3/31/2020
With the spread of the COVID-19 pandemic, governments have adopted several measures and guidelines to contain its impact on society. This scenario may directly affect contractual relations in different sectors of the economy, generating delays and, many times, non-compliance with contracts. To deal with situations like this, in which there is a change in external circumstances that directly affect contractual relations, Brazilian civil law provides for some institutes, among them the “force majeure”.
Force majeure is a concept expressly provided for in Brazilian law, in the sole paragraph of article 393 of the Civil Code:
“Art. 393. The debtor is not liable for damages resulting from unforeseeable circumstances or force majeure, unless expressly held responsible for them.
Single paragraph. The unforeseeable circumstances or force majeure occurs in the necessary fact, the effects of which it was not possible to avoid or prevent.”
The concept provided for in the Civil Code is quite broad and, therefore, the possible framing of the COVID-19 pandemic as a force majeure event must be analyzed on a case-by-case basis, according to the negotiation relation and contract signed between the parties.
Also in accordance with the Civil Code, force majeure is an exclusive liability of the debtor and will apply even when it is not provided for in the contract (except if the obligation has already been breached before the event occurred or if the parties have expressly agreed to be held responsible in such a case).
If the contract contains force majeure, the procedure for arguing it must follow the requirements agreed between the parties that, in general, indicate the sending of immediate notification to the other party.
If not provided for in the contract, the parties may attempt to obtain the following remedies:
a) If force majeure is caused by a temporary event: suspension of the obligation and exclusion of liability during the relevant period; or
b) If force majeure is caused by a permanent / irreversible event: exclusion of liability and, ultimately, termination of the contract without liability of the parties.
In practice, when there is a contractual provision, it is common for contracts to have the following clauses:
a)temporarysuspension of the effectiveness of the obligations during the period in which the force majeure event persists;
b)exclusionof liability arising from non-compliance and / or delay in fulfilling the obligations of the complaining party;
c)theright to terminate the contractual relationship by one or both parties; and
d)automatictermination of the contract, releasing the parties from all obligations provided for in the contract.
Note that there is a risk that one of the parties to a contractual relationship will misuse the application of force majeure, and for this reason fail to fulfill its obligations under the contract (permanently or temporarily), in circumstances where this premise it is not true.
In these cases, the party who wrongly resorted to force majeure will be exposed to breach of contractual obligations and, in more extreme cases, may see the other party terminate the contract for non-compliance and potentially suffer material damage.
In addition to force majeure, Brazilian law also expressly provides for the theory of unpredictability (a concept similar to the “eccessiva onerosità” principle of Italian law), set out in articles 317, 478 and 479 of the Civil Code, which can alternatively be applied to proven imbalances caused by COVID-19:
“Art. 317. When, for unforeseeable reasons, there is a manifest disproportion between the amount of the installment due and the time of its execution, the judge may correct it, at the party’s request, so as to ensure, as much as possible, the real amount of the installment. . ”
“Art. 478. In contracts for continuous or deferred execution, if the performance of one of the parties becomes excessively burdensome, with extreme advantage for the other, due to extraordinary and unforeseeable events, the debtor may request the termination of the contract. The effects of the sentence that will be decreed will be retroactive to the date of the summons. ”
”Art. 479. The resolution can be avoided, offering the defendant to equitably modify the conditions of the contract. ”
The applicability of the institutes mentioned above must be analyzed on a case-by-case basis.
In any case, whatever the circumstance that will lead the contractor to request the revision and / or termination of the contract based on the allegation of “excessive burden”, one cannot lose sight of the fact that an (important) requirement of article 478 of Civil Code, giving rise to contractual review, is the “extreme advantage of the other party”, that is, a situation that puts the other contractor at a great disadvantage.
Regarding this requirement, it must be considered that: (i) both contractors are suffering the impacts of emergency measures aimed at containing the COVID-19 pandemic; (ii) in a crisis / pandemic situation, the entire production chain must be preserved and not just the economic interests of one of the parties; and (iii) the economic balance of the contract must be maintained.
Thus, even if the Civil Code allows the review of contractual clauses and even the termination of contracts due to an unpredictable and imponderable event, and establishes that there is no fact or omission attributable to the debtor, it does not incur a delay (Article 396 of the CC), the extraordinary and unpredictable event cannot be invoked to justify widespread breach of contracts, let alone be justification for changing a contract for the benefit of a single party.
Whatever the hypothesis of applying the theory of unpredictability, the principles of good faith, contractual loyalty, in addition to that which prohibits unjust enrichment must always be respected.
Finally, it should be noted that, from the moment that its occurrence becomes feasible, the pandemic is no longer considered an “unpredictable fact” and, consequently, the theory of unpredictability to contracts signed from that moment on.
The L.O. Baptista team is available to clarify any doubts on this and other matters.
