Puerto Rico Law Blog

Many a time have I seen contracts titled “agreements”, but are they different under PR law? Both terms are used indistinctly here, and give the fact that Puerto Rico is a hub of international commerce because of our unique cultural, language and political duality, private documents between two parties are named “agreements” frequently. Obligations drafted in English are titled “Agreements”, and every day, thousands of these are used to provide goods and services throughout the Commonwealth.

Agreements are contracts under Puerto Rico law.

There is no such distinction here. An agreement, without any “consideration”, or monetary disposition or value, is granted full contract status here. Perhaps the title reads “agreement”, but for all purposes, what negotiating parties are really agreeing to, is a full blown contract.

Obligations that are born from contracts are the law between parties (31 L.P.R.A. § 2994), and since “agreements” are not recognized separately by our Civil Code, they are granted the same enforceability as they would a contract.

But, how about verbal contracts? Is a verbal agreement also a contract?

Verbal agreements are known as verbal contracts in Puerto Rico.

The only three requirements for a valid contract here are: consent of both parties, the object of the contract, and the cause, or motivation for it.

Before I get into a very dense discussion of contracts and obligations, chock full of verbose legalese, it is very important for anyone doing business in Puerto Rico that once an offer has been accepted by the accepting party, a contract is born.

Here’s an example:

1. Company A in Poughkeepsie offers to sell 1,0o0 widgets monthly for the next 5 years to Company B in Humacao for $1 per widget.
2. Company B calls company A over the phone, and the Sales Rep answers the call.
3. Company B’s purchasing agent orders, over the phone, the offered 1,000 widgets at the agreed price.

Voila! A contract for 1,000 widgets for $1 apiece was born! No, a fax need not be sent detailing the purchase order, nor a letter, nor a notarized document is needed. Now, Company A MUST sell the widgets to Company B for the next 5 years. PERIOD.

Widget market value, production costs, and materials may increase, but the price offered cannot be altered, not even by a court (under almost all circumstances) and that’s that.

This example may be simple, but I cannot stress enough the importance of carefully handling possible contracts under our law. Great deference is granted to contractual obligations, and the extinction to claim the right to personal obligations (such as contracts) by prescription is 15 years since they were last requested (31 L.P.R.A. sec. 5294). This means that Company B can be buying widgets for a very long time.

Exclusive distribution rights in Puerto Rico are granted under Law Number 75 of June, 24, 1964 (10 L.P.R.A. § 278, et.seq.). This law, drafted at a time when marketing and importation strategies depended on the commitment of foreign and stateside large corporations to introduce new essential consumer products into the Puertorrican market, intended to grant exclusive rights over the distribution of their products to a dedicated few who invested time, effort and money in return for their continuous flow of merchandise into the island.

This law favors local distributors by establishing controvertible presumptions against the unfair termination of contractual obligations by their foreign and stateside suppliers, by creating causes of action for unfair termination, and by prohibiting quota based sales. In a jurisdiction where verbal contracts are permitted, this creates a risky endeavor for wholesale enterprises seeking to establish themselves in new markets, such as our own.

In just a short matter of time, a simple product purchasing relationship can create an expectation of product exclusivity which forbids the distributor from expanding their sales within our area, without the already established “exclusive local distributor” permitting the possible new and larger ventures. In addition, the loosely defined term “just cause” necessary to terminate the contractual obligation under Law 75 leaves the matter to be interpreted in court, instead of providing an faster and cheaper alternative to exclusive distribution contract dispute resolution.

The safest and best practice for stateside corporations already selling their products to local resellers is to review their contracts to “Law 75 Proof” them. For new enterprising companies wishing to include Puerto Rico into their venues, the safest option is to draft a detailed and precise contract that includes alternative dispute resolution options, limitations of jurisdiction and clauses which reserve the right to sell their products on a non-exclusive relationship.

Otherwise, they run the risk of facing several years of costly litigation, and seeing how a fruitful consumer market such as Puerto Rico turns into a sour venture for everyone involved.

A question I am asked frequently is how can a contract not have consideration in Puerto Rico. Due to our civilist tradition, contracts in Puerto Rico are defined as a personal obligation “to give, do, or not do”. This vague definition protects agreements that lack consideration. A free contract in our jurisdiction has as its purpose “the mere liberality of the contractors”.

The problems usually arise when U.S. based corporations conduct business in Puerto Rico. Perhaps as a precaution, contracts are assigned a nominal $1 to be able to qualify as a “contract” by common law standards. These companies should rest assured that even without consideration, a free contract is valid and enforceable in Puerto Rico.

Contracts, according to our standards, reflect the voluntary will to act and dispose of our present and future estate by consenting to another party to act or limit one’s own acts formally. Being this the first of three elements necessary to qualify a contract in Puerto Rico (consent, object and cause), anyone capable of legally acting can enter a contract that would entail no patrimonial reciprocity whatsoever.

So, the next time you see a “free contract” without any consideration in Puerto Rico, don’t worry over it. It’s still a valid contract…