EUROPEAN BILLS OF EXCHANGE AND THE BRAZILIAN BANKS

The use of negotiable instruments in Brazil is very different from it use in Europe.

I have a case that illustrates that in an informative and funny fashion.

One of my clients, a European company, performed sales of electronic equipment worth several million dollars to a Brazilian buyer.

We drafter a very good sales contract, according to Brazilian law. It was dully signed and executed. Things were looking good.

However, the bank financing the production of the good (my client`s bank) demanded a very specific kind of security linked to the agreement. It wished for a Bill of Exchange.

That is when the problems began.

Brazilian businessmen are used to 3 kinds of negotiable instruments: CHEQUES, PROMISSORY NOTES and, in case of import/export, LETTERS OF CREDIT.

This is pretty much it. In some specific markets, especially in agribusiness, people may use a special note called Warrant. But, apart from that, one would be hard-pressed to find a template of a Bill of Exchange. Let alone use one.

We tried to explain this to the client`s bank and suggested that it replaced the BoE for a promissory note. But the bank was inflexible.

At the end of the day, the solution was to use a Bill of Exchange in which the drawer drew on himself, payable to his own order. That is to say, we have used the Bill of Exchange as if it were, effectively, a promissory note (since there was no third-party acting as a payee).

This solved the crisis, in theory. However, the template used by my client had a blank field that should be filled in with the information of a Brazilian bank, who would, under ideal conditions, be the payee of the BoE.

The field was filled in with the name of the buyer’s bank, but without many specific details about the account. Most importantly, it didn`t contain the banks written acceptance.

This is a curious fact. Obtaining the acceptance of a Brazilian bank to a Bill of Exchange is almost impossible. It is only practicable in large transaction (such as the construction of a stadium). And, to achieve that, the bank will ask for a great deal of counter guarantees from the drawer. Lawyers will review it for weeks, etc.

This is not something that is available to a regular wholesaler or small-business owner.  “Normal” people, so to speak, will use cheques.

This specific aspect of the Brazilian bank system will play a part in the story soon.

Well, after the BoEs have been signed, the client wished us to mail it to Europe, so that it could keep it in his safe.

But then another aspect of the infamous “Brazilian Cost” (the overall name for the small but persistent setbacks that haunt people who do business here) presented itself: the postal service and the courier services working in Brazil (DHL, FedEx, etc.) refused to transport the bill, unless we hired insurance. The cost of the insurance was about 15 thousand dollars.

So, the client bought a plane ticket and came here to pick them up. And that was it.

A couple months later, when the payment of the Bills was due, the Brazilian buyer asked to redeem the hard copies, so that he could make the payment.

At this point, my client told me not to worry. After all, the Bills of Exchange had been mailed (without insurance) to the client`s bank address in Brazil.

I was truly shocked to hear that.

It seems that someone in my client`s financial department just followed the standard procedure they used with other European clients and maild the Bills to the buyer`s bank, expecting the bank to pay it.

The problem is that this procedure is not even conceivable in Brazil. Mainly because Brazilian banks do not act as payees for Bills of Exchange. But also, because nobody in Brazil uses courier or mail to transfer negotiable instruments. They are always closely watched and transferred hand to hand, accompanied by a receipt of some sort.

Well, the person who signed for the delivery of the notes was a common employee of the bank, maybe a security guard or an intern, who used only his first name (which is usual). We couldn`t identify him.

After several phone calls and visits to the bank, I finally spoke to the person who handled the Bills. They ended up being directed to the foreign exchange desk, since they were written in English and “looked like an international thing”.

The person in the forex desk told me, plainly: “I kept it for a few days, then threw it in the trash bin”.

And, just like that, the BoEs were history.

Luckily, the agreement allowed us to receive payment even without the notes.  But the lawyers of the buyer demanded us to draft a series of documents, voiding the original Bill.  The payment was delayed for months, until we could formally prove that the Bill were destroyed.

The point is: Brazil is just like the rest of the world, but different. Try to adapt your business to the Brazilian system. Things will be easier this way.

IS IT SUPER EASY TO IMPORT FROM CHINA TO BRAZIL? WHY DOES IT HAPPEN SO MUCH?

Note: you might also want to read: Why do they invest in Brazil if importing seems so cheap right now?

Dear Adler,

How can a blooming trade between China and Brazil be explained, given all the import barriers, and troublesome bureaucracy in Brazil?

Are there special agreements, or perhaps deregulations apply as far as imports from China are concerned?

It has been impossible for me to find information that confirms so. Perhaps you could help me.

Thank you in advance.

Best regards

Konstantina

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Dear Konstantina, 

I'm flattered that you would ask me that. How did you find me? Through the blog?

The answer is, indeed, very simple: China is cheap. 

Actually, in my opinion Brazil should be importing a lot more from China, is spite of the import taxes and bureaucracy. I think the Brazilian entrepreneurs are still shy and not very prone to international trade, specially in states other than São Paulo and Rio. 

Few Brazilians participate in trade fairs in China (Canton fair, etc.). They usually wait until the foreign sellers comes to Brazil in order to present they products. 

In pure economic terms, it makes little sense to produce anything in Brazil at all. Everything should be imported. 

I'm hearing a lot of people talking about importing from Vietnam and Malaysia, too. 

I hope this helps. May I post this in my blog? It is a very interesting subject. 

Regards, 

Adler

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Dear Adler,

Thank you very much for your prompt response.

Yes, I got to know you through your blog and was impressed by the responsible, qualified answers you give.

I work for a company in Denmark and we are currently evaluating how attractive the Brazilian market is for our machines. 

Part of my market analysis involves trade barriers and your blog resulted in my search. I then read plenty about the fast growing trade economy between the two countries and curiosity stepped in.

Now I understand that China is cheap, import taxes are cumulative so even though taxes might reach 100% on top of invoiced price it will still be cheaper than importing from a not so cheap country to begin with. 

It explains it very clearly.

Thank you again Adler.

I'm flattered that you found my question interesting, you may certainly post it on your blog :)

Konstantina

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Dear Konstantina, 

Thank you very much for the compliments. 

You are the third Danish client I have helped this year. Maybe I should visit Denmark. 

Regards, 

Adler

Cease and desist letters in Brazil

I have just published an article at The Brazil Business. Please check it here, or follow the link. 


Introduction

The use of cease-and-desist letters is a common practice in many English speaking countries, especially those that adopt common law.

Generally speaking (and keeping in mind that I’m a Brazilian lawyer, writing under a Civil Law perspective), a cease-and-desist letter is a letter demanding that the recipient refrain from initiating or stop performing a certain behavior, under the threat of legal action, civil or criminal.

In common law jurisdiction, notably in the Unites States, sometimes a cease-and-desist letter is a fundamental condition to ascertain a party’s legal standing, and, therefore, must be issued before any claim can possibly be brought before court.

Apart from that, cease-and-desist letters also have broad applications, which are widely known by business people. Its use in patent infringement is particularly popular.

In Germany, cease-and-desist letters (called Abmahnung) are also extensively used where there is a contractual breach by the other party.

What about Brazil? Do cease-and-desist letters exist here? Do they have any legal value?

This articles aims at explaining (however briefly) how these letters work in Brazil, from a business perspective.

Notifications

Cease-and-desist letters would be considered a special kind of notification, according to the Brazilian Civil code and Brazilian Civil Procedure codes.

In Brazil, notifications may be used to ascertain a claim, and also to inform the other party of a perceive breach or wrongdoing that it has performed. They may also be used to request the fulfillment of an obligation, and in many other cases, basically whenever a cease-and-desist letter would be used.

On the plus side, notifications may be used to declare the other party to an agreement as being in breach, thus making a future win in a lawsuit more probable. In addition, the date of receipt of the notification may be used as the first day for the application of interests on overdue payments (in some cases).

But the use of cease-and-desist letters in Brazil is also largely symbolic, in the sense that it is not always mandatory for a party to notify the other before filing a lawsuit. That is, a cease-and-desist letter is not always required in order to determine legal standing.

For example: a specific clause of an agreement that is governed by the Brazilian law may request one party to notify the other before terminating the agreement. In this case, the notification is very important, and it is generally expected that one party will notify the other before pursuing any legal action.

However, where this clause is absent, the party wishing to terminate the agreement may go directly to court and ask for the termination, even without issuing any prior cease-and-desist letter to the party in breach.

In some other cases, notably in the assignment of credits to third parties, the assignor’s creditors would have to be notified of the operation, in order to oppose to it if they see fit. Notifications are mandatory, too, in a limited number of situations related to corporate law, such as the summoning to shareholder’s meetings.

On the other hand, in most intellectual property cases, the party that feels damaged will go to court immediately, without issuing any prior notification.

This is because, being a civil law country, Brazil defines the ability to pursue a lawsuit in different basis than the USA, as the concept of legal standing is not the same. In Brazil, it is more theoretical and related to the infringement of a generic written rule (the Civil Code, etc.). Brazil is closer to Germany in this sense. In the USA, the actual situation and the relationship between the parties are, generally speaking, more relevant.

I’m sure the differentiation above may seem useless for many readers, but they are important under a legal stand point and might have serious implications to your business.

Finally, please note that Brazilian public agencies do not usually issue cease-and-desist letters (as they do in the US). More often than not, Brazilian agencies will send you a penalty notification (an order to pay penalties), without previous warning.

Forms of Notification

In Brazil, there are three kinds of notifications.

Extrajudicial notification

The first one would be a simple correspondence mailed or personally delivered to the other party.

The second and most usual one would be a correspondence issue by a [public notary](, upon formal request.

It works similarly to summoning administered by public notaries in the USA. The one interested in making the notification must present himself to a public notary (/article/notary-public-authenticated-photocopy) to a “Cartório”, as we say in Brazil), pay a fee (usually about one hundred reais), and supply the other party’s address and the content of the notification.

A constable or other public notary representative will personally visit the party to be notified and hand him the notification.

The notification, in this case, is not like a subpoena, because the notified party is not obliged to accept the notification, nor is it obliged to declare anything.

However, if this is the case, the public notary (constable, etc.) shall attest that the notification has been presented and read it out loud to the notified party, and that such party refused to receive it or sign a receipt. This attestation has full public faith and credit, and can be used to prove that the party has been dully notified. This kind of notification is thoroughly used in lease disputes, for instance.

Judicial notification

Finally, the third and less usual kind of notification is a judicial notification (the two above are non-judicial notification, or extrajudicial notifications). In simple words, it is a notification that is issued by a judge, upon request of one of the parties.

It shall not be confounded with a court injunction, which communicates the court’s own decisions. In this scenario, the notification is presented before the judge, who merely forwards it to the recipient. It is not more authoritative than the other ones, only more formal, considerably more expensive, for it requires the payment of lawyer and court fees, which may easily amount to USD 2.000,00.

This notification works similarly to the notary public one, with the difference that it is managed by a magistrate (who can refuse forwarding it, if the claim contained in the notification is absurd). Also, it is conveyed to the hands of the notified party by a court clerk, not by the notary public or its representatives.

The court clerk has the same public faith and credit than a notary public, to the effect of attesting the refusal of the recipient to take the notification.

Apart from the increased level of formality, the judicial notification has another advantage: it can be used to notify a party that cannot be found, or whose address is unknown. This is made by the publishing of the notification in public and private newspapers, in a procedure similar to the American “service by publication and mailing."

Those are just general considerations on the subject. Keep in mind that this article describes the use of cease-and-desist letters, not cease-and-desist orders (also called injunctions) issued by courts.

One should always ask for the help of a Brazilian lawyer whenever he wants to make a notification to a Brazilian party.

About the author:

Adler Martins is a Brazilian lawyer specialized in advising foreigners doing business in Brazil. He can speak English, Spanish, German and some Chinese. Mr. Adler has lectured to audiences in Brazil, England and India about how to invest in and export to Brazil.