COVID-19: Impacts in international contracts between brazilian and foreign parties

The Covid-19 virus (CoronaVirus) is a concern for everyone nowadays, even because its spread has reached a global scale; it was even classified by the WHO (World Health Organization) from March 11, 2020, as a pandemic, in a way that has become the worst threat to public health in recent times.

The fact is that the pandemic not only concerns people’s health but is also a cause for uncertainty and instability in the international macroeconomic scenario, given that the world economy will be negatively impacted by the suspension of companies’ activities in an international context.

In Brazil, it is not being different and the repercussions of the virus started to appear. The Federal Government, with the approval of the National Congress, decreed on March 20, 2020, the state of public calamity. With that, the Government has the authorization to spend more than planned for actions to prevent and contain the pandemic and allows the pre-established fiscal target to be exceeded.

The state of public calamity, based on the LRF (Law of Fiscal Responsibility), is expected to last until December 31 and was justified by the government as a necessary measure to carry out the continuous monitoring of the Covid-19, to increase public spending to protect the health and employment of Brazilians, and also due to the expectation of falling revenue.

However, it is worth mentioning that the state of public calamity only affects public policies and the way the government will deal with annual public spending. This means that the state of public calamity does not automatically affect contractual relations, nor does it modify the obligations and penalties contained therein.

Nevertheless, some doubts about commercial relations with Brazil are beginning to emerge, such as: What is the real impact on companies in Brazil? What are the effects on international contracts stipulated between Brazilian and foreign parties? Is there a legal instrument to protect the affected companies? Contractual penalty is possible due to the default?

Initially, to begin clarifying those questions, in international contracts concluded between parties of different legal systems, the first step to make is to identify the law chosen by the parties to govern the contract. Therefore, it is necessary to identify whether the contracting parties are subject, expressly or tacitly, to national jurisdiction, to assess how the contract will be treated under the focus of Brazilian law. If it is not properly regulated, it is necessary to identify which law is applicable through conflict rules.

In the case of the Brazilian law, it contemplates the hypothesis of exceptional situations that modify the circumstances of compliance with contractual obligations that make them unfeasible or excessively onerous.

One of them is conteined in the Brazilian Civil Code (Law 10.406/02), that provides the Fortuitous Event and Force Majeure, as an instrument for excluding liability. According to article 393 of the Civil Code, the debtor is exempt from liability for losses resulting from Fortuitous Event and Force Majeure events, if he has not truly taken responsibility for the event. Besides, the sole paragraph of article 393 provides that the Fortuitous Event and Force Majeure will only apply if the effects of the event were unpredictable and inevitable.

Besides that, there is also the article 478 of the Civil Code, which determines that in contracts of 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 unpredictable events, the debtor may request the termination of the contract.

Nonetheless, to truly identify whether a certain company can apply the exclusion of liability or not, to suspend or terminate the contract or even to prevent the penalty payment for the default, depends on the contractual provisions and specificities of business, which must be evaluated on a case-by-case basis.

After carefully analyzing contractual conditions, the company must assess which measures are most effective for its business and if can invoke Fortuitous Event and Force Majeure. Sometimes the best way out is to solve the problem by renegotiating the terms of the contract. However, there are situations where companies are unable to reach a mutual consensus having to use the legal instruments made available by Brazilian law.

Opting for the liability exclusion instruments for the Covid-19 effects on contracts, in most cases, the most appropriate instrument is the application of Force Majeure, and from there the company must prepare a specific notification to its business partner, based on the terms of the contract, to formally inform of the intention to suspend/terminate the contract. Furthermore, in certain situations, it is still necessary to call the judiciary upon to suspend or prevent the collection of a contractual fine due to default.

Therefore, considering everything explained, for cross-border situations involving Brazilian and foreign companies affected by the effects of Covid-19, only a law firm specialized in International Law, with the accompaniment of a lawyer responsible for the area, who can provide analytically all the support and legal advice to deal with international commercial relations.

Rafael Kotovicz