Construction Arbitration

Last verified on Tuesday 15th June 2021

Construction Arbitration: Brazil

Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Mattos Filho Veiga Filho Marrey Jr e Quiroga Advogados

Legal system

1. Is your jurisdiction primarily a common law, civil law, customary law or theocratic law jurisdiction? Are the laws substantially derived from the laws of another jurisdiction and, if so, which? What instruments have legal force and effect? Who are the lawmaking bodies? How and where are new laws published? Can laws be passed with retrospective effect?

Brazil

Brazil is a civil law country, that has been traditionally influenced in the past by Roman law as well as European civil law countries such as Portugal, France, Spain and Italy. In civil law, the German Civil Code has also some influence.

As a general rule, the lawmaking process is initiated by the proposition of a bill before competent legislative body within specific jurisdictional levels (municipal, state or federal). As a federal republic, federal law is the one applied for contractual, commercial and civil law. Therefore, federal law is enacted after the approval by the National Congress (both Houses) and the President. 

Once enacted, the law is published in the Official Gazette, date from which it will be in force and will commence to have effects, except when otherwise provided for (vacatio legis).

In exceptional circumstances, it is possible for laws to be enacted with retrospective effect, provided that it does not violates a vested right, executed legal acts and the res judicata, which is established in the article 5, XXXVI of the Brazilian Constitution.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Contract formation

2. What are the requirements for a construction contract to be formed? When is a "letter of intent" from an employer to a contractor given contractual effect?

Brazil

To create a legally binding contract under Brazilian law: (i) the contracting parties shall have full capacity and authority to contract; (ii) the object of the contract shall be lawful, possible, determined or determinable; and (iii) the formalities required by law, if any, must be observed. For construction contracts there is no specific formality required by law, but it is highly recommended to do it in writing.

Letters of intent are commonly used in construction projects in Brazil. Such instruments can be binding or non-binding, depending on the works’ type, project deadlines, risks involved, etc. In most cases, the purpose of the letter of intent is to allow the commencement of certain activities related to the works and even the mobilisation of some contractors’ resources before the detailed design is totally concluded or approved.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Choice of laws, seat, arbitrator and language

3. Are parties free to choose: (a) the governing law of their contract; (b) the law of the arbitration agreement; (c) the seat of the arbitration; (d) any arbitral rules; (e) anyone to act as arbitrator; and (f) the language of the contract and the arbitration? If not, what are the limitations on choice and what happens if the parties act contrary to them?

Brazil

As a general rule of law, parties are not free to choose the governing law to their contract, as the rules of private international law are mandatory (Decree No. 4657/42). However, Federal Law No. 9.307/96 (Brazilian Arbitration Act) allows parties to freely choose the governing law whenever arbitration is the final dispute resolution method to the contract.

Under the Brazilian Arbitration Act, parties are free to choose the seat of arbitration, arbitral rules, the language of the contract and of the arbitration. Provided that arbitrators comply with independence and impartiality standards, the Brazilian Arbitration Act allows for any legally capable person who is entrusted by the parties to act as an arbitrator.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Implied terms

4. How might terms be implied into construction contracts? What terms might be implied?

Brazil

In the absence of regulation by the parties, article 610 to article 626 of the Brazilian Civil Code, which govern construction contracts shall apply. Some of these articles may be derogated by the parties, some of them are mandatory, such as article 618, regarding soundness and safety issues. Furthermore, general principles and rules of contract law shall also be applicable to construction contracts.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Certifiers

5. When must a certifier under a construction contract act impartially, fairly and honestly? To what extent are the parties bound by certificates (where the contract does not expressly empower a court or arbitral tribunal to open up, review and revise certificates)? Can the contractor bring proceedings directly against the certifier?

Brazil

Brazilian law does not provide for any requirements related to third-party certifiers to assess a contractor’s interim or final deliverable.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Competing causes of delay

6. If an employer would cause (eg, by variation) a two-week critical delay to the completion of the works (which by itself would justify an extension of time under the construction contract) but, independently, culpable delay by the contractor (eg, defective work) would cause the same delay, is the contractor entitled to an extension?

Brazil

Regarding concurrent delay, courts are likely to analogically apply article 945 of the Brazilian Civil Code, which provides that the compensation of the aggrieved party will be calculated according to the parties’ degree of culpability. In this sense, time and cost relieves would be granted on a manner proportional to employer’s and contractor’s degree of contribution to the delays.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Disruption

7. How does the law view "disruption" to the contractor (as distinct from delay or prolongation to the completion of the works) caused by the employer’s breaches of contract and acts of prevention? What must the contractor show for a disruption claim to succeed? If an entitlement in principle can be shown (eg, that a loss has been caused by a breach of contract) must the court or arbitral tribunal do its best to quantify that loss (even if proof of the quantum is lacking or uncertain)?

Brazil

In the absence of contractual provisions stating otherwise, article 625 of the Brazilian Civil Code allows the contractor to suspend the works without paying an indemnity to the employer due to: (i) employer’s fault (such as delay in obtaining the applicable licences or authorisations); (ii) occurrence of force majeure events; (iii) changes resulting from unforeseeable events (such as geological, hydraulic or similar events), which affect the economic balance of the contract resulting in excessively onerous obligations on the contractor; and (iv) disproportional change orders requested by the employer with respect to the project already approved, even if the employer agrees to pay the additional costs. 

Considering that Brazilian law provides that the relief of the aggrieved party should be measured by extension of the damages caused to it, damages claims cannot be granted unless such damages are evidenced by the claiming parties or previously defined by contractual liquidated damages.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Acceleration

8. How does the law view "constructive acceleration" (where the contractor incurs costs accelerating its works because an extension of time has not been granted that should have been)? What must the contractor show for such a claim to succeed? Does your answer differ if the employer acted unreasonably or in bad faith?

Brazil

There is no provision under Brazilian law that refers specifically to the contractor’s claim to additional money due to the acceleration of works. Since the contractor is usually liable for delivering the works on time, the allocation of costs arising out of an acceleration due to delays not caused or under its control will depend mostly on the assessment of the cause of the delays.

The contractor may choose to: (i) keep working at the same pace and defend the owner’s claim for delay damages while pursuing its own claim for delay damages; or (ii) accelerate the work to meet the completion date and pursue a claim for the costs of acceleration.

For such a claim to have better chances of success, contractor must at least demonstrate that the costs were indeed incurred owing to the delays under the employer’s responsibility. It is also advisable that the contractor shows that the employer was aware of such delays and its corresponding costs.

Although bad faith (ie, in Brazil, breach of good faith principle obligation) of the employer helps improve the contractor's chances of success, it would not be a prerequisite for the success of the claim.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Force majeure and hardship

9. What events of force majeure give rise to relief? Must they be unforeseeable and to whom? How far does the express or implied allocation of risk under the contract affect whether an event qualifies? Must the event have a permanent effect? Is impossibility in performing required or does a degree of difficulty suffice? Is relief available where only some obligations (eg, to make a single payment or carry out one aspect of the works) are affected or is a greater impact required? What relief is available and does it apply automatically? Can the rules be excluded by agreement?

Brazil

According to the Brazilian law, force majeure is considered to be an unforeseeable event, whose effects were impossible to avoid or impair. Brazilian law does not require force majeure to be of permanent effect.

According to article 393 of the Brazilian Civil Code, the affected party will be exempt from fulfilling its contractual obligations and will not be responsible for losses resulting from force majeure events, unless it has otherwise undertaken such responsibility. The affected party will be relieved from performing the obligations to the extent or for the time they have been impaired by the event of force majeure. Therefore, the risk for events of force majeure may be defined, allocated or excluded in the agreement.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

10. When is a contractor entitled to relief against a construction contract becoming unduly expensive or otherwise hard to perform and what relief is available? Can the rules be excluded by agreement?

Brazil

Under article 625 of the Brazilian Civil Code, a contractor may suspend the works due to (i) disproportional change orders requested by the employer with respect to the project already approved, even if the employer agrees to pay the additional costs, and (ii) changes resulting from unforeseeable events (such as geological, hydraulic or similar events) that affect the economic balance of the contract resulting in excessively onerous obligations on the contractor and the employer objects to a price readjustment.

Article 478 of the Brazilian Civil Code provides that, generally, if the contract becomes excessively burdensome to one of the parties due to extraordinary, unforeseeable and unavoidable circumstances, the affected party may claim the termination of the contract. To avoid termination, the other party may offer to modify the conditions of the contract and re-establish its economic balance.

As a rule, parties may limit or, more commonly, establish parameters and circumstances in which a contract is deemed to have become excessively more expensive, thereby allowing the parties to shift substantial risks from one party to the other.

Given the importance of the principle of good faith and social purpose of the contract, in some circumstances, courts may give a more flexible interpretation in order to allow the continuance of the contractual relationship, if the current circumstances were to be harmful to the aggrieved party.

It is worth mentioning that Federal Law 13,874/19 included article 421-A to the Brazilian Civil Code, which provides that the risk allocations provided by the parties in the contract shall be upheld and that judicial interference shall be exceptional and limited.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Impossibility

11. When is a contractor entitled to relief if after the contract is concluded it transpires (but not due to external events) that it is impossible for the contractor to achieve a particular aspect of the contractual specification? What relief is available?

Brazil

If the obligation was impossible right from its conception, it may be considered void as per article 166 of the Brazilian Civil Code. If it jeopardises the purpose of the contract, the parties may allege that the whole contract would be void. Hence, the contractor would be forced to return any portions of the price already paid by the employer.

If the obligation has become impossible after execution of the contract without any fault by the contractor, the contract shall be terminated. If it became impossible due to the contractor’s fault, the contractor shall indemnify the employer for losses and damages, as per article 248 of the Brazilian Civil Code.

Impossibility would mean that the contractor would have to prove that it would be impossible for any contractor to perform the works and not just that specific contractor. If another contractor can execute the works with that particular specification, employer could request the third party to perform the works at the expense of the contractor, as per article 249 of the Brazilian Civil Code.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Clauses that seek to pass risks to the contractor for matters it cannot foresee or control

12. How effective are contractual provisions that seek to pass risks to the contractor for matters it cannot foresee or control, for example, making the contractor liable for: (a) a specified event of force majeure; (b) ground conditions that no reasonably diligent contractor could have foreseen; or (c) errors in documents provided by the employer, such as employer's requirements in design and build forms?

Brazil

Provisions shifting the risk from one party to another are generally effective in light of the principle of freedom to contract. As a rule, parties may limit or, more commonly, establish parameters and circumstances in which a contract is deemed to have become excessively more expensive, thereby allowing the parties to shift substantial risks from one party to the other.

However, given the importance of the principle of good faith and social purpose of the contract, in exceptional circumstances courts may find the application of such contract provisions to be abusively burdensome to contractor.

Article 421-A of the Brazilian Civil Code, included by Federal Law 13,874/19, provides that the risk allocations provided by the parties in the contract shall be upheld and that judicial interference shall be exceptional and limited.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Duty to warn

13. When must the contractor warn the employer of an error in a design provided by the employer?

Brazil

Brazilian law does not provide for a specific duty for contractor to warn the employer about errors in the designs provided by the employer. If not described and detailed in the contract, which tends to be the usual approach, the duty to inform will derive mostly from the principle of good faith and may be impacted by several factual circumstances, such as the nature and extension of the error and the expertise of the contractor and the employer.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Good faith

14. Is there a general duty of good faith? If so, how does it impact upon the following (where they are otherwise permitted under the construction contract): (a) the level of intervention in the works that is allowed by the employer; (b) a party’s discretion whether to terminate or suspend the contract; or (c) the employer’s discretion to claim pre-agreed sums under the contract, such as liquidated damages for delay?

Brazil

Yes. Under Brazilian law, there is a general duty of good faith, which is applied for interpretation of contractual provisions, intent and on the compliance with the undertaken obligations (articles 113 and 422 of the Brazilian Civil Code). Likewise, article 187 of the BCC also prevents a party from abusively exercising its rights over another, beyond the limitations imposed by good faith.

Contract termination, as any other right and contractual provision, must be interpreted under the application of the principle of good faith. Therefore, it can be questioned under Brazilian Law, and in theory article 187 BCC could be applied.

With regards to intervention and supervision, the employer has the right to inspect the performance of the works. However, according to article 619, sole paragraph, of the Brazilian Civil Code, the employer shall be obliged to pay increases of scope performed by the contractor without its authorisation, in case the employer could not have been unaware of modifications or increases of scope performed by the contractor and never protested against it.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Time bars

15. How do contractual provisions that bar claims if they are not validly notified within a certain period operate (including limitation or prescription laws that cannot be contracted out of, interpretation rules, any good faith principles and laws on unfair contract terms)? What is the scope for bringing claims outside the written terms of the contract under provisions such as sub-clause 20.1 of the FIDIC Red Book 1999 ("otherwise in connection with the contract")? Is there any difference in approach to claims based on matters that the employer caused and matters it did not, such as weather or ground conditions? Is there any difference in approach to claims for (a) extensions of time and relief from liquidated damages for delay and (b) monetary sums?

Brazil

As per article 211 of the Brazilian Civil Code, parties may agree on limitations for the barring of claims, as long as such agreement does not conflict with statutes of limitation provided by law. Although there is no substantial precedent on the operation of sub-clause 20.1 of the FIDIC Red Book, it is feasible to assume that there are legal grounds for it to be upheld.

Courts do not treat this limitation differently from claims based on events that the employer caused to those events it did not cause; nor does it distinguish between claims for extensions of time to claims for additional payment. They may, however, consider the contractual requirement an excessive formality if the employer could not have been unaware of the claim and its extension.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Suspension

16. What rights does the employer have to suspend paying the contractor or performing other duties under the contract due to the contractor’s (non-)performance, or the contractor have to suspend carrying out the works (or part of the works) due to the employer’s (non-) performance?

Brazil

 According to article 476 of the Brazilian Civil Code, neither of the parties may enforce the performance of the other party’s obligation before performing its own. For this reason, parties usually provide for (i) a curing period before the contractor being entitled to suspend the works or employer performing its duties and (ii) employer’s rights to retain payments if the contractor is in breach of certain obligations.

However, pursuant to article 623 of the Brazilian Civil Code, the employer can choose to suspend the construction even when the performance of the works or services has already started, provided that the contractor is compensated for the expenses, the work done, costs incurred and profits in relation to the services already provided, plus a reasonable indemnification calculated in light of the gains that contractor would receive if the works have been concluded.

Suspensions should be treated with caution. Article 624 of the Brazilian Civil Code provides that the contractor is liable for losses and damages if it suspends the execution of the work without a proper justification.

Regarding payment by the employer, payments are to be made when it has received or approved works executed by the contractor. Unless the contract provides otherwise, the employer will not be forced to make payments if the contractor has suspended the performance of the works.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Omissions and termination for convenience

17. May the employer exercise an express power to omit work, or terminate the contract at will or for convenience, so as to give work to another contractor or to carry out the work itself?

Brazil

Brazilian law does not expressly provide for unilateral termination for convenience. Pursuant to article 623 of the Brazilian Civil Code, the employer can choose to suspend the construction even when the performance of the works or services has already started, provided that the contractor is compensated for the expenses, the work done, costs incurred and profits in relation to the services already provided, plus a reasonable indemnification calculated in light of the gains that contractor would receive if the works have been concluded.

Notwithstanding, the parties usually agree on specific provisions regarding termination for convenience by the employer in the contract, stipulating more detailed criteria for the calculation of the indemnification due to the contractor in such a scenario, which may include a termination penalty.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Termination

18. What termination rights exist? Can a construction contract be terminated in part? What are the practical and financial consequences?

Brazil

If the parties did not stipulate the circumstances in which the contract could be terminated, Brazilian law provides that termination may occur in the following events: (i) fundamental breach; and/or (ii) occurrence of an extraordinary supervening event, which was unforeseeable to the parties and results in excessively onerous obligations on the party claiming the termination. In such cases, the claimant must request the termination from the relevant court or arbitral tribunal, as the case may be.

The parties are allowed to determine in the contract the termination events that shall apply, including termination for convenience. The most common termination events are: (i) bankruptcy or insolvency; (ii) breach not remedied within a specified period; (iii) delays in the works attributable to the contractor; and (iv) force majeure events continuing for a determined period of time agreed in the contract.

Brazilian law does not expressly deal with the possibility of partial termination. For this reason, construction contracts often provide for the possibility of reduction of scope or step-in rights in such a manner as to allow the employer to take over part of the scope that will no longer be carried by contractor, whether by convenience or by a breach by the contractor.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

19. If the construction contract provides for the circumstances in which each party may terminate the contract but does not expressly or impliedly state that those rights are exhaustive, are other rights to terminate available? If so, what are they and what are the practical and financial consequences?

Brazil

As a general rule, and besides mutual consent, contracts can only be terminated as the result of a breach, pursuant to article 475 of the Brazilian Civil Code. In this case, termination demands judicial or arbitral intervention, namely, a court of an arbitral tribunal must order termination of the agreement, which cannot be made unilaterally by any of the parties.

Moreover, according to article 478 of the Brazilian Civil Code, if the contract becomes excessively burdensome to one of the parties due to extraordinary, unforeseeable and unavoidable circumstances, the affected party may claim the termination of the contract. In order to avoid termination, the other party may offer to modify the conditions of the contract and re-establish its economic balance. In this sense, such termination does not operate automatically and must be declared by the competent court or arbitrator. 

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

20. What limits apply to exercising termination rights?

Brazil

General principles of good faith, social purpose of the contract and the impossibility of exercising a right in an abusive manner are the legal rules that could, in a case-by-case manner, limit the exercise of a termination right.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Completion

21. Does the law of your jurisdiction deem the works to be completed (irrespective of what the contract says) if, say, the employer takes beneficial possession of the works and starts using them?

Brazil

Although the wording and the criteria set forth by the contract must be taken into consideration, in situations where the employer has taken several actions that indicate acceptance such as: (i) operation or use of the works, (ii) payment of the contract price, (iii) release of performance securities, and no reservation is made under the contract or during the management of the contract, a court or arbitral tribunal may find that the employer has impliedly accepted completion of the works.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

22. Does approval or acceptance of work by or on behalf of the employer bar a subsequent complaint? What constitutes acceptance? Does taking over the work by the employer constitute acceptance? Does this bar subsequent complaint?

Brazil

Under Brazilian law, consent and acceptance may be implied if the employer acts in a manner consistent with acceptance.

After acceptance or taking over of the works, even if no further warranties are granted in the contract, the Brazilian Civil Code provides for the contractor’s warranties and liabilities post works.

According to article 445 of the Brazilian Civil Code, in the case of a hidden defect, the employer loses the right to avoid the contract or a reduction in price in 30 days, if the good is moveable, and in one year, if the good is immovable. In both cases, the term is counted from effective delivery. If it was already in the employer’s possession, the term is counted from the date of the transference of possession and is reduced by half. When the defect, by its nature, could only be known later, the time is counted from the moment at which the employer became aware of it, for a period of no more than 180 days in the case of movable property, and of no more than one year for immovable property.

With regards to the defects related to the soundness and safety of structures, article 618 of the Brazilian Civil Code provides that the contractor shall be strictly liable for any defects related to the soundness and safety of the works that appear within five years of the conclusion of the works. This warranty is a mandatory rule, as it is provided to protect not only the employer, but also the whole community exposed to the works; it may, therefore, not be waived or reduced by contract.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Liquidated damages and similar pre-agreed sums ('liquidated damages')

23. To what extent are liquidated damages for delay to the completion of the works treated as an exhaustive remedy for all of the employer’s losses due to (a) delay to the completion of the works by the contractual completion date; and (b) delays prior to the contractual completion date (in the absence of, say, interim milestone dates with liquidated damages for delay attaching to them)? What difference does it make if any critical delay is caused by the contractor’s fraud, wilful misconduct, recklessness or gross negligence? If so, what constitutes such behaviour and can it be excluded by agreement?

Brazil

Article 416, sole paragraph of the Brazilian Civil Code sets forth that, only in cases where the contract expressly allows, the aggrieved party may claim damages in excess to the contractual penalty (liquidated damages).

In cases of fraud, wilful misconduct or culpa grave (which often corresponds to the common law concept of gross negligence), it is possible that the amounts of liquidated damages are overcome and that the aggrieved party may claim additional compensation. The impacts of wilful misconduct, fraud and culpa grave derive from the law and may not be excluded by contract.

Wilful misconduct is often defined as the intent to cause harm by means of an action or omission (ie, fraud). Brazilian law provides no clear definition to culpa grave for contractual or civil relationships, therefore allowing the parties to agree its concept in the contract. 

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

24. If the employer causes critical delay to the completion of the works and the construction contract does not provide for an extension of time to the contractual completion date (there being no "sweep up" provision such as that in sub-clause 8.4(c) of the FIDIC Silver Book 1999) is the employer still entitled to liquidated damages due to the late completion of works provided for under the contract?

Brazil

If the delay is solely attributed to the employer, employer would not be entitled to liquidated damages, based on articles 927 and 945 of the Brazilian Civil Code.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

25. When might a court or arbitral tribunal award less than the liquidated damages specified in the contract for delay or other matters (eg, substandard work)? What factors are taken into account?

Brazil

According to article 413 of the Brazilian Civil Code, the court may equitably reduce the liquidated damages established in the penalty clauses if the primary obligation has been partially fulfilled or if the amount of the penalty is manifestly excessive in view of the nature and purpose of the transaction.

The methods for reduction of the penalty vary across Brazilian courts and tribunals, which tend to decide on a case-by-case basis. Court decisions show that they may, for example, apply mathematical proportions between the degree of fulfilment of the obligation and the penalty to be applied, or reduce penalties to market standards amounts.

According to article 412 of the Brazilian Civil Code, courts may also reduce a penalty if it is higher than the main obligation.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

26. When might a court or arbitral tribunal award more than the liquidated damages specified in the contract for delay or other matters (eg, work that does not achieve a specified standard)? What factors are taken into account?

Brazil

Article 416, sole paragraph of the Brazilian Civil Code set forth that, unless otherwise stated in the contract, the contractual penalty represents the maximum indemnification due to the innocent party, even if the actual damage incurred exceeds what was provided for in the penalty clause.

Therefore, as a rule, claim for damages in addition to the liquidated damages depends on parties carving out the penalty clause by contemplating such possibility. As a result, if proven, the innocent party will be entitled to receive indemnification for damages further to the liquidated damages established in the contract.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Assessing damages and limitations and exclusions of liability

27. How is monetary compensation for breach of contract assessed? For instance, if the contractor is liable for a defect in its works is the employer entitled to its lost profits? What if the lost profits are exceptionally high?

Brazil

Monetary compensation is also assessed by the extent of the damages and losses incurred by the aggrieved party, as well as for any contractual exemption or limitation. It can also be pre-established by means of liquidated damages. According to article 412 of the Brazilian Civil Code, the penalty cannot be higher than the main obligation (ie, contract price).

As a general rule, article 389 of the Brazilian Civil Code allows a party to claim for monetary compensation. The non-breaching party may, therefore, present evidence of the damages effectively incurred (direct damages), including loss of profits, as established in articles 402 and 944 of the Brazilian Civil Code.

In cases where the damages are exceptionally high in comparison with the guilt of the breaching party, the court may choose to reduce the indemnification in equity, as per article 944, sole paragraph, of the Brazilian Civil Code.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

28. If the contractor’s work is technically non-compliant, is the contractor liable for remedying it if the rectification cost is disproportionate to the benefit of the remedy? Can the parties agree on a regime that is stricter for the contractor than under the law of your jurisdiction?

Brazil

Brazilian civil law does not impose any obligation to rectify defects. It only imposes the contractor’s duty to indemnify losses arising out of the defect or the employer’s right to (i) reject the works or (ii) claim for a discount in price in case the defects deprive or diminish the value of the works.

However, the parties may freely agree on warranties or make-good obligations by means of which the contractor will be obliged to correct, replace or repair defective parts of the works. In this case, the employer would have the right to demand correction.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

29. If there is a defects notification period (DNP) during which the contractor must or may remedy any defect in its works that appears during a certain period after their completion, if the construction contract is otherwise silent, does it affect the employer’s rights to claim for any defects appearing after the DNP expires?

Brazil

The Brazilian Civil Code provides for time limitations for the assessment and claiming of latent defects. According to article 445, the employer loses the right to avoid the contract or a reduction in price in 30 days, if the good is moveable, and in one year, if the good is immovable, in both cases, the term is counted from effective delivery. As per article 446, latent defects notice periods are not counted during the contractual warranty periods. Therefore, if the contract does not expressly or impliedly supersede this legal provision, it would be possible for the employer to make claims after the defect notification period.

Regarding soundness and safety defects, article 618 of the Brazilian Civil Code provides that the contractor who supplies materials to the works shall be strictly liable for any defects which appear within five years after the conclusion of the works. If the employer fails to sue the contractor within 180 days of the appearance of the defect, it will no longer have the right provided for in article 618.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

30. What is the effect of a construction contract excluding liability for “indirect or consequential loss”?

Brazil

Clauses excluding indirect damages and consequential losses arising from contractual breach are effective and face no limitation in Brazil.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

31. Are contractually agreed limits on – or exclusions of – liability effective and how readily do claims in tort or delict avoid them? Do they not apply if there is fraud, wilful misconduct, recklessness or gross negligence: (a) if the contract is silent as to such behaviour; or (b) if the contract states that they apply notwithstanding such behaviour? If so, what causation is required between the behaviour and the loss?

Brazil

Clauses of exclusion or limitation of contractual liability are effective, except when:

  • the claim arises directly out of wilful misconduct or culpa grave (which often corresponds to the common law concept of gross negligence);
  • death and personal injuries; and
  • third-party claims;

Contractors are also not able to limit or exclude liability for soundness and safety of the works (comparable to decennial liability). Article 618 of the Brazilian Civil Code provides that the contractor who supplies materials to the works shall be strictly liable for any defects related to soundness and safety which appear within five years after the conclusion of the works. This warranty is considered a public policy since it is designed to protect not only the employer, but also the whole community exposed to the works, and the respective warranty period is, therefore, not subject to reduction or waiver by the parties.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Liens

32. What right does a contractor have to claim a lien (or similar) in the works it has carried out? If so, what are the limits of the right if, for example, the employer has no interest in the site for the permanent works? How is the right recognised and enforced?

Brazil

The Brazilian Civil Code provides for the possibility of sales with retention of title. However, retention of title legal provisions is only applicable to goods that are capable of being identified and differentiated from their peers (eg, equipment that can be identified through a serial number, vehicles).

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Subcontractors

33. How do conditional payment (such as pay-when-paid) provisions operate under the law of your jurisdiction (including interpretation rules, any good faith principles and laws on unfair contract terms)?

Brazil

Brazilian law does not prohibit “paid if paid” clauses (the contractor is not required to pay the subcontractors until it receives payment from the owner). Traditionally, depending on the circumstances, this provision may be interpreted as being abusive if the sub-contractor has fully and duly performed its contractual obligations (ie, has supplied the goods and services contracted) without receiving the related payments. 

However, the changes brought by Federal Law 13,874/19 tend to uphold the agreement of the parties if no third party or public rights are harmed (articles 421 and 421-A of the Brazilian Civil Code.

This notwithstanding, in practice, it is extremely rare for contractors and subcontractors to accept undertaking the full risk of contracting parties in Brazil.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

34. May a subcontractor claim against the employer for sums due to the subcontractor from the contractor? How are difficulties with the merits and proof of the subcontractor’s claim addressed, including any rights the contractor has to withhold payment? What if aspects of the project suggest that the law of your jurisdiction should not apply (eg, the parties to both the main contract and the subcontract have chosen a foreign law as the governing law)?

Brazil

If there is no relationship between the employer and the subcontractor, the subcontractor would not be able to claim payment of its contract price against the employer and its claims would be limited to the contractor.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

35. May an employer hold its contractor to their arbitration agreement if their dispute concerns a subcontractor (there being no arbitration agreement between the contractor and the subcontractor or no scope for joining two sets of arbitral proceedings) or can the contractor, for example, require litigation between itself, the employer and the subcontractor? Does it matter if the arbitration agreement does not have its seat in your jurisdiction?

Brazil

Assuming the arbitration clause is governed by the Brazilian Arbitration Act, regardless of the seat, if there is no contractual relationship or any other form of consent by both the subcontractor and/or the employer allowing them to take the dispute to arbitration, it will not be possible to have go to arbitration. Consolidation – not joining – is possible if both contractual relationships (employer–contractor and contractor–subcontractor) expressly provide for it and it is in accordance with the institutional rules applied to them. There is no provision for joining or consolidation in the law.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Third parties

36. May third parties obtain rights under construction contracts? How readily can those connected with the employer (such as future or ultimate owners) bring claims against the contractor in respect of (a) delays and (b) defects? To what extent are exclusions and limitations of liability in the construction contract relevant?

Brazil

According to article 20 §5, I, of the Brazilian Civil Code, parties may expressly provide for third-party rights, who will then be entitled to claims under the contract, subject to the limitations and conditions provided for in the contract.

However, if third parties are not expressly for such third-party rights, regarding delays, the obligation to timely conclude and deliver the works is contracted between the contractor and the employer and does not benefit third parties, including ultimate owners.

Regarding defects, statutory liabilities for defects and for soundness and safety also benefit third parties.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

37. How readily (absent fraud, wilful misconduct, recklessness or gross negligence) can those connected with the contractor (such as affiliates, directors or employees) face claims in respect of (a) delays (b) defects and (c) payment? To what extent are exclusions and limitations of liability in the construction contract relevant?

Brazil

Unless otherwise provided in the contract and except in cases of piercing of the corporate veil or extension of the effects of the arbitration agreement, affiliates, directors or employees of contractor would not face claims from employer for delay and payment, since they are not parties to the contract.

With regards to defects, contractor’s engineers responsible for the works could eventually face personal accusations of malpractice, depending on the nature or cause of the defect.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Limitation and prescription periods

38. What are the key limitation or prescription rules for claims for money and defects (and insofar as you have a mandatory decennial liability (or similar) regime, what is its scope)? What stops time running for the purposes of these rules (assuming the arbitral rules are silent)? Are the rules substantive or procedural law? May parties agree different limitation or prescription rules?

Brazil

In accordance with article 205, section 5, I of the BCC, if the sums for money are liquid, the statutory limitation for the filing of a lawsuit is five years from the date on which the sum became due. 

For damage claims arising out of contractual breaches, the statutory limitation for the filing of a lawsuit is 10 years, according to the Superior Court of Justice most recent case law regarding such matter.

Also, the Brazilian Civil Code provides for time limitations for the assessment and claiming of latent defects. According to article 445, the purchaser loses the right to avoid the contract or a reduction in price in 30 days, if the good is moveable, and in one year, if the good is immovable. In both cases, the term is counted from effective delivery. If it was already in the purchaser’s possession, the term is counted from the date of the transference of possession and is reduced by half. When the defect, by its nature, could only be known later, the time is counted from the moment at which the purchaser became aware of it, for a period of no more than 180 days in the case of movable property, and of no more than one year for immovable property.

With regards to exposure relating to soundness and safety of construction works, article 618 of the Brazilian Civil Code provides for a statutory limitation of five years counted from the date of delivery of the works. Since they relate to the safety of third parties exposed to the construction, this limitation is unanimously considered as a public policy and is not subject to reduction by agreement between the parties. Additionally, in accordance with the sole paragraph of article 618, if the construction owner fails to sue the contractor within 180 days following the appearance of the defect, he will no longer have the right provided for in article 618.

When not otherwise specified by the law, article 205 of the Brazilian Civil Code provides for a decennial statute of limitation for the filing of a lawsuit.

Under Brazilian law, the rules regarding the limitation or prescription of claims have a substantive nature and may not be altered by agreement between the parties, as pursuant to article 192 of the Brazilian Civil Code. Parties may, however, according to articles 209 and 211 of the Brazilian Civil Code, provide for contractual limitations where the law is silent. Furthermore, pertaining to article 191 of the Brazilian Civil Code, parties may agree to waive its statute of limitation rights only after expired the limitation period.

Meanwhile, statutes of limitation may be stopped by a formal notification from the creditor to the debtor. According to article 202 of the Brazilian Civil Code, statute of limitation is stopped by: (i) order of the court to subpoena the defendant, (ii) for registration of debts, (iii) enforcement of bonds before a court, (iv) any judicial act that constitutes the debtor in delay, (v) any act that unmistakably represents the acknowledgement of the rights by the debtor. As per article 19, section 2 of the Brazilian Arbitration Act, the constitution of the tribunal (or confirmation of the sole arbitrator) also suspends the statute of limitation retrospectively to the date of the request of arbitration.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Other key laws

39. What laws apply that cannot be excluded or modified by agreement where the law of your jurisdiction is the governing law of a construction contract? What are the key aspects of, say, the FIDIC Silver Book 1999 that would not operate as its plain words suggest?

Brazil

Examples of provisions of the FIDIC Silver Book that would may be overruled in light of Brazilian laws that may not be excluded or derogated from include:

  • Defects liability (section 11 of the FIDIC Silver Book 1999), as article 618 of the Brazilian Civil Code provides that the contractor shall be strictly liable for any defects related to soundness and safety of the works which appear within five years of the conclusion of the works. This warranty is a mandatory rule, as it is provided to protect not only the employer, but also the whole community exposed to the works; it may therefore not be waived or reduced by contract.
  • Payment or indexation of the contract price in foreign currency in domestic transactions, as provided Law No. 10.192/2001.
  • At least so far, Dispute Adjudication Board’s decisions (section 20.4 of the (FIDIC Silver Book 1999) are less likely to become final even if no notice of dissatisfaction is presented, since they do not rely on the same powers granted by law to an arbitral tribunal.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

40. What laws of your jurisdiction apply anyway where a foreign law governs a construction contract? What are the key aspects of, say, the FIDIC Silver Book 1999 that would not operate as its plain words suggest?

Brazil

In general, any provisions that may affect public policy rights and welfare of third parties or of the state may cause the contract provision to be void or overruled depending on the circumstances.

Under Brazilian law, the principles of good faith and social purpose of the contract are mandatory and, in some circumstances, courts may give a more flexible interpretation to allow continuance of the contractual relationship if the current circumstances were to be harmful to the aggrieved party. However, recent changes to the Brazilian Civil Code provide that the risk allocation agreed by the parties in the contract shall be upheld and that judicial interference shall be exceptional and limited (article 421-A). Moreover, according to article 192 of the Brazilian Civil Code and as mentioned above, parties may not alter statutory limitation rights.

If the project is located in Brazil or an award must be enforced in Brazil, the following aspects of the FIDIC Silver Book 1999 would not operate as its plain words suggest, among others:

  • Defects liability (section 11 of the FIDIC Silver Book 1999), in view of article 618 of the Brazilian Civil Code, which provides that the contractor shall be strictly liable for any defects related to soundness and safety of the works which appear within five years of the conclusion of the works. This warranty is a mandatory rule, as it is provided to protect not only the employer, but also the whole community exposed to the works; it may therefore not be waived or reduced by contract.
  • Payment or indexation of the contract price in foreign currency in domestic transactions, as provided Law No. 10.192/2001.
  • At least so far, the Dispute Adjudication Board’s decisions (section 20.4 of the FIDIC Silver Book 1999) do not have the same status as a court judgment or arbitral award, therefore they are less likely to become final, even if no notice of dissatisfaction is presented.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Enforcement of binding (but not finally binding) dispute adjudication board (DAB) decisions

41. For a DAB decision awarding a sum to a contractor under, say, sub-clause 20.4 of the FIDIC Red Book 1999 for which the employer has given a timely notice of dissatisfaction, in an arbitration with its seat in your jurisdiction, might the contractor obtain: a partial or interim award requiring payment of the sum awarded by the DAB pending any final award that would be enforceable in your jurisdiction (assuming the arbitral rules are silent); or interim relief from a court in your jurisdiction requiring payment of the sum awarded by the DAB pending any award?

Brazil

Under Brazilian law, before the constitution of the arbitral tribunal, courts have jurisdiction to rule on injunction reliefs. After the constitution of the arbitral tribunal, all the requests related to the dispute should be analysed by the arbitral tribunal. The arbitral tribunal may sustain, modify or revoke the preliminary decision previously granted by the court (articles 22-A and 22-B of Brazilian Arbitration Act).

The success of interim reliefs – either before the courts or arbitrators – will depend on the presence of two legal requirements: periculum in mora (possible irreparable harm) and fumus boni iuris (probability of success of the claim) The judge or arbitral tribunal will verify whether the need for urgent payment before the issuance of a final award fulfils such requirements. If the court or arbitral tribunal is convinced there is no urgency in seeking payment or the case does not have all the evidence needed to verify the likelihood of the claim's success, the contractor will have to wait until the issuance of the final award to obtain the due payment by the employer. 

According to the dispute board regulation from the municipality of São Paulo and most Brazilian scholars, the DAB’s decision is contractually binding until its analysis by the arbitral tribunal. Therefore, it would be possible for a contractor to seek payment of the DAB’s decision with a local court or arbitral tribunal, pending a final award.

As for partial awards, if the decision is not pending revision of any sort by the arbitrators, it is possible to commence enforcement before the courts the same as any other judgment. If the award is not issued in Brazil, it would need prior confirmation by Brazilian competent courts. 

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Courts and arbitral tribunals

42. Does your jurisdiction have courts or judges specialising in construction and arbitration?

Brazil

Brazilian courts do not rely on courts and judges specialised in construction. Construction cases are handled by common/civil/commercial courts. Some state courts such as the state courts of São Paulo rely on dedicated judges to rule on cases involving arbitration and the state courts Rio de Janeiro rely on judges dedicated to matters of commercial law, including arbitration.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

43. What are the relevant levels of court for construction and arbitration matters? Are their decisions published? Is there a doctrine of binding precedent?

Brazil

For construction and arbitration matters subject to state courts, there are three levels of courts: trial courts (ie, first instances judges), State Court of Appeals and the Higher Courts – the Superior Court of Justice for Federal Law matters and the Supreme Federal Court for constitutional matters. The Superior Court of Justice has exclusive jurisdiction to rule on the recognition of foreign awards and judgements.

All the decisions rendered by Brazilian courts are published in the Brazilian Official Gazette. It may not always be possible to see the parties or content of the decisions.

The Brazilian Civil Procedure Code provides for binding court precedents in some situations (article 489, VI of Brazilian Civil Procedure).

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

44. In your jurisdiction, if a judge or arbitrator (specialist or otherwise) has views on the issues as they see them that are not put to them by the parties, can they raise them with the parties? Is the court or arbitral tribunal permitted or expected to give preliminary indications as to how it views the merits of the dispute?

Brazil

Even when applying mandatory rules, judges or arbitrators may not apply a legal ground for his or her decision before giving the opportunity to hear the parties on that specific application. Therefore, only as a matter of legal application, judges or arbitrators can request parties’ views.

Judges or arbitrators are forbidden to render a decision that exceeds parties’ reasoning (articles 141 and 492 of the Brazilian Civil Procedure Code). The decision that exceeds parties’ reasoning is considered null and void under Brazilian law.

Parties could agree on how organise the procedural timetables, but preliminary indications different from a partial award is not allowed.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

45. If a contractor, say, wishes to arbitrate pursuant to an arbitration agreement, what parallel proceedings might the employer bring in your jurisdiction? Does it make any difference if the dispute has yet to pass through preconditions to arbitration (such as those in clause 20 of the FIDIC Red Book 1999) or if one of the parties shows no regard for the preconditions (such as a DAB or amicable settlement process)?

Brazil

According to articles 22-A and 22-B of Brazilian Arbitration Act, before the constitution of the arbitral tribunal, injunctive reliefs can be filed with the courts. After the constitution of the tribunal, the arbitrators will have exclusive jurisdiction over the case. These preliminary court decisions may be sustained, modified or revoked by the constituted arbitral tribunal.

Only mediation, according to the Mediation Law, when provided as mandatory, is considered a necessary prior condition to commencing arbitration. In this case, the parties must attempt to have a first meeting or at least make sure the other party was invited and did not participate.

Other forms of pre-arbitration proceedings, such as Dispute Review Board, or negotiation are advisable but are not considered a precondition to commencing arbitration under Brazilian law.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

46. If the seat of the arbitration is in your jurisdiction, might a contractor lose its right to arbitrate if it applied to a foreign court for interim or provisional relief?

Brazil

No. Parties are free to elect any court for interim or provisional relief, regardless the seat of arbitration.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Expert witnesses

47. In your jurisdiction, are tribunal- or party-appointed experts used? To whom do party-appointed experts owe their duties?

Brazil

Yes. Technical expertise is often required and used. In judicial proceedings, the judge may decide on appointing a technical expert to elaborate an expert report that will support court’s decision. Each party may appoint its own expert to elaborate a report to assist the court-appointed expert (article 465 of the Brazilian Civil Procedure Code). In this case, the court-appointed expert owes its duties to the court.

In arbitration, tribunal-appointed experts may not be used. When used, they will owe their duties to the tribunal.

Party-appointed experts always have a duty to the parties.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

State entities

48. Summarise any specific limitations or requirements that apply when the employer is a state entity or public authority (including, for example, public procurement rules, limits on rights to suspend or terminate, excluded lien rights and arbitrating – as well as enforcing an award – against such an employer).

Brazil

The New Procurement Law (Law 14,133/21), which replaces Law 8,666/93 and other statutes governing public procurements and contracts in Brazil, is already in effect. However, Law No. 8,666/1993 and other public procurement laws will only be revoked in two years. During such period, both legal frameworks will coexist, and the Public Administration will be able to opt between them.

The New Procurement Law provides for special features such as (i) the public entity’s right to unilaterally amend the contract up to a certain percentage of the amount involved in the contract; and (ii) contract’s termination due to reasons of public interest, justified by the maximum authority of the contracting body or entity.

The sole paragraph of article 151 of the New Procurement Law expressly provides that state entities and state-owned entities can resolve their disputes involving freely transferable patrimonial rights through arbitration. The same paragraph of the New Procurement Law explains that disputes involving freely transferable patrimonial may be those related to the economic imbalance of contracts, non-performance of obligations by parties, and assessment of damages.

However, article 152 establishes that the arbitration that involves Brazilian state entities must be decided in accordance with the law (not possible to be decided ex aequo et bono) and shall not be confidential. Such provisions are consistent with the current wording of the Brazilian Arbitration Act. Additionally, the New Procurement Law allows for amendments to contracts to provide for alternative means of dispute resolution, such as Dispute Resolution Boards.

Specific legislation applicable to different economic sectors provides additional guidance when it comes to arbitrating with public entities. For example, Decree No. 10,025/2019, which regulates disputes in the infrastructure sector, states that any disputes shall be resolved in accordance with Brazilian law and that arbitral proceedings shall be conducted in Portuguese, and preferably administered by accredited arbitral institutions. 

Moreover, Brazilian courts have consolidated the understanding that there is no need of bidding process to choose an arbitral institution to administer the case.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Settlement offers

49. If the seat of the arbitration is in your jurisdiction, on what basis can a party make a settlement offer that may not be put before the arbitral tribunal until costs fall to be decided?

Brazil

Parties are free to settle any time before the issuance of the award. Settlement does not need to be presented, authorised or confirmed by the arbitral tribunal. However, parties may want to have the tribunal's confirmation.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Privilege

50. Does the law of your jurisdiction recognise "without prejudice" privilege (such that "without privilege" communications are privileged from disclosure)? If not, may it be agreed that a sum is payable if communications to try to achieve a settlement are disclosed to a court or arbitral tribunal?

Brazil

The Brazilian Civil Code and Brazilian Civil Procedure Code do not expressly provide for the without prejudice principle. However, Brazilian law provides that a party may refuse to disclose documents if its disclosure breaches a duty of honour or brings dishonour to the party, based on the principle against self-incrimination (article 404 of the Brazilian Civil Procedure Code). Also, according to the Brazilian Civil Procedure Code, statements made during mediation or conciliation are confidential and cannot be used against the interest of the party that made them.

Therefore, it might be possible for parties to agree on specific damages in case of disclosure of the terms of a settlement offer to a court or arbitral tribunal by one party without the other party’s consent.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

51. Is the advice of in-house counsel privileged from disclosure under the law of your jurisdiction? Is the relevant law characterised as substantive or procedural law?

Brazil

Under Brazilian law, documents written by in-house counsel are confidential. According to article 404 of the Brazilian Civil Code, a party may refuse to disclose documents if disclosure causes publicity for facts that are professionally confidential. Moreover, the Code of Ethics and Discipline of the Brazilian Bar Association provides that using information exchanged between lawyers as evidence in court is unethical behaviour (articles 25 and 26). In exceptional circumstances, if privileged information is in the possession of counsel involved in criminal conduct, Brazilian courts may exclude the privilege for information. These rules are characterised as procedural law.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Guarantees

52. What are the requirements for a guarantee under the law of your jurisdiction? Are oral guarantees effective?

Brazil

Article 819 of the Brazilian Civil Code, provides that guarantees must be made in writing and it must not be interpreted extensively. With consideration to the guarantor, the creditor is not obliged to accept a guarantor if it understands that the guarantor is not a suitable person, domiciled in the municipality where the guarantee is to be given or does not have enough properties to fulfil the guarantee.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

53. Under the law of your jurisdiction, will the guarantor’s liability be limited to that of the party to the underlying construction contract, if the guarantee is silent? Can the guarantee’s wording affect the position?

Brazil

According to articles 822 and 823 of the Brazilian Civil Code, if the guarantee is silent, it shall cover the debtor’s debt under the contract with all its accessories. The guarantee may be in an amount inferior to the contract’s debt, but it may not exceed the amount of the debt.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

54. Under the law of your jurisdiction, in what circumstances will a guarantor be released from liability under a guarantee, if the guarantee is silent? Can the guarantee’s wording affect the position?

Brazil

In general, a guarantor will be released from liability upon the guarantee’s expiry. A guarantor may also be released from liability in the following circumstances: (i) if the creditor grants the debtor additional time for the fulfilment of the obligation without the guarantor’s consent; (ii) if, by an act of the creditor, the guarantor cannot subrogate the creditor’s rights and privileges; or (iii) if the creditor accepts another good from the guarantor in replacement of the payment of the debt. According to article 837 of the Brazilian Civil Code, the guarantor may also prevent the enforcement of the guarantee based on any arguments that would be available to the debtor itself.

Article 827 of the Brazilian Civil Code provides that the guarantor may require the creditor to first pursue the debtor for the debt’s payment, by naming the debtor’s property, which should be located in the same municipality, be free and clear of encumbrances, and be sufficient to pay the debt. This benefit may be waived by the guarantee's wording.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

On-demand bonds

55. If an on-demand bond is governed by the law of your jurisdiction on what basis might a call be challenged in your courts as a matter of jurisdiction as well as substantive law? Assume the underlying contract is silent on when calls may be made.

Brazil

Brazilian law does not regulate on-demand bonds, which are generally regulated by the provisions of the Brazilian Civil Code regarding guarantees.

Brazilian courts may reject jurisdiction to rule over a dispute regarding an on-demand bond if the bond is considered international and it provides that disputes shall be settled by foreign venue or arbitration.  

As a matter of substantive law, although Brazilian case-law shows that the on-demand nature of the bond by itself is sufficient to substantiate the call, it is possible that, based on the rules applicable to guarantees, courts may eventually bar a call based on the lack of substance of the claim or of the excessiveness of the amounts claimed.  

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

56. If an on-demand bond is governed by the law of your jurisdiction and the underlying contract restrains calls except for amounts that the employer is entitled to (such as sub-clause 4.2 of the FIDIC Red Book 1999), when would a court or arbitral tribunal applying your jurisdiction’s law restrain a call if the contractor contended that: (i) the employer does not have an entitlement in principle; or (ii) the employer has an entitlement in principle but not for the amount of the call?

Brazil

As Brazilian law does not regulate on-demand bonds, they are generally regulated by the provisions regarding guarantees of the Brazilian Civil Code.

As a matter of substantive law, although Brazilian case law shows that the on-demand nature of the bond by itself is sufficient to substantiate the call, it is possible that, based on the rules applicable to guarantees, courts may eventually bar a call based on the lack of substance of the claim or of the excessiveness of the amounts claimed, or if proven fraud or bad faith of the call or the amounts claimed.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Further considerations

57. Are there any other material aspects of the law of your jurisdiction concerning construction projects not covered above?

Brazil

There are mandatory insurance obligations for construction projects. Furthermore, the type of contract chosen by the parties is often impacted by the different tax regimes that may apply depending on the type of construction contract to be engaged in.

Answer contributed by Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

Get unlimited access to all Global Arbitration Review content