By Antonio Mazzucco, Rafael Mello and Leonardo Neri
On November 17, 2020, the government of São Paulo published a decree in the Official Gazette extending the quarantine in the state until December 16. The measure was taken by the state government after an increase in the number of hospitalizations resulting from infection by the new coronavirus was noted.
With the arrival of the second wave of the Covid-19 pandemic, similar to what has been happening in Europe, the impact on business due to the impossibility of fulfilling several contracts has generated new discussions about the extent of the effects of unforeseeable circumstances and force majeure and about the theory of unforeseeability and excessive burden. These are theories that exclude or mitigate the liability of the party arising from the total or partial non-fulfillment of contracts and allow their review or even termination. This article addresses practical issues and recommendations for entrepreneurs that can help in the search for solutions.
Act of God and Force Majeure – Practical issues
The purpose of stipulating unforeseeable circumstances or force majeure is to exclude the liability of the party in the event of non-performance resulting from supervening events whose occurrence could not have been foreseen at the time of contracting and whose consequences are beyond the control of the party. This is the case, for example, of natural disasters. Unforeseeable circumstances and force majeure clauses may be simpler or more complex and may provide for the temporary suspension of the contract, the extension of contractual terms, or even the possibility of one or the other party opting to terminate the contract. The effectiveness of unforeseeable circumstances and force majeure clauses depends on the specific circumstances. It is therefore essential to (i) determine whether the event that occurred qualifies, in fact, as an unforeseeable circumstances or force majeure, and (ii) establish a causal link between the event and the non-performance. Below we detail some situations.
Legal provision: Regardless of the provision in the contract, unforeseeable circumstances or force majeure are provided for in article 393 of the Brazilian Civil Code, which states:
Art. 393. The debtor shall not be liable for losses resulting from unforeseeable circumstances or force majeure, unless he has expressly assumed responsibility for them.
Sole paragraph. The fortuitous event or force majeure occurs in the necessary event, the effect of which could not be avoided or prevented.
Furthermore, Article 399, also of the Civil Code, confirms the need for a causal link to exist to exempt the debtor from liability for non-performance. Let us see:
Art. 399. The debtor in default is liable for the impossibility of performance, even if this impossibility results from unforeseeable circumstances or force majeure, if these occur during the delay; unless he proves exemption from fault, or that the damage would have occurred even if the obligation had been timely performed.
It is clear, therefore, that the general legal rule is that the occurrence of an unforeseeable event or force majeure excludes liability for non-compliance, provided that there is no express liability and, furthermore, practical applications are observed.
Although it is not necessary, the parties may establish in advance events that may be considered force majeure. However, the difficulty of this prediction is evident. How can a pandemic be predicted? This is not a question of interpretation. The burden of proof lies with the person making the claim. How is the event proven? Demonstration of the occurrence of the event and its impact that affected the fulfillment of the obligation. Case law has accepted the theory of unforeseeable circumstances or force majeure as the exclusive argument for exemption from liability of carriers, given the crisis resulting from Covid-19. It is important to highlight that with the extension of the pandemic until December 16, 2020, the effects on contracts verified throughout the year should continue for a longer period in obligatory relationships.
Force majeure does not necessarily exclude the obligation to perform. The solution to non-performance resulting from events of this nature may be full or partial performance at the appropriate time, if still possible, or even termination of the contract. Therefore, although it is a non-performance, it involves solutions that may lead the party to comply with the obligation.
Therefore, it is not necessary to detail the clause on unforeseeable circumstances or force majeure in the contract, although the contract may provide for its consequences, such as termination or others. The contract may also exclude force majeure as an exclusion of the party's liability. In the case of the second wave of the pandemic, it is necessary to verify whether the effects or restrictions established as a result of the pandemic actually result in the impossibility of fulfilling the contract, even partially (for example, the impossibility of opening commercial establishments, closing borders, etc.).
It is not necessary for the unforeseeable circumstances or force majeure clause to list one or more events, although it may do so. This does not mean that the occurrence of the event described will necessarily operate as an exclusion of liability. The specific situation must be verified. The fundamental elements are that the events are unforeseeable or, even if foreseeable, the mitigation of their effects is beyond the control of the parties.
Determination of facts: it is necessary to verify whether the non-performance is effectively due to the event of unforeseeable circumstances or force majeure, that is, the causal link. It should be noted that an event that may make the execution of the contract more onerous does not constitute force majeure. Other legal provisions apply in this case, and the allocation of this additional burden may be discussed.
Time of occurrence of the event and need for notification and immediate action: It is extremely important that the party seeking to be exempted from liability based on the alleged occurrence of an unforeseeable event or force majeure, notifies the other party again about the occurrence of the extension of the quarantine and takes all measures that may be within its reach to mitigate the effects of the event. Therefore, the occurrence of an unforeseeable event or force majeure does not exclude the entire liability of the party if it did not act diligently to mitigate the losses resulting from the occurrence of the event.
Obligation of partial performance of the contract: if the contract has not been terminated and stipulates multiple obligations, these obligations must continue to be fulfilled by the party seeking to benefit from the force majeure clause.
Checklist: Practical Application.
Below we have a practical guide for evaluating both legal and commercial situations in each contract to determine whether or not the application of the fortuitous event or force majeure clause is appropriate.
- Even if there is no provision in the contract, the application of the theory of unforeseeable circumstances or force majeure is possible since it is provided for in the Civil Code. It is necessary to verify whether the contract does not exclude its application. Although rare, this is possible.
- Once the absence of an exclusion clause has been confirmed, the following elements must be taken into account:
- i) the nature of the event;
- ii) the causal link;
iii) the effects on the obligations that are the subject of the contract;
- iv) the need for communication; and
- v) the need to mitigate the effects of the force majeure event.
Note: even if the contract does not contain an obligation to mitigate the effects, this is imperative, according to case law.
- Communication is extremely important and should be carried out in a complete and precise manner so as to allow the other party to take action, if possible. Attention should be paid to any communications and notification clauses that may be included in the contract. If none exist, communication should be given in any way that can be proven.
- If it is concluded that the application of force majeure is inappropriate, other legal theories that may apply to the circumstances must be sought, such as the theory of unforeseeability and excessive burden. A detailed legal analysis is extremely important.
Jurisprudence on force majeure. TJSP and STJ
In the field of commercial lease agreements, case law has not accepted the theory of unforeseeable circumstances or force majeure on its own, with the theory of unpredictability and excessive burden being more robust, duly substantiated with evidentiary elements that indicate the author's attempt to prove his condition of insufficiency, given the current situation of the extension of the effects of the pandemic.
In transport contracts, the Courts are deciding in accordance with current legislation, which already determines the exclusion of liability for damages caused by the carrier of people and things as a result of a force majeure event. In this regard, articles 734, 737 and 753 of the Civil Code stand out:
Art. 734. The carrier is liable for damages caused to the persons transported and their luggage, except in cases of force majeure, and any clause excluding liability is null and void.
Art. 737. The carrier is subject to the scheduled schedules and itineraries, under penalty of being liable for losses and damages, except in cases of force majeure.
Art. 753. If transportation cannot be carried out or is interrupted for a long time, the carrier shall immediately request instructions from the sender and shall take care of the item, for the loss or deterioration of which he shall be liable, except in cases of force majeure.
Therefore, in a practical hypothesis in which the carrier cannot complete the delivery of a person or thing that it is obliged to transport due to the closing of borders to prevent the increase in the transmission of COVID-19 in this second wave of the pandemic, there being no other alternative to fulfill the obligation and, furthermore, this being an unforeseeable fact, the carrier will be exempt from liability for any damages caused, highlighting the importance of a thorough analysis of the case, according to its specificities.
As mentioned above, force majeure clauses are intended to exclude or mitigate the party's liability for failure to comply with obligations arising from unforeseeable events or events beyond its control. Is it necessary to identify the event in the clause?
There is no case law dealing with pandemics or epidemics as exclusions from liability. When assessing the situation, therefore, the quarantine rules and restrictions effectively imposed on a case-by-case basis must be taken into account. The epidemic cannot in itself be considered an exclusion or justification for any non-compliance.
The claim of unforeseeable circumstances or force majeure may be used either for termination or for negotiation of alternative forms of performance, such as suspension or extension of the contract or even partial performance. The consequences of termination may be too severe and the parties may prefer to seek alternative solutions, including considering the principle of objective good faith stipulated in the Civil Code.
If it is not possible to apply force majeure, what other exclusionary theories can be used?
If the circumstances are not considered force majeure, as stated, there is still the possibility of alleging the theory of unforeseeability or excessive burden.
Theory of unpredictability: As a rule, contracts are unchangeable, except by express manifestation of will of the parties. However, in contracts of continuous or deferred provision, which do not end immediately, there is a possibility of supervening events, unforeseeable and unavoidable by the parties, which modify the factual situation of the contractual relationship and, consequently, prevent or burden the fulfillment of obligations. The Civil Code states:
Art. 317. When, for unforeseeable reasons, there is a manifest disproportion between the value of the payment due and that at 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 payment.
The legal doctrine on contracts is based on the rebus sic stantibus clause, which determines compliance with the agreed obligations. However, if there are significant and unforeseeable changes in the conditions then in force, renegotiation is possible. However, not every factual change is considered an unforeseeable situation by the parties. Likewise, not all unforeseeable situations are capable of interfering with the fulfillment of contractual obligations.
To understand how the current second wave of the pandemic may influence and change your contracts, it will be necessary to analyze several contractual and factual specificities, remembering that the unforeseeable event may affect both contracting parties, and reasonableness must be applied in the adoption of extraordinary measures.
Excessive burden: The existence of a contract, based on the principle of free expression of the parties, presupposes the existence of relational balance between the parties. The occurrence of events that make compliance with the contract excessively onerous for one of the parties and make the continuation of the relationship unfeasible, must be considered.
The theory of excessive burden is provided for in article 478 of the Brazilian Civil Code:
Art. 478. In contracts of continued or deferred performance, if the performance of one of the parties becomes excessively onerous, to the extreme advantage of the other, due to extraordinary and unforeseeable events, the debtor may request the termination of the contract. The effects of the judgment that decrees it shall be retroactive to the date of citation.
In addition to the possibility of contractual termination, the Civil Code also provides for the possibility of reviewing contractual conditions, thus promoting the continuity of the relationship (Articles 479 and 480). In this way, the judge is able to modify the agreed conditions in order to reestablish the balance between the parties, avoiding excessive favoritism of one contracting party to the detriment of the other.
Extraordinary Questions. What else should be considered by clients whose contracts have been impacted by the second wave of the Covid-19 pandemic?
In general terms, in any situation, prompt and effective communication is important due to the principle of objective good faith towards the other party. In this sense, we recommend the preparation of new petitions or notifications to the parties or to the Judiciary, requesting retroactive effects to rights that were protected during the first wave of the pandemic and that had their effects ceased throughout the second half of 2020, since the quarantine was extended again with the second wave of Covid-19.
It is also necessary to pay attention to the clauses of the contract in question, but also to the effective means of communication considering the circumstances. The obligation to mitigate the effects is always imperative and is independent of the wording of the clause due to objective good faith.
Objective good faith must also be considered when solving problems arising from force majeure events.
In a supply chain, the effects of non-performance resulting from force majeure events tend to impact all agents in the chain. In this case, the obligation to make efforts to mitigate the effects of non-performance also applies, based on objective good faith.
Finally, it is worth mentioning that regardless of the technicality that may be brought to the issue, the Judiciary also ends up taking subjective aspects into account when determining the rebalancing of the contract.