Key Distribution Considerations for Brazil
A Practice Note outlining the key issues for foreign counsel of overseas manufacturers or suppliers of goods to consider when entering into distribution arrangements in Brazil including applicable laws and regulations, important considerations for appointing a distributor, key provisions in distribution agreements, and termination considerations.
Distributors purchase goods from manufacturers or other suppliers and resell them to others in the supply chain, such as resellers and end users. Distributors also often provide services for the manufacturer, such as product marketing and post-sale support services. Distribution is a commonly used vehicle for sale of goods in Brazil and has many benefits for a foreign supplier, including that the supplier benefits from the distributor’s knowledge of local laws, trading conditions, and customs. However, there are a variety of risks and issues a foreign supplier planning to engage a distributor in Brazil should consider including, tax, competition law, product liability, triggering agency law, intellectual property,
and termination-related risks.
This Note discusses:
- Key legal and regulatory requirements governing the distribution of goods in Brazil, including:
- legal formalities;
- tax requirements;
- competition laws; and
- product regulatory requirements and product liability laws.
- Important considerations for appointing a distributor and structuring the distribution relationship in Brazil, including:
- types of distributorships;
- relationship of the parties;
- import requirements;
- intellectual property issues; and
- online sales considerations.
- Key provisions in the distribution agreement.
- Issues related to termination of the distribution relationship in Brazil.
Governing Legislation and Regulation
The Brazilian Civil Code (BCC) and other statutes provide general rules and principles that apply to all agreements, including distribution agreements, such as the rules on good faith (in Articles 421 to 426), even if the agreement makes no mention of them.
The rules applicable to distribution agreements are set out in Articles 710 to 721 of the BCC. The provisions regulate both distribution and agency agreements and, in relation to distribution specifically, they contain rules regarding:
- Costs borne by the parties.
- Effects of termination.
The general rule is that exclusivity (or sole distributorship) in favour of the distributor is presumed (Article 711, BCC). However, the parties are free to decide through the terms of agreement whether the distribution is exclusive or not.
Except for issues of exclusivity and territory (if not expressly regulated under the agreement) (see Competition/Antitrust Laws), there are no express rules for the supplier other than those applicable to contracts in general under Brazilian law (Articles 421 to 480, BCC). The distributor must act with diligence, following the instructions sent by the supplier, and must bear all costs necessary to perform its distribution activities (Articles 712 and 713, BCC).
In addition to the rules set out in the BCC, Law no 6.729/1979 (Ferrari Law) applies specifically to the distribution of terrestrial motor vehicles (including agricultural equipment and implements). The Ferrari Law contains:
- A defined set of persons who are subject to its provisions (Article 2).
- The possible scopes of the applicable agreements (Article 3).
In general, only industries that produce or assemble motor vehicles or agricultural equipment can be the supplier (including, Ford, GM, Renault, John Deere, New Holland), and the distributors are the authorised resellers of these products and related services.
Where the Ferrari Law applies, there are several requirements and obligations that the supplier and distributor are subject to. For example, the Ferrari Law requires minimum distances between distributors operating within the same territory (Article 5) (selective distribution), among other requirements. There are also specific formalities for setting up a distribution network regulated by the Ferrari Law. Article 19 stipulates that a brand agreement must be executed between each manufacturer and its network of distributors, indicating the rules that all distributors of a given brand must comply with. The brand agreement must cover, for example:
- Car warranty and services.
- Use of trademarks.
- Inclusion of new models and products under ongoing agreements.
- Sale of parts outside the territory.
While Brazilian law does not specifically regulate anti-bribery or anti-corruption clauses in relation to distribution agreements, all legal entities incorporated in Brazil (including branches and subsidiaries) must abide by Brazilian Anti-Bribery Law No 12,846/13 (Anti-Bribery Law). The main areas regulated by the Anti-Bribery Law are agreements and payments involving public entities or governmental authorities, including issues such as bribes and seeking unlawful advantages, among other things. In this context, if a distributor acts on behalf of the supplier in breach of the Anti-Bribery Law, the supplier could also be held liable for acts of the distributor.
There are no registration and execution requirements or other specific formalities for distribution agreements under the BCC. Article 107 of the BCC states that no formalities are required for the parties to enter into an agreement, unless expressly required by statute, which is not the case for distribution agreements. However, it is common practice in Brazil for the parties to initial all pages of the distribution agreement, including exhibits, and sign at the end to indicate their acceptance of all terms of the agreement. It is not unusual to notarize the parties’ signatures, but this is not a requirement for a valid agreement. If the document is produced abroad, the parties can choose to notarize and apostille the signatures, but even in this case, this is not required for the agreement to be enforceable in Brazil.
Under Brazilian law, the parties can sign the agreement electronically. However, to avoid controversies, it is recommended that the parties include a clause in the agreement that authorizes the parties to use electronic signatures.
The supplier does not need to present any formal authorisation to the distributor for the parties to execute the agreement.
However, for distribution agreements covered under the Ferrari Law (see Governing Legislation and Regulation), more stringent requirements apply, such as:
- Registration of the brand agreement at a notary.
- Promotion of its publication in the official publication of the federal government (Diário Oficial da União).
- Signature of the registration by the distributor’s association. (Article 17, Ferrari Law.)
There is no language requirement for an agreement to be considered valid or enforceable in Brazil. However, if an agreement is not in Portuguese, it must be accompanied with an official translation in Portuguese when submitted to a Brazilian court. This requirement also applies to any other document presented in court (Article 192, Consumer Code of Protection (CPC)).
It is common in Brazil for distribution agreements executed between parties from different countries to be written in two languages, with a clause providing that one of the versions prevails in the event of inconsistencies or divergence.
In general terms, if a foreign company operates in Brazil through a fixed place of business or through an agent which has the power to enter into contracts in Brazil on behalf of the non-resident company, it can be considered a taxable presence. A taxable presence should not be deemed to exist if the performance of the agent in Brazil has been limited to business intermediation or forwarding requests and proposals between the parties. Therefore, the essential criterion of taxable presence lies on the autonomy of the local agent or distributor to act on behalf of the non-resident.
Where the distribution activities are strictly limited to storage or display of goods, the foreign supplier would not be considered to have a permanent establishment. It would therefore not be liable for any income taxes related to the income it receives from Brazil. However, if the distributor located in Brazil has the power (in law or in practice) to act on behalf of the foreign legal entity, the foreign supplier may be subject to tax on income obtained in Brazil.
A Brazilian distributor importing goods from a foreign supplier incurs the following taxes:
- Excise tax (IPI). The rate depends on the nomenclatura comum do mercosul (NCM) code under which the product is
- State value-added tax on sales and services (ICMS). The rate depends on the Brazilian state into which the goods are to be imported.
- Import tax (II). The rate depends on the NCM code under which the product is classified.
- PIS/PASEP-import (federal contribution for the social integration program levied on imports). The rate is ordinarily 1%.
- COFINS-import (federal contribution for social security financing levied on imports). The rate is ordinarily 10.65%.
- Additional tax for the renovation of the merchant marine (AFRMM), which applies when the goods are unloaded from a ship arriving by sea.
- Withholding taxes, which may be payable on certain transactions if the relationship between the distributor and supplier is characterised as sending revenue or profits obtained in Brazil (Articles 741 and 469, Brazilian Income Tax Regulation). For example, certain distribution agreements may have clauses that provide for “reverse bonuses” or “split profits”, which may be deemed, if paid, as income subject to withholding at source. On the other hand, if only commercial transactions are performed under the contract, no withholding applies. This must be analysed on a case-by- case basis.
There is some process or “red tape” involved for a distributor to make payments to a foreign supplier but no legal burdens or difficulties. Exchange control procedures are in place. Therefore, as a general rule, payments must be registered with the Brazilian Central Bank even if made via a commercial bank. Article 11 of the National Financial System Law No. 4595/1964 applies to foreign exchange where a domestic distributor makes payments to a foreign supplier. The Brazilian Central Bank controls payments made in foreign currency.
The payment to the foreign supplier can be made in Brazilian national currency or in foreign currency. However, there are certain requirements, such as:
- To make the payment in national currency, the foreign supplier must have a bank account in Brazil.
- For payment in a foreign currency, it is usually necessary to have a foreign exchange contract with a financial institution in Brazil. However, it is also possible to pay the foreign supplier with an international credit card or with resources that the domestic distributor maintains abroad. In this case, an exchange contract with a financial institution in Brazil is not required, but the domestic distributors must comply with some obligations, such as to inform the Brazilian Federal Revenue Office (Receita Federal do Brasil) of these payments.
Brazilian law does not prohibit the supplier from appointing the distributor as its sole and exclusive distributor in a territory (exclusivity), or the imposition of territorial or customer restrictions. In fact, in the context of distribution agreements, exclusivity is the norm, as Article 711 of the BCC, presumes exclusivity whenever there is no written agreement between the distributor and supplier (see Governing Legislation and Regulation).
In this context, there is no assumption that exclusivity is itself illegal or breaches competition rules. Exclusivity may be considered a breach of antitrust law where the alleging party is able to prove it was used in an abusive manner and the potential defendant is deemed a dominant player in a relevant market, however. The Brazilian Antitrust Authority (BAA) assumes that a party holds a dominant position if it has at least 20% of the market share in the relevant markets (Article 36, paragraph 2, Brazilian Competition Act).
Issues that are taken into account when evaluating the legality of an exclusivity arrangement include, among others:
- Whether it causes prejudice to consumers or to the market as a whole.
- The level of economic dependency.
As dominance is not an antitrust issue by itself, both dominant and non-dominant suppliers may operate exclusive and selective distribution arrangements, if the agreements do not lead to market foreclosure or any material limitations or damages to competition (which are subject to a case-by-case analysis).
Minimum Sales Targets
A supplier can establish minimum sales targets for the distributor, which must be explicitly indicated in the distribution agreement or in another document executed by the parties. The relevant document must also state the consequences of a failure to meet sales targets (for example, contractual breach, termination, or loss of exclusivity). Outside the competition context, minimum sales targets could be used by distributors as evidence of the existence of an employment relationship between them and the supplier, under the Brazilian Consolidation of Labor Laws (BCLL), however (see Relationship of the Parties).
Pricing and Other Practices That May Trigger Competition Law Issues
Resale price maintenance, refusal to deal, and the imposition of minimum or maximum prices may be prohibited or restricted if any of the below conditions are present:
- The supplier has market power or a dominant position in the relevant market (or is part of a group of resellers or an economic group).
- The practices limit or damage competition.
The relevant market can be determined by assessing:
- The relevant product or service being offered (duly identified in its segment and in comparison to its competitors).
- The supplier’s market share in comparison to its competitors.
- The territory in which it carries out its activities.
- The actual power it exerts.
The BAA considers that imposing any of the following on the trade of goods or services to distributors, retailers, and representatives in relation to transactions carried out with third parties may be considered anticompetitive, if the supplier has a dominant position or the effects of these actions can damage competition:
- Resale prices, discounts, terms and conditions of payment, minimum or maximum order quantities, profit margins, and any other sales conditions related to their business with third parties (Article 36, paragraph 3, IX, Brazilian Competition Act).
- Tying (Article 36, paragraph 3, XVIII, Brazilian Competition Act).
- Refusal to deal (Article 36, paragraph 3, XI, Brazilian Competition Act).
- Division of markets or clients (Article 36, paragraph 3, I, c, Brazilian Competition Act).
There is a rebuttable presumption of a dominant position whenever an entity with at least 20% of the relevant market share imposes the above measures. Although the BAA will not necessarily find a breach in these circumstances, it may take other measures, for example, shifting the burden of proof onto the investigated company, as seen below in the SKF case. Therefore, the BAA makes a decision based on a detailed case-by-case analysis, taking into account the supplier’s market position and its view of whether these practices limit or damage competition.
So far, the most relevant resale price management (RPM) case on which the BAA has ruled is São Paulo Consumer Protection Agency v. SKF (Administrative Proceeding No. 08012.001271/2001-44) (the SKF case). In the SKF case, SKF, a manufacturer of bearings, imposed minimum mark-ups on its distribution network, arguing that the mark-ups would safeguard themselves and the distributors from “profitability losses.” It was reported that SKF, which held a market share of at least 30%, used to send formal legal notices to distributors who did not comply with the RPM, threatening them with the termination of their distribution agreements.
The BAA found that the practice was illegal from an antitrust and economic perspective. It also held that, due to the cross- shareholding relationships between the SKF distributors, the practice had the potential effect of damaging competition, leading to more incentives for distributors to fix prices and implement other restrictive provisions through RPM practices.
One of the most important aspects of this case is that the BAA shifted the burden of proof onto SKF. It stated that in a price fixing context, the defendant has the burden to prove economic efficiency gains if it holds a market share higher than 20%. It was therefore for SKF to rebut the presumption of dominance to avoid antitrust penalties. (Brazilian Competition Act.)
In 2018, Continental AG, a multinational automotive parts manufacturer, submitted a Consultation Matter to the BAA, seeking the BAA’s view on some clauses of the distribution agreements it intended to enter into (Consultation Matter No. 08700.004594/2018-80). Continental intended to prevent its distributors from engaging in marketing campaigns promoting prices lower than those it recommended. It argued that this would not prevent its distributors from selling at prices below the recommended ones, as the new policy would only apply to marketing campaigns.
Considering the presence of strong competitors in the market affected by the practice (Michelin, BF Goodrich, Pirelli, Goodyear, Bridgestone, Sumitomo, and Fate, among others), and the fact that Continental held less than 20% of the Brazilian market, the majority of the BAA’s tribunal found that there were no material antitrust concerns in connection with the practice planned by Continental.
Minimum Purchase Obligations
It is possible under Brazilian law for a supplier to impose minimum purchase obligations or targets on a distributor. In fact, there are even legal provisions imposing minimum purchase obligations in some circumstances, such as the Ferrari Law (see Governing Legislation and Regulation). Under the Ferrari Law, the default rule is that a minimum purchase obligation must be imposed. The contract can also provide that non-attainment of the sales targets entitles the supplier to terminate the agreement or to revoke exclusivity.
However, there could be issues under competition rules if the distributor engages in any of the anticompetitive practices referenced above (see Pricing and Other Practices That May Trigger Competition Law Issues).
Exclusive Purchase Obligations
Exclusive purchase obligations requiring the distributor to purchase the specified products solely from the supplier (sometimes referred to as exclusive dealing) may trigger competition law issues (see Pricing and Other Practices That May Trigger Competition Law Issues).
Restrictive Covenants Not to Compete
If the relationship between the parties has a commercial nature, it is possible for the parties to agree on and to enforce a non- compete covenant during the term of the relationship. Article 713 of the BCC assumes that the distributor will not engage in business that is similar to that of the supplier. Brazilian law does not specify which activities can be restricted, allowing the parties freedom to agree on these matters. When there are no written contractual provisions, the courts analyse on a case-by- case basis whether the activity has the potential to harm the supplier’s businesses or to mislead customers; activities such as selling, marketing, or manufacturing products similar to those of the supplier are likely to be included in these restrictions.
Post-agreement restrictions are more controversial. These restrictions may be allowed if the distributor was duly compensated for entering into the obligation. To minimise the risk of courts finding such a restriction abusive and, therefore, not enforceable, the parties should expressly define:
- The activities restricted by the obligation.
- The geographical scope of the obligation.
- The duration of the obligation (as a general guideline, since there is no express statutory provision, the courts usually do not allow such restrictions with a term of more than five years).
If duly agreed with the distributor, the supplier can impose an obligation on the distributor to buy and keep a full stock of each of the products contained in the range of products that are the subject of the distribution agreement. However, from an antitrust point of view, if this falls within any of the anticompetitive acts listed above (see Pricing and Other Practices That May Trigger Competition Law Issues), the arrangement may be restricted by competition law.
Before the enactment of BAA’s Internal Rule No. 17/2016, many distribution agreements were considered “associative agreements” and, for that reason, were subject to the merger control regulations (in particular, distribution agreements where the supplier had a market share of at least 30%, and the agreement included an exclusivity clause). Under this new rule, however, a significant number of distribution agreements are no longer subject to merger control since the BAA’s focus is now on associative agreements between firms with a horizontal relationship (in other words, direct competitors) that share costs and risks.
Two recent cases involving distribution agreements between Novartis and Divcom (pharmaceutical market – Merger Case No. 08700.001943/2020-26) and Coca-Cola and HNK Brazil (beer distribution market – Merger Case No. 08700.001283/2021-64) were dismissed under this new rule but would likely have been subject to merger control under the former BAA’s Internal Rule No. 10/2014. On the other hand, a distribution agreement between AB-InBev and Red Bull was subject to the merger control regulations because the parties were direct competitors in the market for the distribution of energy drinks in Brazil (Merger Case No. 08700.002074/2019-13).
Finally, in a recent case concerning the acquisition of Nike Brazil by the leading Brazilian sportswear retailer Centauro (Merger Case No. 08700.000627//2020-37), the BAA expressed some competition concerns regarding the vertical integration of the two companies, since Centauro would become the exclusive distributor of Nike products in Brazil, and one of the largest retailers of Nike products in Brazil. According to the BAA, the transaction would allow Centauro to engage in discriminatory pricing practices against its competitors, and to access sensitive pricing information, ultimately distorting competition in the downstream markets. The BAA cleared the transaction on the condition that a merger control agreement be negotiated. Under the agreement, Centauro and Nike must operate as separate entities, so that Centauro does not have access to sensitive information concerning Nike and other retailers and cannot engage in discriminatory practices against its competitors selling Nike products.
For additional information on competition laws, see Practice Note, Competition Issues for Distribution and Supply Agreements in Brazil.
Product Regulatory Requirements and Product Liability Laws
Under the Consumer Defense Code (CDC), both supplier and distributor are responsible for ensuring that products can be sold in Brazil and that the products comply with regulatory requirements. The supplier and the distributor are both liable for any damages caused to consumers by a defective product (Articles 18 and 34, CDC). This means that, as a general rule, the consumer can file a lawsuit against all parties involved in the chain of supply, individually or jointly (Article 7, Article 25, first paragraph, and Article 34, CDC). Those who are not directly responsible for the damages have a right of recourse against the party responsible, however. This so-called solidarity principle is designed to guarantee that any damages to consumers are restored.
Both supplier and distributor are also both responsible for any product recalls. Suppliers cannot market a product or service that is known to present a high level of harm or danger to health or safety (Article 10, CDC). If a supplier becomes aware that a product or service is harmful, the supplier must notify the National Secretariat for Consumer Defense (SENACON) within 24 hours of having knowledge of the issue (Ordinance No. 618/2019 and Article 10, first paragraph, CDC).
Depending on the specific product or service, the supplier may also be required to notify an additional normative or regulatory body, which will then open a confidential investigation. For example, the National Health Surveillance Agency (ANVISA) must be notified in relation to processed food, and, the Ministry of Agriculture, Livestock and Supply (MAPA) in relation to food of animal origin.
The duration of the investigation should not exceed ten business days unless the supplier can demonstrate the need for an extension. If, once the investigation is completed, the supplier decides to proceed with the recall, it must inform SENACON and any competent normative or regulatory body within two business days.
The supplier must also notify consumers of the recall, using a media plan, at its own expense. The media plan must be submitted to SENACON and to the competent normative or regulatory body in parallel with the recall notification, and it must be designed to reach as many affected consumers as possible. The media plan announcements can be made through social media networks and the websites of the product manufacturing companies, provided that the relevant legal requirements are observed.
If there are product liability claims, and the final buyer is a consumer, the law allows the consumer to file lawsuits both against the distributor and the supplier because the distributor and supplier are liable in the chain of supply, as discussed above (Articles 18 and 34, CDC).
In general, under the BCC and the CDC, a buyer can sue for breach of both an express and an implied term of a contract. Buyers benefit from a general warranty under which producers, distributors, and sellers have strict liability for defective services and products they place on the market, and are under an obligation to:
- Repair any damage caused by such defective services and products.
- Indemnify any non-pecuniary losses suffered by the affected parties.
(Articles 441 to 446 and 931, BCC; Articles 12 and 18, CDC.)
Any person who suffers damages or harm because of a defective product may also bring a claim against the supplier, distributor, manufacturer, or any other person directly involved in the chain of supply, regardless of whether they are a party to the relevant contract (Article 931, BCC; Article 17, CDC).
The law distinguishes between a simple defect in the product, which causes no damage to the consumer or others, and a defect in a product which causes injury. If there are simple defects in the functionality of a product, and no injuries are sustained, only the parties to the contract can file a claim (Article 18, Code of Civil Procedure (CCP)).
In addition to the general legislation, several regulatory bodies in specific sectors issue their own regulations:
- The National Sanitary Authority (ANVISA) regulates all products and services that may affect public health (Law No. 782/1999).
- The National Telecommunications Agency (ANATEL) is responsible for the national telecommunications policy and for ensuring the enforcement of consumer rights by telecoms companies (Law No. 9.472/1997).
- The National Institute for Metrology, Standardization, and Industrial Quality (INMETRO) is charged with introducing standards to ensure the quality and the safety of products and services provided in Brazil (Law No. 5.966/1973).
- Distribution agreements usually provide that a party based abroad has a duty to inform the other party to the agreement of any changes to its own national laws. Even if the agreement is regulated by the CDC, and the supplier and the distributor are jointly liable to the final consumer, the agreement can introduce further obligations regarding either party’s liability. However, any arrangements between the supplier and the distributor in this regard would not bind the consumer in any way.
Appointing a Distributor and Structuring the Distribution Relationship
The general rule is that exclusivity (or sole distributorship) in favor of the distributor is presumed (see Governing Legislation and Regulation). However, distribution agreements are considered non-typical agreements, and therefore, the parties are free to introduce any provisions that better suit their needs, if those provisions do not violate applicable law.
For this reason, four types of distribution agreement are recognized in Brazil:
- Exclusive distribution. The distributor is granted an exclusive right to distribute the supplier’s products or services in a specific territory. Depending on the terms of the agreement, the supplier can reserve the right to supply the products directly to customers (equivalent to the concept of sole distribution).
- Non-exclusive distribution. The supplier retains the freedom to sell directly to customers itself, and to appoint other distributors within the territory, and the distributor reserves the right to work for other suppliers.
- Selective distribution. The supplier agrees to supply to only approved distributors that meet specified minimum criteria, and the distributor agrees to only supply to end users or other distributors or dealers within the approved This arrangement is designed to grant the supplier more control over where and how their products will be sold. Selective distribution is commonly used for luxury goods.
Relationship of the Parties
The BCC regulates agency and distribution agreements within the same chapter. Article 710 of the BCC sets out the key factors that differentiate agency from distribution and specifies that the distributor must have possession of the goods to be sold. In other words, in a distribution arrangement:
- There should be a sales agreement between the distributor and the supplier.
- The distributor resells the products to the clients, and the distributor and clients can freely agree among themselves the terms of the sale and purchase.
However, if there is a mixed relationship (for example, where the distributor receives commissions), the provisions of the specific statute for commercial agents (Law 4.886/1965) may apply in relation to these payments or even to the relationship as a whole.
To avoid the application of provisions relating to agency agreements, it is important that a two-step process of sale can be clearly identified:
- From supplier to distributor.
- From distributor to final client.
Therefore, if there are direct sales from the supplier to the final client, and commissions are paid to the distributor, there is a reasonable risk (depending on the other elements of the relationship) that the arrangement would be seen as one of agency, and terms of Law 4.886/1965 would apply.
In cases where there are no elements that would cause the agreement to be one of agency rather than distribution, case law does not support the application of any of the specific statutes or provisions exclusive to agency agreements to distributorships (Bill of Review (AI) No. 70084666015, 15th Civil Chamber, Rio Grande do Sul State Court, Rapporteur Leoberto Narciso Brancher, 12 November 2020).
Although it is not common, it is also possible that the distributor could be treated as an employee of the supplier. In Brazilian employment law, the reality of the situation prevails over form, so the real relationship between the parties is more important than the wording of the agreement (Articles 9 and 442, BCLL).
The distributor could be considered the supplier’s employee if they provide services on a regular basis for compensation, under the orders or coordination of a supplier company representative. Evidence to support the existence of an employment relationship may include situations where:
- The supplier has control over the distributor’s work schedule and working hours, method, or schedule of distribution.
- There are performance targets in place for the distributor.
- There is any other type of control that indicates a lack of autonomy on the distributor’s part.
In addition to subordination, the following are also requirements of an employment relationship:
- Personal nature (the contractor is hired specifically because of their personal qualifications and skills and cannot delegate the work to anyone else).
- Economic dependence by the contractor on the company.
- Continuity (as opposed to being hired occasionally).
- Regular salary.
If there is a transfer of business, with the new distributor assuming the business and the ongoing labour agreements of the former distributor, all the employment liabilities would be transferred to the new distributor (Articles 448 and 448A, BCLL). However, where the supplier contracts with a new distributor without any relation to the previous company, and without any employees in common, liability does not automatically transfer.
The supplier is not liable for employment issues unless either:
- The above-mentioned elements indicating an employment relationship are present.
- The supplier takes on the former distributor’s business.
There is a risk that the distributor could be considered a franchisee, if the distribution agreement includes typical aspects of a franchise, for example:
- A transfer of know-how from the supplier to the distributor.
- The payment of a fee to the distributor at the start of the relationship.
- The supplier allows the distributor to use the supplier’s trademarks.
- The supplier imposes certain operational standards on the distributor.
- If the agreement is described as a distribution agreement but has the characteristics of a franchise agreement, the agreement may be deemed to constitute a franchise In such a scenario, the distributor would be entitled to claim that a Franchise Disclosure Document should have been entered into, that the agreement is null and void, and that the supplier should reimburse all royalty payments (Article 2, § 2º, Brazilian Franchise Law (Law 13.966/2019)).
The Brazilian distributor, as the importer of the goods, must pay the customs duties on customs clearance when it registers the import declaration (Article 11, Normative Instruction SRF No 680/2006) and must comply with import laws. In Brazil, even if the agreement incorporates the Incoterms 2020 (the International Chamber of Commerce official rules for the interpretation of trade terms), customs duties and compliance with import laws are always the importer’s obligation.
The customs duties are usually the following:
- State value-added tax on sales and services (ICMS). The rate depends on the Brazilian state to which the goods are to be imported.
- Import tax (II). The rate depends on the NCM code under which the product is classified.
- Excise tax (IPI). The rate depends on the NCM code under which the product is classified.
- PIS/PASEP-import (federal contribution for the social integration programme levied on imports). The rate is ordinarily 2.1%.
- COFINS-import (federal contribution for social security financing levied on imports). The rate is ordinarily 10.65%.
- Additional tax for the renewal of the merchant marine (AFRMM), which is a tax levied on sea freight fees on imports. The rate is 25% (over freight fees).
For customs clearance, the importer must present the following documents to the Brazilian Federal Revenue Service for assessment:
- The original of the bill of lading or equivalent document.
- The original invoice signed by the exporter.
- The packing list, if applicable.
- Other documents, depending on the country of origin of the goods, considering the relevant bilateral treaties signed between the countries (if any).
However, it is possible for the distributor to hire an intermediary company (a trading company) to import or order the merchandise on its behalf if the distributor does not want to become involved with the customs procedures. If this is the case, the requirements and conditions set out in Normative Instruction SRF No 1.861/2018 must be fulfilled to avoid the application of penalties by the tax authorities.
Intellectual Property Issues
The law in Brazil does not generally provide specifically for a licence for the distributor to use the supplier’s intellectual property (IP) rights. This means that parties are free to decide on the use of these licences, and the grant of a licence is not presumed (Articles 710 to 721, BCC). This situation is generally regulated by contracts, and usually distributors are contractually entitled to use the supplier’s IP rights in some way.
However, for agreements that fall within the ambit of the Ferrari Law (see Governing Legislation and Regulation), free usage of the supplier’s brand (as identification) falls within the scope of the distribution relationship (Article 3(III), Ferrari Law). Under the Ferrari Law, however, the distributor must abide by certain requirements to protect the supplier’s IP, in the context of a working relationship between both parties. Those requirements are provided in the brand agreement, which regulates the use of the supplier’s IP and the terms and conditions of that use (see Governing Legislation and Regulation).
Registration as owner or user of a trademark is not a strict requirement, but it is highly advisable due to the benefits that a trademark registration with the National Institute Industrial Property (INPI) provides. Where the distribution agreement includes a trademark license and the parties wish to record the license with the INPI, the parties must file a trademark application in Brazil.
Upon recording of the license with the Brazilian Patent Office (PTO), the distributor and supplier may enforce their trademark against third parties, if:
- They are both listed as licensees in the Certificate of Recordal issued by the INPI.
- The distribution agreement does not provide that the supplier is the only party allowed to enforce any trademark rights.
Online Sales Considerations
The commercial aspects of online transactions are subject to the general contract rules set out in the BCC, which has no express provisions regarding online trade. However, in relation to virtual sales, other statutes might also apply, depending on the nature of the parties involved, the products or services that are offered, and especially who the final purchaser of the product is (if they are consumers, for example), such as:
- The Brazilian Internet Civil Framework (Law 12,965/2014), which provides principles, guarantees, rights, and duties for using the internet in Brazil.
- The Brazilian General Law for Protection of Personal Data (Law 13,709/2018).
- The Brazilian Online Sales Decree (Decree 7,962/2013).
In addition to these statutes that have specific rules regarding online sales, which apply to distributors and suppliers alike, the rules of the CDC may also apply, regardless of the nature of the distribution network, whether online or otherwise.
Under the Brazilian Online Sales Decree companies selling online are under an obligation to make available, in a prominent and easy-to-view place, relevant information such as the company’s name, physical address and CNPJ enrolment (tax ID), as well as information about a consumer’s right to withdraw from the sale, which can be exercised within seven days of receipt of the product or service.
The Distribution Agreement: Important Provisions
Distribution agreements in Brazil generally address many issues, including those related to the terms for the sale of goods between the parties. While all the provisions in the distribution agreement are important, those specific to the distribution relationship that foreign lawyers should pay particular attention to include the following provisions.
Confidentiality and Protection of Personal Data
It is common practice in Brazilian distribution agreements to impose restrictions on the use of supplier’’ confidential information. It is standard practice for the parties to observe secrecy over confidential information and data exchanged during the agreement and for five years after the expiration of the agreement (in some cases even ten years); this is also generally accepted by local courts. Confidentiality clauses are recommended in distribution agreements, as information exchanged between market players is highly valuable and important.
Protection of personal data has generated a lot of discussion in recent years. The General Law for the Protection of Personal Data (Law 13,709/2018) (LGPD) came into force in Brazil on 14 August 2018. As a result, it is highly advisable that agreements that involve personal data processing comply with the obligations of the parties as controllers or operators of personal data, as provided by the LGPD.
In distribution arrangements, suppliers often require that the distributor issue a promissory note or grant a letter of credit in favor of the supplier, depending on the sums involved.
Retention clauses are common and are expressly regulated in the BCC for purchase and sale agreements. Brazilian law allows the seller of movable property to reserve the title over the goods until the buyer pays the price in full. To be valid and enforceable before third parties:
- The clause must be in writing and expressly set out by the parties in the agreement.
- The agreement must be registered at the relevant registry of deeds and titles in the distributor’s domicile (Article 522, BCC).
This clause is referred to as a retention of ownership clause (venda com reserva de domínio) (Articles 521 to 528, BCC).
Limitation of Liability
Exclusions or limitations of contractual liability are generally permitted in commercial contracts under Brazilian law. However, the parties cannot exempt themselves from extra-contractual liability (tort), including gross negligence, wilful misconduct, fraud, and illicit acts (Article 186, BCC).
The validity of limited-liability clauses depends on the following:
- The parties bargaining power. The parties must have equal bargaining positions (which is not possible in standard terms contracts where consumers are contracting on the other party’s standard terms).
- The type of liability exempted. A party cannot be exempted from liability related to essential obligations under the agreement, only consequential obligations.
- Compliance with Brazilian public policy.
Contractual liability in Brazil is always measured in accordance with the actual extent of the damages caused (Article 389, BCC). Damages are normally due whenever there is a verified causal link between the acts of one of the parties and the damages suffered by the other. Damages are, therefore, limited to the direct damage caused as well as to the profits the party would have received were it not for the contractual breach. This must be proven with evidence and is not presumed. Case law shows that proof of lost profits is quite difficult to establish (Agravo em Recurso Especial No. 751.996 – RS 2015/0183860-2, TJRS, Recurso Cível no. 0008253-59.2015.8.21.9000, 30 June 2015; Apelação No. 0170304-09.2012.8.26.0100, TJSP, 4 February 2016; Apelação com Revisão No. 0012102-92.2011.8.26.0576, TJSP, 21 October 2015). Punitive damages are not available under Brazilian law.
Therefore, even in the absence of a limited-liability clause, the extent of contractual liability is limited. This provides the parties with a certain level of certainty as they are only liable for damages reasonably predicted at the moment of formation of the contract.
Whether liability can be excluded for the supply of defective goods depends greatly on the nature of the relationship between the parties and whether the final buyer is deemed a consumer under Brazilian law. In this case, the rules of the Consumer Protection Code (CPC) apply, and the parties cannot contract out of its application, because it would be considered abusive and therefore void (Articles 24, 25, and 51, CPC). That is because the consumer is considered the weaker party and therefore is granted extensive protection under Brazilian law. The Superior Court of Justice has taken the view that the CPC applies to a legal entity when there is evidence of a consumer-type relationship (where one party is a supplier and the other is a consumer or a weaker user).
In theory, it is possible to limit liability between the distributor and supplier for defective goods, but case law indicates that to exclude it completely is controversial, especially if the parties are not of equal economic power or do not have balanced leverage over the negotiation (Superior Court of Justice: STJ, REsp no 1076465/SP, Rel. Ministro Marco Buzzi, 4th Group, 10 August 2013).
In any case, where limitation of liability is being questioned, both under the BCC and the CPC, there is no express statute regulating this matter, but case law generally accepts such limitations if:
- They are not included in standard terms and conditions.
- They do not exclude a party’s fundamental obligations.
- The damages were not caused by an act that is deemed illicit, by wilful misconduct, or by gross negligence.
However, in cases subject to the CPC, the courts tend to have a narrower view of what can be excluded.
Regarding an express limitation of liability for damage to tangible property, the supplier can still be held liable towards the distributor for moral damages if the court holds that the supplier committed an illicit act (gross negligence, wilful misconduct, fraud, or any other type of illicit act) (Articles 186 and 187, BCC). This is considered extra-contractual liability, which cannot be limited or excluded contractually. The courts analyse this on a case-by-case basis.
Indemnification and Insurance
In the context of relationships subject to the CPC (that is, where the final buyer is a consumer), it is more common for the supplier to be held liable for a manufacturing defect. If this is the case, the distributor can claim indemnification from the supplier if it is forced to pay damages (Articles 12 and 18, CPC), if this has not been excluded or limited under the distribution agreement.
However, for sales made by distributors which are not subject to the CPC, the general provisions of the BCC regarding limitation of liability apply (see Limitation of Liability).
Term of the Agreement
For agreements regulated under the BCC, it is common practice to provide a term of two to three years. However, there are cases when the parties agree to shorter terms to test the viability of the agreement.
The agreement can be entered into with an indefinite term, subject to Article 720 of the BCC, which introduces a 90-day notice period for termination without just cause for indefinite term agreements. It is questionable whether the parties can reduce this minimum term, but in certain cases the advance notice may need to be longer, depending on the level of investment made by the distributor and whether the distributor has been able to recover its costs.
For agreements under the Ferrari Law, the advance notice period should be a minimum of 120 days (Article 22, paragraph 2, Ferrari Law).
For information on terminating distribution agreements, see Terminating the Distribution Agreement.
Marketing and Promotion
The parties to the distribution agreement are free to stipulate in the agreement how to promote and advertise the contract products. However, the advertising and promotion of certain products are subject to regulations in Brazil, and those regulations must be followed.
The Brazilian Advertising Self-Regulation Code was established in 1978, and in 1980, the Brazilian Advertising Self-Regulating Council (CONAR) was formed as a non-governmental organization comprising professionals from the advertising sector. CONAR’s responsibilities include the enforcement of the Brazilian Advertising Self-Regulation Code, in particular the rules relating to ethical standards, and the resolution in a fast, prompt, and objective manner of disputes involving the advertising industry.
Although designed primarily as a self-regulatory instrument for the advertising sector, the Brazilian Advertising Self-Regulation Code is also used by authorities, for example, the Consumer Protection Office the Mayor’s Office, and the courts as a reference document. It is treated as subsidiary legislation with regard to advertising and any other laws that are directly or indirectly affected by the Code, such as the BCC and the Brazilian Copyrights Law (Law 9,610/98).
Alcoholic beverages, tobacco products, food, soft drinks, fruit juices, and pharmaceutical products are some of the products regulated under the Brazilian Advertising Self-Regulation Code. Law 9,294/1996 regulates the advertising of tobacco products, experimental therapies, medication, and pesticides. The CDC also includes general measures prohibiting misleading advertising.
Compliance with Laws and Supplier’s Policies
Anti-bribery or anti-corruption clauses are common in all types of commercial contracts in Brazil. These clauses normally survive the term of the agreement, for a duration that is to be determined in court according to the specifics of the relationship between the parties. However, as with parties to any contract, the parties to a distribution agreement must comply with the Anti-Bribery Law (see Governing Legislation and Regulation) regardless of whether a clause is expressly included in the document.
Choice of Law and Forum
Generally, in agreements between two Brazilian parties, the parties are free to choose the competent forum with jurisdiction to rule on their agreement. However, there are certain precedents in case law that dictate that the parties cannot make this choice, since the BCC and the rules related to distribution agreements are deemed part of the public order.
If the agreement is submitted to local courts and the contract is silent about the jurisdiction, the CCP determines the jurisdiction based on the type of claim. In most cases, the courts of the city where the defendant is domiciled will have jurisdiction (Article 46, CCP). In addition, any conflict resulting from distribution agreements that are regulated by this law must be submitted to the jurisdiction of the courts of the distributor’s domicile (Article 39, Law No. 4,886/65). However, some court precedents appear to contradict this general principle.
Some court rulings have authorized the parties to choose the competent forum, if:
- The distributor is not deemed to be a vulnerable party.
- The change of venue does not prevent the distributor from accessing justice.
Regarding international contracts, if the agreement itself is silent as to choice of law, the Law of Introduction to Brazilian Law Rules (Decree-Law No 4,657/42) provides guidance where there is a conflict of laws with regard to international private law. A foreign choice of law agreed by the parties is a controversial matter. Some case law has allowed this choice (Superior Court of Justice: STJ, REsp no. 1280218/MG Rel. Ministro Paulo De Tarso Sanseverino, 21 June 2016) but other courts have made the opposite ruling (Superior Court of Justice: STJ, REsp no 1091299 /RJ, Rel. Ministro Antonio Carlos Ferrera, 4th Group, 23 August 2016).
Under an amendment to the CCP introduced in 2015, if the agreement is international in nature and the Brazilian courts do not have concurrent jurisdiction, the parties are free to choose the law regulating the agreement and the forum (Article 25, CCP). However, there are no recent precedents in the Superior Court of Justice relating to the application of the new CCP rule, although lower courts have applied it (see Appellate Courts of the Federal District: TJ-DF, Case no. 20160110571680,
Rapporteur: Eustáquio de Castro, 8 th Group, October 19, 2017).
To reduce the risk of a foreign choice of law being successfully challenged by local courts, it is recommended that parties use arbitration as the method of dispute resolution. Parties may choose any applicable law for the arbitral proceedings and the merits of the case (even if the agreement is not international), provided that no Brazilian public policy and good moral values are violated (Article 2(1), Brazilian Arbitration Law No 9,307/1996). There are court precedents upholding this right to choose the applicable law for an agreement subject to arbitration unless there is clear proof of a violation of public law.
Terminating the Distribution Agreement
Legal and Contractual Obligations on Termination
The BCC requires a 90-day notice period for termination without just cause for indefinite term agreements (see Term of the Agreement). For agreements which have been in place for a considerable time, for example, more than five years, it is advisable to introduce a longer notice period, to avoid the risk of the notice being deemed abrupt, which may entitle the distributor to claim damages.
However, the BCC does not contain express provisions regarding what constitutes a justified termination in distribution agreements. Usually, the circumstances would include scenarios such as:
- Breach of non-compete or exclusivity clauses.
- Lack of performance.
- Business wind-up, death, or bankruptcy.
The Superior Court of Justice has held that a distributor’s failure to meet its payment obligations would constitute just cause for termination, as well as non-compliance with the f minimum sales quotas or targets (Special Appeal (REsp) 1320870/SP, Third Panel, Rapporteur Ricardo Villas Bôas Cueva, 27 June 2017).
For compensation on termination, whether for cause or for convenience, the distributor is usually entitled to receive the products or services corresponding to the orders it has already paid for. The supplier must therefore deliver those orders even after termination.
Indefinite term agreements cannot be terminated without cause until sufficient time has elapsed for the distributor to recover the costs incurred in entering into the agreement (Article 720, BCC). For this reason, it is advisable to include in the agreement the approximate amount invested by the distributor (if any) and a provision estimating the time necessary to recover that investment, to avoid being caught by surprise. No other statutory payments are due. However, distributors can claim other indemnification, such as damages related to building up the trademark or client base. Any such indemnification is subject to proof by the distributor (the burden is on the distributor) of the actual losses suffered; there is no statutory requirement for payments or any restrictions on how this may be regulated by the parties.
When the supply of all products is discontinued because the supplier ceases to manufacture them, the distribution agreement must be terminated under the terms of Article 720 of the BCC. If there is only partial discontinuation of supply and the agreement remains in force between the parties, no compensation is due to the distributor, if the reduction of products does not make the continuation of the contract too burdensome for the distributor (Article 715, BCC).
However, in a recent case the Rio Grande do Sul State Court held that when one of the parties pleads breach of contract, under Article 475 of the BCC, the innocent party has the right of either terminating the contract or enforcing it, with an entitlement to claim damages in either scenario (Civil Appeal (AC), No. 70079842548, 19th Civil Chamber, Rio Grande do Sul State Court, Rapporteur Marco Antonio Angelo, 5 December 2019).
Ferrari Law Agreements
For agreements regulated by the Ferrari Law, it is envisaged that justifiable termination would include breach of:
- Contractual obligations.
- The brand agreement.
- The Ferrari Law itself.
(Article 22(III), Ferrari Law.)
The Ferrari Law provides that whenever the supplier terminates an indefinite-term contract, the supplier must repurchase the stock of vehicles and components from the distributor, at the consumer purchase price as of the date of termination. The supplier must also buy equipment, machinery, or tools from the distributor at the consumer purchase price, in the condition that the equipment is found. The supplier must have previously determined the price or evaluated the state the equipment was in, and not objected to that price and condition (Articles 23, II, and 24, Ferrari Law). In addition, on termination, the supplier must also pay the distributor damages calculated under Article 24, item II of the Ferrari Law, as well as other compensation previously stipulated between the manufacturer and its network of dealers, if any (Article 24, IV, Ferrari Law).
Consequences of termination may vary if termination is justified due to breach by the distributor, or if the supplier does not wish to renew an automatically renewable agreement (Articles 21, 23 and 25, Ferrari Law). Compensation due to the distributor must always be paid within 160 days of the termination date (Article 27, Ferrari Law).
For cases that fall under the Ferrari Law, there are specific rules for the calculation of an indemnification on termination without cause (Article 24, Ferrari Law). These rules include, among other obligations, the payment of mandatory indemnification of 4% of the projected gains for a certain period, multiplied by the number of years of the agreement’s term.
Antitrust/Competition Law Issues Related to Termination
In general, terminating a distribution agreement is not in itself an infringement of antitrust law. The BAA has confirmed this general principle in a recent merger case involving Shimano, a manufacturer of bike equipment (Merger Case No. 08700.004167/2016-30). The case involved the formation of the entity Blue Cycle, a joint venture between Shimano and its two main distributors in Brazil, RR and Douek. Before entering into the joint venture, Shimano distributed its aftermarket products in Brazil through seven distributors, including RR and Douek.
Shimano sought to enter into an exclusive distribution agreement with Blue Cycle and terminated the distribution agreements with all its existing distributors. Some of the terminated distributors filed a complaint with the BAA while the transaction was under review, arguing that the termination was anticompetitive.
The BAA cleared the merger without conditions and dismissed the distributors’ complaint. It argued that Shimano did not have a dominant position in the market, and that there were many competitors both in the manufacturing and the distribution markets for bike parts in Brazil. The BAA also stated that it is up to a manufacturer to decide the best course of action when it comes to the local distribution of its products. It is likely that any harm arising from the termination of a distribution agreement would only affect the terminated distributor and would not be in breach of competition law.
Depending on the circumstances, some manufacturers may restrict the activities of former distributors by requiring them not to use proprietary data and market intelligence the distributor has had access to as a result of the distribution agreement, especially if the former distributor will start distributing products of competing firms. This has the purpose of avoiding free-riding behavior, and, if stipulated as an ancillary clause to a main agreement, would not in itself be anticompetitive.