It was recently discussed, in a judicial case in Uruguay (FORTYLEX S.A. v SOCIEDAD COMERCIAL E IMPORTADORA ENKO LTDA.), involving a supplier and a distributor of an international brand of lighters (RONSON), an issue about the circumstances that can legally lead to a termination for a reasonable cause.
Under Uruguayan legislation, there is no definition or list of events that must be considered as “reasonable cause” for a termination. Consequently, local courts need to construe, on a case-by-case basis, what can be included in this legal standard.
The Uruguayan Supreme Court recently ruled in this case in which a supplier terminated a distribution agreement, without prior notice, alleging, as reasonable cause, circumstances that were qualified by the Uruguayan Supreme Court as indicators of loss of trust.
After two contradictory rulings at the trial court and at the appeal court, ultimately, the recent Cort Order of the Supreme Court, No. 651/2024, dated June 21, 2024, resolved definitely the case.
The Court set forth that both parties of a commercial distribution contract, without a specific term, have the right to terminate it, unilaterally, without compensation. However, provided that termination is executed with abuse, by causing unnecessary damages to the other party, in bad faith, in an unfair manner, or in an arbitrary or capricious manner, compensation can be at issue.
The outcome is that if there is reasonable cause, there is no illegality in the termination and, therefore, there is no obligation to compensate the distributor.
Supreme Court ruling discussed, one by one, the factors that the supplier company alleged as reasonable cause and concluded that supplier lost trust in its distributor and this sole fact led the Court to accept the legal termination.
Summing up the most relevant issues discussed as potential grounds for valid termination were the following:
- a) Constant Request for price reduction by the distributor: Both, the Court of Appeals and the Supreme Court shared that price haggling is part of normal commercial activity, thus the Supreme Court added that these requests had the goal of achieving a better impact in the market, with more competitive prices. This cannot be considered a reason for a legal termination without compensation; therefore, these requests cannot be considered as just or reasonable cause to end the business relationship without prior notice.
- b) Non-compliance of the Distributor with agreed goals: the Appeal Court concluded that since there was no written contract, it could not be demonstrated what the goals were, and that the distributor failed to comply with agreed goals.
However, the Supreme Court saw in this fact a clear symptom of loss of trust by supplier in its distributor.
Thus, the Supreme Court set forth that the supplier constantly requested sales projections and advertising planning from the distributor, and it did not obtain valid responses.
It was highlighted, that supplier asked, in written communication, a greater commitment on the part of the distribution company, which was not complied with.
- c) Distribution of fake Products: It was extensively analyzed by the Supreme Court the difficult in communications parties had. Even though, the issue of the distribution of fake products was not accepted, it showed a clear loss of trust.
Conclusion: Loss of trust as sufficient ground for termination of a Distributionship
The Supreme Court, ultimately concluded, in this context, that supplier did not trust the distributor’s information or its explanations. This is extracted and deduced from the emails attached by supplier.
The Supreme Court concluded that there was a “logical and reasonable basis” for the supplier’s behavior that “in the case deserves to be classified as reasonable cause and exempts him from the obligation to compensate for the damages and losses that could eventually have been caused.”
The Supreme Court added that the circumstance that when communicating the termination, the supplier offered to repurchase the entire stock showed its good faith and the desire not to cause unfair harm to the distributor.
Hector Ferreira, IDI Country Expert for agency and distribution in Uruguay.
