Construction Arbitration

Construction Arbitration: Brazil

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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

Brazilian civil law is based on Roman-Germanic tradition. It has mainly been influenced by European civil law traditions (of France, Germany, Portugal, Spain and Italy). Classical Roman law also influenced the development and formation of Brazilian law.

However, despite having a clear civil law tradition, the Code of Civil Procedure promulgated in 2015 incorporated elements of common law, including the use of precedents.

Brazil is a federal state where the Federal Constitution constitutes the highest law of the land. Federal law is applied to contracts, commercial and civil laws. State law governs the remaining fields.

Legislative power at the federal level is bicameral and the Congress is divided into the Senate and the House of Representatives. At the state level, only one entity exercises legislative power.

Once a law is enacted, it goes into effect and takes force at the date it is published in the Official Gazette, unless otherwise provided. As a general principle, a law cannot be retroactive nor have retrospective effects. This is provided for in the Constitution, as article 5, XXXVI reads that “the law shall not injure the vested right, the perfect juridical act and the res judicata” (emphasis original). However, two exceptions exist: (i) a retrospective law that does not violate article 5, XXXVI can be valid; and (ii) criminal laws can have retroactive effects when they benefit an accused person (const., article 5, XL).

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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

There are no specific formalities for a construction contract to be formed and, therefore, one must refer to general contract law.

Conditions for creating a binding contract under Brazilian law are as follows:

  1. agents are capable, meaning that:
    • agents have full authority from the principal; and
    • agents have full capacity;

2. the object of the contract shall be legitimate, possible and determined or determinable; and

3. the format of the contract is prescribed or not prohibited by law.

As there are no formalities for construction contracts, only conditions (1) and (2) prevail, although a written contract is highly recommended.

In Brazil, letters of intent are commonly used in construction projects, though they are not necessarily binding. A letter of intent under Brazilian law can have legal effect and create legal obligations depending on content, and not format. Accordingly, if the letter of intent contains the same basic elements as a contract, it can be considered binding. Elements to take into account when considering whether such letter is binding include the project’s deadlines, the type of work involved, the risk borne by the parties, etc.

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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

Article 9 of the Introductory Law to the Brazilian Civil Code (ILCC) sets forth that parties are not free to choose the governing law of the contract and must abide by the limitations set forth in the Federal Decree No. 4657/42. Parties, however, are free to choose the law governing the merits and the arbitration. This is if the arbitration is the final dispute resolution method in the contract (article 11, Federal Law No. 9.307/96). Restrictions do apply when a state entity is involved in the arbitration.

Any individual with a “legal capacity”, and trusted by the parties, may serve as an arbitrator. Parties are also free to choose the language, the seat, and the arbitral rules applicable to the arbitration proceedings. Once again, however, the involvement of state entities restricts the parties’ autonomy. For example, in this case, the use of the Portuguese language is mandatory. This does not restrict the parties’ ability to adopt a bilingual arbitration.

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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

There is no requirement for a third-party certifier’s assessment under Brazilian law.

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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

Brazilian law does not contain any specific provisions addressing the claims related to delay. In such cases, a court would apply article 625 of the Brazilian Civil Code, which deals with the termination or suspension of the contract. This is provided that the contract is silent on this issue.

Should a concurrent delay situation arise, a court would likely apply article 945 of the Brazilian Civil Code, which reads that ‘compensation will be fixed considering the gravity of his/her guilt in comparison with that of the of the perpetrator of the damage’.

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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

Similar to claims related to delays, disruption claims are to be analysed under article 625 of the Brazilian Civil Code. If the contract is silent on this issue, the contractor is authorised to suspend the works without having to pay indemnity under the following circumstances:

  • the disruption is the employer’s fault;
  • force majeure events occur;
  • the changes result 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
  • disproportionate change orders requested by the employer with respect to the project have already been approved, even if the employer agrees to pay the additional costs.

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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

Brazilian law does not contain specific provisions regarding constructive acceleration. Therefore, there is no express basis for a contractor’s claim for construction acceleration.

However, a claimant may try to increase its chances of recovery by demonstrating that the employer was responsible for the delay and had knowledge about the consequences of such delay. These elements may establish the employer’s bad faith.

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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

Force majeure is defined under article 393 of the Brazilian Civil Code. A party may not be held liable if facing force majeure events, provided that the contract does not stipulate otherwise. To succeed, a party must demonstrate all of the following:

  • an unforeseeable event;
  • something that is beyond the party’s control; and
  • something that rendered impossible the performance of the party’s obligations.

Brazilian case law distinguishes between force majeure and acts of God – which does not require the event to be unforeseeable and is derived from force of nature. However, as article 393 does not reflect this distinction, the effects of both concepts are similar in terms of the parties’ liability.

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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

The concept of impossibility under Brazilian law means that the obligation cannot be performed by any contractor, and not simply the party to the contract. Accordingly, under article 249 of the Brazilian Civil Code, if the obligation can be performed by a third party, the employer is free to have it performed at the contractor’s expenses without prejudice to the applicable indemnity.

Under article 166 of the Brazilian Civil Code, a contract is null and void when its object is illicit, impossible or indeterminable. Accordingly, a contract that considers an obligation that was impossible at the time the contract was formed is deemed void.

This also applies to an obligation that has been rendered impossible without any fault of the contractor under article 248 of the Brazilian Civil Code. However, when the obligation was made impossible at fault of the contractor, the contractor will be liable for losses and damages to the employer.

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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.

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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

Parties are free to agree on shifting the risk of the execution of a contract amongst one another, provided that such restrictions are used in good faith and do not result in excessive burden to one party. Judicial interference is particularly limited in this regard under Federal Law 13,847/19.

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Duty to warn

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

Brazil

Under Brazilian law, there is no specific duty to warn the employer of an error in a design provided by the employer. The specific provisions of the contract will govern such matters. Should the contract not contain any such provisions, the general principles of contract law will apply. Accordingly, the duty to warn derives from the general duty of good faith.

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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

Brazilian law encompasses a general duty of good faith applied to contract law. The duty of good faith is implied in every contract. It covers the performance under, and the conclusion and interpretation of, the contract (articles 113, 187 and 422 of the Brazilian Civil Code). The duty of good faith also applies to the termination of the contract.

The employer has a general right to inspect the work under the contract, subject to the duty of good faith.

According to article 619, even if there is no written authorisation, the owner is obligated to pay the changes and accretions to the contractor. According to what is determined, as long as the owner has consistently monitored the works, through continuous visitations, and made observations that could not be ignored, yet never protested, then the owner has no claim.

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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

Under article 211 of the Brazilian Civil Code, parties to a contract are free to agree on limitations for claims under the conditions that such agreement does not conflict with statutory limitations. Accordingly, nothing prevents the application of sub-clause 20.1 of the FIDIC Red Book 1999. This approach is applied consistently by courts usually without regard to the responsibility of the employer.

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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

Under Brazilian law, a party can enforce other parties’ performance only after having performed its own obligation under the contract. It is common for parties to include clauses related to a “curing” period during which the contractor cannot suspend the works. Additionally, parties usually agree on the possibility for the employer to retain payments if the contractor breaches its obligations.

Suspension of the work is, however, allowed under article 623 of the Brazilian Civil Code, which reads:

Even when the performance of the works or services has already started, the employer can choose to suspend the construction, provided that the contractor is compensated for the expenses, the work is done, costs incurred and profits in relation to the services have been provided, plus a reasonable indemnification calculated in light of the gains that the contractor would have received if the works had been concluded.

The suspension must be thoroughly justified under penalty of being held liable for damages and losses resulting from the suspension (article 624 Brazilian Civil Code).

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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 allow unilateral termination for convenience of the contract. Suspension is, however, available provided that the contractor is duly compensated.

For this reason, parties should include a specific provision regarding the termination for convenience by the employer. They should be particularly specific on the calculation of indemnification.

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Termination

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

Brazil

Under Brazilian law, parties to a contract are free to stipulate provisions related to termination of the contract. Parties usually include force majeure events, delays due to the contractor, and breach by one party to the contract as termination circumstances. In construction contracts, it is also recommended to include provisions related to partial termination as the law is silent on this aspect. Accordingly, parties to construction contracts tend to include provisions on the reduction of scope to provide that the employer may take over part of the contractor’s obligations in case of partial breach.

By default, and in the absence of parties’ specific provisions, the law provides that a contract may be terminated in the case of a fundamental breach (Brazilian Civil Code, article 475), and in cases where an unpredictable event resulted in an excessively onerous obligation on one party (Brazilian Civil Code, article 478).

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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

Article 475 of the Brazilian Civil Code provides that contracts can only be terminated as a result of a breach. The moving party shall petition the court or the arbitral tribunal for an order of termination of the agreement. The moving party may not unilaterally terminate the contract without such an order.

Under article 478 of the Brazilian Civil Code, a party may move for termination of a contract when it becomes excessively burdensome. The moving party must demonstrate that the circumstances giving rise to the extraordinary burdens were unforeseeable and unavoidable to the parties. Circumstances must also be extremely advantageous to the other party. The non-moving party may avoid termination of the contract by offering the modification of the equitable terms of the contract (article 479 of the Brazilian Civil Code).

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20. What limits apply to exercising termination rights?

Brazil

As usual under Brazilian law, the general principles of good faith apply to the termination of a contract in order to prevent a party from exercising its rights in an abusive manner.

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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

Ultimately, the wording of the contract prevails. However, it is customary to consider that the actions of the employer might lead an arbitral tribunal to determine the implied completion of the contract. Such actions may be the payment of the price under the contract, the absence of reservation, the release of any performance securities that may have been set forth in the contract, or the actual use of the work.

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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

Express statements of consent and acceptance are not required under Brazilian law; instead, they may be implied. An employer acting in a manner consistent with acceptance of the work will be deemed to have accepted it.

The contractor may be held liable even after the acceptance under specific circumstances.

Under article 445 of the Brazilian Civil Code, the employer has 30 days to bring an action based on defects if the good is moveable, and one year if the good is immovable. However, article 446 states that the latent defects notice period is not counted during the contractual warranty period. Nevertheless, article 618 of the Brazilian Civil Code states that when a contractor supplies materials or the land for the work, then this contractor is liable for an irreducible period of five years for the soundness and safety of the work. However, this right is forfeited by the owner of the work if the owner does not bring an action against the contractor within 180 days of the appearance of the defect.

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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

Under article 416 of the Brazilian Civil Code, a party may claim damages in excess of the liquidated damages clause only when the contract expressly allows it to do so. In a case where the parties did not previously agree, the creditor may not demand additional indemnity.

Liquidated damages are not binding under certain circumstances, as established by the law. Such circumstances include fraud, wilful misconduct or gross negligence. In these scenarios, the parties’ choice cannot allow them to escape the law and, should the compensation sought by the aggrieved party be greater than the liquidated damages clause, the party may claim an amount greater than the one foreseen in the contract.

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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

Under article 945 of the Brazilian Civil Code, read in conjunction with article 927 of the same code, when the victim has culpably contributed to the harmful event, its compensation will be fixed considering the gravity of their fault in comparison with that of the creator of the damage. In other words, when the employer is the sole cause of delay, it will not be entitled to liquidated damages.

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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

Article 413 of the Brazilian Civil Code states that the liquidated damages must be reduced equitably by the judge if the main obligation has been partially fulfilled or if the amount of the penalty is manifestly excessive, considering the nature and purpose of the transaction. There is no fixed rule as to the determination of the degree of fulfilment of the obligation and courts seem to apply a case-by-case analysis.

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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

Under article 416 of the Brazilian Civil Code, a party may not claim damages in excess of the liquidated damages clause except when the contract expressly allows it to do so.

Liquidated damages are, however, not binding in circumstances established by the law. Such circumstances encompass fraud, wilful misconduct or gross negligence. In these scenarios, the parties’ choice cannot allow them to circumvent the law and, should the compensation sought by the aggrieved party be greater than the liquidated damages clause, the party may claim an amount greater than the one foreseen in the contract.

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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

Under article 389 of the Brazilian Civil Code, a party may claim monetary compensation when facing a failure to perform an obligation under the contract. The moving party may claim for losses, damages and interest. The moving party may also be entitled to loss of profits under articles 402 and 944 of the Brazilian Civil Code. Article 944 also allows the court to reduce the indemnification provided that (i) it is equitable to do so, and (ii) the damages are exceptionally high in comparison with the costs incurred due to the failure to perform an obligation.

Parties may pre-determine the monetary compensation available through a liquidated damages clause on the condition that the penalty is not higher than the main obligation (Brazilian Civil Code, article 389).

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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

There is no obligation to rectify defects under Brazilian civil law. The law only imposes the duty to indemnify losses that could arise out of the defect, but does not provide for rectifying the defect itself. The employer still has the right to refuse to accept the work or claim for an adjusted price.

The parties remain free to include a contractual obligation for the contractor to cure the defects.

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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

Under article 445 of the Brazilian Civil Code, the employer has 30 days to bring an action based on defects if the good is movable, and one year if the good is immovable. However, article 446 states that the latent defects notice period is not counted during the contractual warranty period.

Nevertheless, article 618 of the Brazilian Civil Code states that when a contractor supplies materials or land for the work, then this contractor is liable for an irreducible period of five years for the soundness and safety of the work. However, this right is forfeited by the owner of the work if the owner does not bring an action against the contractor within 180 days of the appearance of the defect.

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

Brazil

There is no provision in Brazilian law that could limit the right of the parties to exclude liability in a contract for indirect or consequential loss. Accordingly, such a clause would be enforceable.

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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

Parties are usually free to exclude or limit contractual liability in a contract. Brazilian law limits this right under a limited number of circumstances, including (i) when it involves the rights of third parties, (ii) matters related to death or personal injuries, and (iii) claims that arise out of gross negligence or wilful misconduct.

Article 618 of the Brazilian Civil Code states that when a contractor supplies materials or the land for the work, then this contractor is liable for an irreducible period of five years for the soundness and safety of the work. This liability cannot be excluded by parties to a contract when directed at the general public.

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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

A contractor may claim a lien on the work it carried out. This right is limited to identifiable goods. In other words, a contractor has the right to sale with retention of the title for goods that can be differentiated from others.

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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

Pay-when-paid provisions are allowed under Brazilian law. Accordingly, the contractor has the right to pay the subcontractors only once it has received the payment due by the owner. Under articles 421 and 421 A of the Brazilian Civil Code, in conjunction with Federal Law 13,874/19, agreements in this sense are to be upheld provided that no third-party or public rights are abused.

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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

In the situation where there is no direct relationship between the employer and the subcontractor, the latter may not claim against the former for sums due from the contractor.

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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

An employer may hold its contractor to their arbitration agreement if the dispute concerns a subcontractor only under very limited circumstances. Consolidation, under the Brazilian Arbitration Act, is allowed only when both the contract and the institutional rules, by which the arbitration is governed, allow for it.

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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

Parties may provide for third-party rights in the contract as nothing in Brazilian law prohibits it. According to article 20 (5) of the Brazilian Civil Code, parties may expressly provide third-party rights. Such third-party rights, however, would then be limited to the contractual provisions. Specifically, regarding claims for delays, assuming the contract does not provide for third-party rights, only the parties to the contract may benefit from a right to bring a claim with respect to delay.

However, with regards to defects, liability is statutory and a third party may benefit from enhanced rights.

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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

Affiliates, directors or employees are exempt from facing claims for delays and payments because they are not parties to the contract. However, it may be possible for an employer to bring such claims under limited circumstances, such as when the contract provides for this possibility or when the corporate veil is pierced.

Defects liability is statutory, and engineers employed by the contractor may be held personally liable for professional malpractice.

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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

Article 205 of the Brazilian Civil Code provides for a statutory limitation of 10 years only when no other law applies.

When a claimant brings an action to recover sums that are due, the statutory limitation is five years from the date when the sum became due, provided the sum claimed is liquid (Brazilian Civil Code, article 205, section 5). When a claimant brings an action for damages arising out of contractual breaches, the statutory limitation is 10 years.

Claims arising out of defects are subject to a separate regime. Under article 445 of the Brazilian Civil Code, the employer has 30 days to bring an action based on latent defects if the good is movable, and one year if the good is immovable.

However, in the event the defect is latent, by its very nature, the statutory limitation is 180 days from the date the purchaser became aware of the defect for movable goods, and one year for immovable goods. Furthermore, when the claim relates to the soundness and safety of the work, article 618 of the Brazilian Civil Code provides for a statutory limitation of five years from the date of delivery and for a limitation of 180 days from the date the defect appeared. Parties may not limit or otherwise modify this provision through their contractual agreement.

Article 192 of the Brazilian Civil Code provides that the rules on prescription are substantive in nature and may not be altered by an agreement between the parties, except for specific cases where the law is silent (Brazilian Civil Code, articles 209 and 211).

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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

Brazilian law contains several provisions that may supersede the agreement between the parties and, notably, certain aspects of the FIDIC Silver Book 1999.

For instance, Brazilian law is somewhat restrictive in its definition of arbitral tribunal, and it is likely that Dispute Adjudication Board as provided by FIDIC Silver Book 1999, § 20.4 will not be considered as such. This may be of importance, as decisions taken by such boards may not be considered binding and final, even in the absence of notice of dissatisfaction.

Under article 618 of the Brazilian Civil Code, in a construction contract, the contractor will be liable, during the irreducible term of five years, for the soundness and safety of the work. This provision supersedes the equivalent provisions regarding defects liability in the FIDIC Silver Book 1999 (§ 11).

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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

Several provisions of Brazilian law have the character of what other jurisdictions might call lois de police. A contract affecting public policy, third parties’ rights or state’s rights might be voided on this ground.

Principles of good faith and social purpose are mandatory in contractual relationships and parties may not escape those. In particular, despite a recent carve-out in article 421 A of the Brazilian Civil Code, courts may adopt a flexible vision of the contractual agreement to favour the aggrieved party.

Furthermore, Brazilian law contains several provisions that may supersede the agreement between the parties and, notably, certain aspects of the FIDIC Silver Book 1999.

For instance, Brazilian law is somewhat restrictive in its definition of arbitral tribunal, and it is likely that the Dispute Adjudication Board as provided by FIDIC Silver Book 1999, § 20.4 will not be considered as such. This may be of importance, as decisions taken by such boards may not be considered binding and final, even in the absence of notice of dissatisfaction.

Under article 618 of the Brazilian Civil Code, in construction contracts, the contractor will be liable, during the irreducible term of five years, for the soundness and safety of the work. This provision supersedes the equivalent provisions regarding defects liability in the FIDIC Silver Book 1999 (§ 11).

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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 articles 22-A and 22-B of the Brazilian Arbitration Act, a party may file for injunctive relief before the courts prior to the constitution of the arbitral tribunal. If the arbitral tribunal is constituted after the court’s decision, it may sustain, modify or revoke it.

Courts and the arbitral tribunal will rule on the request for interim relief based on two major elements that the claimant must demonstrate. First, the claimant must provide adequate basis as to the possible irreparable harm that would occur in the absence of the interim relief. Second, the claimant must provide justifications as to the probability of success of its claim if properly adjudicated. Should one of those conditions fail, the arbitral tribunal or the court will not grant the request.

However, the procedure set forth in sub-clause 20.4 of the FIDIC Red Book 1999 is considered binding between the parties until an arbitral tribunal or a court reviews it. Accordingly, and as any binding and enforceable decision, a party might seek enforcement of this decision pending a final award.

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Courts and arbitral tribunals

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

Brazil

There is no court of specialised jurisdictions for construction matters in Brazil. However, some states have specialised judges for arbitration matters, either directly dedicated to construction or more broadly dedicated to commercial law. In any event, construction arbitrations are handled by the classic court system.

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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

The relevant courts for construction and arbitration cases are the trial courts, the State Court of Appeals and the Higher Courts. The Higher Courts are split between the Superior Court of Justice, which exercises jurisdiction over Federal Law matters, and the Supreme Federal Court, which handles constitutional matters.

The Superior Court of Justice is prevalent in arbitration as it enjoys exclusive jurisdiction on the recognition of foreign awards and judgments. All decisions are published in the Brazilian Official Gazette, although they may be anonymised, and the content of the decision may be unavailable.

Under the Brazilian Code of Civil Procedure, a judgment is void if it fails to observe precedent, case law or a precedent raised by the party, without showing the existence of a distinction between the precedent and the matter at bar.

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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

Under article 141 of the Brazilian Code of Civil Procedure, arbitrators and judges may not render a decision on the merits exceeding the limits proposed by the parties and are forbidden to entertain issues that have not been raised. Article 492 of the same Code contains a similar rule with regards to the nature of the claims and the sum awarded. Accordingly, a judge or an arbitrator may not apply preconceived views on the dispute and must give the opportunity to the parties to explain their reasoning on the dispute at bar.

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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

Under articles 22-A and 22-B of the Brazilian Arbitration Act, a party may file for injunctive relief before the courts prior to the constitution of the arbitral tribunal. If the arbitral tribunal is constituted after the court’s decision, it may sustain, modify or revoke the court’s order.

When mediation is a precondition to arbitration because of the intention of the parties, the claimant must ensure that a meeting to negotiate has been attempted with the respondent. Other forms of precondition proceedings are not mandatory under Brazilian law.

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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. Regardless of the seat arbitration, the parties have the freedom to elect any court for interim or provisional relief.

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Expert witnesses

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

Brazil

Under the Brazil Arbitration Act, the arbitral tribunal is free to rely on expert evidence. This can be inferred from article 22 whereby arbitrators are free to take deposition and examine experts (both party- and tribunal-appointed).

Under the Brazilian Code of Civil Procedure, a court can appoint experts. Parties may also appoint their own experts to assist the court-appointed expert (article 465). Experts owe their duty to the authority by which they were appointed.

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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

Under Brazilian law “public authority” encompasses (i) state-owned companies, mixed capital companies and their subsidiaries and (ii) public entities, such as the municipalities, the states, the federal government and the agencies, foundations and funds created and controlled by them. This distinction is pertinent as certain Brazilian laws only apply to one of these groups.

For example, Law 13,303/16 establishes public procurement rules specifically for state-owned and mixed-capital companies, as well as their respective subsidiaries. Conversely, Law 14,133/21 sets out public procurement rules for the municipalities, the states, the federal government, as well as agencies and foundations created and controlled by such entities. Further, Law 14,133/21 expressly states that it is not applicable to state-owned, mixed-capital companies and their subsidiaries, except with respect to the criminal law aspects introduced by that law (article 178).

On 1 April 2021, the New Public Procurement Act (NPPA) entered into force through Law No. 14,133/21, with the objective of replacing Law 8,666/93 and other public procurement statutes. However, the NPPA will only be effective on 1 April 2023, and public entities are free to choose between both regimes until then.

The main change of the NPPA is the reinforcement of the most advantageous result approach towards public procurement (ie, the agency will no longer merely secure the lowest price of the most advantageous bid from a technical point of view). Rather, other objectives and criteria may be considered such as lifecycle of the object of the contract, and – in the event of a tie of two or more competing proposals – criteria such as gender equality, and compliance programmes will be used as a tiebreaker. Please note that these criteria will only be used respectively, as the 3rd and 4th tie-breaking criteria. The NPPA also enacts former guidelines into mandatory rules. This is the case with sustainable development objectives and innovation.

Contracting with public entities under the NPPA is significantly different from contracting with any other party. In particular, the public entity may unilaterally amend the contract (subject to certain requirements) and terminate the contract for reasons of public interest.

However, arbitration is allowed under the NPPA provided that (i) the dispute relates to freely transferable patrimonial rights, (ii) the arbitration is conducted in accordance with the law, (iii) the arbitration is not decided ex aequo et bono, and (iv) the proceedings are not confidential.

Parties should pay attention to other specific regulations related various sectors in Brazilian law. This is notably the case in the infrastructure sector, where Decree No. 10,025/2019 provides that any dispute is to be resolved under Brazilian law and the proceedings shall be conducted in Portuguese.

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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 at any stage of the proceedings. This is encouraged by the Code of Civil Procedure. Settlement does not need to be confirmed or even presented to an arbitral tribunal, although parties may decide to do so. It is noteworthy that article 90, section 3 of the Code of Civil Procedure exempts parties from payment of final legal costs should a settlement be reached before the issuance of the award.

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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

There is no provision in either the Brazilian Civil Code or the Brazilian Code of Civil Procedure addressing or recognising “without prejudice” privilege. However, several provisions may be relevant:

  • Under article 166 of the Brazilian Code of Civil Procedure, confidentiality is applied to all the information produced during conciliation and mediation. The contents of the information produced during conciliation and mediation may not be used for purposes that differ from those expressly provided by the resolution of the parties.
  • Article 404 of the Brazilian Code of Civil Procedure states that a party is exempt from disclosing documents when its disclosure can violate a duty of honour (article 404, part II) or when its publication brings dishonour and shame to the party or puts them at risk of criminal proceedings (articl 404, part III).
  • Under articles 25 and 26 of the Code of Ethics and Discipline of the Brazilian Bar Association, using information exchanged between lawyers as evidence in courts is unethical.

Nothing seems to bar the ability of the parties to agree on a specific sum to be payable upon the disclosure of information obtained during mediation or conciliation proceedings.

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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

Yes, the advice of in-house counsel is considered privileged from disclosure under Brazilian law. Brazilian law does not distinguish between in-house and outside counsel. Communications between the corporation and its employees on the one side and in-house counsel on the other are protected by attorney-client privilege.

Under article 404 of the Brazilian Code of Civil Procedure, a party is exempt from disclosure if its exposure entails the disclosure of facts regarding which, by reason of status or profession, they must maintain confidentiality.

However, for the privilege to apply, the communication the facts being discussed must relate to legal matters and the in-house counsel involved must be registered with the Brazilian Bar Association.  These rules are characterised as procedural law.

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Guarantees

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

Brazil

Under article 819 of the Brazilian Civil Code, guarantees shall be in writing and narrowly interpreted. Some conditions relate to the underlying obligations, which must be legal, valid, and binding. Should the underlying obligations suffer from a defect, then the guarantees attached to it are also deemed invalid.

Article 104 of the Brazilian Civil Code sets forth specific conditions that the parties must abide by. Those conditions include, inter alia, the proper capacity of the party and a lawful object. Furthermore, the guarantee shall describe the assets covered by the guarantee and the main terms and conditions of the underlying obligations.

Finally, under article 825 of the Brazilian Civil Code, a creditor may refuse a guarantor when the guarantor is not a reputable person, is not domiciled in the municipality where the guarantee is to be provided or does not have sufficient assets to properly fulfil the guarantee.

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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

Under article 822 of the Brazilian Civil Code, the guarantee covers the contract’s debt and all accessories to the principal debt. However, article 823 reads that the guarantee may be in an amount inferior to the contract’s debt but may not exceed the value of this debt. Accordingly, when the parties to the contract do not restrict or limit the liability of the guarantor, its liability is limited to the value of the underlying obligation.

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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

Under article 838 of the Brazilian Civil Code, a guarantor may be released from liability under the following circumstances:

  • the creditor granted the debtor additional time without consulting with and obtaining the consent of the guarantor;
  • the guarantor faces the impossibility of subrogating the creditor’s rights and privileges due to the creditor’s acts; or
  • the creditor accepted from the debtor another good in payment of the debt.

Under article 827 of the Brazilian Civil Code, the guarantor, who has been sued for payment of the debt, is entitled to demand that the debtor’s property be executed first, until the dispute is contested. The guarantor in this situation shall designate the debtor’s assets, those assets must be situated in the same municipality, and be free and clear. The assets designated must also be sufficient to pay the debt.

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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

On-demand bonds is an area where parties should exercise the utmost caution as Brazilian law does not contain specific regulations regarding on-demand bonds. As a result, on-demand bonds are regulated by the general framework applicable to guarantees of the Brazilian Civil Code.

Applying the classic provisions of conflicts of jurisdictions, Brazilian courts may reject jurisdiction if the bond provides for either arbitration or a choice of jurisdiction designating a foreign forum.

Regarding substantive law, in principle, on-demand bonds can be called by their very nature. However, because the law deals only with the generic category of guarantees, a court of a tribunal applying Brazilian law may restrain a call under several circumstances that are highly dependent on the facts of the case. This situation may arise when the employer does not demonstrate the substance of the claim, when the amount of the call is excessive although the employer has an entitlement in principle, or when fraud or bad faith is successfully alleged by the contractor.

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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

On-demand bonds is an area where parties should exercise the utmost caution as Brazilian law does not contain specific regulations with regard to on-demand bonds. As a result, on-demand bonds are regulated by the general framework applicable to guarantees of the Brazilian Civil Code.

On-demand bonds can be called by their very nature. The law deals only with the generic category of guarantees. A court or a tribunal applying Brazilian law may restrain a call under several circumstances that are highly dependent on the facts of the case. This situation may arise when the employer does not demonstrate the substance of the claim, when the amount of the call is excessive although the employer has an entitlement in principle, or when fraud or bad faith is successfully alleged by the contractor.

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Further considerations

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

Brazil

Brazilian law mandates parties to a construction project to respect and abide by certain health and safety regulations. At the federal level, the Ministry of Labor’s Ordinance No. 3,214/1978 can guide parties in relation to these obligations, although states and municipal entities may have different regulations.

Federal Law No. 6,938/1981 deals with national environmental policy and is relevant for construction projects that may cause pollution or affect the environment.

Anti-corruption initiatives are relevant to the parties as companies can be held strictly liable for acts of corruption, directed at both domestic and foreign public administration. Law No. 12,846/2013 and Decree No. 8,420/2015 should be carefully considered by the parties.

Brazilian law also contains diverse provisions that may affect the contract. For instance, insurance is mandatory for construction projects, tort law contains specific provisions regarding construction and engineering projects (Brazilian Civil Code, article 937), and tax legislation is particularly complex.

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