A Distribution Agreement can be regarded as a partnership usually established between a manufacturer, an importer or a wholesaler and a retail business establishment for distributing products within a particular geographic region.
In spite its status as one of the most common contractual forms in the market, only five articles of the Brazilian Civil Code govern this matter. For this reason, other laws are applied to support clarifying issues arising from this relationship.
The subject matter of the distribution agreement will be the marketing of goods and products supplied by the company to the distributor, which will perform this activity at its own account and risk. These products should be specifically listed and described in the contractual instrument, which should further provide for conditions for listing changes, comprising exclusion or addition of products.
If commercial interests come into play in this connection, the agreement may provide for exclusivity, whereby, for example, supplier would require that distributor should market its product only in a particular region. In these circumstances, attention should be drawn to the commercial dependence distributor will establish before its supplier, which could – in case of termination of contract by the supplier – give rise to a duty on the supplier to indemnify distributor.
Both issues are widely interconnected, albeit there are others which might eventually generate this duty. Repeatedly there are cases where after a few years of contractual effectiveness, the supplier terminates the agreement unexpectedly, taking over the market won by the distributor. In such cases, it is certain that the contractual termination would lead to removal of distributor from the market – given its economic dependence – so triggering supplier’s duty to indemnify.
As set forth by the Brazilian Civil Code, the term deemed reasonable for notice for contract termination is ninety days. This is despite the wording of the law prescribes the following qualification in this regard: “provided due term is elapsed, consistent with the nature and the size of the investment.”
Curiously, the law is silent on specifically providing for an indemnity calculation methodology in those cases. As a result it is necessary to resort to the civil laws on damages and lost profits, or the subsidiary laws above mentioned.
With respect to distributor’s geographical area, this is the physical space within which the distributor will market the supply company’s products. These are contractual provisions that should be well described in order to avoid future conflicts.
Another very significant aspect concerns the possibility of sales being directly conducted by the supplier in the same territory granted to the distributor. It is likewise of upmost importance to establish detailed rules to govern the different possibilities, as this is a common point of contention.
Yet another sensitive clause is the one that establishes the minimum purchase and sale quotas by distributor, since the distribution contract is distinguishable from a mere succession of purchase and sales agreements. The minimum quantities to be acquired by distributor for resale in a given period of time must be fulfilled, or else the distributor may be subject to agreed-upon contractual fines or even contractual termination.
Aspects underlying the use of the brand also warrant attention when structuring a distribution agreement for the benefit of the supplier but also the brand itself.
For a successful business relationship of this nature, it is indispensable to prepare an agreement that meets the interests of the parties as well as the commercial and market specific requirements for that subject matter, legally protecting the parties but also giving them the necessary mobility a business needs to flow as appropriate.
This article was written by Miguel Neto and Cristina de Andrade Salvador of Miguel Neto Advogados, specialising in intellectual property. Miguel Neto is a full service law firm with offices in Rio de Janeiro and Sao Paulo.