Impacts of the current crisis on contracts

Cescon Barrieu Informa — March 24, 2020

The current pandemic has caused governments and companies from many countries to take restrictive measures that impact their ability to comply with contractual obligations.

The law provides for certain remedies, such as concepts of excessive burden and force majeure.

Excessive Burden
Excessive burden is characterized by an extreme alteration to the contractual balance deriving from extraordinary and unforeseeable events.

Such legal concept is applicable to contracts with future or continuous performance.

Upon existence of an excessive burden, the obligor has the right to seek the early termination of the contract. As far as possible, the status quo prior to the execution of the contract must be reestablished and losses mitigated.

Other than that, the law also allows the counterparty to avoid termination should they offer the obligor a contractual change that reestablishes the contractual balance. Upon acceptance of such contractual change the obligor, the contract will not be terminated.

However, a more complex debate derives from the question of whether an obligor can ask courts to review and unilaterally modify the contractual obligations without the other party’s consent.

There is controversy among scholars and court precedents vary on the matter. There are precedents allowing the obligor to ask courts to interfere in reviewing contractual obligations, but also rulings that significantly limit the role of Courts.

Force majeure or fortuitous event
Force majeure and fortuitous event correspond to events that are unforeseeable, beyond control of the parties, and that have unavoidable effects. Although there is no clear distinction between force majeure and fortuitous event is controversial under Brazilian Law, their consequences are strictly the same.

The occurrence of an event of force majeure or a fortuitous event exempts the defaulting party from indemnifying the other party from losses deriving from such default. However, they do not allow the contract to be modified by the Courts, even if it shifts the contractual balance.

The pandemic and the measures taken for its containment can be considered as events of unforeseeable and unavoidable effects to contracting parties. Once such circumstances are verified, they enable the obligor to avoid from (i) indemnifying the other party from losses deriving from the obligor’s breach of obligations and (ii) contractual and legal penalties related to such breach of contract. The analysis must be made on a case-by-case basis, including to see if the parties had already agreed on remedies for scenario such of the pandemic, as permitted under Brazilian laws.

Clauses regarding material adverse changes, known as “MAC” clauses are legal. Therefore in principle clauses establishing liabilities in case of a pandemic are also legal.

It is important to highlight that Brazilian law also forbids parties from acting in bad faith, in an abusive manner, and unfair enrichment. Therefore, opportunistic behavior like, attributing defaults that would have happened even without the pandemic, have no legal grounds.

Dispute resolution mechanisms
Pursuant to our Litigation Newsletter dated March 20, 2020 (only in portuguese) the National Justice Council (“Conselho Nacional de Justiça” – CNJ) passed Resolution CNJ nº 313/2020, halting all judicial deadlines until April 30, 2020.

However, motions for urgent injunctions or restraining orders will keep being heard by Courts.
For contracts containing arbitration clauses, most of the arbitral institutions are still working virtually. Some use the so-called “emergency arbitrator”, that can be called to decide in lieu of Courts.
The moment also calls for cooperation between the parties. Alternative dispute resolution methods such as mediation may be helpful during the crisis, as they can be done remotely through videoconferences.

History shows that, in extreme cases such as the current pandemic, many new solutions are created, and legal rules become more flexible. Thus, the time calls for creative solutions and for the use the law as an instrument to preserve commercial relationships, ensure that the contracts fulfill their social purpose and reduce losses.

Our litigation and arbitration teams is at your disposal for any doubts that may arise.

Carlos Braga | Gabriel Seijo | Fábio Rosas | Helena Abdo | Maurício Fabbri