The Effects of COVID-19 on International Contracts

How to handle the case in which a supplier or customer within an international supply chain defaults on a contract? When can Force Majeure be invoked? What are the consequences on contracts? How to minimize risks to the company’s business?

To answer these questions, it is necessary to analyze the content of the contracts and understand what the law applicable to the individual agreements provides for.

Our experts explain how to manage the effects of the Covid-19 pandemic on industrial and commercial activities and share operational advice for managing international contracts during the emergency.

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How are Force Majeure and Hardship regulated under Brazilian law?

The Brazilian Civil Code (Law no. 10.406/2002) establishes in its article 393 that Force Majeure takes place when there is an unavoidable event which effects are unavoidable or impossible to prevent. In this case, the debtor is not liable for damages resulting from such event, unless debtor has expressly assumed liability.

It is important to note that we use the expression Force Majeure throughout this work as Brazilian legislation does not differentiate Force Majeure and Act of God, treating them as the same.

In summary, under the Brazilian legislation, Force Majeure can be classified as the incident related to external facts, with no influence of human will, impeding the fulfillment of obligations.

Unless a contract foresees that parties will be liable even in case of Force Majeure, the exclusion of liability for damages caused by the inability to fulfill obligations due to force majeure is recognized.

On the other hand, Hardship is understood as the excessive burden on one party, with extreme advantage for the other, arising from an extraordinary and unpredictable event, as determined by article 478 of the Brazilian Civil Code. Such extraordinary and unpredictable events may not be objectively related to the nature of the agreement. As an example, Brazilian courts considered that climate issues impeding the delivery of sugar cane under a supply agreement are not a Hardship event as the climate is a risk inherent to agricultural business.

In the event of Hardship the party suffering the excessive burden may request the termination of the agreement or the alteration of its conditions. The other party may avoid the termination offering to alter the contract to restore its balance, as per the sole paragraph of the above-mentioned article.

Moreover, Brazil is a signatory of the 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG), and, therefore, its application on contracts for the sale of good entered by and between parties domiciled in Brazil and another country that is signatory of the CISG is automatic, unless the parties expressly derogate from specific articles or exclude its application.

However, as Brazil has been a signatory of CISG since 2014, its Courts have not formed solid jurisprudence on the matter so far. First caselaw is dated from 2017 and recognizes the application of CISG in a case of international sale of goods not supported by a written contract. There is no case law yet regarding Force Majeure and CISG.

Can the Coronavirus outbreak be considered as Force Majeure in Brazil?

Having in mind the legal definitions and concepts, it is possible to verify that Coronavirus can be classified as Force Majeure, considering that a pandemic situation cannot be avoided or predicted, reflecting directly in business relations.

First of all, the agreement should be analyzed to check if there is a Force Majeure clause and what are its terms and conditions. In some cases, the parties include their own definition of Force Majeure or foresee the actions that should be taken in case of a Force Majeure event. These particularities must be taken into consideration.

If epidemics are not mentioned in the definition of Force Majeure in the contract, then there is a risk Coronavirus would not be considered as Force Majeure for the purposes of non-fulfillment of such contract’s obligations. In this case, the party in breach should consider claiming a Hardship event, since the Coronavirus outbreak made it excessively burdensome for the contractual obligations to be fulfilled.

The provisions foreseen in the Force Majeure clause should also be respected before the agreement may be terminated. It is common for parties to include clauses stating that a notice should be sent in case of an event of Force Majeure and that the agreement should have its fulfillment suspended for a certain number of days before it may be terminated.

Another matter to be considered is the date of execution of the Agreement. If the agreement was executed when the Coronavirus outbreak was at its start, a claim that Coronavirus is a cause for hardship may be weakened, as parties could already foresee or predict it could present itself as a problem in the future.

However, if the agreement expressly provides for the liability of the party for damages even in case of Force Majeure, it is unlikely the party would obtain a legal protection by the Courts.

How to prove the event of Force Majeure under Brazilian law?

According to the Brazilian Civil Procedure Code, article 373, as a rule, with the exception of consumer cases, the burden of proof falls on whoever is alleging the facts and claiming the respective rights, meaning that the party shall provide evidence to support all allegations.

In this sense, the party that cannot comply with contractual obligations due to the Coronavirus outbreak must prove the causal link between the pandemic and the impossibility to fulfill its contractual obligations.

The other party only has to prove that there was a contract signed by the parties, that it was breached by the other party and that it has suffered damages (apart from claiming any contractually established penalties).

Force Majeure certificates issued by governments could be used as a part of the evidence necessary for proving the Force Majeure under a specific contract. Also, the announcement of “public health emergency of international concern” made by the World Health Organization in January 2020 could be useful. Anyway, the party would have to prove that the situation did directly affect its ability to fulfill its contractual obligations. 

What to do in case of a notice of Force Majeure due to Coronavirus – COVID19?

In case of an event of Force Majeure, before issuing a notice to the other party, the affected party should analyze the contractual terms to make sure it foresees the exclusion of the liability, collect all the evidence it will need to prove the causal link between the event and the impossibility to fulfill its contractual obligations, and check if there is insurance coverage.

It is also advisable to study if there would be alternatives that could be taken to minimize problems and losses. In some cases, it is more advantageous for parties to renegotiate the contractual terms and find a compromise that would benefit, or be less harmful to, both. If so, these intentions should be indicated in the notice to be sent and a mediation could be suggested to aid parties to reach a settlement.

Moreover, there are other issues to be taken care of when a notice of Force Majeure is issued. The party receiving the notice must also assess the impacts the notice will have on third parties and take immediate measures to inform them and mitigate the damages, applying all the above-mentioned steps.

Finally, we would recommend to the parties to make an effort and try to find a mutual acceptable alternative solution to avoid the termination and litigation, mitigating the damages.

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