Businesses including franchises wishing to market their products in Puerto Rico must be aware of two important laws that regulate the commercial relationship between a principal and a distributor. These are Puerto Rico Dealers Act Law 75 and Law 21. The laws were enacted to protect Puerto Rico distributors, dealers and sales representatives from a manufacturer’s arbitrary termination or impairment of their commercial relationship. Both laws are liberally interpreted in favor of those who carry out distribution activities; affording locals injunctive relief and carry stiff penalties for principals that do not comply. Whether a business is considering establishing or terminating a distributorship, sales relationship or even a franchise, it must take into consideration these statutes.
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Differences between Laws 75 and 21
Law 75 protects local “dealers” from a manufacturer’s arbitrary termination or ending their commercial relationship with the Puerto Rican distributors who had prior thereto developed a market for their products. Accordingly, a manufacturer cannot terminate its agreement with a dealer except for “just cause.”
Law 21’s motive is to protect sales representatives who fall short of compliance with dealership status under Law 75. It protects Puerto Rico sales representatives from arbitrary terminations after they create a market for their principals. A sales representative under Law 21 is as “an independent entrepreneur who establishes a sales representation contract of an exclusive nature, with a principal or grantor, and who is assigned a specific territory or market, within the Commonwealth of Puerto Rico.”
Law 21 P.R. LAWS ANN. tit. 10, §§ 279-279h
A “sales representation contract” is an “agreement established between a sales representative and a principal, through which the party of the first part commits himself to making a reasonable effort and due diligence in the creation or expansion of a market which is favorable for the products that the principal sells, directed at capturing clientele to offer it a product or service marketed by him in Puerto Rico, and the party of the second part is bound to comply with the commitments that may result from the sales representative’s efforts and coordination and to pay the previously-accorded commission or remuneration.”
Law 21, provides a sales representative with a provisional remedy pending litigation to continue in all its terms, the relation established by the sales representative agreement and/or to abstain to conduct any act or omission in prejudice thereof.
A dealer’s contract under Law 75 is defined as a “relationship established between a dealer and a principal or grantor whereby and irrespectively of the manner in which the parties may call, characterize or execute such relationship, the former actually and effectively takes charge of the distribution of a merchandise, or of the rendering of a service, by concession or franchise, on the market of Puerto Rico. The `established relationship’ between dealer and principal is bounded by the distribution agreement, and therefore the Act only protects against detriments to contractually acquired rights. Law 75, applies broadly to virtually all distribution relationships where a dealer has effectively in his charge in Puerto Rico the distribution, agency, concession or representation of a given merchandise or service.
Puerto Rico Dealer’s Act- Law 75 prohibits termination, impairment or non-renewal of a dealer’s contract without “just cause,” regardless of any contract provision permitting termination. Just cause is akin to nonperformance of the essential obligations of the contract including actions or omission that adversely and substantially affects the interests of the principal in promoting the marketing or distribution of the merchandise or service. Remedies under the law may include recovery of damages, cost of inventory, goodwill, and five years of profits.
KEY DEFINITIONS & CONCEPTS UNDER LAW 75
Dealer. Law 75 defines a “dealer” at 10 L.P.R.A. § 278(a) as : “a person actually interested in a dealer’s contract because of his having effectively in his charge in Puerto Rico the distribution, agency, concession or representation of a given merchandise or service.”
Dealer Contract. A “Dealer’s Contract” is defined in § 278(b) as a: “relationship established between a dealer and a principal or grantor whereby and irrespectively of the manner in which the parties may call, characterize or execute such relationship, the former actually and effectively takes charge of the distribution of a merchandise, or of the rendering of a service, by concession or franchise, on the market of Puerto Rico.” The International Franchise Organization defines a franchise as a “method for expanding a business and distributing goods and services through a licensing relationship.” So a franchise that takes charge in Puerto Rico of the distribution of merchandise or services of a franchisor – may be protected under Law 75 given the right circumstances.
Termination of the relationship. Notwithstanding the existence in a dealer’s contract of a clause reserving to the parties the unilateral right to terminate the existing relationship, no principal or grantor may directly or indirectly perform any act detrimental to the established relationship or refuse to renew said contract on its normal expiration, except for just cause.
It shall be presumed, but for evidence to the contrary, that a principal or grantor has impaired the existing relationship in any of the following cases:
- When the principal or grantor establishes facilities in Puerto Rico for the direct distribution of merchandise or the rendering of services which were previously in the charge of the dealer;
- when the principal or grantor establishes a distribution relationship with one or more additional dealers for the area of Puerto Rico or any part of said area in conflict with the contract existing between the parties;
- when the principal or grantor unjustifiably refuses or fails to fill the order for merchandise sent to him by the dealer in reasonable amounts and within a reasonable time;
- when the principal or grantor unilaterally and in an unreasonable manner varies the shipping methods or the manner, conditions or terms of payment for the merchandise ordered, to the prejudice of the dealer.
The definition of what is “just cause” ultimately depends on the facts of each case, see R.W. Int’l Corp. v. Welch Foods, 88 F.3d 49, 51 (1st Cir.1996) and is “nonperformance of any of the essential obligations of the dealer’s contract, on the part of the dealer, or any action or omission on his part that adversely and substantially affects the interests of the principal or grantor in promoting the marketing or distribution of the merchandise or service.” P.R. Laws Ann. tit. 10, § 278(d). It is “Only when the dealer fails to comply with any of the essential conditions or adversely affects in a substantial manner the interest of the principal, may the latter terminate the contract without payment for damages.” Warner Lambert Co. v. Tribunal Superior 101 D.P.R. 378 (1973) (“Only when the dealer fails to comply with any of the essential conditions or adversely affects in a substantial manner the interest of the principal, may the latter terminate the contract without payment for damages.”)