Brazil: Force Majeure

Yes. The definition of fortuitous event or force majeure in the Brazilian legal system is set forth in article 393, sole paragraph of Federal Law 10,406 of January 10, 2002 (the Brazilian Civil Code – “BCC”), which reads: “[a] fortuitous event or force majeure is an inevitable fact the effects of which were impossible to avoid or prevent.”

The definition of force majeure is brought together with the definition of “fortuitous event” in the same provision of the BCC. Brazilian legal scholars have different views on the characterization of an event to be considered as fortuitous event or force majeure. The prevailing conceptual stand is that fortuitous events refer to those produced by nature (also known as acts of God) while force majeure is applicable to acts or facts deriving from individuals or from authorities. However, legal scholars converge in the sense that in both types of events the following elements must be present: lack of fault (that is, whoever asserts the existence of the event has not contributed to its occurrence) and unavoidability (that is, the event or its consequences cannot be avoided or prevented).

In practice, both concepts lead to identical consequences and, therefore, all references to force majeure in this article apply to fortuitous events as well.

Once a force majeure event is held to exist, it is first necessary to ascertain whether the impossibility of performing the obligation is temporary or definitive. If the impossibility is temporary, as a general rule, the party in default is entitled to a temporary stay of obligations under the relevant contract for as long as the impossibility remains.

However, if the impossibility is definitive or persists for so long that fulfillment of the obligation is no longer of interest to the other party or has an adverse impact on conclusion of the contract as originally envisaged by the parties, the contract may be terminated.

The main section of article 393 of the BCC states that “[t]he debtor shall not be liable for the losses arising from a fortuitous event or force majeure unless it has expressly undertaken liability therefor.” Accordingly, once the occurrence of force majeure is voluntarily acknowledged by the contracting parties or is recognized by a competent court upon request by the defaulting party, the debtor’s fault is set aside and it is not held liable for the losses arising from non-performance and/or untimely performance of contractual obligations.

However, some relevant aspects should be considered before the debtor is released from obligations and respective liability.

First, due to the opt-out system adopted by the BCC, the contracting parties are free to agree on a clause by which the debtor undertakes liability for any event of force majeure, or a clause that excludes some events of the definition of force majeure under the contract. Thus, in these cases, even if there is an event of force majeure, the liability of the debtor remains as stated in article 393 of the BCC.

Besides that, if the force majeure prevents the debtor from performing part of the obligations and the remaining contractual obligations can still be performed, the creditor may opt for performance of the contract instead of its termination, as detailed in Question 2 above. It is worth mentioning that a mere difficulty, even of an economic nature, does not directly entail an impossibility of performing the contract.

In addition, article 399 of the BCC states that “the debtor in default is liable for impossibility of performance, despite arising out of a fortuitous event or force majeure, if any such event takes place during the delay, unless the debtor evidences that such non-performance was not caused through its fault or that damage would be caused even if the obligation had been performed in due time.”

Therefore, there are some cases in which the event does not provide grounds for exclusion of fault – not because it is not a force majeure event, but rather because the debtor was already in default and is unable to “evidence that fault does not lie on it.”

In case of the COVID-19 pandemic crisis, for example, the relevant contractual sanctioning regime and its related rules for situations in which COVID-19 did not cause the termination or review of the contractual scope, even if COVID-19 characterizes force majeure, must apply if the debtor was already in default. In these situations, even if the debtor is unable to totally or partially perform the obligation, the occurrence of COVID-19 does not release the debtor from performing the obligations, nor does it remove the debtor’s fault for the default.

Therefore, we can draw the following practical conclusions from the cases where COVID-19 is not found to be an exclusion of liability – not because it is not a force majeure event by operation of law but rather because the debtor was already in default and is unable to “evidence that fault does not lie on it“:

• The debtor is already in default before the COVID-19 pandemic and there is a full default as a result of the COVID-19 pandemic, making the relevant obligation impossible to perform. In this case, there would be no default regarding the period since the occurrence of the event (or of its consequences) which prevented the performance, and, consequently, the default charges would not apply. However, it is possible that the debtor would be subject to the contractual penalties for non-performance, as the debtor was already in default before (so if the debtor had performed the obligation in due time, it would not have suffered the COVID-19 impacts).
• The debtor is already in default before the COVID-19 pandemic and there is a specific default of the obligation by virtue of the difficulties caused by the COVID-19 pandemic, i.e., performing the obligation is not impossible but difficult. In this case, there would be default both in the period before and after the COVID-19 event/consequences, as the default is, in the origin, culpable – Had the debtor performed the obligation in due time, it would not have suffered the impact of COVID-19. However, the collection of default charges in the default period after the occurrence of COVID-19 is a controversial point. In this sense, the BCC expressly regulates the default consequences, and for which charges the debtor will be liable.

As mentioned in Question 2 above, once a force majeure event is recognized it is first necessary to ascertain whether the impossibility of performing the obligation is temporary or definitive. If the impossibility is definitive or persists for so long that fulfillment of the obligation is no longer of interest to the other party or has an adverse impact on conclusion of the contract as originally envisaged by the parties, the contract may be terminated.

As mentioned in Question 1, force majeure is defined in the sole paragraph of article 393 of the BCC. In addition, there are at least 15 other references to force majeure in the BCC to address some cases in which force majeure may be invoked (or not) to release the performance of obligations.

Considering that Brazil is under a civil law system and that the BCC brings the definition of force majeure, if there is no force majeure provision in the relevant contract the parties affected by an event of force majeure can invoke the general concept stated in the BCC. Therefore, the Brazilian courts may imply force majeure into a contract provided that the affected party proves that the event is unforeseeable, unavoidable, or even foreseeable but with inevitable and/or unforeseeable consequences preventing the performance of contractual obligations.

In interpreting force majeure clauses, Brazilian courts tend to hold that what the parties freely agreed on and defined in the contract must prevail. Therefore, if the parties, for example, agreed (i) either to exclude some events from the definition of force majeure, or (ii) that the debtor would not be exempted from liability even upon the occurrence of an event of force majeure, the liability of the debtor remains.

This stand is in keeping with article 393 of the BCC (see Question 3 above) and also with the principle of pacta sunt servanda which regulates the private contractual relationships and states that the obligations established by the parties in contract are legally binding and enforceable on them.

In general, Brazilian courts recognize as force majeure those events manifestly (i) unforeseeable, inevitable and irresistible, or even foreseeable but with inevitable and/or unforeseeable and irresistible consequences, and (ii) out of the risks established and allocated by the parties in the contract.

For instance, some events recognized as force majeure by courts are cargo theft during transportation; severe weather conditions leading to fight delays; act of government in case of delay in obtaining licenses and/or authorizations, among others.

In general, Brazilian courts dismiss as being force majeure when (i) the event fell under the debtor’s allocation of risks and responsibilities under the contract; (ii) the event could have been avoided or mitigated by the debtor; (iii) the debtor was already in default; and (iv) the debtor is unable to evidence that the event was unforeseeable, inevitable and irresistible, or even foreseeable but with inevitable and/or unforeseeable and irresistible consequences.

In addition, some courts also state the events not qualifying as force majeure, as is the case of Guiding Precedent 161 of the São Paulo State Higher Court which reads that: “The occurrence of excessive rainfall, lack of manpower, excessive demand, take-over of a project, or administrative hindrances does not characterize a fortuitous event or force majeure. These justifications contain ‘res inter alios acta’ in relation to the acquirer.”

On March 20, 2020, the National Council of Justice (CNJ), which is the judicial body tasked with administrative and financial control of the judiciary and with supervision of judges in Brazil, issued Ordinance 57 of 2020 recognizing the COVID-19 pandemic as an “issue of high complexity, great impact and repercussion.”

Although it is premature to rely on any statistics of the actual number of decisions already taken by the courts throughout Brazil on debtors’ requests for exemption of their contractual obligations in view of the COVID-19 pandemic being recognized as a force majeure event, some courts have indeed granted injunctive reliefs to at least temporarily stay the contractual effects of the debtor’s default on grounds of force majeure within the pandemic scenario. However, the courts are usually very strict on the analysis of specific contracts to verify the unavoidability of events and of the impacts caused by the COVID-19 pandemic, without any fault being attributable to the party concerned (to the extent that it has taken the expected mitigating measures) and considering the existence of a causal link leading to the impossibility of performing the contract (i.e., by considering the non-existence of other events that could have given cause to the inevitable non-performance).

Any administrative decision or announcement by the Brazilian government declaring or even certifying that a certain event may be deemed as a force majeure event should be applicable within the government administrative sphere only (including public utilities) and should not impact the decision-making of Brazilian courts on cases related to the force majeure doctrine set forth in private law. In this regard, it is not likely that any unilateral government initiative such as the force majeure certificate provided by the Chinese government to the Chinese companies would influence the courts in any specific litigation under Brazilian private law.

Another issue relates to the possible application of the act of government (fait du prince) doctrine to private contracts as a consequence of the COVID-19 pandemic. This doctrine was originally conceived to provide full compensation to the private contractor to an administrative agreement when he suffers losses as a consequence of direct interference (modification or termination of the contract) by the public authority in matters of overriding public interest.

Since the outbreak of the COVID-19 pandemic, the Brazilian government authorities have adopted and imposed various restrictions to mobility, commercial activities and others, which suggests an extended application of the government act doctrine to private contracts in case such government measures’ impact on the relevant contract meets all the requisites of force majeure listed above.

Federal Decree 6 of March 20, 2020 declared a state of public calamity in Brazil until December 31, 2020 as a consequence of the COVID-19 pandemic. Subsequent federal, state and local government executive acts have been issued and are constantly being altered to regulate social distancing and restrictions on mobility and on the exercise of activities in all sectors of the economy. For example, government action may directly or indirectly delay or prohibit timely access to services and also impact the availability of labor or materials. In such circumstances, parties to a contract may invoke these acts of government to seek relief from performance under a force majeure clause, as the requisites of unpredictability and inevitability are certainly met. All other requisites such as lack of default, impossibility of or undue hardship in performing the obligations should be proven on a case-by-case basis.

When drafting a force majeure clause the parties may take three different approaches. The first one is to simply rely on the definition of article 393 of the BCC. The second would be to establish an exhaustive list of what shall be (or what shall not be) deemed as force majeure, as the concept of force majeure stated in the BBC is generic and would be most probably subject to the interpretation of the concepts of unforeseeablility and inevitability.

Finally, in case the parties do not establish an exhaustive list of what shall be (or shall not be) deemed as force majeure, the parties may generally define the characterization of this event such as, for example, when it comprises one or all of the characteristics below:

• such event could not be prevented, avoided or eliminated;
• the consequences of the event were unforeseeable in light of the risks inherent to that contract;
• such event does not result from prior nonperformance of obligations by the affected party;
• the event affects, in a significant and adverse manner, the party’s ability to perform its obligations and may not be overcome or performed by alternative means.

In addition, force majeure clauses usually set forth a procedure and deadlines of notification from one party to the other that the parties would be required to comply to invoke force majeure. Thus, the clauses state a deadline for the party affected to notify the other party in relation to the occurrence of a force majeure event (and also for the other party to present a response) as well as some requirements in relation to the content of the notice (details of the event, the measures that are being taken, the impacts on performance of the obligations, among others).

Finally, force majeure clauses also usually address the duty of the party to mitigate the impacts of these events and deals with the consequences in case of force majeure events as non-application of delay and other penalties established in the contract, suspension of obligations and even termination of the contract.

Although force majeure is defined in the Brazilian legislation and may be invoked regardless of a contractual provision, the majority of commercial contracts include a force majeure clause especially to establish (i) a list of the events that shall be (or shall not be) deemed a force majeure or, at least, how this event shall be characterized; (ii) a procedure to invoke force majeure; and (iii) the consequences to the parties in case of an event of force majeure, as detailed above.

Yes, as already mentioned above, as the concept of force majeure is defined by Brazilian law, even if a force majeure clause is not expressly provided for in a contract, parties may still rely on the force majeure doctrine, provided that they evidence that the event is unforeseeable, inevitable, or even foreseeable but with inevitable and/or unforeseeable consequences which prevents the performance of contractual obligations.

The party alleging that it is affected by the event of force majeure has the burden to evidence it. Therefore, the party that invokes the force majeure doctrine will have to prove that the event characterizes as force majeure under the terms of the contract and/or the law and that such event impacted partially or completely the performance of its obligations under the contract as detailed in Question 16 below.

Parties seeking to rely on force majeure are required to show and evidence (i) that the event is unforeseeable and inevitable; (ii) that the event is out of the risks and liabilities under the contract; and (iii) the impact of such event on the performance of their obligations.

In this regard, every contract carries risks for each one of the contracting parties. When establishing the scope of the contractual obligation, the parties may (i) define the risks they intend to take in performing that obligation; (ii) stipulate those risks not admitted by the party in charge of the obligation and/or the beneficiary of the obligation; and (iii) remain silent as to the risks involved in performing the obligation.

However, the parties may not overlook the fact that in contracts for immediate, continuous or deferred performance – but mainly in contracts for deferred performance – there is always the possibility of materialization of the risks supervening the execution of the contract.

Therefore, some considerations are worthy of note in connection with the materialization of these risks: (i) it is necessary to examine the nature of the risks, i.e. whether they are inherent to the deal, or whether they are extraneous, atypical or extraordinary with regard to that deal; (ii) if either of the parties – mainly the party in charge of performance of the obligation – could reasonably expect the materialization of these risks; and (iii) if, following materialization of the risks, it was reasonable to presume their consequences for the deal.

In the case of COVID-19, for example, the contractual approach adopted in each such case provides the bases for coping with the impact of COVID-19 on contractual relations. In addition, it is also necessary to take into account the execution date of the contract and its place of execution. Depending on the place and if entered into at the end of 2019 or beginning of 2020, in the event of a dispute about the effects of COVID-19 on the contract, it is possible that COVID-19 loses the presumption of supervening risk that triggers the review, renegotiation or termination of the contract. This is because the widely publicized existence of COVID-19 turns it into an assessed, or at least assessable, risk by the parties at a certain place and within a certain period.

Therefore, the existence of the pandemic, in and of itself, does not release debtors from their contractual obligations. This will be only justified after proper review of the contract in light of the principles of good faith and reasonableness. Consequently, an alternative for the parties can be to stipulate a standstill agreement so that, during a certain period and in good faith, the parties may discuss and agree on new provisions to protect the respective rights without the need to resort to courts.

Force majeure is an inevitable fact the effects of which were impossible to avoid or prevent. As a result, involuntary non-performance of contractual obligations shall not concern the debtor’s own acts, as it will cease to be involuntary if the debtor has somehow contributed to the impossibility of performance. Thus, force majeure is held to exist when avoiding the event is absolutely impossible.

Therefore, when performing a contract, a party must take all measures necessary to avoid and/or prevent a force majeure event and/or its adverse impact on the contract. In the same way, when a force majeure event occurs, before seeking to rely on force majeure, the affected party must take all possible measures necessary to mitigate its position and the losses from such event.

For instance, the affected party must, among other things and according to the situation, notify immediately the other party, cease immediately the activities affected by the force majeure event, isolate the area, give notice to the other party, give instructions to employees, and reinforce security.

The potential hurdle that could be faced by the parties on the reliance on force majeure under Brazilian law lies in applying the force majeure doctrine to that specific event and/or contract.

In this regard, not all contractual issues that will arise after the COVID-19 pandemic, for example, may be sorted out by applying the force majeure doctrine. If the obligation may be performed by the debtor, albeit on more costly terms, there are no grounds for arguing force majeure in its classical sense.

The most important point is to review the contractual effects of the pandemic, particularly on each contract, based on the doctrine of objective basis of the transaction. In other words, one should examine whether there was or not a drastic change in the basis of the transaction calling on a rebalance of obligations, if possible, or termination of the contract, if impossible.

The grounds for rebalancing of obligations and for contractual review are set out in article 317 of the BCC which states that “[W]hen, for unforeseeable reasons, there is a manifest disproportion between the amount of an agreed payment or performance and the amount due at the time of actual enforcement, the judge may adjust such amount, upon request of the party, to ensure the actual amount of the payment or performance to the extent possible.”

Hence, force majeure in the cases related to the COVID-19 pandemic should be analyzed on a case-by-case basis. This is because it is not possible to assess the impacts of COVID-19 on contracts in a generic manner. For a certain contractual scope, the pandemic may be used both (i) to cause a minor economic imbalance and/or prevent only partially the performance of the contract; and (ii) to cause a relative or absolute impossibility of carrying on with the contract, in view of the unavailability of assets, labor and services, or even a financial imbalance between the contracting parties.

This means that the contracts, depending on the severity of the effects of the pandemic, will have to be adjusted in one way or another. While some contracts will require radical adjustments, other will demand few or no adjustments.

Brazilian law does not impose specific notice requirements which the affected party is required to comply with before invoking the force majeure doctrine. This type of provision is usually set forth in the force majeure clauses of contracts as mentioned in Questions 12 and 13 above.

However, even when there is no such provision in the contract, in light of the principle of good-faith it is highly recommended that the affected party notify the other party as soon as possible about the occurrence of the force majeure event and its impacts on performance of contractual obligations. This is essential because the other party will not only be aware of the force majeure event and respective impacts but also be able to take all possible measures (if any) to mitigate losses as well.

As detailed above, if the force majeure event causes a definitive impossibility of performing the contractual obligations, the contract will be terminated. Thus, this impossibility defines the moment where the contract can no longer be performed.

The effect of termination due to circumstances arising from force majeure is retroactive to the date of the force majeure event, in the same way as it occurs in termination for default – the only difference being that, in the first event, the debtor is not liable for ensuing losses and damages.

Termination by a force majeure event does not entitle any of the parties to undue enrichment at the other party’s expense, though. If advance payments had been made for a product or service that was not delivered or rendered because of the force majeure event, the respective amounts should be returned. Likewise, in case of a continuous contract, i.e., where the contracted services are deferred over time, any and all payments due until the date of the force majeure event should be honored by the debtor.

Apart from force majeure, there are other remedies available in the Brazilian legal system if one party is unexpectedly and adversely affected in a contractual relationship, being the main one the doctrine of termination for excessively burdensome conditions, also known as doctrine of undue hardship or unforeseeability (teoria da imprevisibilidade). Article 478 of the BCC sets forth that “in contracts for continuous or periodic performance or deferred performance, if the payment or performance by either party becomes excessively burdensome at an extreme advantage to the other party, as a result of extraordinary and unpredictable events, the debtor may apply for termination of the contract.’

The debtor needs to file a court action to seek termination under the doctrine of unforeseeability and the counterparty may avoid rescission by offering revision of the contract with a view of restoring its original balance. In 2019, among other provisions to foster free enterprise and the free exercise of economic activity, Law 13,874 introduced a new article in the BCC according to which “in private contractual relations, the principle of minimum intervention and the exceptionality of the contractual review shall prevail,” (article 421-A). It is now expected a more strict application of the doctrine of unforseeability by the courts.

Although Law 8,078 of 1990 (Brazilian Consumer Defence Code) states in articles 12 and 14 that the manufacturer, importer, producer, retailer or supplier are strictly liable for defects in the manufacturing of the products or delivery of services, the stand of the Brazilian courts is that, in case of force majeure, the supplier is not liable for the damage caused to the consumer. Once there is no chain of causation between the supplier’s conduct and the damage suffered by the consumer, there would be no right of redress.

However, the supplier and/or the retailer can only rely on force majeure if the event is not connected with the business risk. Thus, if the event has any relation to the supplier’s business, force majeure cannot be invoked and there is no exclusion of liability.

In our view, the way that the principle of force majeure is applied to consumer contracts affords protection to consumers as the supplier will only have its liability excluded with regard to events that are not directly connected with its activity, which means that force majeure will apply only to the events that are extraneous to the supplier’s activities. Strict liability of the supplier under the Brazilian Consumer Defence Code remains for any other cases.

The insurance policy that could cover force majeure is the All Risks Liability Insurance. However, it is very rare to have policies in Brazil with such coverage as most insurance companies refuse to include this coverage and, when they accept to include it, they charge a very high price for that.

With regard to COVID-19 pandemic, the Private Insurance Authority (SUSEP) in Brazil issued Directive 440 establishing that the pandemic is a risk excluded from insurance coverage.

On June 10, 2020, Law 14,010 was enacted establishing the “Emergency and Transitional Legal Regime for Private Law Relations (RJET) during the coronavirus pandemic period (Covid-19)”. For the purpose of this law, March 20, 2020 is considered as the initial term of events derived from the COVID-19 pandemic.

The law, which originated in the Senate, had part of its text vetoed by the President of Brazil, following a more conservative approach to legal effects of the pandemic in private law relations, and ended up establishing some transitional procedural rules applicable to family, corporate, antitrust and real estate law matters.

In some regulated sectors, specific legislation has also been adopted, such as Provisional Measure 925 of March 18, 2020 which exempts passengers from contractual penalties by accepting the conversion of non-used purchased air tickets into a credit to be used with the air company within 12 months.

In addition, resolutions and ordinances have been issued by various governmental agencies establishing transitional measures to help the population cope with the effects of the COVID-19 pandemic. For example, on March 24, 2020 the National Electric Power Agency (ANEEL) issued Normative Resolution 878, which prohibits the cut of power for non-payment in urban and rural residential consumer units, including low-income dwellings, in addition to services and activities considered essential, according to the legislation, such as hospital units.