(I) Statement of Facts
Civil Uruguayan Court for the Fifth Circuit has recently ruled in a case involving two Uruguayan companies in the health sector, performing one of them a domestic distribution (Court Decision No 143/2024). Distributor brought legal action against its supplier for compensation of damages caused by the unexpected termination of the agreement without a fair reason.
(II) Issues
(i) Whether or not the supplier alleged a fair reason for termination
Short Answer: No. The court considered that in this case no reasonable cause was alleged, therefore, good faith principle was not upheld, considering that 30 days of previous notice was not enough for a 25-year commercial relationship.
ii) Whether or not a local Judge can calculate damages to be paid to distributor in this case.
Short Answer: Yes. Local Courts can calculate the economic impact of damages. Courts are free to consider a contractual notice abusive (too short) and if so, they may give compensation for damages to the affected party. The Uruguayan Courts do not have a legal method to calculate this kind of damages; the situations would be analyzed on a case-by-case basis.
(III) Analysis
(i) Whether or not the supplier had withdrawn the distribution agreement without a fair reason.
Yes, according to Court the contract was unlawfully terminated. The reasoning of the Court included two basic grounds: a) the importance and duration of the relationship and b) the volume of business of the plaintiff. The judge considered that the previous notice, in this case, should have been at least 90 days to protect the contracting party and to adjust it with a future reorganization of business.
Another issue that was analyzed by Court was that, in this case, it was not an exclusive commercial relation between parties, the plaintiff business encompasses other sectors of the market and other business. Hence, Court decided that the notice referred above would be sufficient to reorganize its business.
ii) What period should be considered by Court to calculate the amount to be paid as compensation
With respect to the amount, defendant shall pay compensation. The amount would be the average of the 5 preceding fiscal years to the termination, based on the financial statements of the claimant and its income tax returns.
in other cases, in Uruguay[1], judges quantified the amount of the compensation taking as the first parameter the average net profit obtained by the distributor from the sale of the principal´s products. As a second parameter, it took into consideration the reasonable notice period (not granted) but used, for reference, the last 12 months of relationship.
(IV) Conclusion
The Uruguayan Court ruled that if the termination of a distribution agreement is not legally justified, the other party should grant a previous notice granting a reasonable term.
Otherwise, distributor would claim compensation that would be calculated considering the notice period supplier has not provided to distributor, in full or in part. Moreover, in this case, the amount Court considered to calculate compensation was an average of the last 5 years of relationship.
[1] Judgment N° 9/2020 – Juzgado Letrado Civil de 19° Turno.
Héctor Ferreira, IDI Country Expert for agency & distribution in Uruguay
