Distribution Agreements in Brazil

Distribution agreements are generally considered "atypical" contracts, meaning there is no single, specific law governing them. Distribution relationships are primarily governed by the general principles of contract law set forth in the Brazilian Civil Code (Law No. 10,406/2002), particularly the principles of freedom of contract, good faith (Art. 422), and the social function of the contract (Art. 421).

Specific regulations may apply to certain sectors, such as:

• Law No. 6,729/1979 ("Lei Ferrari"): Governs the distribution of automotive vehicles
• Law No. 4,886/1965 (Commercial Agency Law): While it governs commercial agents, its principles are sometimes applied by analogy to distribution agreements by courts, especially regarding termination.

For the Brazilian legal system, the key distinction between intermediaries lies in the nature of the relationship and the assumption of risk.

• Distributor: A distributor is regarded as an independent commercial entity that buys products from a supplier and resells them for its own account and risk. The distributor takes title to the goods, and its profit is the margin between the purchase price and the resale price. The relationship is a chain of sale and purchase agreements.
• Commercial Agent: An agent, for legal purposes, does not purchase the products. They act as an intermediary, soliciting orders on behalf of the supplier (the principal) in exchange for a commission. The agent does not assume the risk of the transaction, which is governed by the specific Commercial Agency Law (Law No. 4,886/1965).
• Franchisee: A franchisee operates a business using the franchisor's brand, know-how, and business model. This relationship involves the licensing of intellectual property and the transfer of a business system in exchange for royalties and fees. This intermediary relationship is governed by the Franchising Law (Law No. 13,966/2019).

No, there are no specific legal formalities required for a distribution agreement to be valid. Brazilian law upholds the principle of freedom of form, so a verbal agreement can be considered valid.

However, for legal certainty, proof, and enforceability, a written agreement is highly recommended. To make the agreement effective against third parties, it should be registered at the Registry of Deeds and Documents (Registro de Títulos e Documentos)

Exclusivity cannot be presumed in a standard distribution agreement. For an agreement to be exclusive, it must be expressly stipulated in the contract. The parties should clearly define the scope of the exclusivity, including the specific territory, products, and duration.

While Article 711 of the Civil Code presumes exclusivity for commercial agents unless otherwise stated, this principle is generally not applied automatically to distribution agreements. The default rule for distribution is non-exclusivity unless explicitly agreed upon.

This issue is governed by Brazilian Competition Law (Law No. 12,529/2011) and enforced by the Administrative Council for Economic Defense (CADE).

• Resale Price Maintenance (RPM): Imposing a fixed or minimum resale price on the distributor is considered a serious antitrust violation. CADE generally treats RPM as a per se infringement, as it restricts intra-brand competition and harms consumers. This practice can lead to heavy fines.
• Suggested Resale Pricing (SRP): Providing a suggested or recommended price list is generally permissible, provided it is a genuine, non-binding recommendation. The distributor must be free to set its own resale prices without facing retaliation or negative consequences from the supplier.

Yes, reservation of title clauses are fully enforceable in Brazil. They are regulated by Articles 521 to 528 of the Civil Code.

Under this clause, the supplier retains ownership of the goods until the purchase price is paid in full by the distributor. For the clause to be enforceable against third parties (e.g., in the event of the distributor's bankruptcy), the agreement must be in writing and registered at the Registry of Deeds and Documents of the distributor's domicile.

• The short answer is yes, but with limitations.

- During the Agreement: A non-compete obligation is generally considered valid and is often implied by the duty of good faith and loyalty (Art. 422, Civil Code). It is best practice to include an explicit clause.

- After Termination: A post-termination non-compete clause is enforceable only if it is deemed reasonable by the courts. The criteria for reasonableness include:

• Limited Duration: Typically, a period of one to two years is considered acceptable.
• Limited Territory: Restricted to the geographic area where the distributor operated.
• Limited Scope: Confined to the specific products or business segment of the agreement.
• Compensation: Brazilian courts often require the supplier to provide fair compensation to the distributor for the non-compete period. Without compensation, the clause is at high risk of being declared void.

A distribution agreement with an indefinite term can be terminated for convenience (unilaterally, without cause) by either party, provided that prior notice is given.

The Civil Code does not specify a fixed notice period. Article 473 states that the notice must be of a reasonable length, compatible with the nature and significance of the investments made by the distributor. While some courts use the 90-day period from agency law (Art. 720, Civil Code) as a benchmark, this is not a strict rule.

Crucially, the sole paragraph of Article 473 of the Civil Code protects the distributor. If one party has made significant investments to execute the contract, the other party may be liable for damages if the termination occurs before these investments have been reasonably amortized.

A distribution agreement can be terminated for a material breach with immediate effect, as provided by Articles 474 and 475 of the Civil Code.

It is highly advisable for the agreement to clearly define what constitutes a material breach (e.g., non-payment, violation of exclusivity, misuse of intellectual property).

A failure to meet a minimum turnover clause can be considered a material breach justifying immediate termination, provided the clause is clear, reasonable, and has been applied in good faith. If the supplier contributed to the distributor's failure to meet the target (e.g., by setting unrealistic goals or failing to supply products), a court may deem the termination abusive.

For a general distribution agreement, there is no statutory right to a specific indemnity or goodwill compensation upon termination. The mandatory indemnity of 1/12 of commissions established for commercial agents in Law No. 4,886/1965 is not automatically applied to distributors. The Superior Court of Justice (STJ) has consistently ruled against this analogy.

However, a distributor may be entitled to damages in the following cases:

• Wrongful Termination: If the supplier terminates the agreement without a valid cause and/or without providing a reasonable notice period.
• Unamortized Investments: If an abrupt termination prevents the distributor from recouping significant investments made specifically for the contract, as per Article 473 of the Civil Code. Damages are calculated based on the unrecovered investment amount.
• Abuse of Right: If the termination violates the principle of good faith (Art. 187 and Art. 422 of the Civil Code).

• Unsold Stock: There is no legal obligation for the supplier to repurchase unsold stock. The distributor, having purchased the goods, bears the commercial risk. A buy-back clause can, and should, be negotiated and included in the agreement if desired by the parties.
• Investments: As stated above, a distributor is not entitled to a simple "reimbursement" of all investments. Instead, they may claim damages for unamortized investments in cases of wrongful or abusive termination.
• Other Losses: General damages, including proven lost profits, can be claimed if the termination was conducted unlawfully or in bad faith.

Parties in an international contract are generally free to choose the governing law. This choice of law clause is usually respected by Brazilian courts.

However, if the parties do not specify a governing law, Brazilian courts will likely apply Brazilian law, especially if the distribution activities—the contract's main obligation—are performed in Brazil (Article 9 of the Law of Introduction to the Norms of Brazilian Law - LINDB).

Regardless of the chosen law, mandatory rules of Brazilian public order, such as antitrust and tax regulations, will always apply to operations within Brazil.

Arbitration is the most highly recommended method for resolving disputes in international distribution agreements. Brazil has a modern and pro-arbitration legal framework (Arbitration Act - Law No. 9,307/1996), and it is a signatory to the New York Convention, which facilitates the enforcement of foreign arbitral awards.

Advantages of arbitration over litigation in Brazilian courts include:

• Speed: It is generally much faster.
• Expertise: Parties can choose arbitrators with specialized knowledge of the industry.
• Confidentiality: Proceedings are private.
• Enforceability: Awards are more easily enforced internationally.

A multi-tiered clause, starting with negotiation, followed by mediation, and ultimately arbitration, is a common and effective approach.

From a tax perspective, a foreign supplier may be deemed to have a permanent establishment (PE) if its distributor in Brazil is not considered legally and economically independent.

Brazil's domestic tax law does not have a precise definition of PE, but tax authorities (Receita Federal) take a broad view. The Authorities may consider the local Distributor a PE if:

• The distributor has and habitually exercises the authority to conclude contracts in the supplier's name.
• The supplier exercises significant control over the distributor's business activities (e.g., pricing, inventory management, client approval).
• The distributor acts exclusively or almost exclusively for the foreign supplier.
• The supplier maintains a stock of goods in Brazil from which the distributor makes deliveries.

If a PE is established, the profits of the foreign supplier attributable to the Brazilian operation become subject to Brazilian corporate income tax. The existence of a Double Taxation Treaty between Brazil and the supplier's country may provide a more specific PE definition and offer greater legal certainty.