INTRODUCTION For obligations under an international contract to be enforceable against one of its parties in Brazil they must not be contrary to Brazil´s national sovereignty, public order or morality. And this is the reason why one needs to be extremely careful with overriding Brazilian legal provisions.
In this respect, we have to start by calling your attention to the new Brazilian Civil Code, Law 10.406 of 10 January 2002 (“CC”), which came into force on 11 January 2003 with substantial amendments to previously prevailing legal provisions, including those relating to contracts. The CC has some serious failures and numerous shortcomings, which must be clearly understood for the necessary adaptations to be incorporated in the relevant specific documentation.
One of the problems to be circumvented pertains to sale and purchase transactions. In accordance with the CC, if the documents to be delivered to buyers include an insurance policy covering transportation costs, these are to be borne by the buyer (article 531). Well, this is contrary to INCOTERMS and to the clauses Cost, Insurance and Freight (CIF) and Freight, Carriage and Insurance (CIP), in accordance with which the seller has the obligation to ensure the costs of transportation of the relevant goods.
We shall now consider some relevant Brazilian legal provisions applicable to Direct Sales, Distribution, Representation and Joint Ventures before analysing some precautions to be taken during negotiations and completion of any of those contracts with Brazilian parties. For ease of reference, this presentation has been divided into the following topics:
(i) this INTRODUCTION
(ii) DIRECT SALES
– Law n. 6.729/79
– Chapter XII of the new CC
(v) JOINT VENTURES
(vi) CONTRACT CONCLUSION, CONTENTS AND TERMINATION, SECURING OF PAYMENTS:
– Risk of Claims in Relation to Abortive Negotiations and Possible Mitigation
– Adhesion Contracts
– Extraordinary or Unforeseen Events and Termination of Contracts
– Securing of Payments
(vii) FINAL REMARKSA Swiss manufacturer may sell its products directly to Brazilian consumer, and the obligations of the Brazilian purchaser will be enforceable in Brazil, provided that they are not overridden by Brazilian applicable legislation and that all the relevant Brazilian regulations are complied with. Thus, for instance, the price and terms of payments must be clearly agreed in advance and the Brazilian import license must be obtained prior to the shipment of the goods to Brazil. Also, the Swiss manufacturer will be solely responsible for the consumer rights as defined in the Brazilian Code of Protection to Consumers. In practice, however, in view of the particularities and vast extension of the Brazilian market, most transactions are better structured with the intermediation of a local party.The CC, under Chapter XII, denominated Agency and Distribution, deals erroneously with distribution in article 710, as being differentiated from agency only by the effective possession of the goods. Distribution would thus be characterised when a party assumes, on a regular basis, the obligation to promote certain transactions in a given area, on another party’s account and against payment, provided that the distributor has possession of the goods being negotiated. It is still early days to know whether the Brazilian Courts will apply the provisions of Chapter XII of the CC to real distribution agreements between a manufacturer and the distributor who buys the products and contracts to resell them in its own name and at its own risk and to render technical assistance.
Obviously with a proper distribution agreement, the distributor can count on the resale profit, benefiting from the trademark and publicity of the manufacturer, whilst the manufacturer can expand its sales network without having to pay for all the overhead of the distributor or to render technical assistance to all the customers of the distributor.
For that, the wrong definition of the CC must be circumvented with very good drafting skills to adapt international reality and practices to Brazilian law as further detailed below.
Prior to the new CC, Brazilian law did not regulate distribution in any sectors other than that relating to motor vehicles, according to Law 6.729/79. Nevertheless, Law n. 6.729/79 has been an important reference of distribution in other sectors as well and still prevails for motor vehicles.
A distribution agreement will require demarcation of the geographical zone in which the distributor will act ("territory").
Distribution, as the continual purchase and sale of the product, is very similar to a supply agreement. The manufacturer may require that its distributors acquire a minimum monthly quota of its products, failing which the agreement may be terminated for breach of contract. The manufacturer will establish the sales price to the concessionaires to ensure that uniform pricing and payment terms are extended to the entire distribution network.
It is a pre-requisite that special advantages be granted to the distributor, such as payment terms and discounts, so that trading in the product in the consumer market is advantageous so as to permit the distributor to make a profit.
Generally, a distribution arrangement allows for the existence of sub-distributors, which means that the distributor, duly authorized by the distribution agreement, can operate his own network of sub-distributors to distribute a product in the consumer market, such sub-distribution subject to the rules established by the manufacturer.
One of the formal requirements established by Law 6.729/79 in its Article 20 is that the distribution agreement shall be standard for each trademark to which all the distributors of the network confirm their adherence and the new provisions of the CC in relation to adhesion contracts must be carefully considered.
As it is multilateral, the distribution agreement remains open for the admission of new parties; through the use of a standard agreement, new distributors are allowed to join the system as others leave or are excluded from it.
One of the most important characteristics of distribution arrangements relates to control by the producer over the marketing of the product, because of his industrial property rights over the trademark, and the potential future sales to consumers which it may generate. Thus, the producer controls the use of the trademark by the distributor.
The distribution agreement is a synthesis of many other types of contract such as purchase and sale or supply and technical assistance contracts, differing in its structure and primary objectives. Therefore, in order to mitigate potential ambiguity that may well arise in such a complex legal background it is advisable that the distribution agreement spells out all the applicable rules in a clear and systematic way.
In accordance with Chapter XII of the CC, unless the agreement provides otherwise:
(i) the grantor cannot appoint more than one distributor for the same duties in the same territory;
(ii) the distributor cannot be appointed by more than one grantee for the same duties in the same territory; and
(iii) the distributor will be entitled to compensation for transactions concluded in the territory without its participation.
Overriding provisions of the CC include:
(i) the distributor will be entitled to compensation if the grantor, without fair cause, ceases to complete transactions or reduce them to a point that it becomes anti-economic for the distributor;
(ii) even if the distributor is released for fair cause, he/she/it shall be compensated for useful services rendered to the grantor;
(iii) if the distributor is released for no fault of his/her/it, he/she/it shall be entitled to payment accruing until then, including outstanding transactions, in addition to any indemnifications provided for in specific laws;
(iv) if the distributor is prevented from continuing to perform its obligations as a result of force majeure, he/she/it shall be entitled to payment for services rendered until then;
(v) if the agreement is valid for undetermined period, any party may terminate it upon 90 days notice, provided that a term compatible with the nature and amount of the required investment has already elapsed.
Commercial representation in Brazil is regulated by Law 4.886/65 as amended by Law n. 8420/92. Basically, the law defines the autonomous commercial representation as a profession exercised by legal entities or individuals who, without employment relationship, directly intermediate business on behalf of one or more persons.
By law, commercial representatives must be registered with the Regional Council of Commercial Representatives. It is important for the represented to demand said registration of the representative to prevent possible employment obligations.
Also by law, commercial representation agreement shall include provisions covering:
(i) the conditions and requirements for the representation;
(ii) a generic or a specific description of the nature of the representation;
(iii) the term of validity of the agreement, which may be fixed or undetermined;
(iv) the geographic area(s) for the representation;
(v) the exclusivity or non-exclusivity of representation in a certain geographic area;
(vi) the remuneration for the representation and the form of payment;
(vii) the circumstances that may lead to reductions in the geographic area for exclusive representation, if any;
(viii) the rights and obligations of the contracting parties;
(ix) the obligation or otherwise of the commercial representative not to represent any other individual or entities; and
(x) the indemnification to be paid should the principal terminate the agreement for any cause, excepting those defined as mentioned below.
The sphere of commercial representation activity can be regarded in terms of the area in which business may be performed, whether that is a geographical area or area of product concentration. The commercial representation contract establishes the territorial boundaries of the representation, and can also restrict the products or goods that the commercial representative is to promote.
Unless the contract expressly provides for the non-exclusivity of representation in a certain geographic area, the commercial representative shall be entitled to receive commissions on any business.
Conversely, the obligation of the commercial representative not to represent any other individual or entities must not be presumed in the event the agreement is silent in that respect.
Commission shall be paid to the representative by the l5th day of the month following settlement of the invoice relating to the corresponding transaction. Commission paid late shall be monetarily adjusted for inflation. The form of payment of remuneration should be mentioned in the commercial representation agreement and, if omitted, commission shall be paid monthly upon the receipt of the corresponding payment by the principal. The commercial representative is allowed to issue credit instruments to collect commissions.
Commission shall be calculated on the basis of the total value of the merchandise. In the event of unfair termination of the contract by the principal, any outstanding remuneration, whether resulting from orders already settled or not, shall be due on the termination date. Amendments to the commercial representation agreement that may directly or indirectly result in a reduction in the average remuneration received by the commercial representative in the last six months of validity of the agreement are not allowed.
Unless specified in the agreement, the principal´s refusal to accept purchase orders duly delivered by the commercial representative must be made in writing to the commercial representative within 15, 30, 60 or 120 days, depending on whether the buyer is in the same city, state, another state, or another country, respectively. If written refusal is not received by the commercial representative within the appropriate time frame, the commercial representative is entitled to the resultant commission.
No commission will be due in the event the purchaser becomes bankrupt, or fails to make instalment payments, or terminate the contract, or if delivery of products is suspended because of the purchaser´s dubious business standing.
The following, inter alia, are defined as defaults of the commercial representative during the performance of the commercial representation: negligence or malicious fraud to the detriment of the principal´s business; promotion of illegal business or of any transactions against the public interest; violation of professional secrecy; and refusal to present the professional identification card upon request of the principal.
Commercial representative are legally prevented from reducing prices or restructuring payment or acting contrary to instructions from his principal. Article 35 sets forth, as fair cause for the principal to terminate the agreement:
(i) neglect or negligence of the commercial representative in fulfilling his obligations under the agreement;
(ii) carrying out of activities to the commercial discredit of the principal;
(iii) failure to comply with any obligations inherent to the commercial representation activity;
(iv) criminal conviction of the commercial representative; and
(v) "force majeure".
If the principal terminates the commercial representation for any other cause, an indemnification, as specified by the law, shall be paid to the representative.
Once the initial term of an agreement contracted for fixed term is expressly or tacitly renewed, the representation becomes valid for an undetermined term. Any commercial representation contracted to succeed another representation which had been terminated less than six months before, is considered to be for an undetermined term even if the parties agree otherwise.
Notwithstanding the indemnification referred to above, any party terminating, without justifiable cause, an commercial representation agreement which had been contracted for an undetermined term and which had been valid for more than six months shall either: provide the other party with any guarantee that may be stipulated in the agreement; or give notice of at least 30 (thirty) days; or pay an amount equivalent to one third of the commissions received by the representative during a period of three months prior to termination.
Only if the contract is terminated for justifiable cause can the principal retain payments due to the commercial representative to compensate for any damage that may have been caused by such commercial representative.
The agreement may be terminated by the commercial representative, in circumstances including:
(i) reduction in sphere of the commercial representative´s activities contrary to that agreed in contract;
(ii) direct or indirect breach of exclusivity, where exclusivity is established in contract;
(iii) abusive pricing in the commercial representative´s territory aimed at making impossible any regular business activity by the commercial representative;
(iv) non-payment of remuneration when due; and
(v) "force majeure”
Article 39 determines that any disputes arising in connection with the commercial representation shall be brought to the courts of the domicile of the commercial representative.
As seen above, many of the original provisions of Law 4.886/65 indicate a highly paternalistic approach by Brazilian legislation towards the representative. The indemnification due to the representative in cases of unfair termination is of a legal protection similar to that granted to the Brazilian worker. Unfortunately, the amendments introduced by Law 8.420/92 have only served to re-enforce this view.
Thus, Article 44 introduced by Law 8.420/92 determines that in the event the principal is declared bankrupt, the outstanding amounts owed to the representative shall be given priority classification as labour credits.
Furthermore, Law 8420/92 also provides in Article 45 that the temporary incapacitation of the representative, whilst benefiting from sickness allowances from the National Health Service, would not constitute justifiable cause for termination of the commercial representation.
However, some of these problems can be mitigated by the appointment of a legal entity as the commercial representative and at least commercial representations are not so affected by the problems of the new CC as the distributions are.Foreign manufactures can always enter into joint venture agreements with Brazilian partners. Normally, joint ventures are used for large operations, but they can also include the sale or distribution of products in Brazil.
Joint ventures may be structured through a Brazilian legal entity to be owned by both groups. Brazilian law provides for several types of companies. The most frequently used company structures are the "Sociedade Anônima" (S.A.) and the "Sociedade Limitada" (LTDA). This is due to the fact that in both cases the participants have limited liability. The law grants legal status to these companies as entities separate from their participants.
Brazilian Law also provides for other forms of association such as joint ventures and consortia or special types of partnership which do not acquire a legal status separate from their participants; in these cases, the parties’ contract rights and obligations individually for the common benefit of the group. These other contractual structures are usually adopted to fulfil specific purposes or for non corporate business.
In relation to corporate joint ventures, it is important to note that the CC has revoked the Decree Law 3.708 of 1919, which previously ruled on limited liability companies in a very concise manner, allowing great flexibility for the partners to decide on the best provisions for the articles of association. Prior to the CC, the limited liability companies were subject primarily to the provisions of Decree Law and secondarily to the provisions of their articles of association. Only those subject matters omitted both in the Decree law 3.078 and the articles of association were then subject to the law on company by shares. This flexibility proved very successful for the period of eight four years of validity of the Decree Law 3.078, with more than ninety percent of the Brazilian companies being formed as a limited liability company, which was also the preferred vehicle for foreign investment and joint ventures.
Now, however, the limited liability company is primarily regulated in Book II, Chapter IV, articles 1052 to 1087 of the CC which eliminates, almost completely, the previous flexibility of limited liability companies.
The great problem is article 1053 which determines that any matter not ruled by articles 1052 to 1087 of the CC shall be ruled either by (i) the provisions of the CC applicable to the simple companies; or (ii) the provisions applicable to the companies by shares, if there is an express choice to this effect in the articles of association.
In order words, the articles of association cannot contain any provisions which would be contrary to either the provisions applicable to simple companies or to those applicable to the companies by shares.
Therefore, the intended provisions must be carefully considered for the correct choice of company format and again, experience on Brazilian corporate matters and good drafting skills are of paramount importance.
There are many instances in which a party of an abortive contract has initiated proceedings in Brazil, trying to prove that there was a binding obligation of the other party to celebrate the final agreement, as a result of a valid offer or a valid preliminary agreement or even as a result of terms proposed or accepted during initial negotiations. The Brazilian case law in this respect is vast and includes disputes against foreign companies. However, so far, all the existing case law is based on the former Civil Code which was in force until the beginning of January 2003.
The CC introduced a small improvement in determining that preliminary contracts must have all the essential requirements of the intended final contract, as mentioned above. However, during the negotiations, it is possible that the parties somehow discuss possible final terms and conditions and/or it is possible that possible final terms and conditions may otherwise be implied from similar business with third parties (especially, for instance, in the case of standard distribution agreements).
Should a preliminary contract be characterised, unless it expressly allows the parties to subsequently decide not to enter into the final agreement, if the final contract is not eventually celebrated, any of the parties shall be entitled to demand celebration of the final contract or to claim loss and damages. In the first case, depending on the circumstances, the judge may determine that the preliminary contract be considered as the final contract. The possibility of the preliminary contract being considered as a final contract was also an innovation introduced by the CC, which has been very controversial because in many cases it would be far better to keep only the previously existing possibility of specific performance of the preliminary agreement, with the resulting forced celebration of a separate final agreement.
Thus, it is always advisable, whenever possible, to conduct the negotiations with the assistance of a Brazilian lawyer, who can consider, in view of the particulars of the case, which would be the most effective measures to mitigate the risk of possible claims for non-performance of obligations undertaken during the negotiations.
The CC includes for the first time provisions on adhesion contracts and envisages the "social purpose" of the contract, rather than the principles of property and individuality of the Former Brazilian Civil Code of 1916. The inclusion of the concept of "social purpose" of the contract intends to keep adhesion contracts balanced and protect the public interest in them when challenged by private interests.
Even though the provisions on adhesion contracts are new to the Civil Code, the Brazilian Consumer Protection Code "CDC" (Law 8.078/90) already regulated (and still does) adhesion contracts (articles 47 and 54), based on the "social use" of the contract.
The CDC defines adhesion contracts as those with: "… clauses that have been approved by the competent authorities or established unilaterally by the supplier of the products or services, without being properly discussed or modified by the consumer."
The CC neither excludes nor derogates any of the principles of the CDC, which only relates to consumer relations. Thus, even if a principle of the CC conflicted with the CDC, the CDC would always prevail in so far as consumer nexus is concerned. The provisions of the CC, on the other hand, are applicable to transactions of all nature, depending only on the single test of the standardisation of the relevant contract.
Article 423 of the CC sets out the rule "contra proferentem" which determines that: "… whenever there are ambiguous or contradictory clauses in an adhesion contract, the interpretation more favourable to the adherent must be adopted".
Accordingly, the CC also regulates adhesion contracts, which were previously regulated only by the CDC. Hence, even though there is not a consumer nexus, an adherent will be protected owing to the characteristics of this type of contract. The inclusion of adhesion contracts in the CC has the objective of protecting the weaker party in contracts that are not protected by the CDC.
In accordance with article 424 of the CC, contractual clauses by which the adherent waives rights are considered abusive and considered null.
The CC allows the revision of contracts upon judicial decision. This principle is regulated in article 478 of the CC stating that "… in contracts in which the obligation of one of the parties become excessively harmful, with extreme advantage to the other party, owing to extraordinary and unforeseen events, the debtor may request the termination of the contract".
Therefore, it is essential that contracts determine and stipulate clauses foreseeing as many as possible events which may waive responsibility of one of the parties as well as clauses concerning force majeure and fortuitous events.
Basically, any of the usual forms of guarantees used internationally can be adapted to be valid and enforceable in Brazil. However, it is important to note that any guarantee in relation to assets in Brazil will need to comply with the relevant Brazilian legal provisions such as provisions on pledge, mortgage, sales with transfer of title conditional on final payment etc. Surety bonds for instance, are classified as insurance in Brazil and depending on the circumstance of the case, the relevant Brazilian regulation will apply. Proper consideration must be given in each case.
Any such guarantees by a party in Brazil will enable enforcement of payment in Brazilian currency in Brazil.
For any such payment to be remitted outside Brazil in foreign currency, all the applicable exchange control requirements must be previously met. In this respect, basically, all imports into Brazil are subject to:
(i) an import license issued by the Secretary of International Trade (“SECEX”) of the Ministry of Industry and Trade (“MICT”);
(ii) customs clearance by the Secretary of Inland Revenue (“SRF”) of the Ministry of Finance; and
(iii) exchange control by the Central Bank of Brazil (“CENTRAL BANK”).
SISCOMEX is an integrated electronic system through which SECEX, SRF and the CENTRAL BANK exercise their authority in their appropriate areas, dealing with licensing activities, customs and exchange controls related to the importation of goods.
Most products require an import license to be obtained before the goods are shipped to Brazil. To obtain this, the Brazilian importer supplies all the required information to SISCOMEX. Goods should not be shipped to Brazil before the procedure is completed.
In general, customs clearance procedures are initiated after the goods arrive in Brazil and must be completed before the Brazilian importer is allowed to receive the imported items. The importer or its broker prepares an Import Declaration by entering information with SISCOMEX. The Import Declaration must conform to the terms of the Import License previously obtained and reflect the fact that the goods have now arrived in Brazil. The importer then pays all the applicable taxes; including import duty, manufactured products tax (IPI), value added tax (ICMS) and port costs; thereby completing the customs clearance.
In the event that the import is not financed abroad, no further steps will need to be taken with the CENTRAL BANK. Payments to the exporter will be remitted in foreign currency in accordance with the terms and conditions contained in the Import Declaration previously registered with SISCOMEX, through a bank authorized to deal with exchange operations in Brazil.
If the import is financed abroad, additional measures will need to be taken in accordance with the CENTRAL BANK’s regulations as follows:
Imports financed over a term exceeding 360 days require prior registration with the Registry of Financial Operations (“ROF”) of the CENTRAL BANK through an authorized bank. The ROF is processed electronically by means of the CENTRAL BANK Information System (“SISBACEN”). The financial conditions for each registry may be approved automatically or, if not, they will be forwarded to a CENTRAL BANK Regional Offices which will indicate, by means of SISBACEN, the changes necessary for approval. If there is no objection by the CENTRAL BANK within 5 business days, the transaction will be approved automatically, based on the prior contained conditions. On approval of the operation, a ROF number will be issued which then allows the issue of an Import License. The Import License is required before shipment of the goods. After customs clearance, the importer then registers the payment schedule outlined in the ROF, a step required for effecting the remittance of the principal, interest and other obligations abroad.
Although not subject to prior registration with the CENTRAL BANK, the financing of goods for less than 360 days follows a procedure similar to that provided for more than 360 days, with regards to the exchange operations for the remittance of the principal and interest. In this case, remittance of payments to the creditor abroad are made under the terms and conditions detailed in the Import Declaration registered in SISCOMEX. As before, only banks authorized to deal with exchange are able to effect the payment in foreign currency in accordance with the import exchange agreement.As a general rule, the obligations under an international contract can be enforced against one of its parties in Brazil to the extent that:
(i) the execution, delivery and performance of the contract have been duly authorized by all necessary corporate acts;
(ii) the contract has been duly executed and delivered by the Brazilian legal entity;
(iii) the contract is legal, valid, binding and enforceable under the law governing the contract; and,
(iv) the relevant obligations are not contrary to Brazil´s national sovereignty, public order or morality.
Also, in relation to enforceability, it is important to note that for agreements celebrated through private instruments to be enforceable against the defaulting party through a summary execution proceeding in Brazil (without being first acknowledged in a prior and time consuming ordinary proceeding) the private instruments must be signed by the defaulting party and two witnesses.
However, validity of contractual obligations against third parties further depends on registration of the contract with a Public Register of Deeds and Documents. In accordance with Article 130 of the Law on Public Registration, contracts will be valid against third parties as of the date of their respective signatures provided they are registered within twenty days of their execution. Contracts registered after this period will be valid against third parties as of the day of their registration. This may cause a substantial impact for a creditor in the event the debtor becomes insolvent prior to registration of the relevant contract.
Signatures must be notarized and if an agreement is signed abroad, the notarization must be recognized by the nearest Brazilian diplomatic division. Subsequently, instruments celebrated in a foreign language must be translated into Portuguese by sworn translators in Brazil. The Portuguese version will prevail in Brazil.
Choice of governing law and jurisdiction must be carefully considered in each case and expressly included in the relevant agreements.