Doing Business in Brazil

3. Sales representation, distribution and purchase and sale with reserve of ownership and/or other guarantees

02/21/19

3.1.1. Brief concept of agency

An agency or commercial representation is an agreement whereby a legal entity or individual person acts as an intermediary in certain business transactions on behalf of a principal, with exclusivity within a defined area, on a regular and independent (non-employment) basis, receiving offers or orders for transmission as agent to the principal.

A perusal of this concept reveals the principal legal characteristics of the agency relationship, namely: a) business activity; b) regularity of services; c) acting as intermediary on conclusion of certain business; d) independent activity of the agent.

This definition results from the joint analysis of article 1 of Law 4886/65 and article 710 of the Brazilian Civil Code, and it should be noted that both rules are mutually compatible and complementary; it is therefore evident from article 721 of the Code that the lawmakers, when drafting the Code, desired to maintain Law 4886/65 in force.

As regards limits on the activity of agents, article 711 provides, in line with the predominant views of legal commentators, for the optional nature of the exclusivity clause, establishing that, in the absence of express agreement on the matter between the parties, double exclusivity is to be presumed, that is, the principal may not be represented at the same time by more than one agent for the same area and with the same responsibilities, nor may the agent conduct the same kind of business on behalf of other principals.

The agent’s remuneration normally consists of commission on the sales in which he acted as intermediary. Note that, if the agent has the exclusive right to act in a given territory, he may be entitled to commission on business concluded within that territory even though he did not effectively participate in the sale. The manufacturer should therefore be careful to bear this point in mind.

Finally, a point that constantly gives rise to disputes is the basis for calculating the commission due to the agent. It is important to note that commission must be calculated as a percentage of the total value of the goods sold, since it is currently not possible to exclude from the basis of calculation taxes or other charges.

3.1.2. Brief concept of distribution

Distribution is a contract whereby a person assumes the obligation to resell, with exclusivity (unless agreed otherwise), for its own account, against payment, goods of a given manufacturer, in a defined area.

This type of contract may be regarded as a kind of commercial concession. The main difference is that distribution, due to its general nature, allows for sub-distribution; accordingly, the distributor, duly authorized by the distribution agreement, may use a network of sub-distributors in order to arrange for the placing of the product on the consumer market, although such sub-distribution must be subject to the rules dictated by the manufacturer.

The distributor, as already explained, negotiates for its own account. It purchases the merchandise in order to resell it with exclusivity in a certain area, the manufacturer in turn agreeing not to sell it to another dealer in the same area. If it does so, it will be obliged to remunerate the distributor.

Distribution agreements may be considered atypical, as they are not subject to any specific legal rules, being governed by the normal rules applicable to obligations, as well as the general principles of law.

The 2002 Civil Code, in force since January 2003, introduced certain specific provisions relating to distribution agreements, stating that the latter are similar to agency agreements, the main difference being that, in distribution agreements, the distributor has the goods in question at its disposal.

However, after a period of uncertainty in relation to the concept of distribution introduced by the 2002 Civil Code, legal writers and the courts are now settled in their view that the concept is a new institution, which should not be confused with the traditional idea of distribution that existed prior to the coming into force of the 2002 Code. In accordance with the current view, the earlier form of distribution continues without specific regulation, with the result that the general rules governing obligations and the general principles of law are still applicable. As regards the concept of distribution as set out in the Civil Code, this is now regarded as a kind of “agency-distribution”, the only difference being that the distributor now has the product in its hands.

As regards the method of remunerating the distributor, this is based on the margin that the distributor manages to obtain between the purchase price of the goods from the manufacturer and the resale price to its own customers. It should be emphasized that the distributor must be free to set the resale prices. It is normally prohibited for such prices to be stipulated by the manufacturer, although there is no prohibition on prices suggested by the manufacturer.

3.1.3. Termination of a contractual relationship

Generally speaking, it is well known that contracts may be terminated in five ways: a)because of some prior defect, which causes it to be null or voidable; b) by performance, with compliance with all the contractual obligations; c) by negligent non-performance, when there occurs unilateral or bilateral rescission; d) by voluntary willful non-performance, in the event of unilateral or bilateral termination; e) by involuntary non-willful non-performance, in the event of termination, for example, in cases of force majeure.

One of the most polemic issues in relation to the various forms of extinction concerns unilateral rescission, also known as termination of the contract without cause. The other methods have some specific reason, whether by performance, non-performance, expiry of the contractual term or by mutual agreement.

Unilateral termination has more complex characteristics, since it leaves termination of the relationship to the will of one of the parties. For this reason we believe that it merits special consideration.

In principle, termination need not be justified. As this is a legal means of terminating a contract for an indefinite term, the parties know that it may be rescinded at any time by means of a simple unilateral declaration of will, although in certain contracts the party rescinding unjustly may be held liable to pay damages to the other.

This is because there exist contracts, such as those of agency and distribution, which generally reflect the submission of one party (the agent or distributor) to conditions imposed by the other (the manufacturer).

It is therefore a matter of justice that equilibrium be reestablished between the parties, minimizing the vulnerability of agents and distributors.

The agent and distributor may suffer loss with the early and unjustified repudiation of the contract.

As regards agency agreements, the Special Law still in force contained clear provisions on the matter,  establishing the imposition of an indemnity to the agent equivalent to 1/12 of the total retribution earned during the time it exercised the agency.

It further established the obligation of 30 days’ prior notice, or payment of an indemnity equivalent to 1/3 of the commission earned by the agent in the three months prior to the unjustified termination.

The Civil Code of 2002 did not make any changes in relation to the indemnities stipulated in the Special Law, but it did alter the length of the prior notice period, the party rescinding now being obliged to grant 90 days’ notice to the agent in the event of unjustified termination.

As regards distribution agreements, there have always been doubts in relation to the obligation to indemnify, as well as the calculation of the amount due. Which rules are applicable? These issues have given rise to numerous legal disputes in the Brazilian courts.

In the absence of a statutory provision, there were doubts regarding the need to pay an indemnity for unjustified repudiation and its extension.

Currently the view of legal writers and the courts is that an indemnity is obligatory when there is a unilateral rescission of a distribution agreement that is unjustified and prejudicial to the distributor.

An indemnity will also be due in the event of an indirect rescission, that is, when the manufacturer reduces acceptance of the proposals to the extent that continuation of the contract becomes uneconomical, forcing the distributor to rescind it.

As regards the amount of the indemnity, this will depend on the loss suffered.

It is worth noting that the scope of this loss has been expanded to include, in addition to expenses with installation, stock remaining in the possession of the distributor and labor rights of employees laid off as a result of the rescission of the distribution agreement, the
goodwill of the distributor, consisting of its capacity to attract captive customers, who will be inherited by the manufacturer or by a new distributor that it may appoint.

If the distribution agreement is for an indefinite term, the current view is that either party may terminate it, on giving a minimum of 90 days’ prior notice. A longer notice period may be required, depending on the evaluation of factors such as the duration of the relationship and the size of the investment required.

In this case, on compliance with a notice period compatible with the business and provided there is no disagreement between the parties, we consider there would be no reason for the distributor to demand an indemnity.

These, in our opinion, are the most important considerations regarding agency and distribution agreements.

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

3.2.1. Introduction

The transaction of purchase and sale is one of the oldest and most important institutions in Brazilian law. In this regard, one may observe that this legal concept has, over the years, become firmly established as the most common and usual means of concluding legal transactions, hence its importance, both from the juridical and economic point of view.

The fact is, however, that frequently the vendor, particularly in international operations, finds himself in a position of vulnerability in this type of transaction, since the distance factor makes it difficult to adopt measures for the protection of his interests.

Accordingly, the purpose of this article is to suggest options with a view to reducing this position of vulnerability, describing the types of guarantees permitted under Brazilian law,thereby minimizing the risks involved in an international purchase and sale transaction.

3.2.2. Purchase and sale by installments with retention of ownership (reserva de domínio)

3.2.2.1. Concept and application

There will be retention of ownership (pactum reservati domini), when the vendor in a contract of purchase and sale, generally of non-fungible movable property, reserves for himself ownership of the property transferred until the moment when the price is paid in full.

Accordingly, the purchaser will only acquire ownership of the property if he pays the full price, at which time the transaction will become valid and effective.

In this type of purchase and sale, the purchaser at once assumes indirect possession of the object transferred, the acquisition of ownership being subject to payment of the final installment. Hence delivery of the property is not definitive, but conditional. This is a condition precedent, where the uncertain future event is the payment of the price in full. It is clear, therefore, that transmission of ownership of the property remains in abeyance until
fulfillment of the condition, that is, payment in full of the agreed price.

3.2.2.2. Options of the vendor in the event of non-performance

Such an agreement affords a full guarantee to the vendor, permitting him to retain ownership of the property transferred until payment of the price in full, so that, if the price is not fully paid, the purchaser will not acquire ownership and the vendor will have the option to claim the price or to recover the property, by means of a repossession action.

Accordingly, if the purchaser fails to pay the installments due, the vendor may:

a) claim payment of the obligations already due and those to become due (CPC, art. 1.070), by bringing an action for collection of the debt;

b) treat the agreement as rescinded, claiming repossession (CPC, art. 1.071, § 3), in which case the action will start with a prior application for seizure and deposit of the property, which will be granted without hearing the purchaser, in order to prevent the latter from concealing or selling the property or allowing it to deteriorate. Once the vendor has regained possession, he must return to the purchaser the installments paid, less the amount of the
devaluation (Law no. 1.521/51, art. 2, X; CPC, art. 1.071, §§ 1 and 2). If the purchaser has already paid more than 40% of the price, he will have 30 days to settle the outstanding installments, pay interest, monetary correction and court costs, thereby extinguishing his debt.

3.2.2.3. Responsibility for the property

It is the majority view of jurists that the purchaser must bear the risks of the property because, although the vendor retains ownership, physical possession as from the signing of the contract passes to the purchaser, who may make full use of the property. Even as mere possessor, he may not only carry out acts appropriate for the preservation of his rights, having recourse if necessary to a possessory action to defend the property from disturbance by third parties or even the vendor, but may also take advantage of everything that it is capable of producing.

3.2.2.4. Effects against third parties

A contract with retention of ownership must be registered at a Deeds and Documents Registry, after which, in accordance with the principle of publicity, a third party who purports to acquire the property from the original vendor will never be able to allege in his own benefit ignorance of this clause. It should be noted, therefore, that as soon as the contract is registered it is effective erga omnes and not only between the contracting parties; it may be enforced against any third party purchaser.

3.2.2.5. Need formally to establish default

The Civil Code, in articles 525, 526 and 527, determines that the vendor may only execute on this retention of ownership after putting the purchaser in default, by protesting a note or by judicial notification. When the purchaser’s default has been officially established, the
vendor, as already explained, may file a collection action against him for the overdue or future installments, or bring an action to recover possession of the property sold.

3.2.3. Other Forms of Guaranteeing a Purchase and Sale Transaction

3.2.3.1. Secured fiduciary sale (alienação fiduciária)

A fiduciary sale is the transfer from the debtor to the creditor of terminable ownership and indirect possession of non-fungible movable property, as security for the debt, pending performance of the principal obligation (payment of the secured debt).

We may say therefore that this is a legal operation consisting of two juridical relationships: one an obligation, expressing the agreed debt, and the other real, represented by the security, that is, the debtor (fiduciante) transfers the property to the creditor (fiduciário) who receives it, not to hold as his own, but for the purpose of returning it to the debtor on payment of the debt.

The fiduciary sale is widely used in commerce, as it permits payment in cash for movable property with funds belonging to a third party (normally a financial institution). Terminable ownership and indirect possession of the property is transferred to the third party, the debtor remaining as direct possessor and depositary, until the debt is paid off in full.

Currently there is a special law that allows the fiduciary sale of immovable property.

It is questionable whether, under Brazilian law, fiduciary sale is available for contracts between private individuals, many jurists considering that this type of security is only appropriate in relations that involve a financial institution in the negotiation.

3.2.3.2. Mortgage

A mortgage is a real right (binding on the property in question) on immovable (or real) property, a ship or aircraft, which, although not delivered to the creditor, assure to the latter preferential compliance with the obligation.

In this connection, note that the mortgage is a security interest of an accessory nature, in view of the fact that it depends on a principal obligation, assumed by the debtor, which it is sought to secure.

There exist, under Brazilian law, two principles that govern the mortgage, namely: the principle of specialization and that of publicity.

As regards the former, the mortgage is binding only on the property specified in the deed, or collateral mortgage note. The property mortgaged must be described in detail, stating its topographical location, matrícula(registration) number and other data sufficient for the exact identification of the real property that is being offered as security.

As for the second principle, publicity results from registration of the mortgage in the Land Registry. It is this registration that informs the world at large that the immovable property given as security is subject to the mortgage, thereby making it impossible for third parties to
allege ignorance of the encumbrance.

If the mortgage is not registered at the Land Registry, instead of a real right it becomes a personal right, without any sequel or preference. However, notwithstanding lack of registration, a mortgage affords its holder the right to foreclosure, although this does not protect the creditor against third parties in good faith.

3.2.3.3. Commercial Pledge (Penhor Mercantil)

A pledge, in the wide sense, may be regarded as a security interest which is constituted by the actual transfer of possession which, by way of securing a debt to the creditor or the latter’s representative, allows the debtor or its nominee to transfer movable property (art.1.431, CC).

After this initial observation, it should be pointed out that Brazilian law created various kinds
of pledge, with individual characteristics. Here we will consider the commercial pledge.

It should be noted, initially, that under a commercial pledge, the property pledged remains in the possession of the debtor, who must take care of it and preserve it. In such event the debtor enjoys possession on the creditor’s behalf.

A commercial pledge is created by a public or private instrument, registered in the Land Registry Office of the place where the pledged property is situated (art. 1.448, CC). If the obligation is in money, it is possible to issue a negotiable instrument.

Items that may be pledged include machinery, appliances, materials, instruments, installed and in working order, with or without accessories; livestock, used in the livestock industry; salt and goods intended for the exploitation of saltworks; pork products, livestock intended for the industrialization of meat and its by-products; raw materials and industrialized products (art. 1.447, CC).

The debtor may not, without the express consent of the creditor, alter the items pledged or change their situation (art. 1.449, CC).

If the debtor disposes of the property, with authorization, it must replace the same with goods of the same nature, which shall be subrogated to the pledge (art. 1.449, second part,CC).

As a general rule, in every pledge where possession of the property remains with the debtor,the creditor has the right to check the state of the items pledged, inspecting the same wherever they may be, itself or through an accredited agent (art. 1.450, CC).

In the light of these considerations, it is settled law that a commercial pledge may be created as a form of security interest on movable property, such security remaining in force, in the event it is accessory to a contract of purchase and sale, for as long as the purchaser’s obligations last.

3.2.4. Personal Guarantees

Apart from the guarantees already mentioned, there also exist so-called personal guarantees, which may be contained in the contract itself, as is the case of the fiança
(suretyship), or by means of a separate document attached thereto, such as a bill of exchange or promissory note issued by the purchaser and/or by third parties.

Accordingly, without prejudice to the liability and the real guarantees that may be granted to the vendor, it is also possible to obtain personal guarantees, either from the purchaser himself, or from his partners or even from third parties not involved in the transaction, thereby reinforcing the vendor’s options in the event of a default under the contract.

These are therefore the most common forms of guarantee that may be created as accessories in contracts for purchase and sale, with a view to affording better protection for the vendor.

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Author: Charles Wowk

Stüssi – Neves Advogados
Rua Henrique Monteiro, 90 – 10º andar
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