• Sales Agency in Brazil: The Burden for Terminating Agreements
  • May 8, 2012 | Author: Claudio Oliveira Mattos
  • Law Firm: Demarest e Almeida Advogados - São Paulo Office
  • Commercial representation or sales agency is an activity that has been increasingly gaining place and assuming importance in the entrepreneurial area. Seeking to promote business and boost sales, the companies formalize through written or oral agreements the relation with the so-called independent commercial representatives or sales agents (“sales agents”), a relation that is substantially governed by Law 4,886/65 (Brazilian Commercial Representation Law - Lei de Representação Comercial Brasileira - “LRC”).

    Considering the provisions of the LRC, one of the aspects that a company (in this case, the “represented company”) should analyze before executing such an agreement is the potential indemnities due to the sales agents in the event of an agreement termination for cause (due to an infringement) or not (unilateral termination).

    Firstly, in order to evaluate the applicable legal indemnity, it shall be analyzed whether the agreement is for a determinate or indeterminate term.  

    According to the LRC, an agreement for a determinate term becomes an agreement for indeterminate term if its initial period is extended; and an agreement shall be considered as for indeterminate term if it succeeded a prior one within a period of six (6) months. These provisions are intended to protect the sales agents against an abrupt and sudden end of the agreed jural relation. This is because before the enactment of the LRC, the represented company could extend the agreement for successive periods and on any occasion, upon the end of agreement's effectiveness, inform on its intention of not renewing it, without being liable for payment of any indemnity to the sales agent.

    In this scenario, LRC prescribes that in case of termination of an agreement for indeterminate term, whether for cause or not, the represented company will be required to pay to the sales agent an indemnity of at least one twelfth (1/12) of the amount earned by the sales agent on account of consideration. Such consideration will be calculated based not only on the amount earned by the sales agent on account of commissions, but also on all amounts on whatever account this professional earned during the contractual term, such as bonus and reward.

    On the other hand, there is no provision which bounds the sales agents to the payment of an indemnification should they terminate an agreement for indeterminate term, which shows that the law treats the sales agent as hypo-sufficient party to the agreement. In case of breach of the contract by the sales agent, the represented company has the right to be reimbursed for losses and damages and, for such purpose, it may withhold any commissions which are due to the sales agent.

    In case of unilateral termination of the sales agency agreement for indeterminate term, the terminating party has to pay one third (1/3) of the commissions earned by the sales agent in the past three (3) months or deliver a notice thirty (30) days in advance should the agreement have been in effect for more than six (6) months. It is noteworthy that currently there is a doctrine and case law controversy  as to the prior notice period, if it should be of thirty (30) or ninety (90) days, as the LRC establishes thirty (30) days and the Brazilian Civil Code sets forth that such period is of ninety (90) days.

    However, in case a represented company terminates an agreement for determinate term, whether for cause or not, the LRC establishes that it has the duty to pay the sales agent an indemnity equivalent to the monthly average of the consideration (as defined above), multiplied by half the number of the remaining months for the agreement  termination. In order for the indemnity not to be payable upon the termination of an agreement for determinate term, the contract must be performed until it expires, and in this case a prior notice will not be necessary.

    By pre-establishing the indemnity amount in the LRC, the legislator attempted to avoid questionings and delays in settling litigations over sales agents agreements. We stress that our courts have already taken the stance that such amounts also apply to oral agreements, or to agreements that do not set forth the indemnity due, which is of utmost importance for the legal certainty  of the agreed relations.

    One interesting aspect, and which is controversial in regard to the issue of termination for cause, is the provisions in articles 35 "e" and 36 "e" of the LRC, which when listing the reasons for termination for cause, include force majeure among them. Although LRC sets forth that force majeure is a reason for termination for cause, the majority doctrine, and the Civil Code as well, recognize that an event of force majeure excludes liability, and the parties will not be liable for losses caused by force majeure if they have not expressly assumed liability for it.  In practice, because the force majeure will eventually reach both parties to the agreement, which may allege and attest that the performance of the agreement, by both parties, was impeded by the event of force majeure, under articles 35 and 36 of LRC, no indemnity would be payable to any of the parties.