Breach of contract and unfair competition: How to pick the better choice?

It is not unusual for the same factual circumstance to trigger more than one means of judicial relief -or even through an administrative authority's actions-, and this is one of those events.

The free market is premised on the preservation of private property and freedom of contract, as one of the most important individual freedoms. 

Indeed, without one and the other, it would be difficult for businesses to engage in the competitive process of contesting for customers, moreover they would face the same challenge in the exchange of goods and services that defines the existence of a free market.

In Colombia, Article 333 of the Constitution provides for the State' s duty to prevent the obstruction or restriction of economic freedom, particularly it aims for the State to control individuals or companies in abusing from their market power. With the purpose of preserving the collective right to compete, whose essential part is the ability to access a market without unjustified barriers 1 Colombia. Constitutional Court. Opinion C-224. Exp. D-7865, March 24th, 2010. , the Colombian legal system has established provisions that are particularly concerned with sanctioning commercial practices that restrict free competition, and, on the other hand, they deal with the protection of the individual interest of each competitor (although not limited to it) to compete fairly for customers in a market through mechanisms that do not violate good faith.  

The unjustified barriers to access a market faced by a potential competitor, or the unfair commercial practices that one of the current competitors in a market engages in, may -and in many cases is so- be found in a contract provision, or as a consequence of asserting a right under the contract, or even upon the termination of a contract. Such a relationship between contract law and public policy provisions that seek to safeguard the free market and competition is presented with greater clarity in, for example, the definition of "Agreement" included in Decree 2153 of 1992 2 Decree 2153 of 1992, articule 45, numeral 1. , or the unfair competition acts associated with violation of trade secrets 3 Law 256 of 1996, articule 16. , inducement to breach of contract 4 Law 256 of 1996, articule 17. , or even the act of deviation of clientele 5 Law 256 of 1996, articule 8. , as highlighted by the Supreme Court of Justice in decision SC3907-2021, issued on September 8, 2021 6 Supreme Court of Justice, Civil Chamber. Opinion SC3907-2021. Rad. 2011-00181-01, September 8th, 2021. .

The case before the Supreme Court, on cassation appeal, involved a commercial agency contract, whose execution lasted for more than 10 years. During performance, the agent gained clients for its principal in a geographic market where it did not have presence. 

The contract was terminated by the principal under a power set forth in the contract, and the commercial agent was required to hand over a substantial part of the clients served by him to another distributor who would start operating in the same area as new agent. 

The commercial agent filed a lawsuit alleging the occurrence of acts of unfair competition committed by the principal, a claim that was upheld in both instances, with the important note that, on appeal, the Court denied awarding damages to the extent the trial judge and the plaintiff liquidated damages as if they were consequence from the declaration of contractual liability, and this issue was covered in cassation appeal.

Appellant before the Court asserted, among others, the Colombian law authorizes to initiate judicial recourse seeking relief for an unfair practice to compete based on matters related to a contract, thus such means of relief it is not limited to tort-related events. The Supreme Court agreed with appellant recognizing “under exceptional circumstances, a breach of contract may fit within the scope of an unfair competition practice definition (…)”, nonetheless with a qualification: plaintiff may not recover double award on damages based on the unfair practice and the breach of contract, case in which unjustified enrichment would occur.  

According to the Court, seeking monetary relief effectively under the Unfair Competition Act depends on producing evidence to prove the occurrence of a practice showing the purpose in concurring into a market, and therefore that exceeds a privity-of-contract type of relation. The Court stressed on such remark with a direct reference to the case submitted by the appellant, requiring proof that "(...) the early termination of the contract (...) exceeded the sphere of the bilateral distribution agreement to become an instrument of deviation of clientele (...)”.

The main issue lies in associating the breach of a contract to a market purpose the breaching party had when the breach occurred, or at the time the breaching party exceeded a faculty it may assert under the contract. The market-associated purpose, actual or potential, was provided by Unfair Competition Act as relevant issue for the scope of application and, therefore, the availability of remedies embedded in such Act. The market purpose is defined as the objective pursued by the defendant-competitor. It may be even inferred to the extent that the alleged conduct has the potential to allow the defendant, or a third party, to maintain or increase their market share.

While discussing the main issue of the case, the Court highlighted that, within the scope of the Unfair Competition Act, it is not enough to prove the existence of an agreement, its non-performance or imperfect performance, and causation element between a breach of contract and the damage sustained by the wronged party. Instead, plaintiff must produce evidence as to the relevant context that fits within the defined elements of a practice of unfair competition, as provided in the Act, altogether with the causation element between such facts and the injury suffered by the plaintiff.

A final comment particularly on regards the termination of a long-lasting agreement. Generally, the termination of an agreement of such nature is a matter reserved to the parties and what they agreed on, asserting their freedom of contract. Despite the fact the consequences of terminating an agreement are -naturally- negative for one of the parties, the Court remarked that the extensive length of a contract, without a cause that justifies it, harms freedom of contract, but also the public order interest in preserving free market conditions. Hence, liability arising out from the scope of the Unfair Competition Act does not depend on the breach of contract itself, but the conditions under the breach took place.