Does the pandemic caused by COVID-19 justify the request for contractual review?

Commerce stopped, shopping malls closed, new opportunities disappeared and many people without jobs. This is the reality of many Brazilians with the disaster caused by the covid-19 pandemic.

The year 2020 has arrived with a certain optimism for us Brazilians. With the measures adopted by the Federal Government at the end of 2019, which would take place the following year, Brazilians had great hope for the country’s economic development.

It seems that now… in the midst of the pandemic, this “shock of optimism” was buried by the thoughts of several Brazilians, who now – more than ever – think about just surviving and keeping their accounts up to date as a result of the disaster generated by COVID-19.

At this point, many people ask, Is it possible for me to revise my rental agreement? My contract with suppliers? My fee agreement? My service contract?

Dear readers, This question imposes the analysis of several requirements in the light of the legal system and recent decisions of the Brazilian courts on the subject. I tell you that there is no formula, a recipe to be followed or a strategy that applies to all cases. This question must be examined on a case-by-case basis.

Under the prism of contract law, the full point of the discussion and questioning raised by several Brazilians concerns whether the pandemic will be classified and interpreted by the courts for the purposes of exclusion of liability, review or resilience of contracts. It is still too early to make this clear, but as will be demonstrated throughout this article, some decisions have already been made in this regard.

For a better debate, before entering the decisions themselves, it is necessary to reveal that there are some theories of Civil law that can support the applicant in the request for contractual review.

Finally, is it possible to justify the request for contractual review because of COVID-19?

The direct contemplates, in this very exceptional situation, the rebalancing of the economic-financial area of the contract by the following paths:

Fortuitous event or force majeure:

The first theory that would justify the request for contractual review because of the current pandemic would be whether COVID-19 is a hypothesis of fortuitous event or force majeure[1].

Article 393 of the Civil Code provides that “the debtor is not liable for damages resulting from acts of God or force majeure, if expressly not held responsible for them. Sole paragraph. The fortuitous event or force majeure takes place in the necessary fact, the effects of which were not possible to avoid or prevent”.

From the interpretation of such article, it is understood by the conjunction of three crucial elements for the removal of liability for the occurrence of a fortuitous event or force majeure: (i) necessary fact, that is, a fact that necessarily prevents or impairs the execution of the contract; (ii) effects impossible to be avoided or prevented; and (iii) there is no express contractual provision for the assumption of damages by any of the parties in these cases.

As the jurist Arnoldo Wald asserts about fortuitous events and force majeure, see:

The Civil Code conceptualizes the fortuitous event or force majeure as a ‘necessary fact’ whose effects were not possible to avoid or prevent’ (the term necessary means inevitable). Such a definition covers both natural facts (fire, flood), and the facts of third parties or Public Power (war, act of government, provided that they are characterized by inevitability and irresistibility). In Brazilian law, the fortuitous event or force majeure requires for its proof, which must be made by the person claiming it, the existence of two elements: an objective-the inevitability of the event-and the other subjective – the absence of guilt” (our emphasis) [2]

In our view, the coronavirus can be framed in a situation that characterizes a fortuitous event or force majeure, as long as there is a link, an inseparable link or causal nexus in the cause-and-effect relationship between the pandemic and the impossibility of executing the contractual object. From this premise, the parties may claim the occurrence of fortuitous events or force majeure as excluding their responsibilities. Remember: there must be a real and proven obstacle that justifies non-compliance with contractual clauses and such an event cannot be a pretext for opportunistic practices.

Theory of unpredictability

Another theory that may be presented for the discussion of the need to revise contracts due to COVID-19 is the so-called “Theory of unpredictability”, provided for in Article 317 of the Civil Code, in verbis: “when, for unpredictable reasons, there is a manifest disproportion between the value of the provision due and that of the time of its execution, the judge may correct it, at the request of the party, in such a way as to ensure, as far as possible, the real value of the provision”.

The theory of unpredictability [3] is understood to be implicit in contracts, a clause that releases the contractor to continue executing an unbalanced contract.

According to this dilemma, unpredictable, abnormal facts, beyond the control of the contractors, which make the fulfillment of the contract ruinous for one of the parties, create a situation that cannot be supported solely by the injured contractor and impose immediate review of the adjustment.

Therefore, the Economic-Financial Review of the contract is justified whenever a supervening, extraordinary and unpredictable circumstance compromises the balance of the contract, thus having to occur the recomposition of the agreed interests, to adapt them to the new reality.

The current pandemic fits into the core of this concept, as it will have repercussions on the fateful reality of the contracts in force, breaking their economic-financial balance. An easy-to-understand example is the issue of shopping malls. Most of them are closed and how will the tenants be able to afford the very high rent and other contractual clauses without billing and with the doors closed?

Other examples (I) loss of economies of Scale; (ii) exceptional exchange rate rise; (iii) increase in inputs and outputs; (iv) increase in transportation and logistics costs; (v) more expensive insurance, (vi) late payment (vii) new indirect costs, among other contractual losses.

As previously warned, the application will only succeed if it is properly justified technically, financially and legally.

How is the Judiciary behaving regarding contractual review these days?

Events, buffet and children’s parties Company:

The 2nd Civil Court of Santos granted early guardianship, allowing the reduction, for an initial period of 90 days, of 40% in the amount of rents paid by a company in the buffet and children’s parties business, which totaled R$32 thousand. Due to the current crisis triggered by Covid-19 and the consequent closure of commercial establishments, all planned events have been canceled. According to judge Claudio Teixeira Villar, the pandemic of the new coronavirus and the state conducts resulting from it conform to what is drawn in the theory of unpredictability, authorizing the revision of contracts or a temporary modulation aimed at their continuity. “This is an external event, fortuitous and force majeure, modifying the reality foreseen at the beginning of the contracting and making its object excessively burdensome,” he said.

Restaurants

Judge Fernando Henrique de Oliveira Biolcati, of the 22nd Civil Court of São Paulo, granted an injunction to reduce the amount of rent paid by a restaurant due to the covid-19 epidemic in Brazil, which resulted in the reduction of the establishment’s activities and income. According to the decision, the restaurant will pay 30% of the original rental amount for the duration of the health crisis.

Beauty salons

Law judge Camilla Prado, of the 41st Civil Court of RJ, judged that the beauty salon should reduce its rent by 50%. [4]

Mall lease agreement

Judge Vivian Carla Josefovicz, acting in the 4th Civil Court of the district of Blumenau, partially granted the request for urgent guardianship made by a restaurant and, in addition to determining the reduction of rent to half the monthly minimum, suspended the payment of the promotion and advertising fund and prevented the insertion of restrictions before the credit protection agencies in a lease agreement with a shopping mall in Blumenau. [5]

Educational Law

Judge Flávio César Barbalho, of the 3rd Civil Court of the Mossoró District, granted an injunction to determine that the Potiguar University (UnP) suspend the payment of tuition fees due by a student, for a period of six months, as well as refrain from cutting the university scholarship of 50%, enjoyed by the author of the request, under penalty of blocking in the amount of R$ 10 thousand, based on Article 139, IV, of the Code of Civil Procedure.[6]

Alimony

Due to the Covid-19 pandemic, Judge Fernando Henrique Pinto, of the 2nd family and succession Court of the Jacareí Forum, set for the months of March, April, May and June 2020 the amount of maintenance obligation at 30% of the national minimum wage. After the period, in case of formal employment, the parent of a teenager who lives with her father must allocate 20% of her net income to support her daughter. Previously, a provisional decision had fixed the maintenance obligation at the equivalent of 1/3 of the mother’s salary, but she pleaded for the decrease in the amount. “Unlike the author’s father, who only has this daughter as a dependent, and explicitly reported help from two older children, the defendant has another daughter under her responsibility”, highlighted the magistrate, stating that the covid-19 pandemic, which has forced massive social isolation and reduced the economic activity of countries, is impacting the business activity carried out by the author’s mother.

Payment of Labor Agreement

Judge Renato Barros Fagundes, of the 23ª Labor Court of Porto Alegre, suspended the payment of part of a labor agreement between former employees of two event organization companies because of the crisis caused by the coronavirus. According to Fagundes, the payment of the installments of the labor agreement will remain suspended until the end of the state of public calamity in the country.

Dear readers, in the face of the various cases presented, there are great chances that future jurisprudence will settle in the sense that the coronavirus was characterized as a situation of fortuitous event or force majeure for most situations.

However, the future is still uncertain. It has been months since the declaration of the World Health Organization (WHO) of the covid-19 pandemic. The time is now to focus on feasible measures, adapting to the present situation and respecting the friendly solution and common sense by the parties. In difficult times, the negotiation technique can be an escape valve in the face of judicialization of such issues.

[1] These are facts or events that are unpredictable or difficult to predict, that cannot be avoided, but that cause consequences or effects for others. For example: phenomena of nature, general strikes (e.g. truckers ‘ strike), public calamities, wars, etc.

[2] Civil Law – introduction and General part – Arnold Wald. 2015.

[3] Art. 478. In contracts of continued or deferred execution, if the provision 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 that decrees it will be retroactive to the date of citation.

[4] (Case No.: 1026645-41.2020.8.26.0100)

[5] (Autos n. 5010372-55.2020.8.24.0008).

[6] (Autos n. 0804997-71.2020.8.20.5106)

Rafael De Sordi Barbosa Martins

Lawyer, graduated in law, with emphasis in civil law, from Universidade Presbiteriana Mackenzie (2019), enrolled in the Brazilian Bar Association, São Paulo Section (OAB/SP) (2020). Postgraduate in Business Law from the São Paulo School of Law of the Getúlio Vargas Foundation, author of a book and articles.

Leonardo Da Vinci

Lawyer, graduated in law, with emphasis on Business Law, from Universidade Presbiteriana Mackenzie (2012), enrolled in the Brazilian Bar Association, São Paulo Section (OAB/SP) (2012). Post-graduate and Specialist IN Business Law from the São Paulo Law School of the Getúlio Vargas Foundation (2014), Master in political and Economic Law from the Mackenzie Presbyterian University (2017), Vice President of the Business Law Commission of the 33rd subsection of the OAB/SP, author of books and articles, Lecturer, University professor and member of the São Paulo Lawyers Association (AASP). Founding partner of TM Associados.