Brazil: Construction force majeure and alternative relief

Force majeure and alternative relief under standard form construction contracts and local law

Publication May 2020

For the sake of clarity, the laws mentioned in this section are in Portuguese and any translation of legislative provisions we have given has been carried out internally.

What is the most commonly used standard form construction contract used in the country?

In Brazil, the most common standard form construction contracts are the International Chamber of Commerce (“ICC”) Model Turnkey Contract for Major Projects and the International Federation of Consulting Engineers (“FIDIC”) forms of contract. The predominant forms are the first editions (published in 1999) of the:

  • Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer (also known as the Construction Contract or the “Red Book”);
  • Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant and for Building and Engineering Works Designed by the Contractor (also known as the Plant and Design-Build Contract or the “Yellow Book”); and
  • Conditions of Contract for EPC/Turnkey Projects (also known as the EPC/Turnkey Contract or the “Silver Book”).

The FIDIC Red, Yellow and Silver Books are collectively referred to as the “Rainbow Suite”. Clause references and capitalised terms in this section refer to those used in the Rainbow Suite (1999 editions), unless specifically stated otherwise.

Not all construction projects utilize EPC models, especially those that do not involve cross-border financing or other forms of foreign investment. Even though for the past 10 years there has been a growing trend for EPC (especially Turnkey Lump Sum ones) to be chosen over other types of contracts, more traditional models such as Design Bid Built (“DBB”) and its variations are still very widely used. DBB contracts are mainly used in constructions arising from public biddings since these usually involve a basic project being made before the bid actually starts.

Does the contract include provisions on force majeure?

Even though there is no single standard form of contract, force majeure clauses are always present and tend to be standard. Usually there will be a provision defining what is considered to be force majeure, including a non-exhaustive list of what won’t be considered as force majeure for that contract. This varies considerably depending on the specific situation. Usually the same provision will also state that no party is to be held liable for any circumstance arising from force majeure. The common wording used to define force majeure is as follows:

“an extraordinary, supervening event, unpredictable at the time of the agreement's celebration, external to the parties' will, and that affects the contract's execution.”

Other provisions on force majeure include, but are not limited to:

  • Clauses providing for the entitlement of a Contractor to obtain a time extension, provided that the other party is timely notified about such need; and
  • Clauses providing for the duty of both parties to employ all reasonable endeavors to minimize any delay. 

The wording usually used for force majeure clauses comes from a combination of standard form provisions, standard market practice and law provisions. 

Does the contract include provisions for alternative relief that may be relevant to projects impacted by COVID-19? 

Apart from the provisions relating to force majeure, which could generally catch COVID-19, it is customary that contracts include a provision which allows a Contractor to request for a time extension and/or a price adjustment in the case of some events, which vary a lot but tend to include:

  • alterations made to the object of the contract;
  • changes to technical specifications made by the Contracting party;
  • changes to applicable legislation that was valid at the time when the contract was signed, provided that these do affect the object/execution of the contract;
  • creation, modification or extinction of taxes related to the object of the contract; and
  • any event that escapes from the “ordinary course of business” of the party and that effectively cause a so-called economic imbalance of the contract, meaning that the allocation of risks initially made no longer reflects reality. 

It is important to note here that construction contracts in Brazil, aside from incorporating provisions from various sources and because these usually involve the government and other public law entities, also incorporate theories, principles and concepts from administrative law (i.e. involving ordinary course of business and economic balance of the contract). This means that not all provisions set out in the contract, including reliefs related to extraordinary events such as COVID-19, would be applied as they are set out in the contract if a Contractor was to pursue such a relief in court (which could be done even if the dispute resolution mechanism chosen in the contract is arbitration).

Do the laws of the country provide for force majeure relief?  

Brazilian Federal Law No. 10.406 of 2002 (the Civil Code):

Art. 393. The debtor is not liable for damages resulting from unforeseeable circumstances or force majeure, if expressly not responsible for them.

A fortuitous event or force majeure occurs in the necessary fact, the effects of which it was not possible to avoid or prevent.

Art. 625. The contractor may suspend the work:

I - due to the owner's fault, or due to force majeure;

(…)

Article 625 of the Civil Code applies to the so-called Empreitadas, which are more general and much simpler construction agreements primarily governed by the Civil Code. Even though contracts used for larger/infrastructure projects (i.e. EPC contracts) are generally not deemed as Empreitadas, and because there is no single set of rules to regulate those, provisions that regulate Empreitadas are generally also applicable to larger/more complex construction projects.

Brazilian Federal Law No. 8.666 of 1993 (the Public Bids Law)

Art. 65. Contracts governed by this Law may be amended, with due justification, in the following cases:

(…)

d) to re-establish the relationship that the parties initially agreed between the contractor's charges and the management's remuneration for the fair remuneration of the work, service or supply, aiming at maintaining the initial economic-financial balance of the contract, in the event of unforeseeable events, or predictable but of incalculable consequences, retarding or impeding the execution of the adjusted, or, still, in case of force majeure, fortuitous event or a government act, configuring an extraordinary and non-contractual economic area.

Article 77. The total or partial non-execution of the contract entails its termination, with the contractual consequences and those provided for by law or regulation.

Art. 78. The following are grounds for terminating the contract:

(…)

XVII - the occurrence of acts of God or force majeure, regularly proven, impeding the execution of the contract. 

If it is the case that the contract is made, among others, by a public/governmental entity, which is quite common in Brazil, the Public Bids Law is applicable, as well as other administrative law principles as mentioned above.

Do the laws of the country provide for alternative relief that may be relevant to projects impacted by COVID-19?

Civil Code

Art. 478. In contracts of continuous or deferred execution, if the performance of one of the parties becomes excessively burdensome, with extreme advantage for the other, due to extraordinary and unpredictable events, the debtor may request the termination of the contract. The effects of the sentence to be decreed will be retroactive to the date of the summons.

Art. 479. The resolution may be avoided, offering the defendant to equitably modify the conditions of the contract.

Art. 621. Without the author's consent, the owner of the work cannot make changes to the project approved by him, even if the execution is entrusted to third parties, unless, for supervening reasons or technical reasons, it is proven that inconvenience or excessive costly execution of the project in its original form.

Public Bids Law

Art. 65. Contracts governed by this Law may be amended, with due justification, in the following cases:

(…)

c) when it is necessary to modify the payment method, due to the imposition of supervening circumstances, maintaining the updated initial value, the advance payment is forbidden, in relation to the financial schedule established, without the corresponding consideration for the supply of goods or execution of the work or service. 

It is important to note that the Public Bids Law grants the government with very wide powers to unilaterally alter or terminate a contract at any given time, in the terms of article 78, XII below:

Art. 78. The following are grounds for terminating the contract:

(…)

XII – reasons of public interest, of high relevance and extensive knowledge, justified and determined by the highest authority in the administrative sphere to which the contractor is subordinated and recorded in the administrative process to which the contract refers.



Contact

Partner, Norton Rose Fulbright US Consultores em Direito Estrangeiro

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