(I) Statement of Facts
The Uruguayan Court of Appealsfor the Fourth Circuit has recently ruled in a case involving a foreign supplier and a domestic distributor (Court Decision No. 20/2008). United Distillers & Vintners (SJ) BN (‘Supplier’) brought a legal action against its distributor, Parma Importaciones S.A., (‘Distributor’) to collect an owed debt. Afterwards, Distributor counterclaimed alleging, among others, that Supplier breached the distribution agreement, by not complying with certain minimum profit, it allegedly assured to Distributor, and by setting up a branch office to compete with Distributor within the territory.
(II) Issues
(i) Whether or not the supplier must assure a minimum profit to the distributor. Short Answer: No. Even though Supplier can set the price of its products, this does not mean that he must assure a minimum profit to Distributor.
(ii) Whether or not Supplier breached the contract by setting up its own branch in Distributor’s territory to compete with it. Short Answer: No. Distributor was not able to prove that Supplier had the intention to illegally exclude Distributor from the territory.
(III) Analysis
(i) Whether or not the supplier must assure a minimum profit to the distributor.
Paragraph 5.1 of the distribution agreement stated that Supplier shall freely set the price of its products. However, considering ‘all possible circumstances, Supplier shall grant a reasonable profit to Distributor out of its sales once paid direct and indirect reasonable expenses -e.g. discounts and marketing costs-‘. The Court held that, given the purpose of the distribution agreement in which a seller purports to limit its own participation in a territory and to avoid selling its products directly, the wording ‘reasonable profit’ does not mean neither that Supplier must assure a minimum profit to Distributor nor that the latter will not have any loss. Supplier can freely set the prices of its products, though, this should not be done in an abusive way that prevents Distributor from a reasonable profit. However, Supplier is not obliged to prioritize Distributor’s interests to the detriment of its own interests.
(ii) Whether or not the supplier breached the contract by setting up its own branch in the distributor’s territory to compete with it. Given that the distribution agreement did not provide any non-competition clause that refrained Supplier from direct selling (of different brands of the same products) within the territory; the latter started doing business in competition with Distributor. In addition, Supplier increased the prices of the brands sold by its Distributor to benefit the brands it was directly selling. The Court ruled that increasing the price of Distributor’s brands to benefit its own brands, was neither an illegal behavior nor a breach of the distribution agreement. The Court held that it was not proved by supporting evidence that Supplier’s behavior aimed to exclude Distributor from the territory. Furthermore, the rulemaker stated that Distributor should have challenged the situation at the outset. By not doing that, Distributor implicitly agreed to Supplier’s participation in the territory and due to that it should not be able to challenge it many years later.
(IV) Conclusion
The Uruguayan Court of Appeals for the Fourth Circuit ruled that even though the supplier can set the price of its products, this does not mean that he must assure a minimum profit to the distributor.
Supplier does not breach the contract by setting up its own branch in Distributor’s territory to compete with it, provided that the distribution agreement does not prohibit it and that an intention to exclude Distributor from the territory was not sought by Supplier.
Héctor Ferreira, IDI Country Expert for Uruguay.
