There is a general consensus that the outbreak of the Covid-19 pandemic has developed into a global threat. On March 20, 2020, the Brazilian Federal Government declared a state of national calamity due to Covid-19 pandemic and Brazilian State and Municipal governments imposed several restrictions to businesses operations. As a consequence, many entities are becoming unable to meet their contractual obligations. Should the pandemic be considered as a force majeure or an act of god event? In positive case, what would be the corresponding legal impacts?
1. Definition of Force Majeure and Act of God event under Brazilian Law
Brazilian Law1 considers a force majeure and an act of god event as an inevitable and external event beyond the parties’ control, which (i) causes inevitable and direct effects to the commercial relationship between the parties, and (ii) renders the performance of the contract impossible. In addition to the impossibility to fulfill the obligations, the event must be unavoidable in terms of occurrence or impact and unforeseeable (at the time of entering into the contract by the parties). Case law and doctrine recognize force majeure events as events created by human intervention, while act of god events as extraordinary events of nature.
1 Article 393 of the Brazilian Civil Code.
2. Principles of Good Faith and Social Function of the Contract
It is important to emphasize that every contract in Brazil must comply with the principles of social function and good faith, which means that even in case of unexpected circumstances that might be considered force majeure or act of god event, the parties must try to negotiate in good faith and seek for fulfillment of the social function of the contract and of the obligations provided therein.
3. The Covid-19 pandemic
Given the drastic measures taken by the Government and the level of impact of the restrictions imposed on all business, relationships and transactions nationwide, it is clear that the Covid-19 pandemic may be considered as force majeure event under Brazilian law.
However, the impacts and how to address the Covid-19 pandemic, on a contractual relation, require a careful analysis of both Brazilian law and the contract under analysis.
First, it is important to confirm if the contract expressly contains provisions on force majeure event, in which case how the parties have agreed to address the contract in such events (i.e. in case the contract establishes a certain period of suspension of obligations or not, or if the obligations must be fulfilled regardless of the circumstances).
If no provision on force majeure event has been agreed in the contract, Brazilian law will apply. However, the parties will need, though, to analyze the nature, duration and consequences of the Covid-19 pandemic in the specific contract and, if it is the case, discuss how to address the temporary suspension of the obligation under the contract, the period under which there would be no penalty etc. or its termination.
Finally, as a last recourse and in case no negotiation is agreed between the parties, the affected party may still request in Court for the recognition of the force majeure event and the suspension of the obligations and corresponding penalties or the termination of the contract, as the case may be.
For additional information, please contact KLA’s Corporate and Mergers & Acquisitions and Contracts practice areas.
