Commercial Agency Contracts in Brazil

Commercial agency agreements are regulated under Brazilian Federal Law No. 4.886/1965 as amended (the “Brazilian Agency Law”). The agent is defined by the Brazilian Agency Law as the legal entity or individual, with no employment relation, which performs in a permanent basis on behalf of one or more persons, the mediation for commercial businesses, obtaining purchase orders to be sent to principals and can perform or not the acts related to the execution of the transactions.

An agent shall be enrolled with the Commercial Agency Regional Council (in Portuguese, Conselho Regional dos Representantes Comerciais – “CORE”) to perform such activities. However, this requirement is not always observed. The absence of the enrollment does not invalidate a commercial agency agreement.

The Brazilian Agency Law is in force for more than 50 years, has incorporated changes in 1992 and 2010 (Brazilian Civil Code – articles 710 to 721), but the main structure remains the same. It represents a thorough regulation and does not leave too much room for the parties to freely negotiate. It is important to have in mind that the commercial agent is protected and, in many ways, the indemnification and rights of the agent has reminisces of an employment relation.

As an example, principals shall consider that it is quite difficult to avoid a termination penalty of 1/12th of all commissions paid throughout the entire duration of the agency agreement, unless the termination is caused by the agent, due to one of restricted causes for termination by Principal, as more detailed described below.

The following list of features of Commercial Agency in Brazil take into consideration mainly distribution or local direct operations for comparison reasons, since both are the main other vehicles to access the market.

Positive features:

• lower cost of initial inception of the operation;
• faster and less bureaucratically implementation;
• easier access to market if the agent has previous experience and relevant commercial contacts

Negative features:

• higher cost for termination per legal imposition;
• legal limitation to reduce or relocate territory;
• pricing of products have to consider profitability of the distribution channels versus local competition pricing.

Brazilian Agency Law determines that the agency agreement shall contain at least the following list of items:

• general conditions and general requirements for the agency;
• general or specific geographical indication of the products subject to the agency agreement;
• determined or indefinitely term;
• area or areas in which the agency will perform activities;
• need of guarantees, in part or in full, or for a certain period, of exclusivity of area or part of an area;
• compensation and payment terms, conditioned to the actual performance of the business and the receipt (or not) of the payments of the intermediated sales;
• cases where restriction of exclusivity is justified;
• rights and obligations of the contracting parties;
• exclusivity of the agent to principa.

In addition to the list above, it is also relevant to mention that, in Brazil, the agent is not, by definition, an employee of the internal sales force of the principal; the agent is an independent contractor. However, in many cases, the agent can claim that he/she was an employee of the principal, if the agent is capable to demonstrate factual elements that he/she was treated as an employee of principal (further developed in item 9 below).

It is expected the agent to hold farther responsibilities and obligations than a mandate or a business finder, especially for the obligations to report and work on the development of the market for the principal.

The agent is not a distributor, in view the agent does not acquire the principal’s products to resell.

Brazilian Agency Law admits the formation of the agency agreement in writing or orally. Nevertheless, the proof of certain conditions such as exclusivity of the agent in a territory must be demonstrated and cannot be implied. As a result, the written form shall be considered to evidence the parties have agreed upon exclusivity of territory for the agent.

In order to be allowed to develop the agency activity, Brazilian agents are required to be enrolled with the Regional Council of Commercial Agents (in Portuguese, Conselho Regional dos Representantes Comerciais – “CORE”) in the State where the agent has its domicile and operations. It is advisable to have proof of the Agent’s enrollment with CORE stated on the agreement.

To enroll with the applicable CORE, the agent shall be duly enrolled, either as a legal entity or as an individual with the Brazilian Federal Revenue Services and to obtain the Corporate or the Individual Taxpayers’ Registry (for legal entities: Cadastro Nacional das Pessoas Jurídicas – CNPJ; for individuals, Cadastro da Pessoa Física – CPF).

Considering that Agency is considered as a service for tax purposes, and service tax is regulated and collected by Municipalities, the Agent must also obtain the City Taxpayers’ Registry, at the City Hall/Prefecture of the domicile of the agent.

Foreign Principals are not legally required to obtain any local registry or additional documents to enter into an agency agreement.

This Brazilian Agency Law has not stipulated minimum demands for the admission of an agent.

From past experiences, not all the companies or individuals performing agency activities or that have entered into an agency agreement have enrolled with CORE. Not all principals require the proof of enrollment of the agent with CORE. Case law has demonstrated that the absence of enrollment with CORE does not turn the agency agreement necessarily void, although would be highly recommended.

Validity of a contract signed outside the Brazilian territory shall be demonstrated by having the signatures duly notarized and with apostille.

There are two main types of exclusivity that are important to mention. Both are partially regulated by Federal Law 4886/1965, article 27, items (e) and (i) as follows:

Article 27 caput establishes: “Within the comercial agency agreement, beyond the comon elements and those of interest of the parties, must cointain the following: (e) guarantee or not, partial, total or for term, exclusivity of sector or territorial zone; (i) exclusivity or not of the agency on behalf of the Principal.”

The first exclusivity may be granted to the Agent the second may be granted to the Principal. The Law is very generical and leaves a lot of room for interpretation and drafting.

In addition, article 31 of Federal Law 4886/1965 establishes that in case of breach of exclusivity of the agent, the commissions will be due, even if Principal paid commissions for the same sales to a third party.

Finally, according to sole paragraph of article 31 of the same law, Exclusivity may not be presumed and must be agreed upon expressly by the parties.

As seen in item 4 above, Brazilian Law on Agency leaves room for drafting exclusivity clauses and exclusions of territory, sectors, types of clients, online, offline, etc… So, If the Principal has granted to the Agent a general exclusivity clause over the Brazilian Territory without excluding online sales, then the Agent will be entitled to commissions. Therefore it is important that Principal and Agent have a clear view of the markets that will be developed and when exclusivity is advantageous or not.

Non-competition in Commercial Agency is viewed as fair during the execution of an Agency Relationship where the parties agreed upon exclusive dedication of the Agent or, when the Agent agrees to restrain from working as Agent from a direct or indirect competitor of the Principal.

Since, Brazilian law and caselaw, depending on the case, consider Agency closely related to an employment relationship, non-competition clauses must take that view into account. That said, it is important for the Principal to avoid the risk of having the Agency regarded as an employment relationship.

When it comes to non-competition clauses after the termination of the relationship, case law mandates a financial compensation. Amount of compensation will depend on the restrictions of the non-compete clause, on if the Agent has other Principals, areas of commerce, etc...

Brazilian Agency Laws allow the parties to elect foreign law to govern the agreement. Pursuant to the Law for the Introduction to the Brazilian Law Rules (LINDB – Law-Decree No. 4,657/1942, Art. 9), the laws of the place of celebration of the obligation shall rule the contract.

In this sense, if the agency agreement is deemed executed outside Brazil, the laws of that foreign location can be established as the applicable law for the contract. In this sense, we see room for the application of foreign law to the agency agreement. In practice, the difficulties for the application of the foreign law seems so complex that may not be of the best interests to the parties to have a Brazilian judge to construe a decision based on foreign law.

Application of foreign law to a specific case by a Brazilian judge will most likely result to be cumbersome. The court will require sworn translation to Portuguese of all applicable laws and relevant jurisprudence to understand it and then apply it. The costs involved and the need to understand and apply the foreign laws would be sufficient reasons to discourage the use of foreign laws to the agency agreement involving a Brazilian Judgement.

In one decision, the State of São Paulo Court of Appeals had faced the matter – discussion of the termination of an international agency agreement that stipulated Italian laws as applicable – and, by majority of votes, ruled that the Brazilian laws are to be applied for the termination of an agency agreement. One judge understood that the contract was to be ruled as originally agreed by the parties but was defeated by the majority formed by the other judges.

Therefore, in light of the above, if the parties agree on the application of foreign law, most lawyers recommend the election of a foreign Arbitration Tribunal.

It is possible for the parties on an agency agreement to agree on submitting disputes to foreign arbitrators. Brazilian Arbitration Law (Federal Law No. 9,307/1996, as amended, Art. 1) establishes that the parties in a transaction may choose arbitration for resolving private matters that does not involve public policy matters.

Having chosen arbitration as the format for dispute resolution, still according to the Brazilian Arbitration Law, the parties may choose a foreign law, a foreign arbitrator, and a foreign arbitration center to resolve the disputes arising from the agency agreement, provided such choice does not affect public policy matters (Brazilian Arbitration Law, Art. 2).

If arbitration is not chosen as the dispute resolution format and considering that the agency agreement is ruled by the Brazilian Agency Law and Brazilian laws, then, the State courts of the agent’s domicile as competent to resolve disputes related to the agency agreement.

Brazilian Civil Procedural Code (Federal Law No. 13,105/2015, Art. 22) has rules that appoints the Brazilian judge as competent to resolve proceedings in which:

• the defendant is a Brazilian resident;
• the obligations shall be accomplished in Brazil; and
• the grounds are facts occurred or acts performed in Brazil.

An agency agreement with a Brazilian agent is clear that there will be activities to be performed in Brazil. In such case, a Brazilian judge can be considered as competent to judge such matter.

In case of a Brazilian principal, considering payment of commissions will be made by a Brazilian entity or the effects of the agency generate activities in Brazil (e.g., production of goods, exports, among others), it would not be surprising that there are obligations to be accomplished in Brazil and acts performed in Brazil and, consequently, a Brazilian judge will likely understand as competent to rule such a case.

As general rule, the agent is entitled to receive an indemnification of 1/12th of all the commissions paid throughout the entire duration of the agency agreement plus 1/3 of the remuneration received during the previous 90 days prior to the termination to allow immediate termination.

This 1/12th indemnification does not apply in the events of the termination by principal with cause and for contracts with determined term.

Termination by principal with cause are the only cases where the 1/12th indemnification would not be applicable are when the contract is terminated by principal with cause. The Brazilian Agency Law has limited situations for principal to terminate the contract with cause:

• acts by agent causing disrepute of the principal;
• breach of obligations related to the agency activities; and
• criminal conviction related to honor, reputation.

These situations shall be clearly demonstrated. Producing the sufficiently strong evidence of the facts to configure cause for termination may not be an easy task, considering some of the facts may be subject to construing and interpreting by the parties, witnesses and ultimately the judge.

Termination by Agent: the Brazilian Agency Law also stipulates situations that agent could terminate the contract and still be entitled to receive the 1/12th indemnification:

• reduction of the activities in disagreement with the contractual stipulation;
• breach of exclusivity (territory and/or products), if so stipulated in the agreement;
• determination of prices that makes the agency unfeasible;
• default on payment of the commissions; and
• force majeure.

As a result, the indemnification is broad and, from past experiences, it is rare to see principals in conditions to avoid the payment of the 1/12th indemnification.

Just cause for termination by Principal is a delicate issue at Brazilian Courts. Even though the Law generally establishes the threshold.

Article 35 of Federal Law 4886/1965 establishes what constitutes just cause for termination of the Agency Agreement by the Principal:

• negligence in the fullfilment of Agent’s contractual obligations;
• acts that lead to comercial disrepute of the Principal;
• breach of contractual obligations;
• conviction of the Agent for infamous crimes;
• force majeure.

Courts tend to judge commercial and other agreements upon Good Faith Principle. This means that the pacta sunt servanda principle may be relativized if one of the parties acted in bad faith. Therefore, one must bear in mind that clauses of the agreement as well as the behavior of the parties will be scrutinized by the Courts if the Agent brings the case before the Court.

As mentioned above, for contracts with indefinitely term, the agent is entitled to receive 1/12th of all the commissions paid throughout the duration of the entire agency agreement plus a previous notice period or payment of the equivalent amount of 1/3 of the remuneration received during the previous 90 days prior to the termination.

For contracts with determined term, the indemnification shall be the equivalent to the monthly average of the remuneration paid up to the termination date, multiplied by half of the remaining months of the contractual term.

Also, it is relevant to consider if the parties extend the duration or sign a new contract within 6 months after the expiration of the previous, the relation between agent and principal shall be deemed as the same relationship and thus, the duration of the contract is considered as indefinitely. Consequently, the indemnification shall encompass the entire period (past and subsequent contract) and will then turn to the 1/12th of the commissions paid throughout the entire duration of the contract.

Certain scholars consider the indemnity as compensation for giving up of the opportunity to continue exploring the market in which the agent had developed. In this regard, the agent could seek for damages as well.

The statutes of limitation for the agent to file a claim against principal is five (5) years as of the date of the effective termination of the agency agreement.

Brazil has not yet adopted the Permanent Establishment definition of OECD for tax purposes. Therefore, a foreign principal company should not be taxed as such. However, if form is abused and the Agency relationship is further developed, with direct import, storage, trademark licensing, etc… Tax authorities may seek the application of substance prevailing over form.

There are two main points to be observed by the foreign Principal.

First: avoid agent exclusivity at all cost so you may appoint other agents or stablish different channels, such as online/offline or even different commercial channels by size or market class.

This first point is quite obvious, but it is common to see otherwise.

Second: avoid the risk of your agency to be deemed as an employment relationship.

The activities developed by the agent could eventually be deemed as performed by a regular employee of the principal and, in this case, principal could be subject to compensate the agent as an employee.

To that extent, the agent needs to file a labor claim and demonstrate the existence of the employment relationship.

The Labor Court judge will consider the factual situation, prevailing upon the written agreements or other formal documents. The judge may rely on e-mails, witnesses and other evidence.

The elements of an employment relationship are:

• individual: in case the individual acts by himself to perform the services;
• personal services: the services are in fact performed by the individual specifically to the Principal;
• non-eventuality – exclusivity: the services are rendered in a regular basis;
• subordination: key factor - the individual has to follow strict instructions directed by principal, such as reporting to an employee of the principal, determined visits; and
• rewarding - fixed remuneration: the individual is awarded regular amounts and expenses allowances.

In the event the individual can demonstrate the existence of the elements to configure an employment relationship, he/she could have an award to entitle him/her to have his remuneration considered as of a regular employee for the last 5 years.

As a result, the individual would be awarded the payment of Christmas bonus (equivalent to 1 monthly remuneration per year), vacation allowance (1/3 of a monthly remuneration per year), unemployment guarantee fund (1 monthly remuneration per year) plus other benefits that he/she would be given as an employee of principal (based on the collective bargaining agreement between the employees’ and employers’ unions). The company would also be obliged to make the payment of the co-related social security contributions.

Needless to say, the result could turn into a considerable potential contingency.