Brazil: Commercial Representation X Promotion Services X Distribution Under The Brazilian Law

Last Updated: 31 January 2014
Article by Cláudio Mattos

Agreements providing for the three types of activities are not rare although such activities are fully distinct and treated by the Brazilian legislation as such.

It is important that the purpose of an agreement be very clear and well defined in order to prevent the application of other specific rules or laws as, for instance, agency rules and laws under which the contracting party has obligations different from those inherent to the rendering of services.

Commercial representation agreements (common called "Sales Agency Agreement") in Brazil are ruled by the Brazilian Commercial Representation Law (Law 4.886/65 as amended by Law 8.420/92), which covered all the aspects of the contractual relationship between the parties regarding such commercial representation.

In spite of the necessity of meeting the requirements of the mentioned Law 4.886/65 (which we will mention below), it is extremely important to observe the legal formalities applied by the Law. One important legal formality is the registration of the independent sales agent with the Regional Council of Independent Sales Agents.

As mentioned, the Brazilian Commercial Representation Law imposes several obligations on principal such as indemnification for termination by principal without cause. In case said sales agency agreement is terminated unilaterally by Principal, without just cause, the agent will be entitled to legal benefits regarding indemnity rights deriving from such termination as provided for by the Brazilian Agency Law. If the principal terminates a determinate-term agreement, before its expiration and for no just cause, it must indemnify the sales agent for the amount corresponding to the average monthly commissions paid up to the termination date, multiplied by half the number of months remaining for the agreement expiration. If the agreement is for an indefinite term, Principal is obliged to give at least a prior written notice to the agent (30 days under the Brazilian Agency Law) and pay a statutory compensation corresponding to at least 1/12 of the earnings obtained by the agent during the entire period the agent provided services to Principal.

Another issue which we consider the most relevant under the Brazilian Commercial Representation Law is that any changes in the commercial representation which directly or indirectly result in a reduction in the average commission paid to agent for the last six months are forbidden. Therefore, any modification of the contract conditions/basis (even though agreed by the parties) may be considered null and void if directly or indirectly result in a reduction in the average commission paid to agent for the last six months.

The aspects mentioned above in a summarized manner are some among others imposed by the Brazilian Commercial Representation Law that must be necessarily provided for in a commercial representation agreement to prevent risks to principal.

Concerning promotion activities or services, the new Brazilian Civil Code introduced to our legislation a "new" figure and named it as "Agency Agreement".

As the new Civil Code is in force for only few years, there are some discussions whether this new "Agency Agreement" encompasses the existing figure of the Commercial Representation ruled by the above described law, or if it is a new kind of service agreement, whereby the "agent" would promote the client's business and trademarks, without making any sales intermediation nor issuing any kind of orders related to the sale of certain goods.

Although some deem such figures (Representation and new "Agency Agreement" as defined in the Civil Code) as the same, our understanding is that the promoter/service provider differs from the old agent/sales representative, as the former does not take orders nor perform sales, an essential element that characterizes the agency, but rather acts only as a promoter of the other party's business.

it is possible to structure a draft to refers to as promoter figure ("Service Provider" as defined under the relevant agreement) of company's, business, trademarks and products which, in principle, does not intertwine with the ordinary sales agent figure. Under the contract it shall be cleared defined that principal will be solely responsible for conducting negotiations with the customers, and that the role of the "service provider" in its relationship with the customers will be that of mere promoter (marketing and publicizing) of the brand and products sold by principal, and contractor shall not place orders or act as an intermediary in any sale.

As a general rule, and as per our opinion, this kind of contractual relationship may fall into the type of services agreements which are regulated by the Civil Code, especially, by Chapter VII thereof, articles 593 through 609.

However, this does not mean that our understanding shall prevail in the event the Brazilian company claims in court its characterization as a commercial representation contractual relationship ( specially in the event that, in fact, the "promoter" takes orders or perform sales), for purposes of enjoying the legal benefits of the law mentioned above, mainly as regard to indemnity rights deriving from agreement termination or expiration without cause by principal.  

Regarding distribution contractual relationship, we noticed that until de promulgation of the new Civil Code, there were no specific rules governing the Distribution Agreements, although it is largely used to regulate commercial transactions in our country.

The new Civil Code, named as distribution the activity performed by the individual/entity that is in possession of the goods to be distributed to the consumer market. Said Code regulates the distribution by establishing certain provisions that attributes to the supplier some responsibilities, among them; a) to circumscribe the geographic area of the distributor's operation; b) grant or not exclusivity (including as to the area/territory, because in the event of failure to address such matter, the distributor will be entitled to the remuneration corresponding to the deals carried out by third parties within its operation area, even if without its involvement); and c) grant a minimum term of 90 days (which may be changed in the event the distributor goes to court) for termination of an open-ended agreement

Considering the above comments, in our opinion, it is not advisable that one single contract establishes, simultaneously, distribution, promotion and/or sales agency activities, to the extent that the lawmaker assigned to each of said activities legal regime fully different. For instance, mixing up the two concepts (commercial representation and distribution in the same agreement) will create the risk of confusing them under a same regime, so that the represented company (principal) will run higher risks such as, increase in the indemnity amount for unilateral termination of the contractual relationship as we commented in the commercial representation part of this article. There are great risks of the other party using those mixed up legal concepts (agency and distribution) to consider that the indemnity calculation (when applicable) should include or take into account the amounts involved due to the acquisition of products for the distribution, which would increase the basis for the calculation of the indemnity for sales agency.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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