Authors: lawyers Nuno Gonçalves Correia dos Santos, Daniela Favaretto and Ananda Pisanelli Messina, of the law firm Chiarottino and Nicoletti Advogados (https://chiarottino.com.br/), with offices in São Paulo and Ribeirão Preto, specialized in corporate law, tax and labor.
In Brazil, as in other countries, the pandemic caused by Covid-19 has impacted contractual relations, due, among other things, to: (i) the total or partial interruption of supplier activities, affecting the supply chain; (ii) travel and transportation restrictions; (iii) legal restrictions on the exercise of the activities; (iv) the insufficiency of manpower; and (v) the reduction or termination of customer activities.
These factors were exacerbated by a severe currency crisis and a sharp fall in stock market.
In this scenario, many questions arise regarding the legal consequences of these impacts, particularly about the possible breach of the contracts on the basis of those impacts. And, in fact, many companies are not (or will not be) able, due to the consequences of the pandemic, to fulfill their contractual obligations.
It is important to note first that, as we will see in detail below, Brazilian civil law, in addition to sanctioning the principle of good faith, contains rules that expressly regulate the hypotheses of unforeseeable circumstances / force majeure or contractual imbalance due to unpredictable events. Therefore, unlike other legal systems (as is the case with many that follow the common law system), the possibility of invoking such situations does not depend on contractual provision.
However, this does not mean that the existence of contractual clauses that regulate these hypotheses (as is the case with force majeure or hardship clauses) is irrelevant in Brazil.
In this regard, it should be noted that there is a distinction of treatment when it comes to concluded contracts, that are contracts already signed and in force, and contracts not yet concluded.
In relation to contracts not yet concluded, the parties must rely on good faith as a general duty of conduct. One of the implications of this principle is that parties should refrain from taking advantage of the situation to unreasonably modify the terms already negotiated in order to increase, at least substantially, their earnings to the detriment of the other party.
For contracts concluded, already signed and in force, Brazilian law provides for responses or measures that, depending on the case, can be applied to situations where it is impossible to carry out the contractual provision or to excessive costs due to the consequences of the pandemic.
Among these solutions, we highlight the following:
- Exclusion of liability
The Brazilian Civil Code establishes as a general rule that, in the event of a fortuitous event or force majeure, the party responsible for the fulfillment of the contractual duty will not be liable for the damage caused by the event. According to the law, the fortuitous event or force majeure is the occurrence of an event that is the cause of the impossibility of fulfilling a contractual obligation and the effects of which it has not been possible to avoid or prevent.
In addition to the general rule, the Brazilian Civil Code provides for specific consequences of force majeure in relation to a series of specific situations or contracts, such as the loan, the provision of services, deposits, commissions, agency/distribution and transport contracts.
However, it is important to stress that the law allows the parties, through specific contractual clauses, to deviate from the general rule, establishing that liability persists in fortuitous cases or force majeure. Also for this reason it is essential to analyze in depth the application of a possible contractual clause.
- Extinction of the obligation
In addition to the exclusion of liability according to the terms described above, the law also contains a general principle according to which an obligation is extinguished if the performance becomes impossible without the fault of the party responsible for its fulfillment, as in fortuitous cases and force majeure.
- Judicial termination for excessive charges or undue advantage
In the event of excessive burdens or undue advantage for the other party, due to extraordinary and unforeseeable events, the law gives the injured party the right to request the judicial termination of contracts considered to be with “continuing performance” (contracts that are performed through provisions which are maintained or repeated over time) or with “deferred performance” (contracts in which the provision takes place after their conclusion).
- Price correction
In the event of a manifest disproportion between the value of the obligation owed and its value when it is performed, for unpredictable reasons that occurred after the conclusion of the contract, the law enables the injured party to obtain the price correction in court. This legal provision aims to ensure the contractual balance which has been manifestly affected by the occurrence of an unexpected event.
- Abuse of rights
According to the law the exercise of a right that clearly exceeds the limits imposed by its economic or social purpose, good faith or good customs is deemed unlawful.
The admissibility of the application of the above mechanisms must be carefully assessed on a case-by-case basis.
It should be borne in mind that, for example, to obtain the revision or termination of the contract, it is not sufficient to evoke the occurrence of an unexpected and unforeseeable event, since other requirements must be demonstrated.
One of the points that needs to be assessed is how this event affects one party’s ability to fulfill its commitments, which, in some contexts, can be a complex task.
On the other hand, a technical analysis of the terms of the contract is essential, not only to know the balance of interests that the parties wanted to establish, but also because, in many cases, the contract itself may contain clauses (some valid, others not) which provide for the application of the solutions listed above or others. Examples of this are the clause governing fortuitous and force majeure events, the “hardship clause” or the “material adverse change clause” (widely used in mergers and acquisitions). As explained above, although Brazilian law expressly regulates many of those situations, these clauses are by no means irrelevant.
Decisions by Brazilian courts on the impact of the pandemic on contracts
The courts have been paying particular attention to non-residential lease contracts, which were particularly affected by the pandemic, in light of the various problems caused to the tenant and the landlord, the latter often economically dependent on the income resulting from the lease contracts.
Tenants have resorted to the judiciary with several demands: revising contracts, allowing them to terminate without paying a fine, asking for their suspension etc.
It is still not possible to speak of any uniformity in this matter. But we can cite some interesting judgments.
In a trial in Brasilia, in which a lease in a shopping center was being discussed, the Judge decided that, until the moment of the total closure of the shopping centers, the reduction in revenues is to be considered as a commercial risk and it cannot be transferred to the landlord. Therefore, he considered unacceptable the revision of the values previous to the actual closing of the shopping center. However, he acknowledged that the interruption of the activities could justify an early termination of the contract without the payment of the related fine, since it was not the direct responsibility of any of the parties.
The Court of São Paulo, in a leasing case, established that “the reduction in the turnover in a given period cannot be considered a reason of force majeure or a fortuitous case that justifies the non-payment of the rent”. The ruling also determined that the law only authorizes the termination of contracts affected by unforeseeable circumstances or force majeure, and not their judicial revision.
Also in São Paulo, in a procedure in which was being requested the immediate interruption of the obligation to pay the rent or to obtain a 90% reduction in its value, the Court decided that “(…) the reduction in the turnover or monthly income of the lessee, although considerable, cannot be used as a reason to suspend the lease obligation (…) “.
Therefore, we can conclude that the interpretation of the majority, still not definitive, is that, in the current legal scenario, the waiver of the obligation deriving from the lease contract can only take place through negotiation (i.e., bilateral).
Draft law on transitional legal regime for the pandemic situation
It is necessary to mention that a draft law (PL 1179/20) is currently being discussed in the Brazilian Congress, whose objective is to establish a transitional, then provisional, legal regime of private law relations during the period of the pandemic.
According to the above-mentioned draft law, the date of 20th March 2020 would be regarded as the initial time of events resulting from the pandemic and no retroactive effects shall be recognized to the consequences arising from the pandemic in the performance of contracts, including those defined for by the provisions of the Brazilian Civil Code governing unforeseeable circumstances/force majeure.
The draft law also clarifies, as a general rule, that for the purpose of invoking the general rules of the Civil Code which provide for fortuitous circumstances/force majeure or excessive burdens on contracts, the following situations will not be considered as unforeseeable facts: increase in inflation, exchange rate variation, devaluation or replacement of the monetary standard.
If the PL 1179/20 becomes law, the envisaged regime will constitute, together with the Civil Code, an essential legal basis for the evaluation of cases.