The Commercial Agent and the Foreign Client: Legal Risks When Appointing Representatives in Portugal

1. Entering the Portuguese market through commercial representatives

The appointment of a commercial representative in Portugal is often the first step for a foreign company seeking to test or develop the Portuguese market without incorporating a subsidiary, hiring its own sales team or immediately creating a permanent local structure.

The solution may appear straightforward: a foreign company appoints a “sales representative”, “business developer”, “commercial representative”, “introducer”, “agent” or “local partner” to promote its products or services in Portugal, usually in return for commission or variable remuneration. However, under Portuguese law, this arrangement may trigger significant legal consequences, particularly where the relationship is characterised as a commercial agency agreement.

Commercial agency is governed in Portugal by Decree-Law No. 178/86 of 3 July, as amended by Decree-Law No. 118/93 of 13 April, which implemented and completed, in Portuguese law, the regime deriving from Directive 86/653/EEC on self-employed commercial agents. Under Portuguese law, agency is the contract whereby one party undertakes to promote, on behalf of another, the conclusion of contracts, in an autonomous and stable manner, against remuneration, and may be assigned a specific territory or group of customers.

The practical consequence is clear: for a foreign company, appointing a representative in Portugal should not be treated merely as a commercial decision. It is also a legal decision with potential impact on termination, notice periods, post-termination commissions and, above all, the agent’s possible right to a goodwill or clientele indemnity.

2. The name given to the contract is not decisive

One of the most common mistakes in international contracts is to assume that the label chosen by the parties is decisive. It is not.

The fact that the contract is described as a “consultancy agreement”, “business development agreement”, “sales representative agreement”, “distribution agreement” or “partnership agreement” does not, by itself, exclude the application of the commercial agency regime if, in substance, the representative promotes, in an autonomous, stable and remunerated manner, the conclusion of contracts on behalf of the foreign company.

The relevant test is substantive. One must determine what the representative actually does, on whose behalf he acts, who bears the risk of the transactions, who concludes the contracts with customers, how the representative is remunerated and to what extent he is integrated into the principal’s commercial policy.

This distinction is particularly important when compared with neighbouring contractual structures. The agent promotes contracts on behalf of the principal. The distributor, in the strict sense, purchases goods for resale, in his own name and on his own account. The commercial concessionaire is integrated into a distribution network, but usually acts as an independent business operator. The franchisee exploits a business model, trade mark and know-how belonging to another party, usually remunerating the franchisor and acting in his own business interest.

For the foreign client, this distinction is critical. If the relationship is one of true agency, the foreign principal will be subject to a protective legal regime, including rules that cannot be freely excluded by contract.

3. The agent’s autonomy: permissible instructions and the risk of excessive control

A commercial agent is, by definition, autonomous. He is not an employee, does not form part of the principal’s workforce and must organise his activity independently. That autonomy does not, however, prevent the principal from issuing commercial instructions, defining product presentation policies, reporting rules, commercial targets or standards of conduct.

Portuguese law expressly recognises that the agent must comply with the other party’s instructions, provided these do not undermine his autonomy, and must provide the information requested from him or necessary for the proper management of the relationship, namely information regarding the market situation and customers’ solvency.

The balance is delicate. Reasonable instructions on products, prices, campaigns, commercial policy and compliance are compatible with a commercial agency agreement. By contrast, the imposition of rigid working hours, hierarchical dependency, daily control of activity, operational integration equivalent to that of an employee, mandatory permanent physical presence or functional subordination may be incompatible with the agent’s autonomy.

For foreign companies, the risk is twofold: first, the relationship may be classified as commercial agency; secondly, in extreme cases, there may also be debate as to whether a disguised employment relationship exists. The contractual documentation and the parties’ day-to-day conduct must therefore be consistent.

4. Representative without authority to bind the principal: beware of apparent authority

Another essential issue concerns the agent’s authority. In principle, a commercial agent promotes business, but does not conclude contracts in the name of the principal unless powers of representation have been expressly granted.

This distinction is fundamental for foreign companies. An agent may be authorised only to present products, seek customers, collect expressions of interest and forward proposals. Alternatively, he may be empowered to negotiate and conclude contracts, receive orders, sign documents or perform acts in the principal’s name.

Portuguese law requires particular caution. The agent must inform interested parties of the powers he holds, and the law provides consequences for acts performed without authority, including situations in which the transaction may become effective against the principal where there were weighty reasons justifying the good-faith third party’s reliance.

In practice, the contract should expressly state whether or not the agent has authority to bind the foreign company. If he does not, that limitation should also be reflected in commercial communications, proposals, business cards, email signatures, brochures, websites and documentation delivered to customers.

5. Territorial exclusivity and customer portfolio

Exclusivity is another risk area. In Portugal, the agent is only entitled to exclusivity if this is agreed in writing.

For foreign companies, this means that exclusivity should be carefully considered. Granting territorial exclusivity or allocating a customer portfolio may be commercially useful, but it also increases the intensity of the relationship, reinforces the agent’s expectations and may make future disputes over customers acquired, increased business volume and post-termination benefit more significant.

It is advisable, at the outset of the relationship, to document the starting position: customers already existing in Portugal, previously identified leads, sales history, active commercial channels and any prior contacts. This documentation may prove essential if, at a later stage, there is a dispute as to whether certain customers were effectively brought in by the agent or already belonged to the principal’s commercial sphere.

6. Termination of the contract: notice periods and autonomous indemnities

The agency agreement may terminate by mutual agreement, expiry, ordinary termination or termination for cause. In contracts concluded for an indefinite period, ordinary termination requires written notice. Portuguese law provides minimum notice periods of one month where the contract has lasted less than one year, two months where the second year of the contract has already begun, and three months in all other cases. The parties may agree longer notice periods, provided that the period applicable to the principal is not shorter than the period applicable to the agent.

If the principal terminates the contract without observing the applicable notice period, it may be required to compensate the agent. The indemnity for failure to give notice is distinct from the goodwill/clientele indemnity. The former compensates the breach of the minimum notice period; the latter compensates, under certain conditions, the advantage retained by the principal from the customers acquired or developed by the agent.

Termination for cause may occur in cases of serious or repeated breach, or where relevant circumstances make the continuation of the contractual relationship impossible or seriously prejudicial. Unfounded termination may also give rise to liability.

The termination of an agency relationship in Portugal should therefore be prepared with particular care, especially where the agent has developed the market over several years, created a customer portfolio or made specific investments.

7. Goodwill/clientele indemnity: the main risk for the foreign client

The goodwill or clientele indemnity is usually the most sensitive issue for foreign companies appointing commercial agents in Portugal.

Under Article 33 of Decree-Law No. 178/86, the agent is entitled, after termination of the contract, to a goodwill/clientele indemnity if three cumulative requirements are met: the agent must have brought in new customers or substantially increased the volume of business with existing customers; the principal must continue to derive considerable benefit, after termination, from the activity carried out by the agent; and the agent must cease to receive any remuneration for contracts negotiated or concluded, after termination, with those customers.

The indemnity is therefore not automatic. It is not enough that the contract has ended. It is not enough that the agent has worked for a certain period. It is not enough that the commercial relationship was important. It is necessary to prove the creation or substantial development of customers, a considerable benefit for the principal and the loss of remuneration by the agent.

Even so, where these requirements are met, the financial impact may be significant. The amount is fixed according to equity, but may not exceed a sum equivalent to one year’s remuneration, calculated on the basis of the agent’s average annual remuneration over the previous five years. If the contract lasted for a shorter period, the average of that period applies.

Portuguese legal scholarship has emphasised that this indemnity, despite its name, does not correspond to classic civil liability. Joana Vasconcelos describes it as compensation for the fruits of the agent’s activity that the principal continues to enjoy after termination, bringing it closer to a logic of deferred remuneration or compensation for retained benefit than to damages in the strict sense.

Fernando Ferreira Pinto, in turn, warns that the goodwill/clientele indemnity should not be treated as inevitable, nor applied lightly. In his view, it is an exceptional expression of commutative justice and protection against opportunistic conduct by the principal, particularly where the principal takes advantage, after termination, of the clientele whose acquisition or retention resulted from the agent’s specific investment.

8. Time limit to claim the goodwill/clientele indemnity

The agent must notify the principal, within one year of termination of the contract, that he intends to claim the goodwill/clientele indemnity. If no agreement is reached, the agent must bring legal proceedings within one year of that notification.

This rule is particularly important for foreign companies. Even after formal termination of the relationship, any contact from the agent — letter, email or other communication — stating an intention to claim a goodwill/clientele indemnity should be monitored carefully. Receipt of such communication may mark the beginning of a litigation risk period.

9. Choice of foreign law: limited protection

Many international contracts provide for the law of the foreign company’s country, or submit the contract to English, Swiss, German, French, Spanish or US law. That choice may be valid in many respects, but it does not necessarily solve the issue of termination of a commercial agency carried out in Portugal.

Article 38 of Decree-Law No. 178/86 provides that, where contracts governed by that statute are performed exclusively or predominantly in Portugal, foreign law may apply to termination only if it is more favourable to the agent.

This provision is decisive. A foreign company should not assume that the mere choice of foreign law is sufficient to exclude the Portuguese termination regime. If the agent’s activity is mainly carried out in Portugal, Portuguese law may continue to apply to the essential aspects of termination, whenever it is more favourable to the agent.

10. Post-contractual non-compete clause

A post-contractual non-compete clause is admissible, but subject to formal and substantive requirements. It must be in writing, may not exceed two years and must be limited to the territory or customer group entrusted to the agent.

For foreign companies, this clause must be carefully drafted. A clause that is too broad, vague or disproportionate may be challenged. Conversely, the existence of a non-compete clause may, at European level, be treated as a relevant factor when assessing the goodwill/clientele indemnity.

11. What if the contract is presented as distribution or commercial concession?

Some foreign companies attempt to avoid the agency regime by structuring the relationship as distribution or commercial concession. This may be legitimate, provided it corresponds to the economic reality of the relationship.

If the Portuguese partner purchases products for resale in his own name, bears his own commercial risk, sets his own margin and acts before customers as an independent seller, the relationship is closer to distribution or commercial concession. However, if the relationship is only formally presented as distribution, while the partner merely promotes business on behalf of the foreign supplier and is remunerated by commission, it may be reclassified as agency.

Furthermore, Portuguese case law admits, in certain circumstances, the analogous application of agency rules to commercial concession agreements. In Uniform Judgment No. 6/2019, the Portuguese Supreme Court of Justice held that, when Article 33(1) of Decree-Law No. 178/86 is applied by analogy to a commercial concession agreement, subparagraph (c) of that provision is also included, adapted to the concession agreement.

This does not mean that every distributor or concessionaire is entitled to a goodwill/clientele indemnity. It means only that any attempt to avoid the agency regime by using a different contractual label must be supported by a coherent economic and legal structure.

12. Practical recommendations for foreign companies

Before appointing a commercial representative in Portugal, a foreign company should assess at least the following points:

13. Conclusion

Appointing a commercial agent in Portugal is an efficient solution for foreign companies seeking to enter the Portuguese market with reduced initial costs. However, that initial efficiency may become a significant legal risk if the contract is not carefully structured.

Portuguese agency law protects the agent as an autonomous commercial collaborator who often invests in building a customer base for the principal’s products or services. That protection becomes particularly relevant at the moment of termination: notice periods, post-termination commissions, indemnities for breach and, in particular, goodwill/clientele indemnity.

For the foreign client, the main lesson is straightforward: entry into the Portuguese market through commercial representatives should be legally planned from day one. The best way to manage risk is not to artificially exclude the legal regime, but to define, with precision, the nature of the relationship, the representative’s authority, the customer base, remuneration criteria, termination rules and the evidentiary mechanisms that may be needed in the future.

Essential legal extracts for supporting analysis

Article 1 of Decree-Law No. 178/86 — Definition of agency

“Agency is the contract whereby one of the parties undertakes to promote, on behalf of the other, the conclusion of contracts, in an autonomous and stable manner and against remuneration, and may be assigned a specific territory or a specific group of customers.”

Article 33 of Decree-Law No. 178/86 — Goodwill/clientele indemnity

“Without prejudice to any other indemnity that may be due under the preceding provisions, the agent is entitled, after termination of the contract, to a goodwill/clientele indemnity, provided that the following requirements are cumulatively met:
a) The agent has brought in new customers for the other party or substantially increased the volume of business with existing customers;
b) The other party continues to derive considerable benefit, after termination of the contract, from the activity carried out by the agent;
c) The agent ceases to receive any remuneration for contracts negotiated or concluded, after termination of the contract, with the customers referred to in subparagraph a).”

Article 34 of Decree-Law No. 178/86 — Calculation

“The goodwill/clientele indemnity shall be fixed according to equity, but may not exceed an amount equivalent to one year’s indemnity, calculated on the basis of the average annual remuneration received by the agent during the previous five years; where the contract has lasted for a shorter period, the average of the period during which it was in force shall be taken into account.”

Article 38 of Decree-Law No. 178/86 — Territorial application

“Contracts governed by this statute which are performed exclusively or predominantly in Portuguese territory shall only be subject to legislation other than Portuguese law, as regards the termination regime, if that legislation proves to be more favourable to the agent.”

Supreme Court of Justice, Uniform Judgment No. 6/2019 — Commercial concession

“In the application by analogy to the commercial concession agreement of Article 33(1) of Decree-Law No. 178/86 of 3 July, as amended by Decree-Law No. 118/93 of 13 April, the respective subparagraph c) is included, adapted to that contract.”