Brazil: Commercial Agency Agreement Under Brazilian Law

I. INTRODUCTION

The commercial agency contract, according to the Brazilian Legal System, is provided for by articles 710 to 721 of the Civil Code (Federal Law 10.406, dated January 10th 2002). Subsidiary provision is given by Federal Law 4.886, dated December 9th 1965. Major modifications to this Law have been introduced by Federal Law 8420, dated May 8th 1992.

Noteworthy is the fact that in Brazil there are different terminologies to identify the Agent, which may cause some confusion. In the past, and even nowadays, the most usual name for Agent was "Representante Comercial" (Sales Representative or Commercial Representative). Recently, there has been a modification of the Civil Code, and the legislator, following a worldwide tendency, adopted the terminology "Agente" (Agent).

Thus, differently from some other countries, in Brazil people still may – and probably they will do – refer to "Agente" or, most commonly, "Representante Comercial" meaning the same commercial relation.

The Agent may undertake his activities under a Legal Entity, or as a Natural Person. It is an obligatory requirement for the Legal Entity to be registered with the Junta Comercial (Commercial Registry), which is an autarchy responsible for registration of most legal entities.

Simultaneously, the agent has to join a professional body. According to article 2 of Law 4.886/65, the agent must submit his registration with the CORE (Conselho Regional dos Representantes Comerciais – Regional Council of Commercial Representatives) of the State where he has his domicile. The non fulfilment of such obligation implies in a felony with legal provision by article 47 of Decree-Law 3.668/41 (Lei de Contravenções Penais) – illegal exercise of profession.

There is a Federal Council of Agents named "Conselho Federal do Representante Comercial" which represents the agent category at Federal Level - http://www.confere.org.br

Also, each State has a Regional Council named CORE. In order to practice the profession of Agent, the individual or legal entity has to be registered with the Regional Council – CORE.

In case the Agent is not registered with the CORE, and thus performs the agency irregularly, there are the following implications:

• the principal risks to suffer a lawsuit and have recognized the labor liaison, depending on the de facto situation, with important economic consequences;
• the agent does not have the protection of Law 4886, specifically regarding indemnities due to contract termination;
• Agent may be criminally prosecuted for illegal exercise of regulated profession

II. PURPOSE - AGENT'S STATUS - SUB AGENTS

A. Purpose

The nature of the commercial agency contract implies in a grant of right by the Principal to the Agent to negotiate the sale/purchase of goods or services. The Agent may or may not be granted the right to conclude such transactions, or other powers, such as representing the Principal, or to give special discounts. But this is at the sole discretion of the Principal. Such powers may be included in the contract, according to the sole paragraph of article 710 of the Civil Code (Federal Law 10406, dated January 10th 2002).

The power to conclude the business does not mean that the agent will be selling the goods. The sale is always made by the principal directly to the buyer.

Legal provision for the purpose of the commercial agency contract is given by article 710 of the Civil Code and article 1 of Law 4886.

According to article 27, b, of Law 4886, it is obligatory to indicate the products, generically or specifically, object of the contract. However, non compliance with this regulation does not make the contract void, but only creates the presumption that the agency comprises all of the principal's products.

B. Independence

Despite it is expressly determined by article 710 of the Civil Code and article 1 of Law 4886 that the agent acts as a self-employed intermediary, this subject is court sensitive and may give rise to controversies.

There are two elements that indicate the distinction between an agency relationship and a labor one: individuality (work performed personally by the individual) and subordination. Labor Law considers that an employee can only be a natural person, never a legal entity. Thus, if the Agent is a legal entity, the agency agreement is rarely interpreted as a labor relationship. However, we must stress that there is case law showing the contrary, where individual legal entities (Firmas Unipessoais) and husband-wife small legal entities could be disregarded to recognize a labor liaison/relation.

The second element is the subordination. The agent is an independent worker. According to the Regulations of the CORE, the agent must comply with the instructions of the principal, mainly concerning pricing, as well as periodic reports on the ongoing of the negotiations. But the principal shall not impose or demand working hours, dates or schedule for meetings with clients, or functions other than the negotiation of business.

The labor relationship results in a heavy taxation, and therefore many employers try and adopt the relationship of agency, by means of a commercial agency agreement, in order to avoid certain labor obligations. But if the "agent" is a natural person and can prove the subordination, the Court may consider an employment relationship, despite express consent of independence on the contract.

We draw attention to the fact that the registration with the CORE of the agent who undertakes his activities as a natural person can also be considered irrelevant by the court, if it understands that the nature of the relationship, de facto, involves subordination. On the other hand, a person not registered with the CORE not necessarily shall be regarded as an employee. It is necessary to be characterized the subordination element of the relationship. This is a corollary of the principle of the reality primacy.

According to the doctrine of Paulo Emilio Ribeiro Vilhena (in VILHENA, Paulo Emílio Ribeiro de. Relação de Emprego. Estrutura Legal e Supostos. São Paulo: LTr, 2a ed, 1999, p. 495):

"In the practice of national case law (contrary to what has been always rendered by the French Cour de Cassation, to whom the formal criteria –le critère formel – is decisive), the verification of formal elements constitutive of the regular profession of commercial agent does not pre-exclude the examination of the situation de facto, i.e., the way by which the agency develops, and the substantial relations that succeed between agent and principal."

Case law. Note: Employment Relationship – Commercial Agency Contract. The 4th Chamber of the Superior Labor Tribunal has decided that the fact of the worker be considered a commercial agent registered with the competent body does not exclude the possibility of verification by the Judiciary. In this case, the subordination could be verified from the proofs brought to court, and the appeal was granted. (Ac. TST- 4ª Turma-RR-193404/95- Rel. Min. Leonaldo Silva- j. 27.11.96-publ. 13.12.96)

C. Sub-agents

According to article 42 of Law 4886, being the contract silent on this matter, it is allowed to appoint sub-agents.

As far as independence is concerned, the same logic applies for agent and sub-agent. Therefore, if the agency agreement permits the sub-agency, it is highly recommendable that the parties expressly declare that all responsibilities for the activities of the sub-agent shall be of the agent.

The law allows the agent to hire a sub-agent, but the law does not oblige such agent to inform the Principal about it.

So, in order for the Principal to maintain control of the Agency relationship, we suggest to include in the agreement either the prohibition of sub-agents or the obligation to inform the existence and details of the said agreement, and the respective sanctions.

Also, considering the existence of a sub-agency agreement, between agent and sub-agent all terms provided for by article 33 of Law 4886 are expanded in 10 days (article 42 §4, of Law 4886). Article 33 refers to terms for the Principal to refuse, in writing, orders from clients resulting from the agent's performance.

III. RIGHTS & OBLIGATIONS OF THE AGENT

A. Rights

The Agent is generally entitled to the following rights:

• to earn commissions on the deals that he negotiates for the principal;
• where the exclusivity clause is provided for by the contract, the right for commissions on businesses concluded directly between the principal and clients within his territory;
• to obtain indemnity when the principal terminates the contract unilaterally, without just cause;
• to receive previous notice, 90 days in advance, in case of unilateral termination by the principal;
• to terminate the contract when:
  
  
  1. the principal shortens his field of activities, contrary to the terms of the contract;
  2. the principal violates the exclusivity clause;
  3. abusive pricing by the principal, creating obstacles for the agency;
  4. non payment of commissions.

B. General obligations

The commercial agency contract shall respect the major civil law principles regarding contracts in general. Article 422 of the Brazilian Civil Code determines that "the parties are obliged to comply with the principles of probity and good-faith, during the conclusion of the contract as well as its execution".

Besides, according to article 28 of Law 4886, the agent is obliged to provide detailed information about the ongoing of the businesses.

Also noteworthy is the provision made by article 712 of the Civil Code: "The agent shall act dutifully and according to the instructions received from the principal, on the performance of his activity." Such instructions, as already mentioned, include determinations regarding pricing. Article 29 of Law 4886 states: "Unless expressly authorized, the Agent may not concede discounts or deductions, nor extend payment term, nor act against the Principal's instructions."

Provisions for other general obligations of the agent are determined by Resolution n. 277/04 of the CONFERE, from October 10th 2004, http://www.confere.org.br/codigo.htm (Agent's Ethics Code).

C. Specific Obligations

Del Credere. According to article 43 of Law 4886, it is expressly forbidden by Brazilian law to establish a Del Credere clause.

Consignment Stocks. According to the definition of agent and distributor given by article 710 of the Civil Code, the agent may not have the goods at his disposal, being characterized the distributorship in this case. However, the agent may keep a small amount of goods that could be considered sample, not for sale.

Sales Target. There is no specific regulation on this theme. The draft of such clause should state clearly what could be considered as a fault, and the consequences of non attainment of the target. The Brazilian courts may consider, if proof is made, the failure to accomplish the sales targets as carelessness, which is a just cause for termination.

"NOTE: COMMERCIAL AGENCY - CARELESSNESS - JUST CAUSE - COMISSIONS - WITHHOLDING - IMPOSSIBILITY. – The Agent's carelessness on the fulfillment of its contractual obligations constitutes just cause for the termination of the agency agreement by the Principal – The termination of the agreement on grounds of just cause does not authorize the Principal to withhold commissions due to the careless agent. CIVEL APPEAL N° 1.0024.99.133853-4/001 - BELO HORIZONTE STATE COURT OF APPEALS."

Any other specific obligation follows the principle of the autonomy of will. Nevertheless, we draw attention to what was already mentioned at the topic regarding Independence: the principal should not create a situation that could be regarded as subordination.

IV. EXCLUSIVITY & UNDERTAKING NOT TO COMPETE

A. Exclusivity

Although the sole paragraph of article 31 of Law 4886 states that unless expressed by the contract the exclusivity is not presumed, article 711 of the Civil Code gives a new understanding on this matter:

"Art. 711. Unless otherwise agreed, the principal may not constitute, simultaneously, more than one Agent with the same activities within the same territory; nor may the agent perform businesses of the same nature and gender, on account of different principals, within the same territory."

Therefore, it is clear that, according to current legislation, the exclusivity is the general rule, nonetheless being possible to be agreed otherwise.

Notwithstanding, according to article 27 of Law 4886, are obligatory elements of the contract the stipulations on:

• the territory within which the agency shall be performed;
• guarantee or not, partial or total, or for certain period, of exclusivity within the territory or section of this territory,
• cases in which it may be justified the restriction of the territory granted for exclusivity;
• exclusivity performance, or not, in favor of the principal.

Thus, the agreement shall be as extensive as possible on this matter. The silence shall imply in the presumption that the agent is granted territorial exclusivity.

Also, the general rule is that, within his territory, the agent is entitled to commissions on all negotiations concluded by the Principal, with or without his contribution (Civil Code, article 714). Therefore, it is highly recommended for the Principal to make it clear whether he may or may not deal directly with clients within the agent's territory. This is an exception to the rule, and should have a good reason justifying it. Skillful negotiating and drafting abilities are required, in order to avoid future headaches.

B. Internet Sales

This is a matter that must be interpreted in the absence of legal provision. If the agreement between Principal and Agent is clear and determines that the Principal may deal directly with clients within the territory of the Agent, of course internet sales would be embraced by such determination.

Let us consider a case where there is no such permission for the Principal to bypass the Agent's territorial exclusivity. E-mails or telephone contacts by clients located within this area should be redirected to the agent. But some companies might have direct sales to costumers through an internet website. It is commonplace that in such cases article 714 of Civil Code applies and the Agent is entitled to the commissions.

Therefore, it is recommendable to have express provision on the contract about the consent of the parties regarding internet sales. The parties are free to bargain on this matter, being possible to stipulate the right to ordinary commissions, reduced commissions, or no right to commissions at all.

C. Penalties

Failure to comply with the contract's determinations on the exclusivity clause implies not only in the obligation of the Principal to pay the commissions on the concluded businesses that the Agent would be entitled to, but also and foremost it implies in a breach of contract that can be considered a just cause for termination by the Agent, who could demand compensation based on article 718 of the Civil Code, and article 27, j, of Law 4886.

Besides, in case the contract did not have a long life up to the breach, the Agent can demand compensation considering investments made by him, if he can make proof of this.

D. Undertaking not to Compete

This is an important clause of the contract and its stipulation is considered obligatory according to article 27, i, of Law 4886, which states that it is an obligatory clause of the contract the "exclusive undertaking, or not, of the agency in name of the Principal". Thus, the parties shall express their consent. If they don't, the undertaking not to compete is presumed, according to article 711 of the Civil Code.

As for the possibility of enforcement of such clause after the termination of the contract, there is no legal provision. However, there is case law considering that it is an excessive burden to the Agent the stipulation of such clause for a period exceeding two years after termination without compensation. Thus, the parties may stipulate the undertaking not to compete after termination, for as many years they wish, but such stipulation without some sort of compensation for the agent after the second year could be considered abusive and void.

V. REMUNERATION

A. The right to commissions

It must be clear for the parties that the agent's activity is that of intermediary, which means that the agent is entitled to remuneration only if his performance results in credit for the principal.

Article 27, f, of Law 4886 stipulates that it is an obligatory element of the contract the determination of "the retribution (commission) and term of payment, due to the agent's performance, depending on the effective conclusion of the businesses, and on the receipt by the principal."

The last part of the above mentioned article is a bit obscure. The general rule, according to article 32 of Law 4886, is that the right to the commissions is constituted upon the execution of the contract between Principal and Client, i.e., when the principal receives the payment.

But then we have article 27, f, that states that the parties may determine that the right to commissions is born upon performance of the contract between Principal and Client, i.e., when they agree on the object, price and conditions.

Thus, the parties may agree either way concerning the moment that the commissions are due.

B. Term of payment of commissions

Usually, payment shall be made on a monthly basis, by the first half of the month subsequent to the buyer's payment.

C. Determination of the remuneration

Reference to local commercial practice as the method for determination of the remuneration due to the agent is a very abstract and unstable system to be adopted. Preferably, the contract should make clear reference to amounts or percentages of the businesses concluded with the intermediation of the agent, or within his territory.

The agent has no right to inspect the Principal's books.

D. Pending commissions after termination

Although the Civil Code states that the agent is entitled to commissions on pending businesses in case of termination of the contract by fault attributable to the principal, being silent about the agent's fault, it is our understanding that, in case of termination – even if just cause is established, the agent is entitled to commissions on pending businesses.

E. Non Execution of Business

The agent is not entitled to commissions if the business is not executed, except if the cause can be attributed to the principal (Civil Code, article 716).

No commission shall be due if the buyer is insolvent, as well as if he is to blame for the interruption of the deal, or even in the case that the principal cancels the deal or stops the supply of the goods in view of the commercial situation of the buyer, which may compromise the receipt of payment. (Law 4886, article 33 §1)

According to article 33 of Law 4886, if the contract is silent on the term for the principal to refuse the orders or proposals showed by the agent, commissions shall be due if the principal does not express his written refusal within 15, 30, 60 or 120 days, such terms corresponding to a buyer domiciled in the same city, the same state, the same country or abroad, respectively.

Civil Code. Article 715: "The agent or distributor is entitled to indemnity if the principal, without just cause, ceases the conclusion of proposals or reduces it in a way that the continuation of the contract becomes uneconomical".

F. Consignment Remuneration

According to article 710 of the Civil Code, the agent may not have the goods at his disposal. Nevertheless there are legal ways to allow the Agent to dispose of stocks from the principal nearby the local of the practice of the agency, without characterizing distributorship.

VI. CONCLUSION & TERMINATION OF THE AGENCY AGREEMENT

A. Validity

The Brazilian law recognizes verbal contracts in general, and the same applies to agency agreements. Nevertheless, it is highly recommended to have a written contract. Verbal contracts that come into litigation must be proved, and the proof will be necessarily written, such as invoices, mailing, and other documents. Testimonial proof will be considered subsidiary, unless the demand is of small amount (according to article 401 of the Civil Procedure Code, 10 times the minimum wage, currently R$ 724,00).

B. Duration

The agency agreement may be for a certain or indefinite period of time.

If the agency agreement for a certain period of time is continued, it shall be converted into an agreement for indefinite period of time, regardless of the parties consent or of what is stated by the contract (Article 27, §2 Law 4886). Also, in case a contract is terminated and the parties establish a new contract within 6 months, this new contract shall be deemed for an indefinite period of time, regardless of any stipulation concerning duration (article 27, §3 Law 4886).

This legal disposition is mandatory, and is aimed to protect the agent, who in most cases constitutes the weaker side in the relationship and, thus, is subject to the principal's determinations. Without such legal protection, the principal could renew the contract every six months or so, feeling free to terminate it whenever the relationship with clients become solid enough and the services of the agent no longer necessary.

It is advisable for the principal to elaborate an agreement with the agent for a certain period of time, having in mind that this period should be enough for him to evaluate if the agent is performing accordingly. After the term expires, if the principal does not wish to continue, the agreement is terminated and the agent has no right for indemnities provided by article 27, j, of Law 4886, but only to commissions on pending businesses.

D. Unilateral termination and Notice Period

There are two kinds of unilateral termination of contracts: with just cause, and without just cause. The latter implies in the observance of the previous notice and indemnity.

Article 720 of the Civil Code determines that agency contracts for an indefinite period may be terminated unilaterally upon notice, 90 days in advance. This period of notice is mandatory.

Such clause may not be applicable if the elapsed time was not sufficient considering the nature and the sum of investments made by the agent. Although the Law makes reference only to the investment made by the agent, in light of general principles of our civil law, we understand that the same applies to eventual investments made by the principal.

E. Just Cause

According to article 35 of Law 4886, the following situations constitute justified motivation for the termination of the agency contract by the principal:

• the agent's carelessness upon the fulfillment of his contractual obligations;
• performance of acts that may imply in commercial disrepute of the principal;
• non fulfillment of any obligations inherent to the commercial agency contract;
• the agent's conviction based on infamous crimes;
• force majeure.

According to article 36 of Law 4886, the following situations constitute justified motivation for the termination of the agency contract, by the agent:

• reduction of the agent's territory by the principal, in opposition to the contract's clauses;
• direct or indirect breach of the exclusivity clause, if stipulated in the contract;
• imposition of abusive pricing within the agent's territory, with the sole aim of depriving the agent of his regular performance;
• non payment of the commissions due timely;
• force majeure.

In case of termination by just cause, the faulty party is evidently not entitled to indemnity. Termination by the principal, based on just cause, does not exonerate him of the payment of commissions due or on pending businesses. But he may seek damages, if this is the case (Civil Code, article 717).

E. Principal's Bankruptcy

According to article 44 of Law 4886, in case of the principal's bankruptcy all agent's credits will have a labor nature. It means that such credits have preference in relation to any other credits of the bankrupt's estate.

Such credits include commissions (due and pending), indemnities and previous notice.

F. Contract Amendments

According to article 32 §7 of Law 4886, any modification on the agency contract that shall imply in reduction of the average commission based on the last six months is prohibited and considered void.

G. Indemnities

First, it is important to understand the existing kinds of indemnities. There is the indemnity for the previous notice (1), and the indemnity based on the general rule of article 27, j, of Law 4886 (2). Both may be applied together depending on the case.

Unlike other jurisdictions Brazilian legal system does not provide for indemnity for losses and damages, but in substitution has stipulated the indemnity provided for article 27, j of Law 4886.

The indemnity structure is the following:

According to article 27, j, the parties shall stipulate the amount of indemnity owed to the agent in case of termination not caused by the Agent, according to article 35.

In any case, the amount of indemnity shall not be less than 1/12 of the total amount of payments earned by the agent during the entire period of his agency performance in credit of the principal.

In case of agreements for a certain period of time, the amount of indemnity will be calculated as the monthly average commission multiplied by the half of remaining months for the contract's term (article 27, §1).

Case: in Revista dos Tribunais n. 800, p. 289-293, Editora Revista dos Tribunais, São Paulo 2002. 1º TAC (Court of Appeals of São Paulo State).

"Note: As an obligatory clause of the commercial agency contract, it is not valid the contractual disposition that exempts the principal of payment of indemnity to the agent in case of unilateral termination of the agreement, even if present the mutual consent of the parties, because it opposes the rule of article 27, j, of Law 4886/65."

VII. ASSIGNMENT

There are no legal provisions regarding the transfer of Agency Agreements

To that respect, since there are no specific legal provisions and/or prohibitions, the contract and general principles of law shall prevail between the parties. We understand that the possibility of transfer should be expressly provided for by the contract, because if the contract is silent the other party may seek a breach of contract.

VIII. JURISDICTION/ ESCALATION CLAUSE

With regard to Jurisdiction, Law 4886, article 39 establishes expressly that the competent forum to settle disputes arising from the Agency Agreement is the State Court of the domicile of the Agent.

Despite the express jurisdiction of the State Court where the agent is established, determined by Law 4886, the arbitration Law 9307/1996, introduced the possibility to settle disputes without the need to seek the Courts.

As anyone can imagine, this caused an enormous dispute of jurisdiction between the State Courts and the Arbitration Tribunals.

There is plenty doctrine for both sides, but the most recent and respected Professors understand that the Arbitration Jurisdiction prevails over the State Court, as well as recent case law. In fact Brazilian Courts have developed very quickly a good understanding about the Arbitration Procedure and welcomed the Arbitration Law, especially when related to international matters.

We have chosen 2 cases from Rio de Janeiro Appellate State Court where international agency agreements with arbitration clause were disputed by the Brazilian agent against German and Canadian Principals.

Case 1 – Wilhelm Fette GMBH vs. Espal Representações e C.P. Ltda.

Decision rendered by 16ª Civil Chamber of the Appellate State Court of Rio de Janeiro on July 24th, 2003. The parties executed the agency agreement with an arbitration clause establishing the ICC of Paris as competent tribunal and the laws of Germany to rule the interpretation of the contract. The Brazilian agent, Espal, challenged the validity of the clause and got a favorable decision at the first instance. However, the Appellate Court overruled the decision confirming the validity of the arbitration clause freely agreed between the parties. (Agravo de Instrumento 2003.002.00841)

Case 2 – Air Canada vs. South Marketing Ltda.

Decision rendered by 13ª Civil Chamber of the Appellate State Court of Rio de Janeiro on August 22nd, 2002. The parties executed the agency agreement with an arbitration clause establishing the laws of Ontario, Canada to rule the interpretation of the contract. The Brazilian agent, South Marketing, challenged the validity of the clause and lost at the first instance. At the appellate level the Court maintained the decision confirming the validity of the arbitration clause freely agreed between the parties. (Apelação Cível 2002.001.28020)

IX. APPLICABLE LAW

Brazilian National Agency Law and the Civil Code leave few matters to be ruled by other laws, but there are loopholes where international principles of commerce may be applied to guide the interpretation of the relation and/or settle disputes between the parties.

The Agent is entitled to seek protection of the local Brazilian State Court if he feels the interpretation of a foreign law could be prejudicial to his/hers rights. In that case, in all contractual situations where the local law is more favorable to the Agent, the local law may prevail.

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.