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Covid-19 Disputes: Implications of the Pandemic on Commercial Contracts Under Brazilian Jurisdiction

  • Legal Development 13 May 2020 13 May 2020
  • Americas

  • Coronavirus

Covid-19 Disputes: Implications of the Pandemic on Commercial Contracts Under Brazilian Jurisdiction

The outbreak of the Coronavirus (‘’Covid-19’’) has brought disruption and instability to commercial relations, with many contractual parties either wanting to get out of ongoing contracts or to renegotiate better terms with their counterparties.

In this context, parties with businesses in Brazil who are navigating the world post Covid-19 must be wary of the Brazilian law on force majeure and the doctrine of rebus sic stantibus.

Introduction

The Brazilian Courts will have jurisdiction over contractual and non-contractual disputes whenever one of the following circumstances take place: the Defendant is domiciled in Brazil; when the obligation must be fulfilled in Brazil (eg. discharge of cargo) or the act or fact which originated the dispute took place in Brazil (eg. the signature of the contract).

If one of the above mentioned events exists, it is likely that the Brazilian Courts, upon finding themselves with jurisdiction to rule upon the dispute, will apply the relevant Brazilian law to the matter, despite the choice of law of the parties (as we have seen constantly when dealing with commercial disputes).

Although the Brazilian statutory law enables and recognizes the choice of foreign law by contractual parties, it is often the case that the local Courts will not apply them when dealing with disputes brought in Brazil. Thus, the Brazilian Civil Code will apply to local contracts and is likely to apply to international contracts when disputes arise locally and are decided by the Brazilian Courts.

Accordingly, it is relevant to understand what is the Brazilian law and Courts approach to unforeseen events capable of changing the economic circumstances of the parties, such as a global pandemic like Covid-19.

The Brazilian law on Force Majeure

Differently from English law, where force majeure is not a defined legal principle but rather a creature of agreement, Brazilian statutory law contains an overlaying concept of force majeure, which is applicable to all commercial contracts subject to Brazilian law.

Article 393 of the Brazilian Civil Code provides that parties shall not be liable for the losses resulting from unforeseeable events, the effects of which they could neither predict or avoid.

The party claiming a relief from performance under the contract or from payment of damages following a breach of contract arising from a force majeure event has the burden of proving that the event was un unforeseen circumstance, outside their control.

The spread of Covid-19 and the consequences of its outbreak (such as Government lockdowns) are unforeseen events in relation to contracts which were formed before the crisis.

It is still yet to be seen how the Brazilian Courts will treat sophisticated commercial matters (in the fields of marine, international trade, construction and offshore for example), where parties invoke the doctrine of force majeure to fully or partially discharge their contractual obligations, by virtue of Covid-19.

However, there are some decisions already from the local Courts in disputes involving negotiation and/or lack of payment of Shopping Centers’ rents, where the Courts have allowed the Lessee to temporarily suspend the payment of rent, on the grounds that the outbreak of the coronavirus was a force majeure event, which prevented the performance of the contract.

Whether this position will be extended to other contracts is yet to be seen.

The Brazilian law doctrine of rebus sic stantibus

Articles 478-480 of the Brazilian Civil Code enshrine the doctrine of rebus sic stantibus into the Brazilian Contractual law.

These provisions establish that contractual parties may request the termination or renegotiation of the terms of the agreement if its performance becomes excessively burdensome to one of the parties, with extreme advantages to the other, due to extraordinary and unpredictable events.

The aforesaid Articles also allow the party with the burden to request a reduction of the value of the payment due under the agreement or that the type of performance is changed, in order to re-establish the economic balance of the contract.

Accordingly, contractual parties seeking to amend the terms of their agreements (payment terms for instance) or seeking to change a contractual requirement (for instance, a delivery date), given the coronavirus pandemic, may invoke the above mentioned provisions and it is likely that the Brazilian Courts will uphold these changes. It is worth noting, however, that each case will be decided on a factual basis and the entire provisions of the agreement will be taken into account by the Courts, as a whole, when applying the aforesaid principles.

Conclusion

The outbreak of Covid-19 has triggered an unprecedented global crisis with a series of events that will hinder or prevent performance of several contracts in the upcoming months. Government lockdowns are preventing movement of goods and personnel; the changes in the demand and supply of goods have made several companies insolvent; there is shortage of supply and materials to conduct regular business operations, to mention a few events which are a consequence of the coronavirus crisis. In this context, contractual parties subject to Brazilian jurisdiction may seek temporary (or permanent) relief of their contractual obligations, on the grounds of the Brazilian law on force majeure and rebus sic stantibus.

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