The Impact of Covid-19 in the fulfillment of contractual obligations
In March 11, 2020 the World Health Organization (“WHO”) declared that the high and fast expansion of Covid-19 was characterized as pandemic[1].
Consequently, the WHO and the State health bodies issued measures to avoid the spread of Covid-19, such as reduction of meetings, crowds and international trips.
Such recommendations were complied with by several countries, mainly in the public sector and by certain private entities.
For example, several countries, including Brazil, recently decided to shut their borders, preventing the inflow of foreigners for 30 days[2], to avoid the spread of Covid-19.
Those restrictions generated by the Covid-19 pandemic may create, pursuant to the UN Trade Agency[3], a financial loss of 1 trillion dollars in 2020, mainly based on the concern about the interruption of the Chinese production chain.
Also according to some UN[4] economists, only in February of 2020 there was a reduction of about 50 billion dollars in the exports of manufactured products.
Brazilian law 13.979/2020, recently enacted, established measures to “fight the international public health emergency resulting of Coronavirus”. Further, the City of Sao Paulo declared state of emergency on March 17 2020, in order to fight the pandemic.
On March 18 2020, the State of Santa Catarina declared state of emergency and issued several restrictive measures such as the suspension of “activities and private services not essentials, such as gyms, shopping centers, restaurants and retail in general”. Decree 515/20, article 2, II, also limits the continuity of production activities in various sectors of the State of Santa Catarina.
The State of Sao Paulo also recommended that “all shopping centers and gyms of the Sao Paulo metropolitan area remain closed until April 30 2020”, and that “companies grant collective holidays to their employees during such period, to avoid dismissals”[5].
Finally, in March 20 2020, the Brazilian Senate approved a decree recognizing state of public calamity in the whole country due to the Coronavirus pandemic[6].
These economic impacts and restrictions implemented may prevent the fulfillment of contractual obligations, characterizing, in principle, force majeure or fortuitus event (if there is an actual direct cause-consequence relationship) that excludes liability, pursuant to article 393 of the Brazilian Civil Code.
Such impacts may also break the contractual balance, allowing the party who suffers the harm to claim the theory of change of circumstances (also known as Theory of Imprevisión), either to review the agreement or to terminate it (Articles 317 and 218 of the Brazilian Civil Code).
Note, however, that the Brazilian courts do not have an objective understanding of the elements that effectively characterize such change of circumstances, and therefore the situations are analyzed on a case by case basis.
Nevertheless, in general, to determine if there is a situation of force majeure or fortuitus event (noting that there is no legal differentiation between them, only from an academic perspective), an inevitable fact whose effects were impossible to foresee or to avoid must exist.
For WALD[7], “such definition includes natural events (acts of God) such as fires, floods, as well as third party acts, including government acts (war, curfew, etc.), as long as they are actually inevitable and irresistible”. Note that “the element of unpredictability is not essential to determine force majeure or fortuitous event, thus a fact may be predictable but irresistible”.
According to Minister Marcos Buzzi, “only situations considered exceptional, a real public calamity, are the ones that have the power to change the predictable risks that a concessionaire must face”[8].
According to the scholars, the application of the theory of change of circumstances is subject to evidence of “change of circumstances that may entitle a party to terminate or seek a review of the contractual relationship and the element of exceptionality of the event must be present, either (a) by the radical change in the objective economic conditions at the time of execution, vis-à-vis the objective situation when the contract was signed; (b) in the excessive burden for one of the parties and the excessive benefit for the other; and (c) in the unpredictability of such changes”[9].
Considering that the Covid-19 pandemic is an irresistible fact, somehow unpredictable due to its size, and that the country declared a state of public calamity, one can say that certain contractual breaches arouse out of force majeure, as long as there is a direct cause-consequence relationship.
There may be situations in which the Covid-19 pandemic, as an extraordinary and unpredictable fact, will affect the balance originally contracted by the parties. In such cases, one party may go to court seeking the review of the agreement, with the intention of respecting the principle of maintaining the agreement, based on the theory of change of circumstances.
Lastly, the debtor will have the burden to prove the event, as well as the effects on his ability to comply with the contractual obligations, so that the above mentioned theories may be applied, depending on the concrete case.
[1] Pursuant to the WHO, pandemic is a world spread of a new disease that may be present in at least two continents, being transmitted among human beings.
[2] https://edition.cnn.com/2020/03/17/europe/europe-shuts-its-borders-to-stop-coronavirus-intl/index.html; The EU shuts its borders to slow the coronavirus crisis;
[3] https://news.un.org/en/story/2020/03/1059011; Coronavirus update: COVID-19 likely to cost economy $1 trillion during 2020, says UN trade agency
[4] https://news.un.org/en/story/2020/03/1058601; Coronavirus COVID-19 wipes $50 billion off global exports in February alone, as IMF pledges support for vulnerable nations
[5] http://www.saopaulo.sp.gov.br/spnoticias/governo-recomenda-fechamento-shoppings-academias/
[6] https://www12.senado.leg.br/noticias/materias/2020/03/20/em-sessao-historica-senado-aprova-calamidade-publica-contra-covid-19
[7] WALD, Arnold; Direito Civil – Direito das Obrigações e Teoria Geral dos Contrato; 20ª Ed.; Editora Saraiva, 2011
[8] STJ; AResp nº 1.145.485; Min. Marcos Buzzi; j. 3.4.2018
[9] LEÃES, Luiz Gustavo Paes de Barros. A Onerosidade Excessiva no Código Civil. Doutrinas Essenciais Obrigações e Contratos | vol. 4 | p. 721 – 736 | Jun / 2011 | DTR\2006\737