Sunday, January 7, 2018

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.