CONTRACTS RENEGOTIATION IN PANDEMIC TIMES

CONTRACTS RENEGOTIATION IN PANDEMIC TIMES

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The contract has a social function, and it is up to the public authorities to prevent any type of contractual imbalance caused by an unpredictable and/or inevitable event that may generate excessive burden to one of the contractors.
Brazilian law enshrines the principle of exoneration due to non-imputability, as provided in Article 393 of the Civil Code: “The debtor is not liable for damages resulting from unforeseeable circumstances or force majeure, if he is not expressly held responsible for them.” The act of God or force majeure are events whose effects cannot be avoided or prevented, imposed by natural or third party fact.

We first observe that the event must make it impossible to fulfill the obligation, such as, for example, a cargo transport that cannot be carried out because the highway was closed by the authorities to prevent the entry of vehicles and the spread of the coronavirus. In this case, the carrier is not responsible for the default of the transport obligation, and consequently for the damage caused. It is important to note that the effects of the event must be inevitable.

In view of these concepts, it is necessary to analyze the special circumstances of each contract to verify: whether there was a real impossibility of fulfilling the obligation and the inevitability of the obstacle. But if an event, such as the Covid-19 pandemic, complicates or makes it excessively expensive to fulfill an obligation, force majeure or unforeseeable circumstances concepts are not applicable. The effects of acts of God and force majeure must necessarily preclude the fulfillment of the obligation and, in order to determine such effects, it is important that the disabled party has expressly exempted itself from liability for losses arising from acts of God and force majeure.

According to the theory of unpredictability, however, applicable to continuous or deferred execution contracts, when there is an unpredictable fact, potential damage and excessive cost on the part of one party and extreme advantage for the other, the contract can be terminated, according to article 478 of the Civil Code.

As an alternative to the contract termination, it is important to note the article 421-A, recently introduced in the Civil Code by the Economic Freedom Act, establishes the possibility of contractual review, however, in an exceptional and limited way.

The companies negotiated their contracts taking into account an economic and business scenario, which has been profoundly modified by the pandemic caused by the coronavirus. As a consequence, several contracts can no longer be fulfilled and a revision is necessary to restore their balance.

Does this mean that the parties can fail to comply with their contractual obligations under the
aforementioned institutes?

It depends on the specific case. Regardless of the answer, it is important that the debtor party, from the outset, open a dialogue with the creditor, exposing its concrete difficulties and making room for the dialogue and negotiation in order to seek ways to reestablish the pacts, on an equal basis between the parties, avoiding the termination of contracts, by the principle of good faith, as recommended by art. 479, of the Civil Code.

The key word of the moment is collaboration, because going to the clash in the judiciary can further complicate the situation of the companies, not to mention that it implies costs and time for both parties. A mediator can help the parties to stay focused on the negotiation process, encouraging the generation of creative options, helping the parties to clarify interests, exchange information safely and build satisfatory business solutions.

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