Terms of the contract are decisive in Uruguay
03 September 2009
The Uruguayan Court of Appeal recently had to deal with a case
of encroachment between a supplier and a distributor. The supplier
in question did not only open its own stores in the distributor's
territory, but also raised the prices of products supplied to the
distributor in order to make its own products more attractive to
customers.
Two questions that often arise in a franchise context had to be
decided:
- the first question was if there was an implied duty on the
supplier to guarantee its distributor a minimum profit margin
- the second question was whether the supplier was in breach of
contract by setting up its own sales branch in the distributor's
territory
As regards the guaranteed profit margin there have been a number
of franchise cases where franchisors have been accused of
over-charging for tied products, notably the German "Apollo-Optik"
case where the franchisor had to refund the franchisees some of the
"secret profit" made.
In Uruguay, the Court was aggressively pro-supplier/franchisor.
It held that that the supplier had no obligation to guarantee the
distributor a minimum profit, or in fact any profit all. This was
despite the fact that the distribution agreement contained some
language obliging the supplier to allow for a "reasonable profit"
of the distributor under "all possible circumstances" when setting
its prices. The Court stressed the fact that the supplier was not
obliged to prioritise the interest of the distributor over its own
interest.
In respect of the encroachment issue, the Court focused on the
fact that the distribution agreement did not include a
non-competition clause which prevented the supplier from selling
its products in the territory granted to the distributor. In these
circumstances there was nothing to prevent the supplier from
launching a competing brand.
This decision illustrates that franchisors can reserve to
themselves the right to develop competing brands. Absent a
contractual restriction, general law in most countries does not
prevent franchisors from rolling out a competing brand in the
franchised territory. It is of course preferable to include clear
wording to that effect in the franchise agreement.
For further information, please contact Mark Abell, Babette
Marzheuser-Wood or Chris
Wormald.