header_logo
cancel1

Brazil

Last Verified on Monday 10th June 2019

    • Brazil

      There is a certain flexibility related to the election of the applicable law, particularly if the parties choose arbitration rather than the local courts to resolve their disputes. The arbitrator’s decisions can follow foreign law and even ex aequo et bono principles, as long as they do not violate the national public order. If an arbitration involves a public administration entity, the arbitration must be governed by the rules of law, usually Brazilian law. There are public companies that traditionally contract internationally. They usually accept foreign law, as well as foreign courts and international arbitration. If the parties choose the local courts and the contract have not an element that characterises it as an international contract, the state judges are likely to disregard the parties’ choice of a foreign law and apply national regulations.

      Last verified on Monday 10th June 2019

    • Brazil

      Construction contracts are regular agreements generally ruled by the Brazilian Civil Code, which does not require any sort of formality save the parties’ signatures. In fact, the “lump sum” contract is the only type of construction contract expressly governed by a specific set of rules provided by Brazilian law. The Brazilian Civil Code, however, allows parties to draw up contracts that are different from those set forth in Brazilian statutory law. It is indeed very common that parties complete construction contracts that are not governed by a specific set of statutory rules, such as EPC or design & build (for infrastructure works), cost plus fee (more common in real estate buildings), etc. It is important to note that these contracts are, nevertheless, subject to mandatory rules of Brazilian law. Although it is not mandatory, it is convenient to collect signatures from two unrelated witnesses, to turn the construction contract into an enforceable title.

      Last verified on Monday 10th June 2019

    • Brazil

      Given that construction is an activity dealt with by many areas of law, there are usually a few things that owners should consider while negotiating a construction agreement and also while managing its execution or performance.

      Environmental issues are likely to impact on all construction projects; however, if environmental damages are underwent throughout the works for the contractor’s fault, the owner shall be held liable before the public authorities, thus being subject to penalties, indemnifications and remediation. Subsequently, the owner may seek proportional reimbursement from the contractor.

      As regards labour issues, the owner should negotiate protective clauses and pay special attention to the contractor’s and subcontractor’s assiduity in paying its payroll, as employees may file lawsuits claiming that the labour rights of all parties involved have been violated.

      Tax responsibilities related to the contractor may also creep up to the owner, particularly those related to social security rights. In this case, contractual clauses (eg, right of retention) may also protect the owner against the contractor’s potential default.

      Regarding tort law, the Brazilian Civil Code expressly imposes on the owner the liability for damage caused to third parties if the building falls into ruin owing to poor building maintenance.

      Last verified on Monday 10th June 2019

    • Brazil

      Lump-sum agreements are by far the most frequently used modality, especially in less sophisticated enterprises and most public contracts. Other sorts of agreements are also very familiar to the Brazilian market, such as EPC (in infrastructure projects), cost plus fee with guaranteed maximum price (in real estate projects) and other FIDIC adapted variations. Some major companies in very sophisticated infrastructure projects have also executed alliance agreements, but they have not yet taken off in the Brazilian jurisdiction, as some of their concepts were not perfectly applied by the operators, causing difficulties to the partners as they seem to be reluctant to change their lump sum mentality.

      Last verified on Monday 10th June 2019

    • Brazil

      Approvals and permits may vary according to the municipality, as each town may have its particular requirements for construction projects. In general, however, municipalities tend to require a construction approval certificate, a construction execution certificate and, after completion, an occupancy certificate. Buildings and infrastructure projects in general also require certification from the fire department, and all projects of this nature shall appoint a responsible engineer, who shall obtain before the competent technical institution (CREA) its registration attesting its technical responsibility for that particular project.

      Perhaps even more important are the environmental licences that the owners must obtain, which may take a long time to be issued, depending on the complexity and the area where the construction is to be held. Depending on the scale and coverage of the impacts, local, state or federal authority may be competent to analyse and grant environmental licences and permits. In any case, the owners shall submit environmental studies to the competent authorities, and may only start civil works after obtaining the installation licence.

      Last verified on Monday 10th June 2019

    • Brazil

      Yes, it is. Depending on the region and on the type of infrastructure being built, notwithstanding the quality of geological surveys, the parties often face difficulties in dealing with geological risks. This is why the Brazilian Civil Code grants the contractor (specifically in lump sum contracts) the right to stop the works in case the owner is not willing to rebalance the contract, despite the increase in costs for unforeseen geological difficulties. However, the parties in the contract can exclude this legal protection.

      As a matter of fact, severe problems of such nature were noted when a great number of small hydroelectric power plants were being implemented between 2000 and 2010. For this reason, the parties tend to invest more time and money in previous geological investigations and tend to be very careful while allocating geological risks, as the parties are free to negotiate clauses in this regard.

      Last verified on Monday 10th June 2019

    • Brazil

      Brazilian jurisdiction does provide statutory protection for ‘unforeseeable’ or similar risks, which can be derogated or further negotiated by the parties. Article 393 of the Brazilian Civil Code exempts the parties from default in case of force majeure. Article 478 also entitles the party to terminate the agreement if it suffers extreme impact of an unpredictable and extraordinary event, which would also bring extreme advantage to the other party.

      In fact, these legal provisions allow for a comparison between concept of hardship and the French theorie de l’imprevision as both institutes fall within the hypothesis of a substantial change of circumstances, which hinders the economic performance of the contract, but does not render it impossible. These laws diverge, however, considering the range of the judge’s action in reforming the contract. While the French theory allows for the judge’s direct intervention, the Brazilian Civil Code does not prescribe such a possibility. In Brazil, albeit a defined doctrinaire position on the matter is inexistent, it is undeniable that, according to article 478, the contract’s renegotiation is bound to the parties’ consent.

      Last verified on Monday 10th June 2019

    • Brazil

      In general the contract provisions tend be strictly interpreted (pacta sunt servanda), but in extreme cases a more equitable solution is likely to prevail. Delay penalties, for example, may be reduced by the courts to provide a greater level of fairness to the contract (Brazilian Civil Code, article 413). There is also the possibility to argue substantial performance to avoid delay penalties, which can be recognised by judges and arbitrators as an expression of the principle of good faith.

      Reliefs are commonly granted in case default by one of the parties prevents the other from carrying out works. As standard principles, the Brazilian Civil Code does not rule specifically on the exact evidences that are required to support cost or schedule relief claims, therefore it is advisable that the parties negotiate the terms to bring clearer parameters to their contractual relationship. 

      In relation to public contracts, cost and schedule relief may be accepted in the following cases: (i) project modification or specification changes, (ii) unpredicted and exceptional events, (iii) disruption caused by the owner, (iv) increase of quantities, (v) obstruction caused by third parties and (vi) owner default.

      Last verified on Monday 10th June 2019

    • Brazil

      Not only are equilibrium clauses accepted in the Brazilian jurisdiction and can be freely negotiated, but also the law itself rules on the circumstances where rebalance is admissible. As per private projects, article 478 of the Brazilian Civil Code determines the right of termination, in case one of the parties undergoes extreme impacts derived from extraordinary and unpredictable events, which also bring extreme advantage to the unaffected party. Article 479, however, allows the unaffected party to avoid termination if it accepts to equitably modify the contract conditions. Article 480 goes even further, allowing the affected party to impose a modification (scope reduction, for example) in case it undertakes excessive burden. 

      Despite the legal provisions above, Brazilian private law is still considered to be laconic in relation to economic equilibrium mechanisms. For this reason, it is recommended that the parties negotiate specific hardship clauses with customised equilibrium provisions. 

      In public contracts, there is a specific governing act (Law No. 6.666/93). It clearly provides, in article 58, V, second paragraph, that economic provisions shall be revised in order to keep the contract balanced.

      Last verified on Monday 10th June 2019

    • Brazil

      Although Brazilian employment laws are equally applied in all states of the federation, the political and economic strength of labour unions differs between cities and states, thereby resulting in more or less “active” and “flexible” unions depending on their location and represented category. It is thus safe to say that labour unions used to play a very strong role in the Brazilian market, notably, in the construction sector, until the Labour Law reform, occurred in 2017. Since then, mainly because workers are not enforced to pay monthly contributions anymore, the Unions lost great part of its force and influence. Nevertheless, they remain an important stakeholder in a project.  

      Last verified on Monday 10th June 2019

    • Brazil

      Consortia and other types of joint ventures are legal structures commonly used by contractors not only when participating in public biddings but also in private works. Consortium agreements engaged by private parties do not make them jointly/severally liable for their obligations unless stated otherwise in their by-laws according to article 278, first paragraph, of the Brazilian Joint-Stock Company Law (Law No. 6.404/1976). However, if the consortium or joint venture is contracted by the Public Administration, then joint liability is mandatory, pursuant to article 33, item V, of Law No. 8.666/1993. In any case, consortia and joint ventures do give rise to a separate legal person in Brazilian law.

      Last verified on Monday 10th June 2019

    • Brazil

      Limitation of liability clauses are enforceable in Brazil.

      The limitation of liability clause may be disregarded in the case of gross negligence and wilful misconduct. However, the concept of gross negligence is not established by the law, and is only considered by doctrine and case law (jurisprudence).   

      The lack of regulation and legal definition, in addition to the Brazilian court’s and arbitrator’s parsimony in attesting gross negligence in construction disputes, can impose difficulties on the application of such concept. This is why it is highly advisable that the parties negotiate and insert a well-defined description of gross negligence into their contracts, to restrict further discussions whenever a dispute arises.

      Last verified on Monday 10th June 2019

    • Brazil

      The two most commonly used instruments are insurances (performance bond) and bank guarantees. Performance bonds provided by insurance companies are not as liquid as bank guarantees, as the insurer needs to be notified of the damages incurred in order to evaluate them before deciding whether or not to indemnify the beneficiary. Bank guarantees, on the other hand, are a first demand bond, which can be paid immediately after its presentation to the bank.

      Construction companies tend to reject the idea of bank guarantees for two reasons: they are more expensive than insurances and they give too much power to the employer, which can use it in abusive ways. So, performance bonds are used more widely than bank guarantees.

      Last verified on Monday 10th June 2019

    • Brazil

      When concurrent delay is under discussion, the central issue is causation: who is liable for the events that caused the delay? It is therefore necessary to determine the proportion of each party’s liability.

      Where a true concurrent delay occurs, the owner may not impose any delay penalties and the contractor may be entitled to an extension of time if it demonstrates that the owner-related delay supersedes the contractor-related delay.

      Additional costs incurred may be sought in accordance with article 945 of the Brazilian Civil Code, which states that in case of concurrence, the compensation of the aggrieved party would take into account both parties’ degree of culpability.

      Last verified on Monday 10th June 2019

    • Brazil

      In general, insurance policies for construction projects must be placed with local insurers, as states article 19 of Complementary Law No. 126/2007. However, article 20 of the same Complementary Law, alongside article 6 of Brazilian’s National Council of Private Insurance (CNSP) Resolution No. 197/2008, allows legal entities domiciled in Brazil to place insurance policies with foreign insurances if there is no offer in Brazil and no legal infringement.

      On the other hand, CNSP Resolution No. 353/2017 brought an important change to the Brazilian insurance market: it is now permitted to take out insurance policies with local insurers in Brazil and facultative reinsurance abroad.

      According to Central Bank of Brazil Resolution No. 3.691/2013, there are no restrictions regarding payment of insurance proceeds offshore. Third parties such as lenders may be entitled to insurance proceeds as long as they are included as obligee in the policy.

      Last verified on Monday 10th June 2019

    • Brazil

      Regarding the tax regime applicable to construction projects, either actual profit method or deemed profited method may be applied. In both regimes, the most common taxes applicable are: corporate income tax (IRPJ), social contribution on net profits (CSLL), contribution to the social integration plan (PIS), contribution for social security financing (COFINS) and service tax (ISS). The main difference between them refers to the tax base: it will be the actual profit for the first regime and the deemed revenue for the latter. In any case, the first regime is mandatory when the company’s revenue is above 78 million reais in the previous fiscal year. 

      Also, withholding and value added taxes are both applicable. Onshore and offshore work should not necessarily be performed by separate contractors; it will depend on the parties' wishes.

      Last verified on Monday 10th June 2019

    • Brazil

      The main warranty period under the Brazilian laws for large buildings and constructions can be found in article 618 of Brazilian Civil Code, which explains that in construction contracts the contractor is responsible, for a period of five years, for the soundness and safety of the works. This provision applies to all types of large-scale works, regardless of the procurement method adopted by the parties. It is also important to note that this warranty is mandatory and cannot be excluded nor reduced by the parties.

      Article 445 of Brazilian Civil Code also determines warranty periods for movable properties and real properties in general. For the former, the liability period is of 30 days and, for the latter, one year. In case of defects that, “due to their nature, can only be discovered later” (hidden defects), the liability periods are extended, respectively, to 180 days and one year counted from the date when the aggrieved party becomes aware of the defect. Therefore the maximum liability period imposed by the law for defects that do not jeopardise the soundness and safety of the construction is of 210 days for movables (30 days + 180 days) and two years for real estate.

      Finally, it is worth mentioning that the parties may also agree on a warranty period. In this case, the warranty period set forth in the agreement precedes the beginning of the warranty periods imposed by the law. In other words, the warranty period imposed by the law starts after the end of a warranty period agreed between the parties in their contract. This rule is contained in article 446 of Brazilian Civil Code.

      Last verified on Monday 10th June 2019

    • Brazil

      Traditionally, the statute of limitations is 10 years for contractual claims (article 105 of Brazilian Civil Code), and three years for non-contractual claims (article 206, 3rd paragraph, item V, of the same Code).   

      Despite the traditional understanding above, in 2016, the Third Chamber of the Brazilian Superior Tribunal of Justice (STJ) issued a decision determining the period of three years as applicable to both types of claim, which has caused great commotion among scholars.

      Since that decision, the statute of limitation for contractual claims has become a major controvertial issue. In 2017, the majority of the decisions regarding this matter adopted the three-year period for the statute, with only one dissenting sentence by the Fourth Chamber.

      Last verified on Monday 10th June 2019

    • Brazil

      Dispute adjudication boards are growing an incipient method of dispute resolution in Brazil. There are important signs showing that mechanisms of such nature are blossoming, as they have been used in some public contracts, mainly because of developing banks fundings.

      There is a recent municipal act in the city of São Paulo which provides Dispute Boards in public contracts. There are also two bill in federal level to make Dispute Boards mandatory in federal public contracts.

      A decision issued by the State Court of São Paulo in 2018 became iconic to Dispute Adjudication Boards, as it recognised the mechanism as a free choice of the parties and, as a consequence, its decisions must be respected and complied by the parties until final arbitral or judicial award.

      Last verified on Monday 10th June 2019

    • Brazil

      Currently, there is one important bill drawing the attention of players in public projects. Bill No. 6.814/2017, which is under discussion in the Upper House, establishes a new set of rules for public bids and contracts. Among its new provisions, it sets forth a mandatory performance bond of 30 per cent of the contract price for large-scale engineering works and services. Also, it allows insurers to step in and continue the performance of the contract in case of default by the contractor. 

      Law No. 13.655/2018, which was sanctioned on 25 April 2018, aims to provide legal security for private investors and public agents in public projects. According to its provisions, public agents must take into account the practical consequences of their decisions under administrative, controlling and judicial spheres. In addition, changes in positioning or new interpretation by public authorities must not affect previously set up situations. On the other hand, the law provides that public agents may only be prosecuted for wilful misconduct or gross error for their decisions. Such provision grants some security not only for the public agent, but also for the public project itself, as the agent would prefer to procrastinate any decision for being afraid of eventual sanctions only by making decisions contrary to the interpretation of the controlling body. Since January 2019, when the new federal government took office, the provisions of this law are being implemented in the new bids.

      Last verified on Monday 10th June 2019

Latin Lawyer gives you a fantastic platform to promote your legal expertise to our extensive readership base

Become an author

Contributing editors