Robert Alex Fleming
When discussing business expansion, the formulation of distribution contracts stands as a cornerstone for companies aiming to broaden their market reach. This approach is particularly relevant in Puerto Rico, where the intricacies of Laws 21 and 75 play a pivotal role.
While these legislative frameworks—Law 21 safeguarding sales representatives and Law 75 protecting dealers—lightly touch upon the broader spectrum of distribution agreements, they are essential considerations for businesses venturing into the Puerto Rican market. Thus the two laws are relevant when establishing or terminating a commercial relationship between principals and distributors. Law 21 prohibits a principal from terminating its agreement with an exclusive sales representative without just cause. Law 21 is modeled after the Dealer’s Contract Act, also known as Law 75, designed to protect Puerto Rican “dealers” from a manufacturer’s arbitrary termination or impairment of their commercial relationship. Both laws afford locals injunctive relief and carry stiff penalties for principals that fail to comply. Please visit bvirtualogp.pr.gov to access both Law 75 and Law 21, although in Spanish.
Introduction to Law 75 and 21
Law 21 was meant to protect sales representatives — who “assume all the operational costs which such representation entails, such as the cost of maintaining an office, exhibition rooms, cars, office personnel, phones, electricity, water, insurance, travel costs, representation costs, office supplies and municipal patents” — from termination without just cause.
Its older cousin, Law 75- was designed to protect Puerto Rican “dealers” from a manufacturer’s arbitrary termination or ending their commercial relationship (distribution agreements) with the Puerto Rican distributors who had prior thereto developed a market for their products. Pursuant to Law 75, a manufacturer cannot terminate its agreement with a dealer except for “just cause.” A scheme to compensate dealers terminated without just cause was enacted under Law 75.
Law 75: Distributors and Dealers
Distributor (Dealer) under Dealer Act 75: In the context of Dealer Act 75, specifically under 10 L.P.R.A. § 278(a), a “distributor” or “dealer” is identified as an individual or entity deeply invested in a dealer’s contract due to their role in overseeing the distribution, agency, concession, or representation of specific merchandise or services within Puerto Rico. This definition underscores the critical function of distributors in the local market under the umbrella of Law 75.
Dealer’s Contract under Law 75: Section 278(b) of Dealer Act 75 articulates a “Dealer’s Contract” as the legal nexus between a distributor and a principal or grantor. This bond is recognized regardless of the terminology or formalities adopted by the parties, signifying the distributor’s active engagement in the distribution of merchandise or provision of services through a concession or franchise within the Puerto Rican market. Accordingly, franchises operating as distributors in Puerto Rico and managing the distribution of a franchisor’s merchandise or services could be safeguarded under Law 75, given suitable conditions.
Termination of the Distributor Relationship under Act 75: Despite any provision in a dealer’s contract allowing unilateral termination by any party, Dealer Act 75 restricts a principal or grantor from adversely affecting the established distributor relationship or from declining to renew the contract upon its standard expiration without legitimate cause.
The presumption of “just cause” for termination is triggered in scenarios such as:
- The principal or grantor initiating direct distribution facilities in Puerto Rico for merchandise or services previously managed by the distributor, impacting the distribution landscape within Puerto Rico.
- The principal or grantor forming distribution agreements with additional distributors in Puerto Rico, which conflicts with the pre-existing contract under Law 75.
- The principal or grantor’s unjust refusal or failure to fulfill reasonable orders for merchandise from the distributor within a timely manner.
- The principal or grantor’s unreasonable alteration of shipping methods or the terms, conditions, or payment methods for ordered merchandise, to the detriment of the distributor.
“Just cause” for the termination of contracts under Act 75 hinges on specific case facts and is generally characterized by the distributor’s failure to meet essential contractual obligations or actions or inactions that significantly harm the principal or grantor’s interests in the marketing or distribution of merchandise or services. This concept is supported by case law, including R.W. Int’l Corp. v. Welch Foods, 88 F.3d 49, 51 (1st Cir.1996), and Warner Lambert Co. v. Tribunal Superior, 101 D.P.R. 378 (1973), which clarify that a principal may terminate a contract without liability for damages only when the distributor breaches essential conditions or substantially undermines the principal’s interests.
The distributor can recover damages including the cost of inventory, goodwill, and five years of profits
Law 21: Agents
Law 21’s motive is to protect sales representatives who fell short of compliance with dealership status under Law 75. Law 21 protects Puerto Rico sales representatives from arbitrary terminations after they create a market for their principals.
Law 21 defines a sales representative 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.” When interpreting contracts pursuant to Act 75, courts have noted that exclusivity is generally apparent either from the contract or from the arrangements agreed upon between the parties.
A “sales representation contract,” in turn, is defined as follows:
The 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. Unlike Law 75, an essential element of a Law 21 claim is the existence of an “exclusive sales representation contract” (entered after December 5, 1990 when the law was enacted.
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
Conclusion
In Puerto Rico, the distribution of goods and services necessitates a deep understanding of Laws 75 and 21, for all parties involved, including suppliers, principals, and franchisors. These regulations are critical in shaping the dynamics between the principal the distributors and the agents. The Puerto Rico Dealers Act, or Act 75, protects local distributors from unfair contract termination and impairment, insisting on “just cause” for such actions, particularly for those who have significantly enhanced a manufacturer’s product market presence. Law 21 complements this by safeguarding sales agents with exclusive contracts in Puerto Rico from baseless terminations.
These laws are in favor of distribution activities, providing solutions and imposing penalties for non-compliance, thereby stressing the importance of legal adherence during the initiation, revision or dissolution of distributorship, agency, or franchising relationships. It’s crucial for both distributors and principals, including suppliers, to recognize that contracts might contain clauses that could negate the protections afforded by these laws. This reality underscores the need for meticulous negotiations and a comprehensive grasp of the legal provisions relevant to their commercial engagements.
We guide both suppliers and distributors through these legal complexities, offering direct assistance in drafting precise contracts and establishing franchising and distribution structures that comply with Puerto Rican legal requirements. Our proficiency also encompasses the development of proactive strategies for conflict resolution, handling of contractual impairments, and management of terminations, all designed to significantly mitigate legal risks for our clients. With a focus on legal compliance and risk reduction, our tailored services equip businesses to confidently navigate the regulatory landscape of Puerto Rico, ensuring robust legal support throughout their commercial endeavors.
For a detailed discussion of the compensation guidelines under Puerto Rico sales representative Law 21, see the related article- Law 21 Sales Agent Case Discusses Compensation Guidelines.
As to commercial arbitration in contracts, you can view my law review article on the matter: Comercial Arbitration Awards in Puerto Rico.
Additional information on Act 75 available here.