URUGUAY: Distribution Agreement – Fair Reasons for Termination and Reasonable Notice.

Héctor FERREIRA | URUGUAY | 2015-04-20

Héctor FERREIRA

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(I) Statement of Facts

 

The Civil Uruguayan Court of Appeals for the First Circuit has recently ruled in a case involving a foreign supplier and a domestic distributor (Court Decision No 81/2014). INSAR SRL (Distributor) brought a legal action against its supplier CENTRO DE INSEMINACIÓN LA ELISA CIALE (CIALE ARGENTINA) for the compensation of damages caused by the unexpected termination of the distribution agreement without a fair reason.

 

(II) Issues

 

(i) Whether or not the supplier had withdrawn from the distribution agreement without a fair reason.

 

Short Answer: Yes. It is considered that the exercise of the right to withdraw is abusive when it is contrary to principle of good faith. The reasons alleged by the defendant were known for a long time. However, they never expressed their intention to withdraw from the agreement.

 

ii) Whether or not the supplier had unexpectedly terminated the distribution agreement.

 

Short Answer: Yes. In order to exercise the right to withdraw unexpectedly, it must be subordinated to a fair reason which was not alleged in the case.

 

(III) Analysis

 

(i) Whether or not the supplier had withdrawn the distribution agreement without a fair reason.

 

Firstly, the defendant alleged that the exercise of the right to withdraw from the distribution agreement did not involve abuse of rights since they did not act with the intention to harm as emerged from the evidence provided. Moreover, they had not acted in a negligent way as they had always looked for a solution to INSAR SRL’s and its representative Mr. Carrere’s problems. In this respect, the defendant suggested that Carrere’s dedication to the activity involving INSAR SRL had declined. Furthermore, INSAR SRL did not uphold the necessary stock due to economic and infrastructure problems.

 

The Court held that the existence of a fair reason for the withdrawal from an agreement is relevant whenever there is a current term. Besides, it is not lawful for the parties to rescind the agreement without a legitimate, serious and founded cause that justifies so. Based on this, the Court understood that all the reasons given by the defendant were known previously, and they were never considered as a justification to withdraw from the agreement. The exercise of the right to withdraw entails a violation of the principle of good faith.

 

ii) Whether or not the supplier had unexpectedly terminated the distribution agreement.

 

It is considered that the right to withdraw from an agreement is abusive when it violates the principle of good faith. Generally speaking, the said principle requires a reasonable notice for the termination of the contractual bond for it not to be unexpected and abrupt. Moreover, the other party should have reasonable time to reorganize its commercial activities and to find an alternative way to ensure the income for which he will be deprived of.

 

The Court ruled that the reasons given by the defendant were not suitable to justify a withdrawal without reasonable notice.  Moreover, it should be noted that the Court, did not participate in the opinion that suggested that the previous notice eliminates the unlawfulness of the withdrawal of the agreement. However, it did believe that even when there is no fair reason, a reasonable notice may determine the inexistence of damages.

 

(IV) Conclusion

 

The Uruguayan Court of Appeals for the First Circuit ruled that under the good faith rule, the termination of a distribution agreement is fully justified in the event of having a fair reason, which by its significance has an impact upon the mutual trust between the parties, preventing the continuity of the distribution relationship even during the term of a short notice.

 

Nevertheless, where no fair reasons are at stake, the good faith principle requires that termination be effected with reasonable notice, after a minimum duration of the agreement, in a timely manner, and without taking the other party by surprise.

 

 

Hector Ferreira, IDI agency & distribution country expert for Uruguay

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