Highlights of Brazil

Author: Charles Wowk
Stüssi-Neves e Advogados

3.1. Sales representation and distribution agreements

3.1.1. Brief definition of sales representation

The sales representation or commercial representation is the contract whereby a company or individual acts as an intermediary in certain deals on behalf of another party, with exclusivity in a certain territory, on a non-sporadic basis and without an employment relationship, agency proposals or orders to ultimately inform same to the party that it is representing.

The main legal characteristics of the sales representation relationship derive from this definition, namely: a) business activity; b) non-sporadic nature of the representation services; c) mediation in the realization of certain deals; d) the agent's autonomy to act.

This definition pursues from the joint analysis of article 1 of Law 4886/65 and article 710 of the recently enacted Brazilian Civil Code, being worthy to note that both rules are harmonious and complete each other, being clear the legislator's intention in the new Civil Code (article 721) to maintain effective Law 4886/65, applying it, as applicable, to the sales representation agreements and also to the distribution agreements.

3.1.2. Brief definition of distribution

The distribution agreement is the contract whereby a party undertakes the obligation to resell, with exclusivity (unless convened otherwise), on its own behalf, upon the payment of a fee, the products of a certain manufacturer in a certain territory.

This type of contract may be considered to be a species of the commercial concession gender. The main difference is that the distribution, due to its generality, allows the sub-distribution; hence, the distributor authorized by the distribution agreement, may adopt its own network of sub-distributors to set up the placement of the product in the consumer market, however such sub-distribution arrangement must abide by the rules determined by the manufacturer.

The distributor deals in its own name, as quoted above. It purchases the products to resell them with exclusivity in a certain territory, the manufacturer assuming, on the other hand, to not sell them to another dealer in the same territory. If it does so, it will be obligated to pay a fee to the distributor.

3.1.3. The new rules concerning sales representation and distribution contracts

As previously stated, the sales representation agreements were defined in a special law in Brazil in 1965, enacted as Law 4886/65, subsequently amended by Law 8420/92, with very broad and clear rules on the relations between agents and manufacturers. These rules were furthered in the new Civil Code.

Inversely, the distribution contracts always presented a huge legal vacancy, lacking more specific rules for this type of contract, at least until 2002.

Initially, in addition to the General Principles of Law, the regular rules on obligations established in the former Civil Code applied to the distribution contracts.

Some judges applied by analogy to the distribution contract a law that specifically addressed the commercial concession between manufacturers and distributors of land vehicles (Law 6729/79, as amended by Law 8132/90).

As of January 2003, pursuant to the enactment of the new Brazilian Civil Code, which introduced specific provisions on the distribution agreements and also certain novelties regarding the sales representation contract.

In the new Civil Code (articles 710 up to 721), the distribution contract is regulated jointly with the sales representation contract, receiving a similar treatment, being conceptualized as follows:

According to the specific definitions established in the new Code, through the representation contract a person undertakes on a non-sporadic basis and without dependency, the obligation to promote, on behalf of another person, upon payment of a fee, the realization of certain deals in a certain territory, the distribution is characterized when the agent has at its disposal the object to be negotiated (article 710).

Hence, the main difference between the sales representation and distribution contracts is that in the latter the distributor has the disposability of the object that is being negotiated. Such disposability must be construed as a genuine purchase for resale and not plainly possession.

As quoted above, although they are addressed in the same chapter in the new Civil Code, the sales representation and the distribution contract are not identical. Both concern the contracting of mediators engaged in the distribution of the proposing party's products. However, in the sales representation, these products continue to be at the level of the proposing party's disposal, which is bound directly to the customers, the agent being entitled to a commission for the sales representation services that it provided. In the distribution arrangement, inversely, the products are transferred to the distributor's patrimony, and accordingly the customer contracts the purchase of the product with the distributor and not with the proposing party. The fee that is paid to the distributor is not a commission, but instead the profit that results from the difference between the purchase and the resale prices.

As regards the limits of the representative's and distributor's acts, article 711 establishes, vis-à-vis the best legal theory, the freedom to establish an exclusivity clause, and provides that, in the absence of such a clause, dual exclusivity shall be presumed, which consists in that the proposing party cannot designate, simultaneously, more than one representative or distributor, in the same territory and with the same duty, nor may the latter undertake business of the same type on behalf of other proposing parties.

Important Jurists nowadays have started advocating the idea that the distribution organization introduced by the 2003 Civil Code is a new legal figure, which should not be confused with the classical distribution that used to exist before the new Code went into effect. According to these Jurists, the former form of distribution still remains although without specific regulations, so that the general rules regarding obligations and the general principles of law ought to continue to be applied, besides the application of the business concession law (by analogy). This discussion is also continuing before the Courts, and there are judges who apply the new Code to distribution agreements and there are other judges who apply the general rules instead. A general guidance with regards to the subject is still missing, however, although it is expected that over the coming years the Courts shall establish a uniform jurisprudence on the matter.

3.1.4. Termination of the contractual relationship

Generally, contracts may be terminated for five different reasons: a) due to a previously existent defect that renders it void or subject to cancellation; b) pursuant to its performance, with the fulfillment of all the contractual obligations; c) due to negligent non-performance, in which event it is unilaterally or mutually terminated; d) pursuant to voluntary non-negligent non-performance, in which event it is unilaterally or mutually terminated; e) pursuant to involuntary, non-negligent non-performance, in which event the contract is lawfully terminated (as occurs, for example, in force majeure cases).

One of the most controversial issues in regard to the several forms of termination concerns the unilateral termination without cause of the contract. In the other forms the contract is terminated for a certain reason, either pursuant to its performance, non-performance, expiration or by the parties' intention.

The unilateral termination without cause has more complex characteristics since the contractual relationship is terminated at one of the contracting parties will. Thus, special considerations should be devoted to it.

At first, the initiative of terminating the contract is not required to be supported by any reason. Though it is a legal means to terminate a contract that has an indefinite duration, the parties are aware that the contract may be terminated at any time upon a plain statement of such an intention, but that in certain contracts the party that terminated it without cause is subject to indemnifying the other party for losses and damages.

This is due to the fact that certain contracts, such as the sales representation and distribution agreements, that then in general aspects reflect the submission of one party (the representative or distributor) to conditions imposed by the other (the manufacturer).

It is, therefore, imperative upon the courts to reestablish the stability between the parties, mitigating the distributors' vulnerability.

The representative and the distributor may suffer losses in the event of any early termination of the contract without cause.

In regard to the sales representation agreements, the Special Law still in effect was already clear in its provisions thereon, establishing an indemnity to the representative equal to 1/12 of the entire compensation that the representative earned in the period in which it was engaged as a sales representative.

It further established the compulsory 30-day prior notice of termination or the payment of an indemnity equal to 1/3 of the commissions that the sales representative earned in the three months that precede the termination without cause.

In this regard the new Civil Code changed the prior notice period established in the Special Law and now requires the represented party to provide a 90-day prior notice to the sales representative in the case of termination without cause.

The new Code raised a single doubt that has not yet been clarified: do only the indemnities already established in the Special Law for the cases of termination without cause of the sales representation agreements continue to exist or is it possible for the representative to claim any additional indemnity? This doubt shall only be clarified in the course of time upon the review of actual cases but, in principle, in the absence of specific provisions in the new Civil Code, apparently only the indemnities foreseen in the Special Law continue to exist.

As regards the distribution agreement, there have always been doubts as to the obligation of the indemnity, as well as the determination of the amount thereof. What rules apply? These doubts triggered many court disputes before Brazilian courts. In the vacancy in the law, doubts existed as to the fitness or not of indemnity in the case of termination without cause and the amount thereof.

Excepting understandings to the contrary, the new Civil Code apparently clearly provides that heretofore it is required to indemnify in the case of unilateral termination, without cause and that is harmful to the distributor.

Indemnification was also expressly established in the case of indirect termination, i.e. when the proposing party reduces the fulfillment of the orders up to the point that the continuity of the contract becomes unfeasible, uncomfortably compelling the distributor to terminate it.

As regards the indemnity amount, the new Civil Code apparently was not intended to pacify the issue. It refers the matter, in articles 718 and 721, to a special law that, in the case of distribution, does not exist.

Therefore, at least in the short term, it would appear that the solution that has been adopted up to the enactment of the new Civil Code, i.e. liquidate the obligation through indemnification for losses and damages, with the corresponding determination of the damages, will continue to be applied.

It should be emphasized that the understanding of such damages has been broadened to cover, in addition to the expenses incurred with installation facilities, with the inventory held by the distributor and the labor rights of the employees that are dismissed pursuant to the termination of the distribution agreement, the

distributor's goodwill as well, i.e. the distributor's capacity to lure new clients, which the proponent or the new distributor that the proponent may appoint will benefit from.

Without prejudice to the cases of termination without cause, the new Civil Code also establishes in regard to the distribution agreement that, if the contract has an indefinite term of duration, any party thereto may terminate it upon a 90-day prior notice, provided that a period proportional to the nature and the magnitude of the investment required has elapsed.

In such event, having elapsed the prior notice period proportional to the business and not existing any disagreements between the parties, it would appear that there is no reason for the distributor to claim any indemnity.

We deem that these are the main aspects of the sales representation and distribution agreements.

3.2. Purchase and sale with reserve of ownership and/or other guarantees

3.2.1. Introduction

The purchase and sale transaction is one of the oldest and most important institutes of Brazilian law. In this regard, it should be noted that in the course of time this institute has been consolidated as the most common and regular means of closing deals, which demonstrates its importance both under the legal and economical viewpoints.

It is a fact, however, that commonly the seller, particularly in international transactions, is vulnerable in this type of deal inasmuch that the distance poses difficulties to adopt measures to protect its interests.

Hence, this essay aims to suggest options to attempt to mitigate this vulnerability condition, demonstrating the types of guarantees that are established in Brazilian law, thus mitigating the risks associated with an international purchase and sale transaction.

3.2.2. Purchase and sale on credit with reserve of ownership

3.2.2.1. Definition and application

A reserve of ownership (pactum reservati domini) occurs when the seller, in a purchase and sale agreement, by rule involving unchangeable, movable property, reserves to itself the ownership of the property sold up to the occasion of the full payment of the price. Accordingly, the buyer only acquires the ownership of the property upon the payment of the price, as of which occasion the transaction will be fully valid.

In this type of purchase and sale the purchaser promptly assumes the indirect possession of the property sold, the acquisition of the ownership thereof being subject to the payment of the last installment. This infers that the transfer is not definitive but rather conditional. It consists in a preceding condition whereby the uncertain and future event is the full payment of the price. Hence, the transfer of the ownership of the property is conditioned to the implementation of the condition, i.e. the full payment of the convened price.

3.2.2.2. The debtor's options in the event of breach

This type of contract affords a full guarantee to the seller as it enables to withhold the ownership of the sold property until the price is fully paid, hence if the price is not fully paid the buyer will not acquire the ownership thereof and the seller may elect to either claim the price or repossess the property through a repossession suit.

Thus, in the event the buyer does not pay the installments due, the seller may:

a) claim the payment of the installments that are overdue and that fall due in the future (Code of Civil Procedure - CPC, article 1.070), through a debt collection suit;
b) consider the contract terminated and claim the repossession of the property (CPC, article 1.071, paragraph
c) proposing the suit with a preliminary claim of seizure and legal custody of the property, granted without need of hearing the buyer beforehand, so to prevent the buyer from hiding, selling or deteriorating the property. Upon repossession of the property, the seller is required to return to the buyer the installments that were paid, less depreciation (Law no. 1.521/51, article 2, X; Code of Civil Procedure, article 1.071, paragraphs 1 and 2). If the buyer has already paid more than 40% of the price, the buyer shall have a 30-day term to pay the overdue installments, arrears interest, adjustment for inflation and charges, thereby regularizing its arrears status.

3.2.2.3. Liability as to the property

It is a prevailing understanding that the buyer bears the risks associated with the property since, although the seller retains the ownership thereof, as of the execution of the contract the possession of the property is transferred to the buyer, who uses and benefits from its use, merely as a possessor, and may in addition to perform the acts appropriate to preserve its rights, inclusively resorting to, if necessary, property injunctions to defend the property against interferences of third party or even of the seller, also extract from the property all the benefits that the property is capable of affording.

3.2.2.4. Effects against third parties

The contract with reserve of ownership must be recorded with the Public Registry of Deeds and Documents. By doing so, in abidance by the principle of publicity, the due registration of the contract will prevent a third party that purchases the property from the original buyer from alleging in its benefit that it was not aware of such contract. Hence, the registration of the contract produces erga omnes effects not only between the contracting parties but also against any third party buyer.

3.2.2.5. Requirement for characterizing arrears status

Articles 525, 526 and 527 of the Civil Code determine that the seller may only enforce the reserve of ownership clause after characterizing the buyer's arrears status, by protesting the instrument or court notification. Upon the characterization thereof, as previously stated the seller may file either a suit to collect the overdue or not yet matured installments or to repossess the property that it sold.

3.2.3. Other types of purchase and sale guarantees

3.2.3.1. Chattel mortgage

The chattel mortgage consists in the transfer by the buyer to the creditor of the conditional property and indirect possession of an irreplaceable chattel, to secure its debt up to the fulfillment of the principal obligation (i.e. payment of the secured debt).

Thus, this consists in a relationship comprised by two legal relationships: a relation of obligation that expresses the debt and another represented by the guarantee in which the mortgagor transfers the property to the mortgagee, who receives it not to have it as its property but rather with the purpose of returning it to the mortgagor with the payment of the debt.

The chattel mortgage is widely used in commerce as it enables the payment in a lump sum of chattels with a third party's resources (usually a financial institution). The conditional property and indirect possession of the property is transferred to the latter, the debtor remaining with the direct possession and vesting the status of depositary thereof until the debt is fully paid.

Under Brazilian law the chattel mortgage is questionable in contracts between private parties, many finding that this type of guarantee is only appropriate in transactions that involve a financial institution.

3.2.3.2. Mortgage

The mortgage is the property right (binding the subject property) over real estate property, a ship or aircraft that, although not delivered to the creditor, secure to it, with a preferred right, the fulfillment of the obligation.

Note that the mortgage is a guarantee right, i.e. it is characterized by its ancillary nature since it depends on a principal obligation, i.e. the obligation assumed by the debtor, which it is intended to secure.

In Brazilian law there are two principles that regulate the mortgage, namely: the principle of specialization and the principle of publicity.

As regards the first, it should be stressed that the mortgage applies solely to the property specified in the deed of the property or mortgage deed. The mortgaged property must be described in detail, with all its particularities such as geographical location, enrollment number, borders and other data that enable to identify precisely the property that is being secured by mortgage.

As regards the second principle, it should be stressed that the publicity is attained through the recording of the mortgage with the relevant Real Estate Registry. It is the enrollment that provides the publicity disclosing to all that the real estate given as guarantee is subject to a mortgage, thus preventing any third party allegation of non-awareness of the mortgage on the property.

In the lack of regarding the mortgage with the Real Estate Registry, the right over property will be a personal, unsecured right. Notwithstanding the lack of enrollment, the mortgage vests onto the mortgagor the right to file a collection suit, though it does not protect the creditor against any bona fide third parties.

3.2.3.3. Commercial pledge

In broad terms, the pledge may be defined as a property guarantee right that is constituted by way of the effective transfer of possession that, as a guarantee of the debt provided to the creditor or its representative, by the debtor or its representative, of a chattel that may be transferred (article 1.431 of the Civil Code).

It is important to emphasize that Brazilian law establishes several types of pledges, each having its own characteristics. The commercial pledge is the type that is addressed hereunder.

Initially, it is important to emphasize that in the commercial pledge the property that is pledged remains in the possession of the debtor, who must safeguard and preserve it. Under this guarantee the debtor holds the property on behalf of the creditor.

The commercial pledge is constituted through a public or private instrument recorded with the Real Estate Registry that has jurisdiction over the place where the pledged property is located (article 1.448 of the Civil Code). When the obligation consists in cash, a bond may be issued.

The pledge may consist in machinery, appliances, materials, instruments that are installed and operating, with or without the accessories thereof, livestock used in the livestock industry; salt and the goods destined to the salt exploitation activities; pork industry products, livestock destined to the industrialization of meat and its by products; raw materials and industrialized products (article 1.447 of the Civil Code).

The debtor cannot modify the property that was pledged or change its status without the creditor's express consent (article 1.449 of the Civil Code).

If the property is transferred upon authorization it should be replaced by the same type of property, which will be subrogated under the pledge (article 1.449 of the Civil Code).

As a general rule, in any pledge whereby the possession of the pledged property remains with the debtor the creditor has the right to check the status of the pledged property and to inspect it wherever it is located, per se or its designee (article 1.450 of the Civil Code).

Hence, without any doubt a commercial pledge may be constituted as a property guarantee over a chattel, which shall be maintained in the event it is ancillary to a purchase and sale agreement while the buyer's obligations persist.

3.2.4. Personal guarantees

In addition to the foregoing guarantees, there also exist the so-called personal guarantees, which maybe established in the contract, such as the surety or a negotiable instrument thereto such as, for example, an exchange bond or a promissory note issued by the buyer and/or a third party.

Thus, without prejudice to the responsibility and the property guarantees that may be granted to the seller, collateral guarantees may also be offered, either by the buyer or the partners of the buyer or of third parties unrelated to the transaction, thus securing the options of course of action by the seller in the event of contractual breach.

Hence, these are the most commonly adopted types of guarantees that may be established as ancillary guarantees in purchase and sale agreements, intended to further protect the seller.