The distribution agreement is an efficient option for Brazilian and foreign companies willing to expand clients and territory.
There are details in the relationship between the supplier company and its commercial distribution partners that require attention to ensure legal security and business effectiveness.
We highlight 4 key points in the use of distribution contracts and in managing relationships with commercial distributor partners:
1. Exclusion of the commercial representation relationship: Since the distributor’s activity can be very similar to that of the commercial representative, the drafting of the contract and its day-to-day management (with special emphasis on the selection of commercial partners) must be made with the purpose of expressly excluding the application of the Commercial Representation Law (Law no. 4,886/65), otherwise all risks and burdens from commercial representation relations will be added to the relationship, without any of the benefits and advantages thereof.
2. Internal third-party management policies: Those responsible for monitoring the execution of the contracts will be essential to ensuring effectiveness and legal security for the supplier company, as their conduct will rule out (or allow the claim) that the distribution contract contains a commercial representation relationship, employment relationship or economic dependence. The development of internal policies to carry out this monitoring is essential at this point.
3. Term and Termination: It is common for the supplier company and commercial partners to adjust the need to make initial investments to execute the contract. Therefore, there will be a period during which the party(ies) responsible for the investment expect these expenses to be repaid, and it is recommended that a minimum duration is set for the relationship. If the contract is effective for an indefinite period (even after the minimum term) it is important to observe the 90-day notice rule for termination, in accordance with art. 720 of the Civil Code.
4. Labor and/or economic dependence risk: Both arise from the same factor, which is how much the relationship with the supplier company represents for the commercial partner. From a labor perspective, the drafting of the contract and the day-to-day management of the relationship must eliminate the requirements for the configuration of an employment relationship (prove its non-existence). As for economic dependence, the supplier company needs to ensure that the relationship does not represent essential revenue for the commercial partner’s activity.
The distribution relationship can be an interesting alternative for production outflow, expansion of market access and revenue growth in new territories, however, it is essential that an appropriate contract is designed exclusively for the business being developed as one of the tools to bring security to the relationship, combined with training and focus on third-party management best practices, ensuring the effectiveness of the legal business sought by supplier companies.