compel arbitration of Law 75 dispute

It is worrisome that some lower courts in Puerto Rico still find ways not to enforce arbitration agreements. The latest is a theory that, if the contracting parties lack the necessary information to provide an informed consent to the implications of arbitration, the arbitration provision is invalid.

A sub-distributor of Nissan motor vehicles filed suit in the Court of First Instance, San Juan Part, against Motorambar, the general distributor, invoking Laws 21, 75 and asserting claims for breach of contract and preliminary and permanent injunctive relief. The dispute originated when Motorambar purportedly attempted to change the exclusive nature of the relationship in a designated territory and terminated the relationship when the sub-distributor refused to acquiesce to change the existing dealer agreement.

Motorambar moved to dismiss and to compel arbitration alleging that the dealer agreement has an arbitration clause. The sub-distributor responded that there was no obligation to arbitrate as the dealer agreement had expired; that the agreement was null and void, and that it was governed by Puerto Rico’s arbitration statute, 32 LPRA §3201 and not by the Federal Arbitration Act. The trial court refused to dismiss the action in favor of arbitration reasoning that an evidentiary hearing was required before deciding the validity of the arbitration provision. After an evidentiary hearing, the trial court invalidated the arbitration provision on a theory of lack of informed consent. The trial court also rejected a constitutional attack under the FAA to Article 3C of Law 75 that requires a court to validate the voluntariness of arbitration provisions in Law 75 cases.

A Panel of the Court of Appeals denied both Motorambar’s motion to stay and a petition for certiorari. In L.M. Quality Motors Inc. v. Motorambar, Inc., 2011 TSPR 158 (P.R. Oct. 28, 2011), by a vote of 5-4, the Supreme Court of Puerto Rico stayed injunction proceedings in the trial court and entered an order to show cause as to why the appellate court’s decision should not be reversed. The majority did not issue a reasoned opinion but likely will reverse. Four Justices of the Court explained in the dissent that there was sufficient evidence to invalidate the arbitration agreement for lack of informed consent and did not believe that the FAA preempted the application of Puerto Rico’s commercial arbitration law in the circumstances of this case. Stay tuned.

Update: Since then, the local court denied the sub-distributor's request for preliminary injunctive relief to maintain the status quo pending further proceedings. Not surprisingly, Motorambar filed a motion for voluntary dismissal of its certiorari petition in the Supreme Court noting that it would be more efficient to try the case in the local court than to arbitrate. The motion to dismiss, if allowed, would moot the appeal.