In the United States, several states have so-called relationship statutes governing commercial relationships in the distribution and franchise areas. These statutes often require just cause for the termination or modification of such relationships. From the point of view of manufacturers and franchisors, it is tantamount to operating with a straitjacket even when the parties have executed written contracts intended to give manufacturers and franchisors great leeway in dealing with their distributors and franchisees.

            Puerto Rico’s Act 75 of June 24, 1964 is one such statute. It specifically prohibits any conduct detrimental to such relationships or any conduct, be it an act or omission, without ‘just cause’. See 10 LPRA section 278a. ‘Just cause’ is defined as the failure to comply with any essential obligation of the distribution or franchise agreement; or any act or omission, on the part of the distributor or franchisee, which substantially and detrimentally affects the distribution or the development of the market. 

            Even when the distribution or franchise contracts provide for a fixed term and non-renewal, Act 75 supersedes such contract terms by always requiring just cause not to renew. This means that a manufacturer or franchisor would be obligated to renew the contract unless it can prove just cause. Puerto Rico is, thus, an evergreen jurisdiction.

            Other types of conduct which require just cause include any act of impairment of the relationship such as contravening exclusivity rights; unreasonably refusing to supply product; and unreasonably and unilaterally modifying the terms of payment. See 10 LPRA section 278a-

            Moreover, Act 75 creates certain presumptions that the statute has been violated, such as, when a manufacturer or franchisor unreasonably and unilaterally modifies the shipping or payment terms.

            Act 75 clearly establishes that the manufacturer or franchisor would not have just cause to impose rules of conduct or sales goals upon a distributor or franchisee unless such rules or goals are reasonable in view of the conditions of the Puerto Rico market at the time of their breach. The statute also limits what a manufacturer or franchisor may do to restrict transfer of ownership interest or control over the franchisee. Only when the failure to comply with such restrictions could detrimentally and substantially impact the distribution or development of the market, may a manufacturer or franchisor claim that just cause exists for the restrictions.

            In sum, Act 75 and statutes like it restrict the freedom of contract to a substantial degree and, thus, manufacturers and franchisors would be well advised to inquire about such statutes prior to doing business in any U.S. jurisdiction.

September 2009

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By Rossell M. Barrios-Amy

Admitted in the Commonwealth of Puerto Rico,

U.S. District Court for the District of Puerto Rico,  

U.S. Court of Appeals, First Circuit

District of Columbia,

U.S. Supreme Court

Shareholder of Goldman Antonetti & Córdova, P.S.C.

rbarrios@gaclaw.com