The coronavirus pandemic (also known as “COVID-19”) outbreak has challenged humanity to control the spread of the virus and save human lives. While the world is incredulous at the rising death toll, and more than a third of the global population is experiencing social distancing and self-isolation measures for the first time in history, country leaders have been negotiating stimulus aid packages to ease the economic impact of the coronavirus outbreak. At the same time, companies from all industries affected by the coronavirus pandemic have been seeking means to mitigate losses and legal grounds to validate the non-compliance with commercial and financial contracts.
In Brazil, the situation is undistinguishable from the rest of the world. Multinational and local companies that carry out commercial activities in Brazil have been strongly affected, due to the coronavirus pandemic.
The Brazilian legal framework allows companies to (i) renegotiate the terms of the contracts in order to re-establish their economic and finance aspects (rebus sic stantibus clause) in the event of a change in the course of the relationship due to an unforeseen event; (ii) rescind the deferred performance contract in case of undue hardship to one of the parties, or (iii) rescind in the event of impossibility or impracticability. In addition, according to Brazilian law, the parties to a contract may be fully or partially discharged from their duties or obligations due to force majeure, that is, an extraordinary and unforeseen event. In the Brazilian Civil Code, Force Majeure or “Acts of God” is broadly defined as anysituation that was not possible to avoid or prevent (Article 393, sole paragraph).
The coronavirus pandemic is an extraordinary and unforeseen event. The chaotic scenario caused by the coronavirus may provide reasons for companies to excuse the performance of a duty or obligation or rescind agreements on the ground of force majeure doctrine. However, it is too early to affirm that the Brazilian courts will consider COVID-19 pandemic as an “act of God” or force majeure event. The impact of the pandemic on a given business and under a given contract depends on specific facts involved in each case. Even if the contract does not set forth pandemic as a cause of renegotiation or termination of the contract, the parties to the agreement may have grounds to seek relief from its duties and obligations due to the coronavirus negative impacts based on the background law.
Companies seeking full or partial discharge of contractual duties based on the effects of the coronavirus should assess and prove the cause and effect between the pandemic and the impossibility, impracticability or hardship to fully perform their duties and obligations. When establishing the terms of notifications grounded on the force majeure, the terms of the agreements should be reviewed in conjunction with other instruments relevant to the company, in order to assess whether the notification includes all relevant rights and obligations. Accordingly, it may be necessary to send notifications within defined periods.
Furthermore, the terms of contracts and applicable law govern the scope of possible defenses against contractual default. Therefore, an assessment of the coverage of available insurance policies should also be carried out and the respective claim reports must be made in a timely manner.
Lastly, it is recommended that companies who are currently negotiating agreements should proactively consider the appropriate allocation of risks and the consequences of further deterioration in business resulting from the coronavirus outbreak. In this case, it is advisable to include a clause in the new agreements establishing the duties and obligations of each party considering possible impacts in the full performance due to the coronavirus. As coronavirus outbreak is no longer an unforeseen event, force majeure doctrine may not be invoked in relationships established after the beginning of the crisis.
If you would like to obtain further information on coronavirus impacts on the commercial or financial agreements and its legal consequences, please contact the Brazil Desk of Squire Patton Boggs.