- Flexible: Parties have great freedom to decide on the terms of their distribution arrangements (which is different to the appointment of agents).
- Terminations can be tricky: Distribution agreements governed by Brazilian law may lead to higher compensation payments upon termination.
- Common mistakes: Don’t forget to register your trademarks and domain names in Brazil, consider the effect of transfer pricing rules (in exclusive distributorships) and make sure you undertake a due diligence on the distributor.
- Have a detailed agreement: This will avoid major risks and costs in the future. It is important that the agreement be reviewed by a Brazilian lawyer.
Appointing a distributor is often the cheapest option for foreign suppliers looking to sell to the Brazilian market, although Brazil’s tax system often makes distributorships only viable in specific cases.
The appointment of agents can be tricky, as there are court decisions that found that Brazilian law must apply to all agency relationships. On the other hand, the appointment of distributors is less risky, as foreign law can apply to distribution agreements.
Should you appoint an agent or a distributor?
It depends. Often the decision between appointing an agent or distributor will depend on the sophistication of the buyers (and their willingness to deal with the bureaucracy and risks of importing goods into Brazil) and the taxes applicable to the product, service or IP right being supplied to Brazil.
In addition to the problems involving Brazil’s mandatory laws applicable to agents, appointing an agent places the commercial risk on the final customer, which is seldom welcomed by them. Furthermore, it leaves the customer with the burden of dealing with the bureaucracy to clear customs (in the case of goods) or making foreign international payments and withholding the relevant taxes (in the case of services and IP rights). Hence, appointing an agent is only suitable in very specific cases.
On the other hand, appointing a company to distribute goods tends to cut heavily into margins given the risks taken by them and the cashflow constraints, as the high import-related costs and taxes (payable upon clearance) can end up pricing the goods out of the market. This tends to be less problematic when the company is appointing distributors to resell services and IP rights.
Are there any formalities required for the appointment of distributors? What if there is no formal contract with the distributor?
No. Distributors may be appointed orally or by conduct (and proving the contents before a court can be complicated). However, an appointment that is made informally or via an agreement that is signed by the parties in Brazilian territory and without an express clause choosing that a foreign law govern the agreement will mean that the Brazilian Civil Code will most likely govern the distributorship.
Brazil’s Civil Code states that unless the parties agree otherwise the distributor is:
- responsible for all expenses relating to the distribution arrangement; and
- entitled to the remuneration relating to deals made within the distributor’s territory (even if the distributor did not bring about the deal).
The Civil Code also provides the rules relating to termination.
How are distribution agreements terminated under Brazilian law?
If Brazilian law governs the distribution agreement, then the Civil Code will apply to its termination.
The Civil Code provides the distributor is entitled to damages if the principal, without just cause, “stops supplying or reduces the supply so much that keeping the contract in place becomes commercially unviable”. The purpose of this provision is to protect distributors where suppliers force distributors to terminate the agreement by controlling the supply of goods or services.
If the distribution agreement is not for a fixed term, then the notice period must be reasonable considering the distributor’s efforts and the amounts invested by the distributor. This is often a complex assessment, as the Civil Code does not prescribe specific methods to calculate the distributor’s entitlements.
What if a foreign law governs the distribution agreement?
The Superior Court of Justice has consistently ruled in favour of allowing foreign laws to govern distribution relationships. However, that does not mean that all distributorship-related rules will be governed by the law chosen by the parties as there are Brazilian laws that cannot be excluded by contract.
For instance, where the Consumer Protection Code applies to the purchase, then the manufacturer, the supply and the distributor will be strictly liable where the product is faulty (and this also applies to the provision of services) and limitation of liability clauses will be ineffective.
What are the common pitfalls associated with appointing an agent in Brazil?
In addition to ignoring the effect of mandatory laws on distribution relationships, suppliers often:
- neglect to file for trademark protection in Brazil (which can be easily done now under the Madrid Protocol);
- do not make arrangements for registration of the “.br” domain name;
- ignore that Brazil’s transfer pricing rules will apply to exclusive distributorships;
- do not obtain a due diligence report on the distributor and the distributor’s related parties; and
- fail to have a detailed agreement in place that is customised for Brazil’s legal environment.
Have you filed for registration of your trademark in Brazil?
Brazil follows the first to file trademark registration system and removing an existing trademark that was unduly registered by a third-party can be an expensive process. It is recommended that arrangements be made for registration of the trademark as soon as the decision to enter the Brazilian market is made. Click here for further information on how trademarks work in Brazil.
Will you be liable for employment obligations of your distributor?
Courts can (and often do) find principals liable for employment-related obligations when a distributor’s employees can be regarded as an employee of the principal. This will occur if the distributor’s employees can prove that:
- there is direct interference of the principal in the activities of the distributor;
- the principal exerts control over termination of employment contracts of the distributor;
- the principal set sales goals directly to the distributor’s employees; and
- the principal (rather than the distributor) is the beneficiary of the services provided by the distributor’s employees.
The principal will be held liable if the distributor is unable to pay for the employees’ employment-related rights.
Have you obtained a due diligence report before appointing the distributor?
Unfortunately, too often foreign principals tend to be overly trustworthy – and this ends up being a costly mistake. Brazil is a highly litigious country with complex and sophisticated rules.
Before appointing a distributor, principals should retain lawyers to prepare a due diligence report on the company and the key persons behind it (such as shareholders). This report should include:
- a review of the corporate documents from the relevant Company Registries where the distributor operates;
- obtaining the Federal State and Municipal tax, social security and employment litigation-related certificates where the distributor operates; and
- undertaking State and Federal court searches (including the Employment Court hierarchy) and analysing court matters that appear to be of relevance.
In addition to this basic due diligence process, it is recommended that principals undertake an analysis on whether the distributor would be ready, willing and able to meet its obligations under the distribution agreement from a financial and commercial point of view.
Do you have an agreement customised for the Brazilian legal environment?
Companies with distributors around the world frequently have standard contracts that they use to appoint them in different jurisdictions. Due to Brazil’s particular rules relating to distributorships, it is important that these agreements be reviewed by Brazilian lawyers before they are presented to the potential chosen distributor.
Relying on a choice of law and court (including arbitration) provision will do little to avoid the mandatory nature of some Brazilian laws that will apply to the distribution relationship.
Thus, having a well-drafted agreement customised to the Brazilian legal environment and following its terms throughout the distributorship arrangement will go a long way to minimise the exposure of the principal to undesired risks.
Last modified: October 28, 2022