Put Christian Fernandes Rosa and Beatriz Wehby – 03/25/2020

The consequences of the COVID-19 pandemic have impacted social relations of all kinds. And this was no different for legal transactions: signed contracts are already having their execution affected by these facts, placing an unequal burden on one or both parties. This becomes even more relevant in contracts between private companies and the Government.

Even in the regime of contracts in general, between private parties, the Law provides treatment for these circumstances. In parallel to their legal treatment, contracts reflect the agreement of the parties regarding a given list of obligations, charges and benefits. Contracts express, in a given transaction, which risks were assigned to each of the parties. This relationship between risks and their remuneration structures the economic-financial balance of a contract.

The negative effects (imbalances) caused by the epidemic in partnerships between private agents and the Public Administration (Union, States and Municipalities) leads us to seek in Law the parameters for readjusting the economic-financial balance of these contracts. We are facing an extraordinary, unpredictable situation or one with unforeseen consequences, which affects the financial equation of the contract. Contracts with the Public Authority may undergo variations on the subject, depending on the regime to which they are subject. However, in general, the frustration of the private agent or additional costs that may arise due to the epidemic are economic losses at the risk of the Public Authority, for which the individual may file an administrative request for economic-financial rebalancing.

The constitutional basis for this claim for contractual restructuring is in section XXI of article 37 of the Constitution. By providing that the effective conditions of the proposal are maintained, the Constitution highlights this notion of economic and financial balance of public contracts and demonstrates that the private contractor has the right to preserve the proportion between the charges and the remuneration initially defined in the signed agreement, so that the monetary consideration paid to the private contractor remains equivalent to those conditions established in the proposal. Faced with greater charges for the execution of the contract, resulting from the epidemic, it is certain that it will have the constitutional right to increase its remuneration, or reduce other charges provided for.

Laws No. 8,666/93 and 8,987/95 are also worthy of note. The first, a general rule for public procurement and contracts, provides for two means of price adjustment: review and readjustment. The types of readjustment are index adjustment and renegotiation, which are intended to adjust the contract price due to ordinary or economic risk, such as inflation. The institute of review is important here, as it requires proof of a supervening and extraordinary fact or of incalculable consequences, so that it is only applicable in circumstances of this nature.

This last form is also provided for in Law No. 8,987/95, the law on (common) public service concessions, a system that allows for some sophistication on the subject, without straying too far from the general rule, by adopting a risk matrix in which there are economic impacts at the risk of the individual, while others – extraordinary ones – remain the responsibility of the contracting Public Authority. This rule also explicitly provides for tariff review (such as tolls in highway concessions) as a means of rebalancing harmful events.

The infra-constitutional framework for claims for economic and financial rebalancing only gained broader contours with the advent of Law No. 11,079 of 2004, the Public-Private Partnerships (PPP) law in the strict sense. Among the innovations, there was a specific legal treatment that allowed, in theory, the distribution between both parties (contracted company and contracting Public Authority) of risks previously reserved for the Public Administration, “including those relating to fortuitous events, force majeure, acts of the prince and extraordinary economic risk”, under the terms of its article 5, paragraph III. In these cases, therefore, the concrete analysis of the distribution of risks of a given contract is fundamental in order to understand to what extent these risks, now faced, were shared between the parties.

However, in general, the economic and financial impacts caused to private individuals hired by the Government due to the COVID-19 crisis are risks assumed by the public contractor. The (marginal) negative effect of the epidemic on the company's cash flow (such as excess costs for demobilization and new mobilization, exacerbated increase in the costs of inputs for the activity, among others) requires specific treatment in each case. However, they are, as a rule, subject to a request for economic and financial rebalancing before the contracting Government.

The Public Law & Compliance team at Mazzucco & Mello Advogados has extensive experience in public-private contracts and is available to provide any clarifications regarding the legal model and economic-financial structuring rules for these contracts between the Public Administration and the private sector, as well as to clarify the appropriate classification and applicable measures, in theory, to protect the rights of companies contracted by the Public Administration.