Presentation made at the 50th Congress of the Union Internationale des Avocats, on the 1st November 2006, in Salvador, Bahia, Brazil.
For obligations under an international contract to be enforceable against one of its parties in Brazil they must not be contrary to Brazil’s national sovereignty, public order or morality. And this is the reason why one needs to be extremely careful with overriding Brazilian legal provisions.
In this respect, we have to start by calling your attention to the new Brazilian Civil Code, Law 10.406 of 10 January 2002 (“CC”), which came into force on 11 January 2003 with substantial amendments to previously prevailing legal provisions, including those relating to contracts. Chapter XII of the CC (articles 710 to 721) is denominated Agency and Distribution. The CC has some serious failures and numerous shortcomings, which must be clearly understood for the necessary adaptations to be incorporated in the relevant specific documentation. We will mention below some of the legal provisions to be considered in relation to agency or distribution in Brazil.
Article 710 of the CC determines that, through an agency agreement, a person undertakes, in a non-fortuitous manner and without dependency ties, the obligation of promoting, to the cost of another, upon compensation, certain business in a specific zone.
It is important to note that the above definition of agency agreement, as contained in the CC, is practically the same as the definition of commercial representation, as contained in the Law on Commercial Representations (Law No. 4.886/65).
The only difference consists on the fact that Law No. 4.886/65 defines the object of the commercial representation as being the promotional of “mercantile” business. However, the fact that the CC omits the expression “mercantile” can be explained by the fact that the CC has now caused the disappearance of the previously classical differentiation of Brazilian Law between civil and mercantile transactions. Therefore, for all practical purposes, agency and commercial representations may be equivalent, which means that the specific Law on Commercial Representations may also be applicable to agencies, as a result of article 721 of the CC which determines that agencies are also subject to provisions of specific laws on the same subjects.
Law on Commercial Representations
Commercial representation in Brazil is regulated by Law 4.886/65 as amended by Law n. 8420/92. Basically, the law defines the autonomous commercial representation as a profession exercised by legal entities or individuals who, without employment relationship, directly intermediate business on behalf of one or more persons.
By law, commercial representatives must be registered with the Regional Council of Commercial Representatives. It is important for the represented to demand said registration of the representative to prevent possible employment obligations.
Also by law, commercial representation agreement shall include provisions covering:
• the conditions and requirements for the representation;
• a generic or a specific description of the nature of the representation;
• the term of validity of the agreement, which may be fixed or undetermined;
• the geographic area(s) for the representation;
• the exclusivity or non-exclusivity of representation in a certain geographic area;
• the remuneration for the representation and the form of payment;
• the circumstances that may lead to reductions in the geographic area for exclusive representation, if any;
• the rights and obligations of the contracting parties;
• the obligation or otherwise of the commercial representative not to represent any other individual or entities; and
• the indemnification to be paid should the principal terminate the agreement for any cause, excepting those defined as mentioned below.
The sphere of commercial representation activity can be regarded in terms of the area in which business may be performed, whether that is a geographical area or area of product concentration. The commercial representation contract establishes the territorial boundaries of the representation, and can also restrict the products or goods that the commercial representative is to promote.
Unless the contract expressly provides for the non-exclusivity of representation in a certain geographic area, the commercial representative shall be entitled to receive commissions on any business.
Conversely, the obligation of the commercial representative not to represent any other individual or entities must not be presumed in the event the agreement is silent in that respect.
Commission shall be paid to the representative by the l5th day of the month following settlement of the invoice relating to the corresponding transaction. Commission paid late shall be monetarily adjusted for inflation. The form of payment of remuneration should be mentioned in the commercial representation agreement and, if omitted, commission shall be paid monthly upon the receipt of the corresponding payment by the principal. The commercial representative is allowed to issue credit instruments to collect commissions.
Commission shall be calculated on the basis of the total value of the merchandise. In the event of unfair termination of the contract by the principal, any outstanding remuneration, whether resulting from orders already settled or not, shall be due on the termination date. Amendments to the commercial representation agreement that may directly or indirectly result in a reduction in the average remuneration received by the commercial representative in the last six months of validity of the agreement are not allowed.
Unless specified in the agreement, the principal’s refusal to accept purchase orders duly delivered by the commercial representative must be made in writing to the commercial representative within 15, 30, 60 or 120 days, depending on whether the buyer is in the same city, state, another state, or another country, respectively. If written refusal is not received by the commercial representative within the appropriate time frame, the commercial representative is entitled to the resultant commission.
No commission will be due in the event the purchaser becomes bankrupt, or fails to make instalment payments, or terminate the contract, or if delivery of products is suspended because of the purchaser’s dubious business standing.
The following, inter alia, are defined as defaults of the commercial representative during the performance of the commercial representation: negligence or malicious fraud to the detriment of the principal’s business; promotion of illegal business or of any transactions against the public interest; violation of professional secrecy; and refusal to present the professional identification card upon request of the principal.
Commercial representative are legally prevented from reducing prices or restructuring payment or acting contrary to instructions from his principal.
Article 35 sets forth, as fair cause for the principal to terminate the agreement:
• neglect or negligence of the commercial representative in fulfilling his obligations under the agreement;
• carrying out of activities to the commercial discredit of the principal;
• failure to comply with any obligations inherent to the commercial representation activity;
• criminal conviction of the commercial representative; and
• “force majeure”.
If the principal terminates the commercial representation for any other cause, an indemnification, as specified by the law, shall be paid to the representative.
Once the initial term of an agreement contracted for fixed term is expressly or tacitly renewed, the representation becomes valid for an undetermined term. Any commercial representation contracted to succeed another representation which had been terminated less than six months before, is considered to be for an undetermined term even if the parties agree otherwise.
Notwithstanding the indemnification referred to above, any party terminating, without justifiable cause, an commercial representation agreement which had been contracted for an undetermined term and which had been valid for more than six months shall either: provide the other party with any guarantee that may be stipulated in the agreement; or give notice of at least 30 (thirty) days; or pay an amount equivalent to one third of the commissions received by the representative during a period of three months prior to termination.
Only if the contract is terminated for justifiable cause can the principal retain payments due to the commercial representative to compensate for any damage that may have been caused by such commercial representative.
The agreement may be terminated by the commercial representative, in circumstances including:
• reduction in sphere of the commercial representative’s activities contrary to that agreed in contract;
• direct or indirect breach of exclusivity, where exclusivity is established in contract;
• abusive pricing in the commercial representative’s territory aimed at making impossible any regular business activity by the commercial representative;
• non-payment of remuneration when due; and
• “force majeure”
Article 39 determines that any disputes arising in connection with the commercial representation shall be brought to the courts of the domicile of the commercial representative.
As seen above, many of the original provisions of Law 4.886/65 indicate a highly paternalistic approach by Brazilian legislation towards the representative. The indemnification due to the representative in cases of unfair termination is of a legal protection similar to that granted to the Brazilian worker. Unfortunately, the amendments introduced by Law 8.420/92 have only served to re-enforce this view.
Thus, Article 44 introduced by Law 8.420/92 determines that in the event the principal is declared bankrupt, the outstanding amounts owed to the representative shall be given priority classification as labour credits.
Furthermore, Law 8420/92 also provides in Article 45 that the temporary incapacitation of the representative, whilst benefiting from sickness allowances from the National Health Service, would not constitute justifiable cause for termination of the commercial representation.
However, some of these problems can be mitigated by the appointment of a legal entity as the commercial representative and at least commercial representations are not so affected by the problems of the new CC as the distributions are.
The CC deals erroneously with distribution in article 710, as being differentiated from agency only by the effective possession of the goods. Distribution would thus be characterised when a party assumes, on a regular basis, the obligation to promote certain transactions in a given area, on another party’s account and against payment, provided that the distributor has possession of the goods being negotiated. It is still early days to know:
• whether the Brazilian Courts will apply the provisions of Chapter XII of the CC to real distribution agreements between a manufacturer and the distributor who buys the products and contracts to resell them in its own name and at its own risk and to render technical assistance; and
• how the Brazilian Courts will treat agency agreements when the agents have the possession of the goods. Obviously with a proper distribution agreement, the distributor can count on the resale profit, benefiting from the trademark and publicity of the manufacturer, whilst the manufacturer can expand its sales network without having to pay for all the overhead of the distributor or to render technical assistance to all the customers of the distributor. For that, the wrong definition of the CC must be circumvented with very good drafting skills to adapt international reality and practices to Brazilian law as further detailed below.
Law n. 6.729/79
Prior to the new CC, Brazilian law did not regulate distribution in any sectors other than that relating to motor vehicles, according to Law 6.729/79. Nevertheless, Law n. 6.729/79 has been an important reference of distribution in other sectors as well and still prevails for motor vehicles.
A distribution agreement will require demarcation of the geographical zone in which the distributor will act (“territory”).
Distribution, as the continual purchase and sale of the product, is very similar to a supply agreement. The manufacturer may require that its distributors acquire a minimum monthly quota of its products, failing which the agreement may be terminated for breach of contract. The manufacturer will establish the sales price to the concessionaires to ensure that uniform pricing and payment terms are extended to the entire distribution network.
It is a pre-requisite that special advantages be granted to the distributor, such as payment terms and discounts, so that trading in the product in the consumer market is advantageous so as to permit the distributor to make a profit.
Generally, a distribution arrangement allows for the existence of sub-distributors, which means that the distributor, duly authorized by the distribution agreement, can operate his own network of sub-distributors to distribute a product in the consumer market, such sub-distribution subject to the rules established by the manufacturer.
One of the formal requirements established by Law 6.729/79 in its Article 20 is that the distribution agreement shall be standard for each trademark to which all the distributors of the network confirm their adherence and the new provisions of the CC in relation to adhesion contracts must be carefully considered.
As it is multilateral, the distribution agreement remains open for the admission of new parties; through the use of a standard agreement, new distributors are allowed to join the system as others leave or are excluded from it.
One of the most important characteristics of distribution arrangements relates to control by the producer over the marketing of the product, because of his industrial property rights over the trademark, and the potential future sales to consumers which it may generate. Thus, the producer controls the use of the trademark by the distributor.
The distribution agreement is a synthesis of many other types of contract such as purchase and sale or supply and technical assistance contracts, differing in its structure and primary objectives. Therefore, in order to mitigate potential ambiguity that may well arise in such a complex legal background it is advisable that the distribution agreement spells out all the applicable rules in a clear and systematic way.
4. FURTHER PROVISIONS OF THE CC ON AGENCY AND DISTRIBUTION
In accordance with Chapter XII of the CC, unless the agreement provides otherwise:
• the grantor cannot appoint more than one distributor for the same duties in the same territory;
• the distributor cannot be appointed by more than one grantee for the same duties in the same territory; and
• the distributor will be entitled to compensation for transactions concluded in the territory without its participation.
Overriding provisions of the CC include:
• the agent or distributor will be entitled to compensation if the grantor, without fair cause, ceases to complete transactions or reduce them to a point that it becomes anti-economic for the distributor;
• the remuneration will also be due to the agent when the transaction is aborted as a result of any reasons attributable to the principal
• even if the agent is released for fair cause, he/she/it shall be compensated for useful services rendered to the grantor;
• if the distributor is released for no fault of his/her/it, he/she/it shall be entitled to payment accruing until then, including outstanding transactions, in addition to any indemnifications provided for in specific laws;
• if the distributor is prevented from continuing to perform its obligations as a result of force majeure, he/she/it shall be entitled to payment for services rendered until then;
• if the agreement is valid for undetermined period, any party may terminate it upon 90 days notice, provided that a term compatible with the nature and amount of the required investment has already elapsed.
5. ENFORCEABILITY IN BRAZIL
As a general rule, the obligations under an international contract can be enforced against one of its parties in Brazil to the extent that:
• the execution, delivery and performance of the contract have been duly authorized by all necessary corporate acts;
• the contract has been duly executed and delivered by the Brazilian legal entity;
• the contract is legal, valid, binding and enforceable under the law governing the contract; and,
• the relevant obligations are not contrary to Brazil’s national sovereignty, public order or morality.
Also, in relation to enforceability, it is important to note that for agreements celebrated through private instruments to be enforceable against the defaulting party through a summary execution proceeding in Brazil (without being first acknowledged in a prior and time consuming ordinary proceeding) the private instruments must be signed by the defaulting party and two witnesses.
However, validity of contractual obligations against third parties further depends on registration of the contract with a Public Register of Deeds and Documents. In accordance with Article 130 of the Law on Public Registration, contracts will be valid against third parties as of the date of their respective signatures provided they are registered within twenty days of their execution. Contracts registered after this period will be valid against third parties as of the day of their registration. This may cause a substantial impact for a creditor in the event the debtor becomes insolvent prior to registration of the relevant contract.
Signatures must be notarized and if an agreement is signed abroad, the notarization must be recognized by the nearest Brazilian diplomatic division. Subsequently, instruments celebrated in a foreign language must be translated into Portuguese by sworn translators in Brazil. The Portuguese version will prevail in Brazil.
Choice of governing law and jurisdiction must be carefully considered in each case and expressly included in the relevant agreements.
I have mentioned above some of the legal provisions to be considered in relation to agencies or distributions in Brazil. Depending on each specific case, some other provisions may be applicable as well and all the applicable provisions must be very well mastered for the necessary adaptations to be incorporated in the relevant documentation to ensure, to the extent possible, that international companies have the intended rights for a profitable sale of their products through agents or distributors in Brazil. I remain available for any clarifications you may require.