METS Advice – Getting Contracts Right in Brazil

Ranking fifth globally in terms of population, with approximately 214 million people, Brazil boasts abundant natural resources, fostering robust mining, agriculture, technology, and manufacturing sectors. This has created opportunities for foreign technology and service providers to offer their unique solutions in a growing market.

While Brazil has lots of opportunities, it also has its own complexities which make it distinctly unique in terms of contracting. It is imperative for foreign entities interested in the Brazilian market to understand its legal framework, political and economic landscapes, and contractual norms.

This can be particularly true for foreign companies originating from common law countries. Navigating the Brazilian civil law system presents significant differences, mainly because there are several legal provisions that, if left undefined or unregulated in the contract, shall be applied regardless of the parties’ intentions.

Here are some of the key points that companies should be familiar with:

Contractual Principles: Brazilian legislation establishes several contractual principles that must be considered:

• Enforceability (pacta sunt servanda): the contractual clauses have the force of law between the parties and should be duly executed. If a party fails to fulfil their obligations, a specific performance can be levied, as further explained in the liability section; and
• Good faith (bona fides): this principle determines that the parties should act ethically and honestly when entering a contract.

Liability: As set by the contractual enforceability principle, once the parties reach an agreement, they shall perform their contractual obligations. In Brazil, together with the possibility of specific performance, contractual default is a cause for losses and damages. There are two types of damages set by the Brazilian civil legislation:

• Actual Damages: certain and verifiable monetary losses of a party due to the other party’s default. This can mean a decrease in the party’s net worth, or an increase in expenses and costs.
• Loss of Profits: reasonable and probable gain that a party would have if the other party hadn’t breached the contract. To determine the amount to be paid by the party in default, the party must demonstrate the potential profits are reasonably calculated and disregard eventual expenses that would be incurred to obtain the profits.

Limits of Liability: Despite the legal provisions defining liability, parties may set different liability terms within the contract. For example, contracting parties in Brazil often choose to explicitly exclude the obligation to pay loss of profits. Parties also often set a cap limiting their liability, which can vary depending on the sector and represents a percentage of the consideration. In any case, it is important to bear in mind the principles of good faith and balance in the contractual relationship to avoid invalidity of such clauses, which usually happen when one of the parties acts unlawfully or commits gross negligence.

Force Majeure: The Brazilian Civil Code stipulates that the party will not be liable for their unlawful actions caused by a force majeure event, which represents extraordinary and unforeseeable circumstances resulting in an excessive burden for one of the parties. On the other hand, parties may foresee some events and expressly indicate that a particular circumstance will not exempt them from any liability, thereby preserving obligations and preventing contract resolution.

Penalties: Parties can insert both penalty clauses and liquidated damages clauses in contracts, which will have a different legal regime depending on the types of penalty/fine stipulated in contracts:

• Compensatory fine/penalty (Multa Compensatória): These are fines/penalties that aim to compensate the party for the losses or damages suffered due to a breach of contract by the other party. It is like the liquidated damages clause in Common Law.
• Delay fines/penalties (Multa Moratória): These are fines/penalties that the party shall pay in case of delay in the performance of the contract.
• Non-compensatory fine/penalty (Multa Não Compensatória): These penalties have a coercive/punitive nature and are intended to deter breaches of contract rather than compensate for actual losses. The purpose of non-compensatory fines is to encourage parties to fulfil their contractual obligations and discourage breaches. The party may charge them with the specific performance or claim for losses and damages.

Termination and Penalties: The Brazilian Civil Code allows the termination of a contract for various reasons:

• Unilateral termination: when authorized by law or agreed upon by the parties, either party has the right to terminate the contract without specifying a reason by providing prior notice to the other party, typically within 30 days.
• Mutual termination: when the parties come into an agreement that extinguishes the previous one and liberates each party of the contractual obligations.
• Termination by default: the contract will be extinct by force of legal action or contractual clause if one of the parties fails to perform or comply with their obligations. Without contractual provision, the innocent party may file a lawsuit to seek termination and other appropriate remedies under applicable law. Nevertheless, Brazilian contracts often include provisions addressing default scenarios and imposing penalties calculated based on the total value of the agreement, which takes immediate effect and should not require legal proceedings.

Payment Terms and Conditions: The payment clause is crucial in any legal order, so it is essential always to consider the contract’s total value, late payments, interest rates, and penalties. Additionally, for contracts lasting over 12 months, it is common in Brazil to set an index for monetary correction. Be aware of the chosen index and monitor its most recent variation to avoid unexpected price adjustments.

General Provisions: Commonly set at the end of Brazilian contracts, the general provisions section establishes a few rules regarding the interpretation and enforcement of the contract. These provisions typically include clauses related to contract amendment, assignment of rights and obligations, governing law, jurisdiction for dispute resolution, severability, and entire agreement. These clauses clarify the rights and responsibilities of the parties involved and provide guidance on how the contract should be interpreted and enforced in case of any disputes or ambiguities.

Conclusion

It is important for foreign companies to understand how contracts and specific clauses are dealt with in each country they are operating in. Contracting in Brazil requires careful attention to ensure the integrity and enforceability of agreements. Given the complexity of Brazilian law and the potential consequences of contractual disputes, seeking professional legal assistance, and adhering to best practices in contract drafting and negotiation are highly advisable.

By proactively addressing legal and contractual considerations, businesses can confidently navigate the Brazilian market. For our clients, we look at contract reviews as a teaching opportunity for management teams who may not be accustomed to civil law, providing them with explanations of legal concepts and recommendations.

In addition, we support our clients with creating bespoke contractual procedures and templates that our fit for their specific considerations. This helps streamline future contract reviews while ensuring that proper protections are in place.

Lastly, our team can provide legal translations of contracts, assist with protecting intellectual property, and/or provide sign off for the board of directors.

Ax Legal is an advisory firm that works with foreign companies in Latin America. Our team of legal and commercial advisors have a distinguished track record of helping foreign technology and services companies to grow and operate in Latin America. Over the years, we have worked with starts up, mid-size businesses, and publicly listed companies. The one common factor that connects our clients is that they are leaders in their field, providing innovative technologies and services to the industrial sectors.

To better understand how we can support you in the Region, please contact Cody Mcfarlane at cmm@ax.legal