Contract Law: Force Majeure and Hardship in Brazil

Written by | Contracts, Dispute Resolution

Quick read:

  • The coronavirus (COVID-19) outbreak has caused major disruptions to businesses around the world, especially to supply chains and sales.
  • Brazilian law can protect parties from having to perform obligations due to certain unforeseen events and hardship. This allows for termination and delayed performance without the payment of penalties, or price renegotiations.
  • Companies should immediately seek legal advice upon realising that there were not be able to perform their obligations, as the protections available under Brazilian law may not be available if prompt action is not taken.
  • Court decisions granting temporary relief based force majeure and hardship arguments have been handed down since the COVID-19 outbreak commenced.

Introduction

Many companies that do business with Brazilian companies have agreements that are governed by Brazilian law. Force majeure and hardship are often defined in agreements drafted by Anglo-American lawyers, but this is rarely the case when the contract is drafted by Brazilian lawyers.

Brazilian law contains rules that can offer protection to those companies unable to perform their contractual obligations due to the disruptions brought about by COVID-19.

Force Majeure under the Brazilian Civil Code

The Brazilian Civil Code will apply to all local contracts and those international contracts that are neither governed by UN’s Convention on Contracts for the International Sale of Goods (the “Convention”) nor by the Consumer Protection Code (which I will not address here).

Article 393 of the Civil Code sets out the rule applicable to those contracts governed by the Code. The article provides:

“The obligor is not liable for damages resulting from fortuitous cases or force majeure if he is not expressly responsible for them.

Sole paragraph. The fortuitous case or force majeure occurs in a necessary event whose effects were not possible to be avoided or prevented”.

The article allows a party that must do or not do something under a contract to avoid having to pay damages where a “fortuitous case or force majeure” occurs. But what do these terms mean?

Courts and scholars have interpreted the expression “fortuitous case” as an unforeseen event that has its origin in an act of man, while “force majeure” has its origin in nature (an “act of God”). The event must be “irresistible, external” and one which “prevents [the party] from acting in performing the obligation”. Importantly, the impossibility of performance must be a consequence of a “fact that was not controlled by the [party]”.

Force majeure under the Civil Code is Brazil’s equivalent to the doctrine of frustration under English law (see also hardship further below) and the doctrines of impossibility and frustration of purpose under American law.

Force Majeure under the Convention

Where an international contract is for the sale of goods between parties located in countries that are members of the Convention, the Convention will apply to their contractual obligations (unless expressly excluded by the parties).

The Convention contains a provision that deems force majeure to be part of contracts for the international sale of goods. This is set out in article 79:

“(1) A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it, or its consequences.

(2) If the party’s failure is due to the failure by a third person whom he has engaged to perform the whole or a part of the contract, that party is exempt from liability only if:

(a) he is exempt under the preceding paragraph; and

(b) the person whom he has so engaged would be so exempt if the provisions of that paragraph were applied to him.

(3) The exemption provided by this article has effect for the period during which the impediment exists.

(4) The party who fails to perform must give notice to the other party of the impediment and its effect on his ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, he is liable for damages resulting from such non-receipt”.

Differences between the Civil Code and the Convention

There are important differences between the applicable provisions in the Civil Code and the Convention:

IssueCivil CodeConvention
DefinitionMore general with greater discretion given to the courts.More specific.
Scope and elements required to be provedCovers any event that the party is not capable of avoiding. The party must prove that the event was unforeseen and outside of its control.The reason for not performing the contract must be:

(a) beyond the control of the party; and

(b) the party could not reasonably have expected to:

(b.i) take the impediment into account at the time of the conclusion of the contract; or

(b.ii) have avoided or overcome the impediment or its consequences.
Performance by third partiesFalls under the general rule.Both the party bound to perform the obligation and the third party must prove the elements for not performing as set out above.
Notice requirementsFalls under the general obligation to act in good faith throughout the performance of the contract, hence timely notice is likely to be required. The notice must be given to the other party:

(a) setting out the impediment and its effect on the party’s ability to perform; and

(b) within a reasonable time after the non-performing party knows or ought to have known about the impediment.

Hardship

Under articles 478 to 480 of the Civil Code, where performance by a party becomes “exceedingly onerous” and extremely advantageous to the other party due to “extraordinary and unpredictable events” the party under the obligation to perform can terminate the contract.

Also, the party bound to perform can offer to reduce or change how its obligation could be performed so that the obligation is no longer exceedingly onerous on that party.

However, if other party offers to pay a higher price that is reasonable in the circumstances, all other contractual obligations will need to be performed by both parties.

Additionally, article 317 of the Civil Code provides that if for unforeseen reasons an event occurs that causes a “manifest disproportion” between the value of obligation agreed to at the time the contract was made and at the time the obligation is to be performed, the Court may adjust the amount payable.

These principles are Brazil’s equivalent to the doctrine of frustration under English law and the doctrine of unpredictability under American law.

Examples and Court Decisions

Force majeure and hardship may apply to a variety of situations and each case needs to be analysed individually. However, in general terms:

  • if a service provider was bound to provide services in Brazil but it was not able to do so because its staff were under a government-ordered lockdown, then it is likely that there would be a fortuitous case under the Civil Code and the manufacturer would not be liable to pay damages;
  • if a manufacturer was bound to deliver a product by a certain date but it was unable to do so because its factories were closed due to an unforeseen major shortage of raw materials as a consequence of the COVID-19 outbreak, then it is likely that there would be force majeure under the Civil Code and the Convention, and the manufacturer would not be liable to pay damages;
  • if a product manufacturer had supply disruptions due to the COVID-19 outbreak, with the cost of acquiring raw materials having increased substantially and the market price for the final product having become much higher, it is likely that the hardship provision under the Civil Code would apply and allow the manufacturer to terminate the contract or reduce the number of products to be delivered (but the buyer could offer to pay a higher price that is reasonable in the circumstances and, if so, the manufacturer would need to perform its contractual obligations in full).

Already, there have been court decisions granting temporary relief based on the principles addressed above arising from the COVID-19 outbreak. These include:

  • In VBR Gastronomia v Costa, a restaurant operator (lessee) sought a reduction in the rent payable. As the lessee was only able to operate the restaurant on a take away basis, the Court held that a temporary order should be issued reducing the rent by 70%.
  • Also, in Turqueza v Paulo Octavio, the plaintiff was a lessee in a shopping centre. It sought a temporary order stopping it from having to pay the minimum rent and marketing fund levy. The Court relied on article 317 of the Civil Code to find that the COVID-19 outbreak amounted to a “black swan as described by [Nassim] Taleb” and held that the lessee was not bound to pay the minimum rent and marketing fund levy.

Final Remarks

Brazilian law can provide relief to those parties unable to perform their obligations as a consequence of COVID-19. This may allow for contract terminations and renegotiations of contractual terms (including price and payment terms).

Companies should seek legal advice as soon as they realise that they will not be able to meet their obligations under a contract as delays in notifying the other parties to their agreements may prevent the party from benefitting from the protections provided under Brazilian law.

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Last modified: April 21, 2020