TERMINATION OF DISTRIBUTION AGREEMENTS IN URUGUAY
1. Uruguayan applicable law.
Since no specific regulation of this type of contact exists in Uruguay, it will be regulated by general principles of civil law and we must take into consideration the different verdicts adopted by Uruguayan courts for similar situations. It is important to note that the decision of one court, does not bind another court that can issue a decision different from the other court and might not follow the same principles.
2. General regime for termination of distribution agreements in Uruguay.
Distribution agreements are agreements that extend in time, and the general principle is that if no term is pending, either party can finalize the agreement. No party can be bound to comply with an agreement eternally, and all parties should have the freedom and possibility of ending an agreement that has lasted in time.
Courts state, that if there is no specific term to be complied with, either party can decide to end the agreement. The Supreme Court has stated that the party that ends an agreement that has extended in time, without excess, is not in breach and should not be obliged to pay damages.
In order to determine whether “excess” exists, it is important to determine whether the party terminating the agreement, has done so abusing its right to do so. Every part has the right to terminate the agreement, but if it does so abusing its right, then it must pay the damages caused to the other party. In order to determine if there is an abuse of rights, we must analyze whether the termination is done in bad faith, affecting moral principles, business customs, with illegitimate purposes, etc.
In order to determine whether abuse of right exists, a two step test is used by courts:
First Step: Existence of legitimate cause to terminate.
The first issue that must be analyzed is whether legitimate causes to terminate the agreement exist, for example delay in payments, material breach of the agreement, disagreement on prices, sales policy, lack of cooperation, lack of achievement of sales level, market share, lack of execution of the agreement, etc.
If the Court decides a legitimate cause exists, it stops its analysis and determines no damages should be awarded since we are not in presence of a termination with abuse of rights.
If the Court decides a legitimate cause for termination does not exist, then it will analyze the second step of the test.
Second Step: Termination with abuse of right.
In this stage, the Court will analyze whether abuse of right existed, in order to determine this it will take into consideration whether a reasonable notification of termination was given, if termination was done in good faith, if there were expectations created by the party terminating that affect the other party, if there were unnecessary damages caused to distributor, etc.
If notice of the termination is given, Courts generally accept that we cannot be upon an abusive termination. Notice must be of a reasonable period of time that will eliminate the urgency of the termination. If the period of time is stated in the agreement, notice should be for that period. The notice does not require special formalities; it can be done by public notary or by certified mail. A duly given notification with a reasonable period of time before termination is an excellent element to minimize a claim for abusive termination.
Other important issues that can configure an abusive termination are: generation of long term expectations and requirement of important investments, and termination of the contract. For example, if a new showroom is required, investment in advertising, etc. and two days after the showroom is opened, termination is communicated, that would be abusive.
The burden of the proof in this case is on plaintiff that must prove and determine that there was a wrongful termination with abuse of right and it must also prove the damages and the amount of the damages.
Amount of Damages
If an abusive termination is determined by the Court, it is important to analyze how the amount of damages that must be paid for the abusive termination are determined.
If the Court determines that a reasonable notification of 90 days should have been granted and was not given, then the damages would be of the profits the distributor would have obtained if the agreement would have continued for the 90 days.