Differences sales representation (agents) and the distribution contract
The sales representation and the distribution contract are NOT identical. It is important to understand the differences.
- Sales representation is FEE-based, they do buy your product
- Distributors purchase your products and resell them
Both concern the contracting of mediators engaged in the distribution of your products.
In the sales representation contract you keep the title of the product, the product will not be to the disposal of the agent. You will sell and deliver the product to the final customer. The agent will be entitled to a commission for the sales representation services provided.
In the distribution arrangement, inversely, the products are sold to the distributor (they hold the title of the product) and the customer has a contract with the distributor. The reseller fee that is paid to the distributor is not a commission, but instead the profit that results from the difference between the purchase and the resale prices. The distributor is allowed to build its own network of sub-distributors, however such sub-distribution arrangement must abide by the rules determined by the manufacturer. The distributor deals in its own name. It purchases the products to resell them with exclusivity in a certain territory, the manufacturer assuming, on the other hand, to not sell them to another dealer in the same territory. If it does so, it will be obligated to pay a fee to the distributor.
Commercial representation and agency contracts
Commercial Representation is defined as intermediation activity, performed on a permanent basis by any person or company (referred to in Brazilian law as a Commercial Representative or Agent) contracted to act in the market for goods or services on the behalf of a company or several companies.
The main legal characteristics of the sales representation relationship derive from this definition, namely:
- business activity
- non-sporadic nature of the representation services
- mediation in the realization of certain deals
- the agent’s autonomy to act
Commercial Representatives (or Agents) gather buying proposals from prospective customers and submitting them for the approval of the represented company. When a proposal is accepted, the Commercial Representative is entitled to a previously and contractually agreed percentage of the transaction (commission), conditioned to the effecting of payment by the purchaser, unless the contract stipulates that the commission shall be paid independently of the payment by the purchaser. Furthermore, the Agent is entitled to be a commission for all sales in contractually defined area of intermediation activities, unless otherwise specified in the agency contract.
Agency contracts must be in writing, and must, in addition to the specific provisions agreed upon by the parties, contain the following topics:
- general conditions of representation
- indication and features of products
- duration of the contract
- indication of the area, or areas where the representation is to be performed
- permission for the represented company to perform direct sales in the indicated area or areas granting of (total or partial) exclusivity in the sales area
- commissions due to the Commercial representative and payment schedules, conditioned (or not) to effective receipt of the purchaser’s payments
- exclusivity (or not) of the represented company’s products
- compensation for the Commercial Representative in the event of unjustified termination of contract
You have the freedom to establish an (non)-exclusivity clause. In the absence of such a clause, dual exclusivity shall be presumed, which means that you cannot designate, simultaneously, more than one representative or distributor, in the same territory and with the same duty, nor may the latter undertake business of the same type on behalf of other proposing parties.
It is very important to emphasize that no employment relationship should exist between the contracting parties. The scope of Brazilian Labor Law is such that you, as a represented company,might be liable for labor claims from former agents, except if the representative is a company. Such claims may be based, among other allegations, on legal presumption of an employment relationship, which requires the concomitance of personalty, salary dependence, habitualness, and subordination.
TIP: To avoid such claims and its liabilities, it is of crucial importance that you include the following restrictions in all Commercial Representation Contacts:
- the Commercial Representative must always be established as a company formed by at least two partners
- avoid issuing orders directly to staff of your agent. Any orders must be limited to performance of obligations of the representative
The Distribution Agreements in Brazil have been divided in two similar but not same categories: commercial distribution agreements and ordinary distribution agreements.
Ordinary Distribution Contracts are governed by general provisions of the New Civil Code. Thus, contracting parties may define their relationship almost exclusively by contract, provided they comply with the general provisions and obligations of the Civil Code. On the other hand, if the relationship between the parties should involve intermediation by the Distributor and not an obligation to buy products for resale, regardless of the denomination for the contract, it will be deemed a Commercial Representation (or Agency) contract.
Nevertheless, it should be stressed that, if the parties’ distribution relationship concerns products considered automotive vehicles and their spare parts under Law 6.729, parties may need to adhere to a different distribution agreement, the Commercial Distribution Contract. More information about this type of contract can be found in the Legal Guide for Foreign Investors.
Termination of contracts
Generally, contracts may be terminated for five different reasons:
- due to a previously existent defect that renders it void or subject to cancellation
- by its performance, with the fulfillment of all the contractual obligations
- due to negligent non-performance, in which event it is unilaterally or mutually terminated
- by voluntary non-negligent, non-performance, in which event it is unilaterally or mutually terminated
- pursuant to involuntary, non-negligent non-performance, in which event the contract is lawfully terminated (as occurs, such as, in force majeure cases).
One of the most controversial issues on the several forms of termination concerns the unilateral termination without cause of the contract. In the other forms the contract is terminated for a certain reason, either by its performance, non-performance, expiration or by the parties’ intention. The unilateral termination without cause has more complex characteristics since the contractual relationship is terminated at one of the contracting parties will. Thus, special considerations should be devoted to it.