Legal Requirements for Distributor Agreements in Brazil
A distributor agreement may be one of the best chances of a company establishing itself in a new market, like Brazil. However, some specific rules may apply for these types of agreements. In this article, we will take a look at the legal requirements for distributor agreements in Brazil.
Distributors in Brazil
Distributorships in Brazil were first regulated in 1979, when laws for the commercial concession between producers and distributors of land automotive vehicles were set. But it was only in 2002, with the enactment of a new Brazilian Civil Code, that specific provisions related to distributors in Brazil were set.
According to the new regulation, the distributor is someone who assumes the obligation to promote, on behalf of another person or company and upon remuneration, certain transactions, within a given area.
Distributor Agreements
First of all, it is necessary to say that there are two different types of distribution agreements in Brazil:
- Commercial distribution agreements
- Ordinary distribution agreements
Ordinary distribution agreements are signed between any manufacturer that is willing to promote its products through a third party and are valid for almost all sectors. However, if the parties’ agreement is for the distribution of automotive vehicles or their spare parts, a special distribution agreement is to be drawn up: the commercial distribution agreement.
It is worth mentioning that, according to the Brazilian Competition Law, which was enacted in 2011, the following acts constitute a violation of the economic order, if imposed by the contractor:
- Resale prices
- Discounts
- Payment conditions
- Minimum or maximum quantities
- Profit margin
- Any other trading conditions
So, according to this law, distributors are free to determine the prices and conditions for which they will sell the products to their customers.
Ordinary distribution agreements
According to the Brazilian Civil Code, an ordinary distribution agreement must comply with the following requirements:
- The agreement has a non-sporadic feature and does not create any dependency bond between both parties
- In a given operational area, unless otherwise agreed by both parties, the contractor may not designate more than one distributor to operate with identical assignments
- Unless otherwise stated, the distributor will be entitled to remuneration corresponding to all commercial transactions concluded within its operational zone, even if they did not take part in it
- Unless otherwise stated, all expenses occurring from the distribution activity are to be held by the distributor
- The distributor is entitled to compensation if the contractor ceases the contract without a just reason
- If the contract has no provision on its duration, it is legally assumed to be undetermined, and its termination may occur at any time by means of a simple 90-day notice
Commercial distribution agreements
Only dealers of automobiles, trucks, buses, agricultural tractors and motorcycles are subject to commercial distribution agreements, while dealers of other automotive vehicles, such as boats and non-agricultural tractors, are not subject to this special regulation. In these cases, the responsibilities of the dealer are:
- Sales of automotive vehicles described above
- Provision of spare parts of automotive vehicles manufactured or supplied by the respective manufacturers
- Provision of technical assistance to consumers
- Use of the manufacturer’s trademark
It is important to state that a commercial distribution agreement, as opposed to the ordinary distribution agreement, may forbid the sale of new automobiles produced by other manufacturers. However, dealers are allowed to trade new automotive parts manufactured or supplied by third parties, provided that “loyalty levels” are respected. Loyalty levels are defined as the minimum amount of the manufacturer’s additional parts or goods which the dealer is required to acquire. These are set between syndicates and companies.
In a commercial distribution agreement, the following basic provisions must be specified:
- Definition of the operational area reserved for the dealer. While operational areas may be reserved for more than one dealer, it is possible for the contractor to grant exclusivity to a specific dealer
- Minimum distances between different dealers - established in accordance with marketing potential criteria
- The dealer commits themselves to trade the contractor’s automobiles and spare parts, as well as to provide technical assistance to its customers
Finally, a commercial distribution agreement must clearly state that a dealer is forbidden, personally or through third parties, from performing such activities outside its area.
Termination of Agreements
Distributor agreements may be terminated for five different reasons:
- Due to a previous condition that may render the new agreement void or subject to cancellation, such as legal pendencies
- When the contract is due to expire and it is not renewed or extended
- Due to careless non-performance, in which it may even be terminated unilaterally
- By voluntary non-performance, in which it may even be terminated unilaterally
- Following involuntary non-performance, in which the agreement is lawfully terminated, as in force majeure cases