Q&A: The Impact of COVID-19 on Contractual Obligations 27 de March de 2020

Our Corporate Partners prepared an informative material regarding some impacts of the COVID-19 pandemic on contracts. We clarify that the following questions were elaborated in a generic and comprehensive way, considering the Brazilian legal system (Civil Law). Therefore, our understanding may change according on the peculiarity of the practical case.


1. What are the consequences in cases of contractual default because of COVID-19? Can I be penalized?

First of all, we should clarify that the consequences of contractual default as a result of the pandemic caused by COVID-19 depends on the nature of the agreement. Let us focus here on the commercial relationships regulated by the Brazilian Civil Code. As a general rule, contractual default is regulated by article 475 of the Civil Code, which authorizes the damaged party to file for contractual termination, if not choosing to require compliance in addition to that, as well as indemnity for losses and damages.

This rule, however, accommodates exceptions, to wit: (i) Acts of God and Force Majeure, under article 393 of the Brazilian Civil Code; and (ii) in case of excessive burden (Change in Circumstances Theory – rebus sic stantibus), under article 478 of the Brazilian Civil Code.

The events mentioned above may, in our opinion, serve as a basis for discussion tending to relativize the gross imposition of contractual provisions that prove to be unfeasible under such conditions.

2. If I cannot pay installments from loan and financing agreements given the crisis involving COVID-19, is there something that could be done?

The Brazilian Courts are usually strict when applying the provisions related to Acts of God and Force Majeure and an excessive burden. Not rarely we face decisions that deny acknowledgment of Acts of God and Force Majeure to circumstances, for example, of future purchase and sale agreement of agricultural products, the planting of which is affected by some plague. It occurs because the Courts construe that the “plague” risk is inherent to the business and cannot be alleged as an exceptional and unpredictable event. Likewise, we have a similar interpretation as regards excessive burden. As an example, we refer to the agreements in foreign currency, in which the mere foreign exchange fluctuation to the detriment of one of the parties would not be an extraordinary, unpredictable event since, by nature, the foreign exchange invariably oscillates, this being a risk inherent to the business.

However, the situation we are in could have better luck. This is because, given the restriction measures to the circulation of assets and people, lockdown of commercial establishments, foreign exchange and market fluctuations given the pandemic (and here we stress the cause and effect relation), it is possible, to what it seems to us, to sustain the occurrence of Acts of God and Force Majeure and the consequent excessive burden. Use of one or the other institution shall be regulated by the existence of the default (Acts of God and Force Majeure) or the difficulty in the compliance (excessive burden).

Notwithstanding the previous considerations, we must clarify that each situation is unique and shall be timely reviewed.

3.What is the best alternative for the agreements which have become excessively burdensome given the consequences of COVID-19?

If the pandemic caused by COVID-19 is acknowledged as an extraordinary, unpredictable event, there shall be room for article 478 of the Brazilian Civil Code, which deals with the excessive burden, to be applied. After this clarification, except for the circumstance of an extrajudicial negotiation, by rule, recognition of the burden occurs by legal means, being able to have three (3) ramifications, to wit:

(i) in the continued or deferred enforcement agreements, if the provision of one of the parties becomes excessively burdensome, with extreme advantage to the other, the debtor may ask for contractual termination;

(ii) to avoid termination, the debtor may, as an alternative, propose to the counterparty, the contractual reinstatement to reestablish its balance; and

(iii) if in the agreement the obligations apply only to one of the parties, this may plead its provision to be reduced, or the way to enforce it to be changed, to avoid excessive burden as a result of COVID-19.

4.Is COVID-19 one of the causes of Acts of God and Force Majeure?

Considering the definition of Acts of God and Force Majeure brought in the remaining paragraph of article 393 of the Brazilian Civil Code, it is possible to assert that COVID-19, since its effects cannot be avoided or precluded, may be rated as Act of God and Force Majeure or else be the trigger for characterizing excessive burden.

5.I am going to be late in delivering a contractual obligation because of the crisis consequences, how can I mitigate the impacts and avoid penalties? 

Article 422 of the Brazilian Civil Code determines that contractors’ parties are obliged to abide by, both upon conclusion of the agreement and in its enforcement, the honesty, and good faith principles. It means that, considering that COVID-19 fits, at first, the circumstance of Acts of God and Force Majeure and could preclude or even prevent compliance with specific requirements within the timeframes as covenanted, it is possible for the debtor, aware that delay shall occur in compliance with the requirement, to previously notify the counterparty, providing it with a new way to comply with the requirement or, else, rearrange the timeframes. It is essential to notice that the same rationale would apply, in theory, if the circumstance dealt with an excessive burden.

6.Can the price readjustment indices and terms as determined in the agreements be unilaterally amended given the consequences of COVID-19?

Considering that the contracts are bilateral agreements of the mutual will of the parties and, the comprise annual price readjustment rule, with the use of legally permitted indexes in Brazilian legislation to recompose the currency over time, such as INPC, IPCA, IGPM, etc., it is not reasonable for one of the parties to promote unilaterally, i.e., without the express agreement of the other contracting party, any change concerning the index and adjusted term, as well as failing to apply this adjustment unilaterally, due to the effects caused by COVID-19.

7.Is it possible to claim the revision of the contract price due to excessive burden resulting from the effects generated by COVID-19?

Given the effects caused by COVID-19, in cases where the obligation has become very burdensome, the creditor of the obligation may seek to pass on exceptional values to the other party at the contractually agreed price, for example, foreign exchange difference, etc. If there is no extrajudicial agreement on such transfer, it will be up to the obligation debtor to request the review in court seeking to restore the economic and financial balance of the agreement. In this case, we reiterate that the requirements for the review of contractual prices must be proven so that evidencing that such imbalance entails an excessive burden for the required performance of one of the contracting parties in comparison to the consideration received from the other party.

8.Can I terminate an agreement justified by the COVID-19 crisis?

As noted earlier, observing the peculiarities of the practical case, and depending on the impacts of the pandemic on a given contract, it can be invoked to “terminate” an agreement. However, the debtor of the obligation must substantiate its request in such a way as to show that the occurrence of the pandemic is a preclusion to the fulfillment of its obligation or is rendering the respective performance very costly.

9.For cases involving consumer law, what are the best measures that can be taken to minimize the impacts of the crisis?

Concerning consumer rights, we cannot rule out the circumstance of the prevalence of jurisdictional understanding by applying Force Majeure only for the benefit of the consumer and consider that, despite the impacts caused by COVID-19, the supplier had an obligation to comply the requirements assumed under the agreement. However, it is necessary to point out that the national courts in Brazil have never faced issues such as those that arise at a time when COVID-19 is imposing losses on all suppliers of goods and services due to the progress of the disease and the high rate of contagion.

In this case, despite the Brazilian consumerist code being silent on the subject, we understand that it is possible to rely on the provisions of the Civil Code and the general principles of law, also assuring to supplier’s protection of their rights and their business.

10.How are objective good faith and the duty to renegotiate agreements at this time?

As already mentioned above, for a contractual obligation to be breached or an agreement to be terminated from an inevitable, unforeseen or extraordinary event, that is, in times of crisis as we are living in COVID-19 times, the fact is not enough, it is necessary that the contractual obligation cannot be fulfilled to consider the debtor’s release due to Acts of God and Force Majeure, which can only be verified on a case-by-case basis. The same rationale applies in cases of excessive burden.

However, it should be noted that not even a severe event such as a global pandemic can, in general, declare that from now on, everyone is released from compliance with the contractual obligations assumed or that the contracts can be terminated or mandatorily revised. It is necessary to be very careful with directions of this nature in the abstract, especially those that can be invoked to support the breach of contracts and obligations arising from them during a crisis scenario.

The contractual good faith and the duty to renegotiate must be preserved in light of what affects the mandatory established relationship, and the event and the economic chaos that emerges should not be factors that only made the signed contract uninteresting from the negotiating point of view.

Even in cases where the contracts are economically affected, it is crucial to think of alternative solutions to preserve the established legal relations and the fulfillment of obligations, so that there is real social solidarity, ensuring cooperation and loyalty between the parties.

Only then, considering the termination of contractual ties and judicial review of contracts in extremely urgent and unavoidable situations, given the restricted functioning of our judiciary, will we be able to not submerge in the crisis and not succumb to the pandemic in the business world as well.