Covid-19 (“Coronavirus”): Relevant contractual aspects
The recent outbreak of coronavirus and its rapid evolution from a local disease to a global threat made an impact on business relations around the world. Beyond the repercussions on the labor market, the disease affects the international transport of goods and people and is responsible for the industrial slowdown, which is leading to a reduction in energy demand and pushing down prices of commodities such as copper, iron ore, coal, oil, and LNG.
In this context, many companies are concerned about the implications of the coronavirus outbreak on contractual conditions. Although the risk exposure varies according to the wording of each contract and should always be evaluated on a case-by-case basis, we outline below the most relevant aspects and the legal requirements generally applicable to companies doing business in Brazil.
Can the coronavirus outbreak be considered a force majeure event under Brazilian law?
The main question that we have been asked by our clients is whether the coronavirus outbreak can be considered as a case of force majeure and whether it can be argued as an exclusion of liability.
Unlike many foreign jurisdictions, where force majeure is a creature of contract, in Brazilian law force majeure is established in the Civil Code. However, the Brazilian Civil Code does not set out hypotheses falling under the concept of force majeure. Considering the outbreak of coronavirus is a natural (and unpredictable) event, whose economic effects were not possible to avoid or prevent, it is generally possible to invoke force majeure if such disease or its effects prevents or hinders the performance of contractual obligations. Even so, individual analysis of each contract is recommended to assess the applicability and extent of the exclusion or mitigation of liability.
In practice, it is common for contracts governed by Brazilian law or whose execution will occur in Brazil to provide for clauses that set out force majeure events and their consequences. As a rule, contracts usually provide that each party shall bear its own losses in the occurrence of a force majeure event. In this respect, a party unable to perform must notify the other party (immediately or within a specified number of days) and duly prove the occurrence of a force majeure event.
The parties usually agree that no penalty shall be imposed to and no claim for breach shall be made against the party that invoked the force majeure clause, which will lead to the interruption of the contract as long as its causes and consequences last. In usual contracts in the O&G industry, such as Charter Contracts, the contracted party may be entitled to a discounted fee during the contract interruption period, depending on a case by case analysis.
If the force majeure lasts more than expected, it is also common to have a provision that allows termination.
The parties should also consider the effects of the declaration of the force majeure in other contracts. In the O&G industry, it is common for financing contracts for FPSOs and drilling rigs to include cross-references with other contracts relevant to the company's operation, so that an interruption of a certain contract due to force majeure may imply in additional obligations toward lenders.
Another relevant aspect, given the current context of the unpredictability of the duration of coronavirus outbreak, is the possibility of claiming revision (hardship) of term, prices and contracted quantities, among other commercial clauses, in case it is not possible to configure force majeure. Among other factors, it is important to assess whether changes to contractual circumstances could be foreseen when the contract was entered into or whether such change made impossible the execution of the contract as a whole.
In this context, it is particularly relevant to mention the contracts entered into with the Public Administration. Notwithstanding Brazilian law's provision that public interest shall supersede private interests, it is possible to claim for renegotiation of contracts based on the allegation of excessive burdens, aiming to reinstate the economic and financial balance of the contractual relationship. In any case, the legitimacy of such a claim must be assessed in accordance with the provision of the relevant contract.
Thus, even though the coronavirus outbreak may, in theory, be considered as a force majeure event in view of the unpredictable consequences of a pandemic, only the analysis of the circumstances of the specific case can effectively authorize or not the use of such event as an exclusion of liability or as a cause of contractual review or even termination.
• Has the coronavirus outbreak prevented or hindered the fulfillment of a contractual obligation?
• Has the party intending to invoke (or that has invoked) force majeure expressly agreed to bear the risk of a force majeure event?
• Should have the party intending to invoke (or that has invoked) force majeure fulfilled its contractual obligation before the outbreak of coronavirus?
• Has the party against whom the force majeure is intended to be invoked (or that was invoked) fulfilled its contractual obligation in consideration of the one that the party intending to invoke (or that has invoked) force majeure alleges than cannot be fulfilled?
• Could the delay deriving from force majeure event justify termination?
• Could the declaration of force majeure impact obligations towards lenders?
• If it is not possible to claim force majeure, is it possible to claim hardship under the contract?
The assessment of the extent of impacts resulting from the coronavirus outbreak on contractual relationships requires an individual analysis of the facts. We are paying close attention to developments of treatment of contractual and legal aspects arising from the coronavirus pandemic and we remain at your disposal to analyze the relevant rights and obligations from a Brazilian law standpoint.