The impacts caused by the COVID-19 pandemic have proved to be extremely severe. Measures such as social isolation, closure of commercial establishments and restrictions on traffic, although necessary, paralyze activities, and generate a downturn in the economy. In this context, compliance with contractual obligations may prove unfeasible.

The Executive Power, in its different spheres, has taken measures to minimize the impact of the pandemic. Within the scope of the Legislative Power, there are projects aimed at changing or making more flexible legal provisions to mitigate the effects of the recession and adapt legal circumstances to the global crisis. Noteworthy, among them, Legislative Bill No. 1.179/2020, which proposes significant changes to Law No. 10.406/2002 (Civil Code), including on the review of contracts, called the Emergency and Transitional Legal Regime for Private Law legal relations. (RJET).

We highlight, below, some legal alternatives that can be adopted by those who are effectively prevented from regularly continuing to fulfill their contractual obligations due to the economic and social repercussions resulting from the COVID-19 pandemic.

  • CONTRACTUAL RENEGOTIATION

The preservation of the contract and its economic balance must be the number 1 goal of the contracting parties. In this sense, renegotiation is the main alternative to preserve contracts that have become very costly due to the crisis brought on by the pandemic, not only because it is faster and more dynamic, but mainly because it allows for more creative and flexible solutions. The criteria for renegotiation must take into account the legal and economic risks at stake, to provide both cost reduction and the strengthening of the partnership between the contractors, based on the values of cooperation, loyalty, and transparency (good faith).

  • TEMPORARY SUSPENSION OR EARLY TERMINATION OF THE CONTRACT

One party may not agree with the terms of the renegotiation or, even if it does, might be unable to cooperate under the risk of also compromising the survival of its business. Depending on the impact of the pandemic, fulfilling contractual obligations may prove to be impossible, even if temporarily. In this case, the hypotheses of temporary suspension or early termination must be considered, including using a judicial measure, and for that, we highlight some applicable legal bases.

  • INVOLUNTARY NONPERFORMANCE BY FORCE MAJEURE

According to the Civil Code, in contracts governed by Brazilian law, the debtor is not liable for damages arising from unforeseeable circumstances or force majeure, thus considering the necessary fact, in relation to which he cannot be held responsible, and which effects could not be prevented or avoided, such as the COVID-19 pandemic (article 393). It is essential to demonstrate the causal relationship between the pandemic and the impossibility of fulfilling the obligation. Also, involuntary nonperformance does not benefit debtors who were already in arrears before the event of force majeure, unless they prove that the damage would have happened even if the obligation had been fulfilled within the time limit (article 399).

To reinforce the framework of the pandemic in a force majeure event, it is important to have as reference the recognition of the state of public calamity by the Federal Senate (Legislative Decree No. 6, of March 20, 2020), as well as the states rules – such as Decree No. 46.984, of March 20, 2020 in Rio de Janeiro, and Decree No. 64.879, of March 20, 2020 in São Paulo – and municipal ones – such as Decree No. 47.263, of March 17, 2020 in Rio de Janeiro and Decree No. 59.283, dated 3.16.2020, from São Paulo.

In the case of an international contract, one should check the governing legislation and confirm how the competent jurisdiction deals with cases of force majeure. Countries that adopt the common law legal system, such as the United States and the United Kingdom, usually recognize the institute only by expressed contractual clause.

  • PRINCIPLE OF UNPREDICTABILITY AND EXCESSIVE ONEROSITY

According to the Civil Code, in the contracts of continuous or deferred execution, if the performance of one of the parties becomes excessively onerous, with extreme advantage for the other, due to extraordinary and unpredictable events, the debtor may request the termination of the contract (article 478). If the obligation falls to only one of the parties, it may claim that the benefit is reduced, or alter the way it is being executed, avoiding excessive burdens (article 480). For the Theory of Unpredictability to be accepted, it is essential to demonstrate that the increase in the onerosity of the contract results, directly or indirectly, from the effects of the pandemic.

  • SUSPENSION BASED ON EXCEPTION OF NON-COMPLIED CONTRACT

Sometimes the best way to get through a difficult phase is to put the contract into hibernation. In this sense, article 476 of the Civil Code, applicable only to bilateral contracts, allows any of the contractors to interrupt the performance of their contractual provision, in case the other fails to fulfill a previous obligation on which the performance of the first depends. In other words, if one party fails to act and this compromises the ability of the other party to honor the agreement, the best thing to do is to suspend the contract until one (or both) is/are able to have the conditions to resume it. In that case, one of the parties can only demand that the other fulfills its obligation if, before that, what has been agreed has been accomplished, unless the other party’s abstention is considered serious. This is the institute called exception for the contract not fulfilled.

  • SUSPENSION WITH PERFORMANCE SECURITY OF THE TERM OBLIGATION

Article 477 of the Civil Code brings two more tools for contractual suspension, which are based on a decrease in the equity of one of the parties that compromises or questions its ability to honor the agreement. The first one allows the contractor to remain inert about its performance. The second, on the other hand, allows an initial pause in the contract, resuming from the moment when the contracting party in difficulty presents a convincing guarantee that he will be able to comply with the agreement. Such institute is called security for the obligation’s performance on term.

  • AFTER ALL, WHAT CAN BE DONE?

There is no closed mathematical equation to answer this question. However, regardless of the path chosen, it is essential that the contracting party documents its initiatives and notifies any decision or idea to the other party. Besides, depending on the complexity of the contractual relation, it is recommended to have a specialized professional analysis.