- Agents under Brazilian law: An agent under Brazilian law is a person or legal entity that brokers commercial deals on a regular basis.
- Mandatory rules: There are court decisions that consider Brazil’s Representatives Law as binding regardless of the parties choosing a foreign law to govern their contracts. Distributorships are more flexible.
- Termination can be costly: The compensation provisions in the Representatives Law provides for the payment of 1/12 over all commissions paid during the agency relationship if the termination is without just cause.
- Agent as employee: Care must be taken to ensure that the agent is not deemed to be an employee as compensation payments will be very high.
- Common mistakes: Principals often neglect to register their trademarks and domain names in Brazil, ignore the effect of transfer pricing rules (in exclusive agency relationship) and do not undertake a due diligence on the agent.
- Have a detailed agreement: Having a detailed agreement will avoid major risks and costs in the future. It is important that the agreement be reviewed by a Brazilian lawyer.
What is an “agent” under Brazilian law?
Brazilian law provides for different types of agency relationships. The most common, which is the focus of this article, is that of “commercial representative” (“representante comercial”). Specific rules apply to real estate agents (brokers) and others.
The rules applicable to agency relationships in Brazil differ substantially from those in force in most common law countries and to those applicable to distributorships (which are a lot more flexible). There are court decisions that have deemed Brazil’s Representatives Law as mandatory, which makes the use of agents riskier than distributors.
An individual or company will be regarded as a “commercial representative” if the individual or company regularly “brokers the making of commercial deals, being an agent for sale or purchase offers”.
To be regarded as an agent, it is irrelevant if the agent acts for one or more principals or if the agent also assists in the performance of the contract that ensues from their work.
What are the common mistakes associated with appointing an agent in Brazil?
In addition to ignoring the effect of mandatory laws that may apply to agency relationships, principals often:
- neglect to set aside funds for the payment of mandatory compensation in case of termination without cause;
- neglect the risk of the courts finding that the agent is an employee of the principal;
- do not obtain a due diligence report on the agent and the agent’s related parties; and
- fail to have a detailed agreement in place that is customised for Brazil’s legal environment.
Have you set aside funds for terminating the agency relationship without cause?
Brazil’s Representatives Law provides that upon termination of the agency relationship the agents are entitled to 1/12 of all commissions they received throughout the period of the agency relationship as compensation for the termination. Therefore, if an agent received R$1 million per year over 12 years, the agent will be entitled to R$1 million at the time of termination.
The compensation will apply even if the contract was renewed every year, but it will not apply if the agent was terminated for “just cause”. There will be “just cause” for termination where:
- the agent disregards or breaches the material obligations under the agency agreement or obligations relating to it;
- the agent’s acts lead to the commercial discredit of the principal;
- the agent has been convicted for a crime relating to the agent’s reputation and the conviction cannot be appealed; and
- force majeure.
Moreover, where the agent’s fees are based on commissions, these cannot be reduced by the principal. Therefore, agents are entitled to claim the difference between the higher rates and the reduced rates (the majority position at the Superior Court of Justice is that claims for this difference should be limited only to the last five years of the agency relationship).
Will the agent be deemed to be your employee?
Courts are likely to treat agents as employees when there is factual evidence that:
- the services are of a personal nature (that is, the court will look at the relationship with the specific individual performing the services);
- the principal exerts control over the agent (there is subordination);
- the agent receives a steady income from the principal; and
- the agent performs services on an ongoing basis.
Importantly, Employment Courts will generally ignore the terms of any written agreement between the parties and whether the agent was acting through a company controlled by him or her. Instead, the Employment Courts concentrate on the factual circumstances between the principal and the appointed agent.
The elements above are general guidelines and Brazil’s Employment Courts have extensive case law addressing the difference between agents and employees. Unfortunately, too often foreign principals set strict rules addressing how an agent is to perform his or her work, which is used by plaintiff employment lawyers to persuade judges that an employment relationship exists.
Therefore, care should be taken when establishing the relationship with agents, especially if the agent operates a small company that does not employ any other agents other than himself or herself.
Have you obtained a due diligence report before appointing the agent?
Unfortunately, too often foreign principals choose to appoint at face value – and this ends up being a costly mistake. Brazil is a highly litigious society, with strict tax rules that quickly penalise those companies that are not tax-compliant.
Before appointing any agent, principals should retain lawyers to prepare a due diligence report on the agent. This report should include the agent, the agent’s company, its directors and shareholders and include:
- a review of the corporate documents from the relevant Company Registries where the agent operates;
- obtaining the Federal State and Municipal tax, social security and employment litigation-related certificates where the company operates; and
- undertaking State and Federal court searches (including the Employment Court hierarchy) and analysing any specific cases of concern.
This basic due diligence process should be done in addition to an analysis on whether the agent would be ready, willing and able to meet its obligations under the agency agreement from a financial and commercial point of view.
Do you have an agreement customised for the Brazilian legal environment?
Companies with agents around the world frequently have standard contracts that they use to appoint agents in different jurisdictions. Due to Brazil’s particular rules relating to agency relationships, it is important that standard agreements be reviewed by Brazilian lawyers before they are presented to the agent.
Relying on a choice of law and court provision may not prevent the mandatory nature of many Brazilian laws that will apply to the agency relationship.
Thus, having a well-drafted agreement customised to the Brazilian legal environment and following its terms throughout the agency relationship will go a long way to minimise the exposure of the principal to undesired risks.
Contact me if you require further information.
Last modified: November 26, 2019