Responsibilities in the supply contract

Supply contract concept

The supply contract has been defined by jurisprudence as an agreement between the parties to maintain a continuous sale, with distributed or deferred deliveries. As an example, we cite the definition of the Supreme Court Judgment of June 13, 2002:

“… the supply contract is one by which one of the parties agrees in exchange for a price to be made in favor of another “periodic or continuous benefits” whose function is the satisfaction of continuous needs to meet the lasting interest of the creditor.”

The supply contract has great similarities with the sale, although it is evident that both figures cannot be identified. The supply requires a series of lasting and successive services so that the merchandise delivered is suitable as agreed between the parties, and the requirements of full, punctual and exact delivery must be met.

In legal terminology, we say that it is an “atypical” contract, since Spanish legislation lacks a specific regulation for its nature. Faced with this type of contract, we resort to the general rules of obligations and contracts.

The supply as an atypical figure is regulated by the provisions of the parties (art. 1255 C.C.) and, failing that, by the regulations of the commercial sale (art. 325 et seq. C. de c.) and the general rules of obligations and contracts. This is how the jurisprudence has established it. As an example, we cite the Sentence of March 22, 2004 of the Provincial Court of Madrid.

Responsibility of the contracting parties

The enforceability of contractual obligations is unequivocally included in articles 1,089, 1,091 and 1,258 of the Civil Code. The obligations derived from the contract have the force of law between the contracting parties, which must be fulfilled in accordance with the same and also in accordance with the dictates of good faith, usage and law. Regarding good faith, the STS of March 12, 1998 said:

“… the good faith referred to in article 1258 of the Civil Code, we must understand it from an objective point of view, as honest and fair behavior, perspective which in turn is enshrined in article 7 of the same text, as a general rule, the beginning of that name”.

In accordance with art. 1,124 of the Civil Code, the non-compliant party has the power to demand compliance with what was agreed in the litigious supply contract in the event of breach of obligations of the other contracting party, in addition to claiming the corresponding compensation for damages.

The jurisprudence requires that certain conditions be met to request the termination of the contract plus the claim for damages. We analyze each of them below:

a) It must be a bilateral contract, with reciprocity in the benefits owed by the parties.

Usually the obligations of the parties are the delivery of merchandise in the agreed quantity and frequency, in exchange for a price.

b) The default by the defaulter must affect an enforceable obligation.

According to art. 1,113 of the C.c. every obligation is enforceable from the perfection of the contract and until its termination. That is, since the consent of the parties determines the beginning of the contractual relationship while the supply contract remains in force. Therefore, it would not be possible to appreciate breach if the contract has come to an end, or if compliance depends on some condition.

c) The breach must be on a main obligation and not accessory.

Typical examples of main obligations in the supply contract are the payment of the full price or the delivery of non-defective merchandise.

Breach can also refer to the number of minimum orders. Establishing a minimum order for the product supplied may mean ensuring a volume of business for the supplier who signed the agreement and thus knowing in advance the performance that the employer can obtain. Unilaterally altering that commitment is breaching a principal obligation and violating the trust of the contracting party in good faith.

Related to the minimum order, there is often exclusivity of supply. The contract may put a price on the exclusivity that the supplier offers to the supplier. It is beyond any doubt that the exclusivity of the supply contract is also an essential element thereof, and cannot be presumed as a gratuitous obligation. Sometimes exclusivity is offered in exchange for a minimum number of orders that ensure the supplier a sufficient volume of business to compensate for the exclusion of third-party customers. Failure to comply with said minimum order commitment could amount to breaching the essential reason for exclusivity in the supply and with it the agreed price, and therefore an essential part of the contract.

As we can see, the main obligations vary depending on the case, and a particular analysis must be made of each supply relationship.

d) The breach of the obligation on the part of the defendant constitutes or implies an injury whose repair by means of the present lawsuit is justified.

Claim for damages

The defaulter will have the right to request compensation for the economic damage derived from a breach of supply contract. The Indemnity Principle, understood as the one that should inspire compensation for non-compliance, allows and requires compensation for both consequential damage and lost profits.

The consequential damage will be the decrease or loss of value, for example the payment of the price not received for the delivery of supplied merchandise, or the payment of the expenses caused to the party dutiful.

Loss of profit is the loss of legitimate profit or benefit that the person affected by an illegal act would foreseeably have obtained. Despite being included in art. 1,106 C.C, the jurisprudence completes the concept of lost profits. Thus the STS of July 15, 1998 says:

“This precept establishes the scope that must be given to compensation for damages, by establishing that they include not only the value of the losses, but also that of the profits that have ceased to be obtained, that is, that of the frustrated profits or lost profits that, with a certain probability, were expected in the normal development of the circumstances of the case.”

The STS of November 5, 1998 adds:

“Loss of earnings has economic significance; attempts to obtain reparation for the loss of profits not received, a concept different from that of material damages (thus, Judgment of May 10, 1993), whose compensation for both concepts must cover all the patrimonial loss suffered by the injured party (thus, Judgment of October 21, 1987 and September 29, 1994).”

There is no formula that allows the loss of profit to be valued in a fixed manner, but it will depend on what was agreed and the concurrent circumstances in each supply agreement.

Before we discussed the breach in the minimum order. In this case, the benefit that the supplier would have presumably obtained if the supplier had complied with its contractual obligation of minimum orders should be considered part of the lost profit.

If there was also the commitment to supply exclusively, the loss of profit resulting from not having been able to supply merchandise to the rest of the competition must be computed, or in any case the economic value of said exclusivity commitment. Otherwise, the supplier would have lost the possibility of introducing the product on the market without receiving the economic benefit expected by the exclusive commitment. The jurisprudence has defined this damage as “loss of possibilities”, whose concept differs from that of “loss of profit”. The Provincial Court of Madrid addresses this matter in a judgment of September 14, 2002:

“Likewise, and as a different concept from lost earnings, some sector of civil scientific doctrine has coined the notion of «loss of opportunities», or of «possibilities», to understand the frustration of expectations of future earnings. If the compensation for lost earnings requires the verification as certain of a legally suitable situation in the subject in such a way that it would allow him to reasonably expect earnings, on the other hand, compensation in cases of “loss of opportunities”, we are faced with the absence of that certainty. In the latter case, it cannot be understood, however, that it is a hypothetical damage, a qualification that could well be predicated of the eventual gains that could have been achieved if the intended or desired success materialized, presupposes the performance of the lost opportunity, but it cannot be denied that the very loss of the opportunity already integrates, in itself, a damage. There is, then, uncertainty in the benefit that could have been obtained, but there is certainty as to the probability that the opportunity itself would not have been lost due to causes attributable to a third party, that is, when it is the harmful event that deprives the subject of that propitious situation.”

The loss of possibilities constitutes in itself damage attributable to the breaching party.

Conclusions

First.- The supply contract does not have a specific regulation and it should not be equated to that of the sale. It is an atypical contract subject to the general regime of obligations and contracts.

Second.- Both the supplier and the supplied party can claim responsibilities from the defaulting party.

Third.- When a main obligation is breached, the other party may request the termination of the contract and therefore the termination of the supply agreement.< /p>

Fourth.- The compensation for damages must include both consequential damage and lost profits, as well as the assessment of lost opportunities.