Contracts signed between private parties have been seriously affected by the COVID-19 pandemic, especially since the Federal Government, the State, and the City of São Paulo enacted Executive Orders to implement severe health measures.
The newly named “Corona Crisis” interferes strongly in an array of contracts, such as Supply, Real Estate, Construction, and Services, generating delays, cancelations, and suspensions. These circumstances lead to severe uncertainty in the market as a role, given that the parties hesitate in this new and unforeseen situation.
There is, however, a way to approach this scenario. The first step is, naturally, to look at what the contract says. It is important to use its provisions as a guideline for the tortuous path the parties have ahead of them. Some contracts already provide for circumstances where one may terminate or renegotiate the agreement. If, however, the contract does not provide a solution for the present circumstances, one must find in the law how to fill in the blanks.
In this regard, Brazilian law provides the tools and remedies to be used in situations like the one we face today: act of God, force majeure, hardship, unpredictability, duty to renegotiate, to name a few.
Act of God and/or force majeure (caso fortuito e/ou força marior) requires that the effects of the Corona Crisis be both inevitable and unforeseeable.
Hardship (onerosidade excessiva) comes into play when a longstanding contractual relationship has become imbalanced due to an extraordinary and unpredictable event, calling for an adaptation of the contract.
Unpredictability (teoria da imprevisão) may be found when severe currency fluctuation affects a contract between the moment it is executed and the moment it has to be performed (i.e., payment becomes due). Currency fluctuation, however, ought to have been caused by an unpredictable circumstance.
In all these examples, the problem lies on the qualification of the “Corona Crisis”. Is it an unpredictable and extraordinary circumstance? Could it have been avoided? Are all contracts affected indistinctly?
Despite the fact that the global economy is somewhat dependent of Chinese Economy, and that China was the epicenter of SARS not long ago, due to the early stages of the virus in Brazil, it is impossible to determine, with certainty, if the abovementioned legal remedies would be applicable to all the affected contracts. This is also true because the crisis is boosting a few sectors of the economy. Therefore, these matters must be evaluated on a case-by-case basis and, will, without a doubt, be the object of future analysis by the Judiciary and by Arbitral Tribunals.
Also, one must bear in mind that every contract is guided by good faith, among other contractual principles. From good faith, one may extract the duty to cooperate that binds the parties, which can also manifest itself through the duty to renegotiate.
When parties enter into a contract, they do so in specific circumstances (economic, historical, social, environmental, and others) and, as a consequence, assume certain risks. These risks may implicate in more or less profit (or losses). That is fair play, and is truly essential to contractual relationships.
However, it is possible that those initial circumstances change substantially and, with them, the risks assumed by each party.
In cases like these, with the support of the recently enacted Law of Economic Freedom (Lei de Liberdade Econômica), the parties should renegotiate their contract in order to restore the allocation of risks originally envisioned. If renegotiation is not possible and termination is the only alternative, the parties should, through negotiation, allocate losses in the most efficient manner.
Therefore, the parties must, in good faith, renegotiate the terms and conditions of the contract before any decision of termination is taken, or before any judicial or arbitral procedure is initiated, in order to fulfil at least part of the contract’s purpose.
Our multidisciplinary team at Costa Tavares Paes is fully capable of guiding clients through this and other important issues originated from this Corona Ccrisis. We are here to assist you in whatever is needed.