Under Uruguayan Law there is no regulation for Distribution Agreements other than those for specific tax and social welfare purposes2. Therefore, Distribution Agreements are regulated by the general principles of Civil and Commercial Law. Furthermore, the use and practice generally observed in commercial trade and the location where the contract is to be performed are usually taken into account by our courts when deciding relevant cases.
Distribution Agreements in Uruguay are generally entered into as a written contract by the parties, often establishing a term date and prior notice periods in case of anticipatory termination by either party. The written contract will act as the law between the parties3. Oral agreements are also enforceable in Uruguay. However, if a party to a contract challenges the existence of an unwritten Distribution Agreement, the party seeking to enforce the agreement will have to submit evidence before the court to establish the existence of an oral contract. In fact, in the enforcement of oral agreements the plaintiff will first need to prove the existence of the commercial relationship, second the essential terms of such relationship and third the breach of the agreement.
In case a just cause for termination arises, such as a material breach of the contract, the agreement can be terminated without prior notice or indemnification, subject to a conclusive evidence of the just cause.
On the other hand, termination is considered abusive and subject to indemnification when one or some of the following circumstances occur: (a) absence of a just cause; (b) notification of termination is not given on time; and /or (c) termination is done in bad faith.
I. Abusive Termination
As previously stated, termination of a Distribution Agreement is considered abusive, when made without a just cause, when done without prior notice and/or in bad faith.
a. Termination without a Just Cause
The term just cause connotes a fair and honest cause or reason, regulated by good faith on the party exercising termination. It can also be defined as the reason that is legally acceptable, sufficient and essential to get certain court action.4
A just cause to terminate a Distribution Agreement may arise in the case of: (i) A breach of the contract by either party (e.g. past due on payments, failure of Distributor to achieve reasonable sales quota, failure of Supplier to deliver products on time, violation of exclusivity); (ii) Any action or omission of either party that affects the interests of the other party (e.g. inadequate product promotion, poorly trained salespeople or products in bad quality delivered by Supplier); (iii) The bankruptcy of one of the parties (e.g. when entering into a bankruptcy or debt restructuring proceeding); and (iv) The termination of the activities (e.g. Supplier or Distributor enters into liquidation proceeding).
Therefore the absence of a just cause when terminating a Distribution Agreement may give the innocent party a reason of action legally accepted to seek compensation.
b. Termination without prior notice
The prior notice is set forth to allow the innocent party to reorganize its business before the contract comes to an end.
If the contract establishes a prior notice period for anticipatory termination and a party decides to terminate without following such notice and without a just cause of termination, the innocent party will likely be entitled to recover damages for breach of contract.
If the Distribution Agreement is unwritten or has no term date and no prior notice period for anticipatory termination, the general rule is that either party can finalize the agreement, based on the Principle that a party cannot be bound to comply with an agreement eternally. In such a case, a notice within a reasonable period of time before termination is required in order to prevent an eventual claim for abusive termination. The Uruguayan courts have ruled that a reasonable period of time for prior notice may vary from thirty (30) to one hundred eighty (180) days depending on the context of the contract.
If notice of the termination is given, following the period established in the contract or in a reasonable period of time (in the case where no period is pre-established) courts will generally reject abusive termination claims, except when made in bad faith.
c. Bad Faith
Contracting parties will owe a duty of good faith regardless of the specific terms of a contract, as required by law.5
Termination is considered to be done in bad faith when for example: (i) the profit loss or damages caused to the other party are not taken into consideration; (ii) business or moral principles are affected; (ii) done with illegitimate purposes, etc.
A typical case of bad faith is when Supplier congratulates Distributor for its recent achievements and encourages further investments into the business to be done, but few months later gives notice of termination. In such cases our Jurisprudence had ruled that Distributor holds a legitimate expectation of maintaining the relationship for an extended period of time and that the Supplier acted with bad faith, so Distributor will be entitled to compensation for the damages caused by Supplier.
II. Quantity of Damages
In terms of damages awarded for abusive termination, compensation is usually limited to the loss suffered by the innocent party as a result of the termination, including expected profits and compensation for investment which has not been recouped. While the quantity of damages will be determined by the Courts in each case, the following are some of the elements and factors generally considered:
- Term history of the relationship
- Exclusivity of the relationship
- Sales & purchase level achievements
- Investments & amortization made by either party
- Difficulties & expenses caused as a consequence of termination
- Timing & context of termination
- The established practice, if any, in the trade or the business
Terminating a Distribution Agreement without proper consideration can be a costly process, therefore it is important to obtain legal advice before any termination decision is made. It is crucial to analyze the Distribution Agreement as well as the whole context of the commercial relationship in detail, evaluating when and how to pull the trigger in order to avoid or at least prevent legal claims together with expensive litigation costs.
* Doctor in Law and Social Sciences -University of the Republic, Uruguay- 1996. Admitted to practice in Uruguay 1997. LL.M in International Legal Studies -Washington College of Law, American University, USA- 1999. Partner @ Reyes Rius, Montevideo.
2 Law 14.625 January 4, 1977.
3 Article 1291 of the Uruguayan Civil Code assimilates Contract Law to General Law.
4 Black´s Law Dictionary.
5 The Principle of good faith is established by article 1291 of the Uruguayan Civil Code.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.