Legal Aspects To Be Considered In Anticipated Termination Of Commercial Distribution Agreements In Uruguay

Under Uruguayan Law there is no regulation for Distribution Agreements other than those for specific tax and social welfare purposes2. Therefore, Distribution Agreements are regulated by the general principles of Civil and Commercial Law. Furthermore, the use and practice generally observed in commercial trade and the location where the contract is to be performed are usually taken into account by our courts when deciding relevant cases.

Distribution Agreements in Uruguay are generally entered into as a written contract by the parties, often establishing a term date and prior notice periods in case of anticipatory termination by either party. The written contract will act as the law between the parties3. Oral agreements are also enforceable in Uruguay. However, if a party to a contract challenges the existence of an unwritten Distribution Agreement, the party seeking to enforce the agreement will have to submit evidence before the court to establish the existence of an oral contract. In fact, in the enforcement of oral agreements the plaintiff will first need to prove the existence of the commercial relationship, second the essential terms of such relationship and third the breach of the agreement.

In case a just cause for termination arises, such as a material breach of the contract, the agreement can be terminated without prior notice or indemnification, subject to a conclusive evidence of the just cause.

On the other hand, termination is considered abusive and subject to indemnification when one or some of the following circumstances occur: (a) absence of a just cause; (b) notification of termination is not given on time; and /or (c) termination is done in bad faith.

1. Abusive Termination

   As previously stated, termination of a Distribution Agreement is considered abusive, when made without a just cause, when done without prior notice and/or in bad faith.

   1. Termination without a Just Cause

      The term just cause connotes a fair and honest cause or reason, regulated by good faith on the party exercising termination. It can also be defined as the reason that is legally acceptable, sufficient and essential to get certain court action.4

      A just cause to terminate a Distribution Agreement may arise in the case of: (i) A breach of the contract by either party (e.g. past due on payments, failure of Distributor to achieve reasonable sales quota, failure of Supplier to deliver products on time, violation of exclusivity); (ii) Any action or omission...