Saturday, January 6, 2018

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.