Newsletter: Contracts – The great confusion between act of god and force majeure and the supervening excessive burden

06th april

 

  1.  Introduction

Currently, in the world, the only thing people talk about is the crisis caused by the Coronavirus COVID-19 Pandemic and how it will affect the health of people, their loved ones, their economies and the economies of other nations.

This pandemic has already been recognized by the Federal Government (Law 13,979. of February 6, 2020) and even the National Congress, on March 20, 2020, has recognized a state of public calamity for the purposes of art. 1 of the aforementioned decree.

Also, within the Federal Government sphere, several Provisional Measures have been issued in order to face the crisis caused by referred Pandemic, which began with Provisional Measure No. 921 of February 7, 2020, and several have followed it.

State and City governments have also been very active.

For example, the State of São Paulo issued (i) Decree No. 64,862 of March 13, 2020, establishing temporary and emergency measures to prevent the spread of COVID-19, (ii) Decree No. 64,879 of March 20, 2020, recognized the state of public calamity, resulting from the COVID-19 pandemic, (iii) Decree no. 4.8845. of March 22, 2020, decreed the quarantine in the State of São Paulo, restricting activities in order to avoid the possible contamination or spread of the coronavirus, in accordance with the aforementioned decree, among many other decrees.

The Municipality of São Paulo, for example, amended Decree No. 59,283 of March 17, 2020, declaring a state of emergency in the City, by means of Decree No. 59,291 of March 20, 2020, declaring state of public calamity in the City and Decree No. 59,298, of March 24, 2020, suspending face-to-face service to the public in commercial establishments and provision of services, in addition to others that followed them.

As can be seen from the brief normative framework described above, it is not difficult to notice the size of the financial crisis in which Brazil entered into due to the COVID-19 Pandemic.

For such cases, given the specific situations in which people see themselves unable to comply with their contractual obligations, the Law offers several remedies, provided that their own requirements are met.

  1. Act of God and Force Majeure.

As is the case, the binding legal relationship establishes a creditor’s right to receive and a correlative duty of the debtor to pay. The provision, in turn, relates to a conduct of behavior carried out by the debtor; or a positive action or activity (provision of an act), or an abstention, tolerance or omission (refrain from providing an act)[1].

After clarifying this concept, which is critical in understanding Acts of God and Force Majeure, we shall now discuss it.

Art. 393 provides that “[The] debtor shall not be liable for damages resulting from acts of God or force majeure, if they have not made themselves liable for them in a clear way”, establishing, in turn, the sole paragraph of that same article “acts of God or force majeure refer to facts, which effects could not be avoided or prevented.”

Clearly, the essential characteristic of act of God or force majeure, according to the Brazilian law, lies on the inevitability of the consequences of that fact[2].

Usually, these events refer to public calamities, natural events (earthquakes, floods, typhoons, etc.) and factum principis (governmental acts)[3].

However, the analysis of the effects of acts of God or force majeure on duties to perform shall be made on a case-by-case basis, notably, the effects on the provision which the debtor must comply with in a cause-and-effect basis. A classic example of an act of God or force majeure with general effect is the state of general strike or, with private effects, the theft of items of a warehouse which was duly protected according to the normal criteria of diligence and where the goods were deposited (taylor made) that would be shipped for the fulfillment of the provision.

The question that should be asked, for example, would be this: what is the unquestionable obstacle that the coronavirus pandemic offered to suppliers that prevented them from shipping their goods and complying with their supply contract, that is, purchase and sale agreement? If the answer is lack of capital, we understand that in this case – act of God or force majeure – they will not find the solution to their claim.

JUDITH MARTINS-COSTA makes it quite clear that “Agostinho Alvim, the rapporteur of the Law of Obligations in the Draft Civil Code, warned that ‘the need for the fact must be studied due to the impossibility [of the debtor] to comply with the obligation, and not in an abstract manner”[4], that is, the mere occurrence of the coronavirus crisis is not enough for the debtor to invoke the occurrence of act of God or force majeure, in fact, they must be able to objectively provide the reasons for which such event is preventing them from fulfilling that particular provision, on a cause and effect basis.

In addition, those who claim the occurrence of act of God or force majeure, have the burden of proof.

For example, if the debtor is already in arrears when the act of God or force majeure occurs, this claim will not help in any way, the same is true in the duty to give uncertain thing, before the choice is made (art. 246 of the Civil Code). In the event of duty to give a certain thing, the contract shall be terminated for both parties, etc.

The act of God or force majeure also disregards the debtor’s default, when the duty is due after its occurrence.

The occurrence of act of God or force majeure has profound consequences in purchase and sale contracts in general (national and international), EPC, transportation, storage, including general warehouses, etc.

The legal provisions that directly involve harm to individuals (e.g. Decree No. 59,298 of March 24, 2020, of the City of São Paulo, which suspended face-to-face service to the public in commercial establishments and services) are traditionally designated as factum principis (governmental act), the same is the case with the closure of public agencies for the issuance of permits and authorizations. The delay in their issuance, due to a governmental act resulting from the COVID-19 crisis, is also a factum principis.

Here too, in the factum principis, a cause-and-effect relationship between administrative performance and damage is required[5] and also so that it can be used to remove the consequences of defaulted obligations [6].

Classic examples of factum principis is the prohibition of marketing certain merchandise or certain activity by governmental act.

Depending on the situation, the act of God, force majeure and factum principis may lead to the very termination of the contractual bond, either by the hindering of the provision, for example, due to the lack of interest of the creditor in its performance at later time, or its postponement to a later time.

RECENTLY, on March 30, 2020, Senator Antonio Anastasia sent a bill of law to the Federal Senate intending to establish the “Emergency and Transitional Legal Regime of Private Law Legal Relations (RJET) during the pandemic period of the Coronavirus (Covid-19)” (“Bill of Law“).

With regard to the issue of act of God and force majeure, such Bill of Law provides the following:

“Art. 6- The consequences arising from the Coronavirus pandemic (Covid-19) in the execution of contracts, including those provided for in art. 393 of the Civil Code, shall not have any retroactive legal effects.”

In our view, what matter from the provision above, is its final part, that is, that the “consequences arising from the coronavirus pandemic (Covid-19) in the execution of contracts, including those provided for in art. 393 of the Civil Code, shall not have any retroactive legal effects”, that is, once they are recognized, and considering that another date may be indicated, under no circumstances may it be applied to a date before March 20, 2020, which is the initial legal term of the events derived from the coronavirus pandemic (§ 1 of Art. 1 of the Bill of Law).

  1. The supervening excessive burden.

Art. 478 of the Civil Code provides for the possibility of terminating contracts due to supervening excessive burden. For this to occur, the following requirements have to be met:

(a) the contract must be a time-deferred or continued performance contract;

(b) the provision must become excessively burdensome for the debtor. It is not enough for the provision to become more difficult (this is the debtor’s burden), it is necessary that it becomes excessively burdensome. The supervening fact that caused the imbalance must be outside the realm of usual risk of the contract, that is, outside the measure of risk that the contract normally entails[7];

(c) excessive burden on the debtor must arise from extraordinary and unforeseeable events, i.e. exceptional and unpredictable events according to common predictive capacity standards[8] and

(d) be accompanied by “unexpected and unjustifiable profit” for the creditor [9].

If the provision has already been fulfilled, or the debtor is defaulted at the time of the event, any supervening excessive burden is absolutely irrelevant[10].

Any judgment rendered in a case where the occurrence of supervening excessive burden is claimed, carries a constitutive efficacy[11], and may not, therefore, retroact in order to achieve situations that occurred before the filing of the action (the final part of art. 478 established that the effects of the judgment shall go back to the date of the summons), having ex nunc efficacy, i.e. future efficacy[12]. Thus, for example, it cannot achieve provisions which may have already been fulfilled by the contractor, but only those due after the action has been filed[13] (or, more precisely, the content of the final part of Art. 478, as of the date of summons).

The defending contractor may avoid the termination of the contract by offering a fair change to the conditions of the agreement (art. 479).

In contracts where the obligations fall only on one of the parties, i.e. in unilateral contracts (such as loans), one of the parties may, on the basis of supervening excessive burden, request the reduction of its provision, or change the form of compliance (art. 480 of the Civil Code).

The aforementioned Bill of Law also establishes, in article 7, that:

 “Art. 7º For the exclusive purposes of art. 478[14], 479[15] and 480[16], of the Civil Code, increased inflation, exchange rate variation, devaluation or substitution of the monetary pattern are not considered unpredictable facts.

  • 1 – The rules on contractual review provided for in the Consumer Protection Code and Law No. 8,245 of October 18, 1991 are not subject to the provisions of the main section of this article.
  • 2 – For the purposes of this Law, consumer protection rules do not apply to contractual relationships under the Civil Code, including those established exclusively between companies or entrepreneurs.”

As can be seen, in a very didactic way, the aforementioned Bill of Law intends to clarify that the possible increase in inflation, exchange rate variation (in a floating exchange rate regime), the devaluation or substitution of the monetary standard, are not considered unpredictable events.

  1. Conclusion

This short abstract intends to introduce the issue to our Clients and Employees, with the exception of several other aspects that should be considered, which could only be possible with the individual analysis of each case. —///—

[1] João Calvão da Silva, Compliance and Mandatory Payment Penalty, separate from volume XXX of the Supplement to the Bulletin of the Law School of the University of Coimbra, Coimbra, 1987, pp.62/66 and 76/78.
[2] Pontes de Miranda, Private Law Treaty, São Paulo, RT, 1984, 3rd edição – 2nd print, XXIII, § 2.793, 3.
[3] Pontes de Miranda, Private Law Treaty, São Paulo, RT, 1984, 3rd edição – 2nd print, XXIII, § 2.793, 3.
[4] Judith Martins-Costa, Comments to the New Civil Code: the default of obligations, Forense, Rio de Janeiro, vol. V, t. II, p. 199.
[5] Guido Smorto, Dell’impossibilità sopravvenuta per causa non imputabile al debitore in Delle Obbligazioni, a cura di Vincenzo Cuffaro – arts. 1218-1276, Commentario del Codice Civile under the direction of Enrico Gabrielli, Torino, UTET, 2013, pp. 692/693.
[6] Nicola Distaso, Le Obbligazioni in Generale in Giurisprudenza Sistematica Civile e Commerciale, diretta da Walter Bigiavi, Torino, UTET, 1970, p. 363.
[7] Antonino Cataudella, I Contratti, Torino, Giappichelli, 2000, 2nd edition., page. 204.
[8] Antonino Cataudella, I Contratti, Torino, Giappichelli, 2000, 2nd edition, page. 202.
[9] Pontes de Miranda, Private Law Treaty, São Paulo, RT, 1984, 3nd edition – 2nd print, XXV, § 3.074, 2, Caio Mário da Silva Pereira, Civil Law Institutions, Rio de Janeiro, Forense, 1986, 7nd edition, vol. III, page. 111, Álvaro Villaça Azevedo, Theory of Unprediction and Judicial Review in Contracts in RT 733, page. 113, no. 4, Arnoldo Medeiros da Fonseca, Act of God and Theory of Unpredictibility, Trade News, Rio de Janeiro, 1934, page. 196/197.
[10] Accordingly: Gianluca Mauro Pellegrini in Codice Civile um der the resposibility of Pietro Rescigno, Milano, Giuffrè, 1994, 2nded., page 1644.
[11] Gustav Boehmer, El Derecho A Través de la Jurisprudencia – su aplicación y creación, trad. esp., Barcelona, Bosch, 1959, page. 477/478
[12] Pontes de Miranda, Treaty of Actions, São Paulo, RT, 1972, III, page. 15
[13] Alberto Trabucchi, Istituzioni di Diritto Civile, Padova, Cedam, 1997, 37th Edition page 679.
[14] Art. 478. In contracts of continued or deferred execution, if the performance of one party becomes excessively costly, with extreme advantage to the other, due to extraordinary and unforeseeable events, the debtor may request the termination of the contract. The effects of the judgment declaring it shall retroact to the date of summons.
[15] Art. 479. The termination may be avoided by offering the defendant to equitably modify the terms of the contract.
[16] Art. 480. If in the contract the obligations fall to only one of the parties, this party may claim that its performance be reduced, or the way in which it is carried out is altered in order to avoid any excessive burden.

 

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