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URUGUAY

URUGUAY: Perpetuity clauses in distribution agreements.

It was recently discussed, in a judicial case in Uruguay, an issue about the difference between distribution agreements with unlimited term and contracts in perpetuity.

Hector FERREIRA - 17.12.19
Country expert

It was drew a distinction between, on the one hand, a distribution without a specific term, due to parties have not set forth a contractual term, or after termination they extended verbally the contract without a specific term, and, on the other hand, a contract that was agreed in perpetuity.

The latter can be construed not only as a contract without a specific term but a contract without a time reference, without a limit or time restriction i.e. forever.

Uruguayan jurisprudence and commentators agree that in a distributorship without a specific term, or in a contract with a term extinguished in which parties continued to execute the contractual relationship without a term, both parties can terminate the contract for their sole own decision at whatever time.

However, the issue was raised in a recent case in which a contract was scrutinized. The latter set forth the typical language of a contract without a limited term but stating expressly that the contract was in perpetuity.

In Uruguay contractual relationships must have a term, they cannot be forever due to the constitutional principle of freedom whereby nobody can be linked with another person forever, provision that comes from the end of slavery in our country.

In this context, the principle upheld by Uruguayan jurisprudence was that clauses that set out a provision in perpetuity -or forever- must be considered void under Uruguayan Law.

The practical effect of considering void a clause in perpetuity is that the contact becomes without a term, and as already said, both parties can terminate it at any time.

Typically, when analyzing a clause in perpetuity, we are inclined to think in a contract with many years of execution. In these cases, the change between a contract –allegedly- in perpetuity and a contract with an unlimited term, can be considered not significant since, most probably, the effect of agreeing a contract for several years was obtained. However, in the case of a contract just signed by parties, pursuing with the perpetuity clause, at least, a long-term relationship, parties can terminate it, following this new jurisprudence, even at the beginning of the contract.

Clauses in perpetuity are unusual in this type of contracts and more common in copyright licenses. However, this judgment we have referred to is an important opinion in this regard.

The reasoning beyond the opinion of the Uruguayan Judge[1] was the one mentioned above, connected with the fundamental right of freedom contemplated by the Uruguayan constitution.

The Judge expressly said that “(…) contracts in perpetuity are against the Uruguayan system since they collide with the fundamental right of individual freedom. Precisely, in the legal system two principles are relevant: 1) the contract enforceability cannot be left to the decision of one of the parties (section 1253 of the Uruguayan Civil Code) and 2) the inadmissibility of legal relations in perpetuity (section 1836 of the Uruguayan Civil Code), which entails the temporality principle of the obligational link…”

 

[1] Nº 54/2016 Nov 3, 2016, “Florian SA c/Corporación Cervecera SC. Acción Declarativa y Rescisión de Contrato”, expediente Nº 2-12329/2016.

 

Hector Ferreira, IDI Country Expert for agency & distribution in Uruguay

 

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