Distribution law in Portugal

Agency Agreements

Decree-Law 178/86 of 3 July 1986, on Agency Agreements

Formation of Agency Agreement

Are there any formal requirements upon concluding an Agency Agreement?

Under Portuguese law, the Agency Agreement can be entered into both verbally or in writing. There are no special formalities to take into account.

In case of an Agency Agreement already entered into verbally, either party is entitled to request the other party to sign a written document stating the content of the Agency Agreement.

Are there any specific information obligations on concluding Agency Agreements?

Statutory law does not provide for any specific information obligations regarding Agency Agreements.

Under Portuguese law, a general obligation exists to correctly answer questions and to provide certain crucial information without special request prior to entering into an agreement (doctrine of culpa in contrahendo).

Are there any specific pitfalls which need to be borne in mind when concluding Agency Agreements?

Portuguese law differentiates – also in b2b situations – between individually agreed agreements and standard terms and conditions.

Regarding standard terms and conditions, there are strict rules on the validity of contractual clauses. Regarding individually agreed contracts, generally, a vast freedom of contract exists. However, this freedom in the field of Agency Agreements is limited as many statutory rules are mandatory and cannot be deviated from contractually (neither in standard terms and conditions nor in individually agreed contracts). In any case, it is very important to bear the strict rules on standard terms and conditions in mind when drafting Agency Agreements under Portuguese law in order to avoid the invalidity of contractual provisions.

Standard terms and conditions are deemed to exist if the contractual terms are imposed by one party on the respective other party without being open for negotiation. This means that in particular standard Agency Agreements used by Principals are often likely subject to Portuguese law on standard terms and conditions.

Scope of Commercial Agency

Are the parties free to agree on the scope of the Commercial Agency?

The Principal and the Commercial Agent are free to agree on the scope of the Commercial Agency. In particular, the parties may decide on instructing the Commercial Agent (1) worldwide or for a certain geographic region, (2) for all or only for certain products of Principal, (3) for all or only certain customers of the Principal.

What are the primary obligations of the Commercial Agent and the Principal?

As general principle, the Commercial Agent has the following primary obligations:

  • obligation of good faith and loyalty towards the Principal, as well as the obligation to watch over the Principal's interests;
  • respect the instructions of the Principal, as long as it does not affect its independence;
  • when necessary, report to the Principal any information available, in particular related to the solvency of a third party with whom transactions are being carried out;
  • clarify the other party about the market situation and prospects of evolution;
  • render account of the transactions carried out;
  • obligation of secrecy;

As general principle, the Principal has the following obligations:

obligation of good faith and loyalty towards the Commercial Agent;

Upon request from the Commercial Agent, provide to the later those elements which, taking into account the circumstances, are proven necessary for the exercise of its activity;

  • provide a list of the contracts concluded and the fees due, not later than the last day of the month following the quarter in which entitlement to the commission was acquired;
  • provide all information, in particular an extract from the account books, which are necessary to verify the amount of commissions due to the Commercial Agent;
  • pay the Commercial Agent, as agreed;
  • informing the Commercial Agent of the acceptance or refusal of the contracts negotiated and of the ones that have concluded without the necessary powers;
  • inform the Commercial Agent of any relevant information, especially when the volume of the transactions is going to be slightly below what the Agent is usually expecting;
  • pay special commissions, which may be cumulated, relating to the charge of collection of credits and the del credere clause.
How is the Commercial Agent paid?

Generally, the Commercial Agent is entitled to commission for business transactions between the Principal and customers within the scope of the Commercial Agent's instruction.

During the contractual term the remuneration of the Commercial Agent comprises either:

  • a fixed amount;
  • a variable commission; or
  • a combination of both systems.

After the contractual term has ended, Commercial Agent is entitled to a commission if:

  • the transaction was entered into before the contractual term has ended; or
  • the transaction is mainly attributable to the Commercial Agent's efforts during the period covered by the Agency Agreement and if the transaction was entered into within a reasonable/short time frame after the contractual term has ended.

Term and Termination of Agency Agreement

Term of the Agency Agreement

There are no statutory rules on the term of Agency Agreements. The parties are free to decide on the duration of the agreement.

If the parties have not agreed a term, the Agency Agreement is considered concluded for an indefinite period.

If the parties agree on a fixed term and, after the expiry of the fixed term, continue to perform the Agency Agreement, the Agency Agreement is considered as concluded for an indefinite term.

Termination of the agency contract

If the Agency Agreement has been entered into for a fixed term, as a general principle, the Agency Agreement may only be terminated extraordinarily for good cause. During a fixed contractual term, no termination for convenience is admissible.

If the Agency Agreement has been entered into for an indefinite term, it may be terminated extraordinarily for good cause and for convenience by complying with certain minimum notice periods. Portuguese statutory law sets out the following minimum notice periods (depending on the actual duration of the Agency Agreement in question):

  • during the first contractual year, a minimum notice period of one month with effect to the end of the month must be complied with;
  • during the second contractual year, a minimum notice period of two months with effect to the end of the month must be complied with;
  • during the third and/or any subsequent contractual year, a minimum notice period of three months with effect to the end of the month must be complied with.

The notice periods may not be shortened. The notice periods may be extended by contractual agreement, provided, however, the notice period for the Commercial Agent is at least of the same length as the notice period of the Principal.

Portuguese statutory law establishes a written form requirement with respect to the termination notice (both for good cause and for convenience).

The indemnification claim as main consequence of the Agency Agreement's termination

Upon termination of the contract, the Commercial Agent will be entitled to claim a compensation against the Principal (“compensation claim”) if the following circumstances occur:

  • he Commercial Agent has acquired business with new customers or has substantially increased business with the existing customers;
  • the Principal continues to derive substantial benefits from such business;
  • the Commercial Agent has ceased to receive any commission or retribution (after termination) for contracts entered with the customers referred to in (i) above;
  • the Agency Agreement has not been terminated due to any cause attributable to the Agent or the Commercial Agent has assigned to a third party its contractual position under the Agency Agreement.

In case the parties do not reach an agreement with regard to the amount of the compensation claim, such amount shall be equitable fixed by a judicial court having regard to all the circumstances of the individual case and, in particular, the commission lost by the Commercial Agent.

In any case, however, the amount of the compensation claim is capped: it may not exceed the Commercial Agent's average annual remuneration over the preceding five years (or the actual term, if it was less than five years). The cap may be used as an estimate figure for Principals to assess the financial risk of a termination of the Agency Agreement.

The Commercial Agent has one year after termination to request the compensation claim. The relevant lawsuit must be filed within the year following such communication.

The rules on the Commercial Agent's compensation claim are mandatory and may not be contractually excluded.

Other consequences of the Agency Agreement's termination

In the absence of a contractual agreement to the contrary, Portuguese law does not stipulate a post-contractual non-compete obligation of the Commercial Agent. Portuguese law, however, allows an agreement on such post-contractual non-compete obligation of the Commercial Agent for a period of maximum two years calculated from the end of the Agency Agreement. It is important to bear in mind that the Commercial Agent is entitled to a reasonable financial compensation if such post-contractual non-compete obligation has been agreed (unless the Principal in writing waives this obligation prior to the contractual end).

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Distribution Agreements

There are no specific statutory rules on Distributors. Subject to certain requirements, Portuguese law on Commercial Agents applies by way of analogy, especially with regard to termination rules.

Formation of Distribution Agreement

Are there any formal requirements on concluding Distribution Agreements?

Under Portuguese law, a Distribution Agreement can be entered into both verbally or in writing. There are no special formalities to take into account.

Are there any specific information obligations on concluding Distribution Agreements?

Statutory law does not provide for any specific information obligations regarding Distribution Agreements.

Under Portuguese law, a general obligation exists to correctly answer questions and to provide certain crucial information without special request prior to entering into an agreement (doctrine of culpa in contrahendo).

Are there any specific pitfalls which need to be borne in mind when concluding Distribution Agreements?

Portuguese law differentiates – also in b2b situations – between individually agreed agreements and standard terms and conditions.

Regarding standard terms and conditions, there are strict rules on the validity of contractual clauses. Regarding individually agreed contracts, generally, a vast freedom of contract exists. However, this freedom in the field of Agency Agreements is limited as many statutory rules are mandatory and cannot be deviated from contractually (neither in standard terms and conditions nor in individually agreed contracts). In any case, it is very important to bear the strict rules on standard terms and conditions in mind when drafting Agency Agreements under Portuguese law in order to avoid the invalidity of contractual provisions.

Standard terms and conditions are deemed to exist if the contractual terms are imposed by one party on the respective other party without being open for negotiation. This means that in particular standard Agency Agreements used by Principals are often likely subject to Portuguese law on standard terms and conditions.

Scope of Distributor's instruction

Are the parties free to agree on the scope of the Distribution Agreement?

There are statutory limits to the Principal's and the Distributor's freedom to agree on the scope of the Distribution Agreement (mainly based on EU Competition law).

In particular when it comes to limiting the geographic region in which the Distributor may (or may not) sell the products and the customers to which it may (or may not) sell them, the EU regulation on vertical restraints (Commission Regulation No 330/2010) plays a significant role: such limitations are admissible only under specific requirements which need to be assessed in the individual case. 

Furthermore, also agreements with respect to the amounts of products the Distributor must source from the Principal is subject to EU Competition law: contractual provisions which require the Distributor to source 80% or more of its demand in products solely from the Principal may only be agreed for five years.

Non-compete obligations may be agreed, however, as a general rule based on EU Competition law, only for five years (for a post-contractual non-compete obligation, see below). The five-year period may be extended by mutual agreement for a further five years.

The Principal is generally not allowed to influence the Distributor's resale price of the products. The Principal may only once per year send a list with price recommendations to the Distributor. Principals should take great care when performing any activities which could be construed as an attempt (even an indirect) to influence the Distributor's freedom to determine the resale price.

What are the primary obligations of the Distributor and the Principal?

As a general principle, it is assumed that the Distributor has the following primary obligations:

  • obligation of good faith and loyalty towards the Principal, as well as the obligation to watch over the Principal's interests;
  • to distribute the products;
  • to provide the Principal with relevant information regarding the market, (potential) customers and requirements concerning the products;
  • to diligently safeguard the interests of the Principal in all business respects; and
  • to maintain confidentiality.

As a general principle, it is assumed that the Principal has the following primary obligations:

  • obligation of good faith and loyalty towards the Distributor;
  • to apply reasonable efforts to deliver all products ordered by Distributor;
  • to support the Distributor with respect to the Principal's business (for example in providing brochures, etc.);
How is the Distributor paid?

As a general principle, the Distributor is not entitled to a specific remuneration for its distribution activities. The remuneration of the Distributor consists in the profit it generates in purchasing the Principal's product with a rebate and selling them to its customers at a higher price. The parties may, however, following the principle of freedom of contract, agree on additional remunerations.

Term and Termination of Distribution Agreement

Term of the Distribution Agreement

There are no statutory rules on the term of Distribution Agreements. The parties are thus, as a general principle, free to set out the parameters of the contractual term, for example in agreeing on a fixed term or an indefinite term or a combination.

If the parties agree on a fixed term and, after the expiry of the fixed term, continue to perform the Distribution Agreement, the Distribution Agreement is considered to have been tacitly renewed for an indefinite term.

Termination of the Distribution Agreement

If the Distribution Agreement has been entered into for a fixed term, as a general principle, the Distribution Agreement may only be terminated extraordinarily for good cause. During a fixed contractual term, no termination for convenience is admissible.

If the Distribution Agreement has been entered into for an indefinite term, it may be terminated extraordinarily for good cause and for convenience by complying with certain minimum notice periods. Most legal commentaries and case law advocate that the statutory minimum notice periods for Commercial Agents (which depend on the actual term of the Agency Agreement in question, see above, and range between one and three months) should be applied by way of analogy to Distributors, unless in the individual case a longer notice period is required for equitable reasons (for example because the Distributor made substantial investments when entering into the Distribution Agreement).

Portuguese law on Commercial Agents, applicable by way of analogy, establishes a written form requirement with respect to the termination notice (both for good cause and for convenience).

The indemnification claim as main consequence of the Distribution Agreement's termination

As described above, the main consequence of an Agency Agreement's termination under Portuguese law is that it may trigger a compensation claim of the Commercial Agent. Portuguese case law applies the entitlement to an compensation claim to Distributors, upon fulfilment of the same requirements applicable to Agency Agreements foreseen.

Other consequences of the Distribution Agreement's termination

Statutory law does not provide for a post-contractual non-compete clause. EU Competition law, as a general principle, considers a post-contractual non-compete clause as invalid and only allows for such under certain exceptional circumstances. If a post-contractual non-compete clause has been validly agreed (complying with EU Competition law), the statutory provisions regarding Commercial Agents apply by way of analogy and the Distributor is entitled to a reasonable financial compensation.

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Fernando Cruz Trinca
Partner
Lisbon