Publications

Category: Public and regulatory law

In the wake of actions to mitigate the effects of the covid-19 crisis, the federal government decided to suspend the annual adjustment of drug prices for 60 days. It was Executive Order No. 933/20, published on May 31, that implemented the suspension, postponing the annual adjustment of drug prices to June 1.

In Brazil, medications have a price schedule. The Medications Market Regulation Chamber (CMED) provides criteria to determine this price and discloses to consumers a table with the maximum prices to be charged by pharmacies. The inter-ministerial body responsible for the economic regulation of the drug market in Brazil is also in charge of determining the price adjustment, which occurs every year as of April 1st. The formula for calculating the annual adjustment currently takes into account the Broad Consumer Price Index (IPCA) for inflation, market characteristics, changes in input costs, and productivity gains of drug manufacturers.

The pharmaceutical industry is one of the examples of the use of regulatory mechanisms by the State to control prices in the production, marketing, and sale chain. From the economic point of view, state regulation of this industry aims to stimulate the supply of medicines, in order to allow monitoring of trade and the application of sanctions in the event of non-compliance with economic regulations. The near-term effects are protection of consumers of these products, which are relevant to public health, and promotion of pharmaceutical assistance to the population.

The essentiality of the drug market and the exceptional context in which Brazil finds itself may mean that debates on the constitutionality and legitimacy of price control in this particular case, as has occurred and is occurring in other contexts and economic sectors, may not be raised. In the case of drugs, the government acted preventively in face of the automatic regulatory mechanism already in place as a result of Law No. 10,742/03. On the other hand, the same factual reasons may justify the establishment of maximum prices in sectors in which, until now, a system of price freedom is in force.

Implementing a regulatory pricing policy under a tariff, freeze, or some form of binding adjustment, in certain circumstances and in relation to specific sectors, can be an important instrument to combat inflationary outbreaks and protect consumers against opportunism from economic players (especially in situations such as imminent shortages). As an example, it has been seen that the market is currently experiencing an increase in the price of items such as sanitizer, masks, and even cooking gas, in the face of insufficient supply in relatoin to strong and growing demand. In these cases, the institution of a price policy could meet the constitutional requirements that legitimize this type of economic regulation by the state, along with the sectors of the highest relevance for confrontation of the current crisis, such as drugs, where greater clarity is lacking.

Price control in the market stems from the constitutional requirement assigned to the State to act as a "normative agent and regulator of economic activity" (article 174 of the Federal Constitution). This form of state intervention on and in the economy runs counter to some fundamental dictates of the economic order idealized by the framers of the 1988 Constitution, among them free enterprise. For this reason, price control is an extreme measure that can only be justified if it is applied in circumstances of real need, under penalty of violating constitutional principles. Obviously, as is proper for the administrative legal framework, the exceptionality of the measure imposes a more intense burden as regarding justification of the reasons for the measure, and this need to justify more rigorously is placed as a true material limit.

Obviously, price control also encounters a formal limit: it does not dispense with legislative authorization for exercise thereof. In accordance with article 174 of the Federal Constitution, economic regulation can only be exercised by the Government if there is a law that establishes its limits and, consequently, if the regulation is found within these legal limits.

The Executive Branch's compliance with this competence cannot neglect freedom of initiative or business competition, values so dear to our legal system. However, as we have mentioned, it is undeniable that such principles are not absolute in their extent and may have relaxed application in the face of protection of other founding principles of the economic order, whose pillars are, aside from free initiative, the value of labor work and the objectives of ensuring a dignified existence for all, according to the dictates of social justice. In addition, consumer interests, the search for full employment, and environmental protection are principles applicable to the economic order (article 170 of the Federal Constitution). The justified protection of these legal assets therefore justifies the legitimacy of the State’s parameterizing economic relations and imposing restrictions on business freedom.

A proportionality must be observed, and in the case of medicines, for example, the President of the Brazil could not have ordered a definitive freeze on the price, and he did not. This is because, as we have said, the application of (somewhat opposing) fundamental principles in the economic order leads to a greater link between market containment measures and the reasons for them. Indeed, price control should be extraordinary and transitory. In these terms, the legal scholarship and case law of the Federal Supreme Court (STF) signals a consensus on the acceptability of price control and the limits thereof.

The STF has considered price regulation to be legally feasible in the face of public interest justifications. Examples of this are the occasions on which the higher court has accepted grounds based on the public interest associated with preservation of the right to health (ADI 2435-RJ, decided in 2003); protection of the right to education (ADI 319-DF, decided in 1993); and promotion of culture and leisure (ADI 1950-SP, decided in 2005, and ADI 2163-RJ, decided in 2018). On those occasions, the STF ruled price control constitutional to the detriment of the freedom of initiative of economic players. The grounds were based on reasons of public law deemed to legitimize State intervention in the economy.

The STF's assumptions in these precedents are that the Brazilian state is not subordinated to the classic liberal model and that it is permeated by social and public interest issues that support indirect State intervention through price control. In addition, it seems to be a general perception among judges that price control does not constitute abuse of economic power, market domination, elimination of competition, or arbitrary increases in profit.

On the other hand, the STF has already decided that State intervention in the economic domain is not lawful when based on mere discretion as to the measure's meeting public needs observed in the economic context, since such action may infringe on public freedoms, as well as cause unfair harm to individuals. In an emblematic case, the STF held that strict liability is applicable to the State, ordering the Federal Government to compensate the sugar-alcohol sector due to damage caused to this productive sector as a result of the pricing of the sector's products at values lower than the cost research conducted by the Getulio Vargas Foundation (cf. General Repercussion in Extraordinary Appeal with Interlocutory Appeal - RG REA 884325 - DF, decided in 2015). In this case, the STF held that there was violation of the constitutional value of free enterprise.

The topic is currently on the STF’s agenda, but there is a more conciliatory trend. ADIs 5956, 5959, and 5964 have as their subject matter discussion of the constitutionality of the establishment of minimum price for freight via road transport of loads provided for by Law 13,703/18, originated by Executive Order No. 832/18, in addition to ANTT Resolution No. 5,820. In 2018, Justice Luiz Fux, reporting judge in the case, granted an injunction suspending the imposition of fines for non-compliance with the floors provided for in Law No. 13,703/18. This decision was based on the harmful economic impacts of the establishment of a minimum price for the freight, in addition to the following allegations of the plaintiff that the minimum price represents "an affront to free enterprise, a fundamental principle applied under the Rule of Law (article 1, IV, and 170, head paragraph), to free competition (article 170, IV), consumer protection (article 170, V), to the provision of state intervention in private activity in an indicative manner only (article 174) and all other norms of the Federal Constitution that establish capitalism as the Brazilian economic system." In February of 2019, Justice Fux suspended all proceedings relating to MP 832/18 and reinstated the imposition of a fine for failure to following the minimum freight price. Before the joint judgment of the ADIs, postponed to April of 2020, the Justice coordinated a conciliation hearing that included representatives of truck drivers and businessmen who are members of the Brazilian Highway Freight Transport Association, the Confederation of Agriculture and Livestock of Brazil (CNA), and the National Confederation of Industry (CNI), signaling the possibility of settlement, to be determined in future rounds of negotiation among the same players.

It is clear that, given the specific circumstances of the market and of the Brazilian economy and the relevance of the activity regulated, it is necessary to find an optimal midpoint between (i) individual rights and respect for the freedom of economic players; and (ii) protection of the public interest and constitutional principles that privilege social and consumer rights.

The adversities observed in the current scenario make it obvious and urgent that the Government should resort to economic regulation for certain products and services. In addition to allowing for management of the current crisis, price control can prevent the charging of abusive pricing for essential items, in addition to protecting consumers and, especially, the most vulnerable from the economic point of view. However, it is essential that, in these times and in the future, State intervention through price control be restricted, and proportional, to the real need, so that all the principles and rights involved are safeguarded simultaneously.

Category: Tax

In a change of position, the Superior Court of Justice (STJ) ruled that it is possible to include the cost of wharfage services (loading, unloading, and handling of goods) in the customs value for the purposes of the import duties calculation base (II).[1] The decision was reached on March 1 by the 1st Section of the STJ by majority vote and in the context of a decision adjudicating multiple repetitive appeals on the same issue. The previous understanding, until then settled by both panels making up the 1st Section (1st and 2nd), was favorable to taxpayers, i.e., it did not include wharfage services in the customs value.[2]

In summary, this time the understanding set out in the dissenting opinion of Justice Francisco Falcão prevailed (with Justices Herman Benjamin, Og Fernandes, Sérgio Kukina, and Napoleão Nunes concurring),[3] to the effect that wharfage services provided inside the port, airport, or customs area should be maintained in the calculation base for II, on the grounds that this conclusion is drawn from a joint analysis of articles 77 and 79 of Decree No. 6,759/09 (which enacted the Customs Regulation).

More specifically, the winning argument found that, according to these provisions of the decree, wharfage services would be included in the concept of customs value, since such activities (loading, unloading, handling, among others) would be performed both inside the port and at the customs border point, being, therefore, within the scenarios provided for in article 77 of the Customs Regulations.

According to article 2 of Decree-Law No. 37/66 (as amended by Decree-Law No. 2.472/88), the customs value, which is the calculation base for II, is established in accordance with the rules of article 7 of the General Agreement on Tariffs and Trade (Gatt), better known as the Customs Valuation Agreement (AVA).

The AVA is mandatory for all member countries of the World Trade Organization (WTO), as is the case of Brazil, and was internalized in our legal system by Decree No. 1,355/94. The internalization was done precisely to avoid the exacerbated protectionism of Brazilian products over imported ones and to establish a market balance.

In short summary, the customs valuation agreement establishes the parameters that must be observed in order to determine the value of the imported products, which will be used as a calculation base for the taxes levied on imports. Thus, the AVA rules must be applied to all goods subject to import clearance in Brazil. This is exactly what article 76 itself of the Customs Regulations states.

In view of this, what is understood to be the customs value is relevant for the purposes of identifying the calculation base of II. This discussion is not recent: it has already been the subject of review in other important judgments, such as the one conducted by the Federal Supreme Court (STF) in the judgment on the unconstitutionality of the PIS/Cofins-Import calculation base, provided for by article 7, I, of Law No. 7,865/04, especially in the part that added the amount of the ICMS tax to the calculation basis of these contributions (RE 559.937/RS).

At the time of this judgment, faced with the necessary analysis of the concept of customs value, the STF found that the concept adopted by the Federal Constitution, considering the internalization of the international rules on the subject, is exactly what is defined in the AVA, i.e., what is provided for in its article 7 (Customs Valuation Rules).

Analyzing the provisions of article 7, articles 1 and 8 of the Agreement on the Implementation of article VII of the AVA have relevance for the topic "expenses with wharfage services." These provisions expressly list what expenditures will be considered by the member country to determine the customs value (which is the value of the transaction). These are: (i) the cost of transporting the imported goods to the port or place of import; and (ii) the costs of loading, unloading, and handling associated with the transport of the imported goods to the port or place of import.

This means that any expenditure on wharfage services incurred in unloading and handling the goods at the port of destination after the arrival in Brazil of the imported goods cannot be included in the customs value. It is very clear in the AVA that only the expenses with loading, unloading, and handling of the imported goods until the bonded port can be computed in the customs value, an understanding that, in the end, was settled by the STF.

In clear contradiction to the provisions of the AVA, however, the Brazilian Federal Revenue Service (RFB) issued Normative Instruction No. 327/03 (IN 327/03), which establishes rules and procedures for the declaration and control of the customs value of imported goods. According to the rule, the expenses related to loading, unloading, and handling associated with the transportation of imported goods in Brazilian territory must be included in the customs value.

In view of this, because they believe that the provisions of IN 327/03 violate the terms of the AVA, with regard to the possibility of including the cost of the wharfage service in the customs value even when such expenditure occurred outside the limits of the customs port, the taxpayers resorted to the Judiciary. After years of struggle with the Attorney General of the National Treasury (PGFN), the issue had finally been settled by the STJ, which concluded that inclusion was illegal. As a result, all taxpayers who litigated the subject began to exclude expenditure on wharfage fees from customs valuation for the purpose of collecting the import duties.

To everyone's surprise, however, an issue for which there was no longer any discussion gained new attention with the judgment handed down last March 11, when the 1st Section of the STJ found exactly the opposite of what had been defined more than three years ago, so as to reverse the scenario that had been favorable to taxpayers until then, by granting the appeals filed by the PGFN.

The change in the STJ's settled stand ends up going against the very concept of customs value set forth in the AVA (which overlaps with the Brazil's domestic laws) and ratified by the STF. The interpretation given to articles 77 and 79 of the Customs Regulations is simply not in line with the AVA itself.

In addition, the change in understanding undermines the principle of legal certainty, the pillar of the rule of law, and leads litigants to distrust the Judiciary. This breakdown in legal certainty entails serious damage to Brazil, since the requirement for reliability of the decisions handed down has not been met. It is an element that tends to increase the risk of doing business in Brazil and drive away foreign investors.

And what is worse: as the judgment issued by the 1st Section of the STJ took place in the context of an appeal under the procedure for deciding multiple appeals with similar issues, it must be observed by all judges and courts in Brazil, with immediate application to all cases that have the same ongoing discussion, as determined in articles 926 and 927 of the Code of Civil Procedure of 2015.

We need to await publication of the judgment, but, in principle, it is possible that this issue will be reviewed again, now by the STF, especially in the light of article 153, I, of the Federal Constitution of 1988, combined with the AVA itself, as occurred with RE 559.937/RS, mentioned above.

All taxpayers that already had favorable decisions in their cases still in progress in the courts will suffer from the reversal of the STJ’s position. We will not address here possible questions on the part of the PGFN as to final judgments that might have been handed down in closed cases for some taxpayers. This "thorny" issue deserves to be addressed in another article.

In practice, it is not known how the newly decided issue will be dealt with in relation to the past, since there was no debate in the judgment handed down by the 1st Section of the STJ regarding potential softening of the effects of the decision. In our understanding, and so that legal certainty is not further compromised, this softening, if it occurs, should only have prospective application.

[1] Topic 1014 – REsp 1799306/1799308/1799309.

[2] AgInt no REsp 1566410/SC, Opinion drafted by Justice Benedito Gonçalves, first panel, decided on October 18, 2016, published in the Electronic Gazette of the Judiciary on October 27, 2016, AgRg no REsp 1434650/CE, Opinion drafted by Justice Herman Benjamin, second panel, decided on May 26, 2015, published in the Electronic Gazette of the Judiciary on June 30, 2015.

[3] Justices Gurgel de Faria, Regina Helena Costa, Assusete Magalhães, and Mauro Campbell dissented. They found that wharfage expenses should not be included in the customs value, which makes up the calculation base for import duties.

Category: Restructuring and insolvency

The impacts of the covid-19 pandemic are undeniable and the three branches of government have been adopting measures to mitigate public health risks while dealing with the effects of the economic and financial crisis.

In this scenario, the National Council of Justice (CNJ) issued Recommendation No. 63, on March 31, 2020, to guide judges throughout Brazil in conducting the insolvency proceedings already underway, suggesting that acts for them to proceed normally can help reduce the difficulties and limitations imposed by measures to combat the pandemic.

The CNJ was also concerned with recommending immediate solutions to the crisis as a way to preserve companies, including mitigating, when justifiable, the consequences provided for in the Reorganization and Bankruptcy Law (LRF), for example, noncompliance with obligations provided for in the judicial reorganization plan, which, under the terms of article 73, would be decree of bankruptcy.

Among the main provisions of CNJ Recommendation No. 63, the following should be highlighted:

• Suspension of in-person general meetings of creditors (AGC). It is recommended that they be authorized to be held virtually. The judicial trustee shall, if possible, arrange for the necessary measures.

• In cases where it is necessary to postpone the holding of the AGC, it advises extending the stay period (period in which the running of the statute of limitations and all actions and executions in relation to the debtor are suspended) pending the resolution at the AGC.

• For judicial reorganizations with plans already approved, it suggests authorization to submit an amendment to the plan, provided that (i) the debtor proves that, due to the pandemic, its capacity to comply with obligations has been reduced; and (ii) the obligations contained in the current plan were being fulfilled. Modification of the plan must be resolved on in the AGC, to be held within a reasonable time.

• The judicial trustee shall continue to perform his duties, especially supervision of the business activities of the debtors in possession, in a virtual or remote manner, as well as present the monthly activity reports on its website.

• The general guideline is for judges to assess with special caution the granting of emergency measures relating to obligations in default during the state of public emergency declared in Legislative Decree No. 6/20.

The CNJ’s recommendation has no binding effect on the Judiciary. However, we noted that some of these guidelines were already being adopted and discussed by judges, such as relaxation or deferment of obligations under reorganization plans and the possibility of virtual AGCs.

However, it is crucial that the Judiciary adopt the exceptional measures with parsimony and with respect for legal security, lest, in the long run, problems occur that are even more serious than the crisis generated by covid-19.

Category: Environmental

Federal Supreme Court (STF) Justice Ricardo Lewandowski granted an injunction to suspend the effectiveness of a Ministry of Agriculture, Livestock, and Supply (Mapa) ordinance that allowed the tacit release of pesticides and chemical products without prior review by environmental and health oversight authorities.[1] The decision was handed down in the judgment of the Suit for Breach of a Fundamental Precept (ADPF) 656, on March 27. Lewandowski was accompanied in his opinion by Justices Dias Toffoli, Edson Fachin, and Alexandre de Moraes. Justice Roberto Barroso asked to see the record and there is still no forecast for when the judgment will continue.

For Lewandowski, the reporting judge designated for the case, “to allow an indiscriminate release, as is intended by means of the Ordinance contested, in my opinion, would further increase the chaos that has been established in our public health system, which is already highly overloaded with the uncontrolled pandemic [referring to the covid-19 pandemic]."

The party Rede Sustentabilidade [“Sustainability Network”] had filed ADPF No. 656 on March 3 against items 64 to 68 in Table 1 of article 2 of Mapa Ordinance No. 43. Published on February 27, 2020, the ordinance establishes deadlines for, in the absence of any response by certain public agencies, tacit approval for public acts of release from liability by the Bureau of Agricultural Defense (SDA) of Mapa, based on Federal Decree No. 10,178/19, the regulator of the Economic Freedom Law (Law No. 13,874/19).

Soon after the publication of the Economic Freedom Law, we analyzed in an article on this portal the potential impacts of the new measures on environmental laws and regulations. At the time, although we concluded that environmental licenses, strictly speaking, could not be granted tacitly, due to express prohibition by article 14 of Complementary Law No. 140/2011, we argued that this understanding would not apply to environmental and regulatory authorizations in general. This is because the Economic Freedom Law established as an essential right for the development and economic growth of Brazil the establishment of a maximum term, or public agencies to review requests for the release of economic activity.

On December 18, 2019, Decree No. 10,178 was published, regulating the Economic Freedom Law and providing criteria and procedures for the risk classification of economic activities. It sets a deadline for public agencies to respond to requests by regulated parties that, if not complied with, give rise to tacit approval due to the administrative agency's inertia. The decree provides that the highest authority of the agency or entity responsible for the public act of release will set the deadline for responding to the request by the regulated party. The text provides the express proviso that tacit approval shall not apply to administrative processes for environmental licensing or to other public acts of release of activities with significant impact on the environment.

Based on these provisions, Rede Sustentabilidade argues that Mapa Ordinance No. 43/20 created a "mechanism for tacit release of pesticides and other chemicals that are extremely dangerous to human health and the environment," taking the position that such approval would violate the fundamental right to an ecologically balanced environment, provided for in article 225 of the Federal Constitution. Considering this understanding, it is alleged that there would be breach of a fundamental principle in the right to protection of life (article 5 of the Federal Constitution) and to human health (articles 6, 7, and 196 of the Federal Constitution). The party also alleges violation of the general principles of economic activity, arguing that the ordinance hinders compatibility between economic activity and defense of the environment (article 170, VI, of the Federal Constitution) and offends the social function of property (article 8, III, of the Federal Constitution).

Rede also states that Decree No. 10,178/19 prevents tacit authorization when the approval by the administrative agency is tantamount to financial compromise for the Government, so as to then argue that Mapa Ordinance No. 43/20 would have a direct impact on public health spending, causing greater burdens than economic and financial benefits.

The ordinance provides for a period of 180 days for SDA/Mapa to respond regarding the registration of fertilizers, correctives, inoculants, biofertilizers, remineralizers, and substrates for plants; and 60 days regarding agrochemicals and the like. After these deadlines, the absence of a conclusive response by the SDA would entail tacit approval of the public act of release of these products. It is important to emphasize, however, that Decree No. 10,178/2019 provides that release granted in the form of tacit approval does not exempt the applicant from complying with the rules applicable to the conduct of the economic activity, nor does it remove the need to carry out the adjustments identified by the public authorities in subsequent inspections.

The process for registering new agricultural defensives, as a rule, goes through Mapa, the Ministry of Health (through Anvisa), and the Ministry of the Environment (through Ibama). In the present case, Mapa enacted the ordinance commented on here, Anvisa defined a period of four years per product to be review, and a position from Ibama is still forthcoming. Communication between the three administrative agencies is important to optimize and make more efficient the regulation of agricultural production activity.

[1] According to the Justice writing for the court, “[i]t is not possible, unless the STF decides otherwise en banc, to admit the tacit release of agrochemicals and chemicals, without an in-depth analysis of each case by the environmental and health oversight authorities. To allow an indiscriminate release, as is intended by means of the Ordinance contested, in my opinion, would further increase the chaos that has been established in our public health system, which is already highly overloaded with the uncontrolled pandemic."

Category: Real estate

On March 30, the acting presiding officer of the Senate, Antonio Anastasia, proposed Bill No. 1179/20, which creates the Emergency and Transitional Legal Framework for Private Law Relations (RJET) for the period of the covid-19 pandemic.

The bill includes emergency measures similar to those approved by parliaments in various countries, such as the United States, England, and Germany. It is also inspired by the Faillot Act of January 21, 1918, which created exceptional rules for the application of the theory of unpredictability in France.

In Germany, for example, legislative measures deal with contract, corporate, bankruptcy, and criminal law.

In Brazil, the bill is limited to private law and does not deal with bankruptcy and reorganization matters, as explained in its principles.

On April 3, the bill was passed in the Federal Senate, in the form of its replacement, partially accepting some amendments presented.

In this article, we will focus our analysis on the provisions of the RJET relevant to commercial contracts.

Principles of the RJET

In its justification, it is stated that the RJET has four principles:

• Maintenance of the separation between equal (or parity) relations, i.e., civil law and commercial law relations in general, and asymmetric relations (of consumer law and urban property leases);

• Non-alteration of the laws in force, considering the emergency nature of the pandemic, but the creation of transitional rules that, in some cases, temporarily suspend the application of existing provisions of law;

• Treatment of predominantly private matters, leaving tax and administrative matters for other bills; and

• Absence of treatment of bankruptcy and reorganization matters, which are the subject of other bills in the Brazilian Congress.

Although it does not expressly deal with the issues below as principles, the RJET recognizes that:

• The Civil Code and the Consumer Protection Code already have adequate rules for termination or revision of contracts, whether due to unforeseen circumstances or excessive burdensomeness (also called objective basis of the deal); and

• It is necessary to contain any excesses committed in the name of unforeseeable circumstances and force majeure, but also to prevent vulnerable segments of society from suffering restrictions on the right to housing.

Structure of the RJET and general provisions

The RJET deals broadly with the most varied of legal relationships in private law in 13 chapters and in a section of final provisions, structured as follows:

• Chapter I - General provisions

• Chapter II - Statute of limitations and lapse

• Chapter III - Legal entities governed by private law

• Chapter IV - Termination, rescission, and revision of contracts

• Chapter V - Consumer relations

• Chapter VI - Urban property leases

• Chapter VII - Adverse possession

• Chapter VIII - Building condominiums

• Chapter IX - Corporate arrangement

• Chapter X - Competition arrangement

• Chapter XI - Family law and succession

• Final provisions

In the general provisions, the sole paragraph of article 1 defines the initial term of the events derived from the covid-19 pandemic: March 20, 2020, date of publication of Legislative Decree No. 6.

Article 2 states that suspension of the application of standards referred to in the RJET does not mean their repeal or amendment.

Provisions relating to commercial contracts

The RJET addresses the consequences of the covid-19 pandemic for commercial contracts in its articles 6 and 7.

Article 6 states that the consequences of the pandemic on the performance of contracts, including those arising from unforeseeable circumstances and force majeure, shall not have retroactive legal effects.

Article 7 provides, in its head paragraph, that, for the purposes of applying the theory of unpredictability and excessive burdensomeness of the Civil Code (contained in its articles 317, 478, 479, and 480), increase in inflation, foreign exchange rate variation, devaluation or substitution of the monetary standard are not considered unpredictable facts.

It adds, in its paragraphs 1 and 2, that the rules on contractual revision of the Consumer Protection Code (also called the theory of the objective basis of the deal) and the Urban Real Estate Lease Law are not subject to the provisions of the head paragraph. It also establishes that consumer protection rules do not apply to contractual relations subject to the Civil Code, including those entered into exclusively between companies or businessmen.

Even if it is not in the articles of the RJET, there is in its justification a provision that the effects of the pandemic are equivalent to those of unforeseeable circumstances or force majeure, but that they do not take apply to obligations due before the recognition of the pandemic.

Opinion

In relation to commercial contracts, the RJET did not bring in innovations, but rather a legal consolidation of doctrinal and jurisprudential majority positions on the institutes dealing with supervening change of contractual circumstances.

Article 6 makes explicit the non-retroactivity of the effects of the pandemic, including those arising from unforeseeable circumstances and force majeure, which is also reinforced in the justification of the RJET, where it is stated that these effects do not apply to obligations that fell due before the recognition of the pandemic. This is already the standard of Brazilian civil law.

It is settled case law that situations resulting from macroeconomic crises in Brazil, such as increased inflation, foreign exchange rate variation, devaluation, or replacement of the monetary standard, are not considered unpredictable for contractual relations under the Civil Code. The head paragraph of article 7 consolidated this case law. It seems to us that the list of events contained in this provision is merely illustrative, thus not excluding others that may be considered predictable.

In turn, paragraphs 1 and 2 of article 7 consolidate jurisprudential and doctrinal positions to the effect that: (i) the contractual revision of the Civil Code is different from the contractual revision of the Consumer Protection Code and the Urban Real Estate Lease Law; and (ii) the rules of the Consumer Protection Code are special, and do not apply to legal relationships that are exclusively subordinate to the Civil Code.

Considering the principles mentioned above, especially that of maintaining the separation between parity and asymmetrical relations, the RJET is aimed at avoiding interference in parity relations and favoring the mechanisms of risk allocation in commercial contracts arising from this type of relationship.

Even the rapporteur in the Senate, Simone Tebet, indicated during the deliberations that she considers one of the most relevant points of the RJET to be the distinction between parity and asymmetrical relations, especially for the purposes of applying the rules of contractual revision.

In view of this, the text aims to bring about greater legal security by providing general and binding effects for the Brazilian population, since this did not derive from the existence of the jurisprudential and doctrinal positions mentioned above.

In relation to commercial contracts, the guidance is reinforced that the problem of the effects of the pandemic always require a circumstantial analysis, considering the characteristics and provisions of each contract.

A criticism should be made, however, of the general manner in which the RJET treats the pandemic as a form of unforeseeable circumstance and force majeure. Extensive and detailed legal rules are not considered necessary, but it should be remembered that the effects of the covid-19 pandemic will not always be equivalent to unforeseeable circumstances and force majeure, especially in parity relations, where the parties have ample freedom to decide on the cases and effects of unforeseeable circumstances and force majeure. In addition, depending on the circumstances of each contract, it may be the case that the pandemic does not constitute an actual impediment to the fulfillment of obligations. We believe that the requirements provided for in the sole paragraph of article 393 of the Civil Code (“Unforeseeable circumstances or force majeure are found in necessary facts, the effects of which could not be avoided or prevented”) continue to apply, and must be ascertained on a case-by-case basis.

This problem is highlighted in the justification of the RJET, where it is peremptorily stated that the effects of the pandemic are equivalent to those of unforeseeable circumstances and force majeure. If this were not enough, on April 2, Senator Marcos Rogério presented Amendment No. 11, in which he proposed adding another paragraph to article 1 to expressly state that "for the purposes of this Law, the impacts caused by the pandemic are considered cases of unforeseeable circumstances or force majeure. Fortunately, after the deliberation on April 3, this amendment was rejected.

Thus, although the pandemic is an unpredictable event and beyond the control of the parties (and there is no doubt about this), it is the consolidated understanding in Brazilian legal scholarship and case law that a finding of the occurrence of unforeseeable circumstances or force majeure requires an analysis of the specific case. The inclusion of legal provisions that could eliminate or limit this analysis is very harmful, not least because it could lead to disregard for the conduct of the parties in taking measures to mitigate the effects of the pandemic and potential harm to the other party.

Conclusion

The text should continue to be processed quickly. Considering the reactions that have already occurred, the provisions on commercial contracts do not give rise to much discussion, unlike the provisions on urban property leases and the General Data Protection Law, for example. Therefore, the expectation is that there will be no significant changes with respect to the provisions applicable to commercial contracts.

Finally, it is also important to note that the justification of the RJET states that some of the rules contained therein will be presented by the Chief Justice of the Supreme Court (STF) to the National Council of Justice (CNJ), in the form of a recommendation to Brazilian magistrates.

We are monitoring the proceedings and, after the vote, if there are any relevant changes in relation to commercial contracts, we will conduct further analysis.

Category: Restructuring and insolvency

Congressman Hugo Leal submitted to the Chamber of Deputies, on April 2, Bill No. 1,397/20 (PL 1,397/20), which contemplates emergency measures, including amendments to Law No. 11,101/05 (the Bankruptcy and Corporate Reorganization Law - LFR), to deal with the effects related to the covid-19 pandemic. The proposal is to institute transitional measures until December 31, 2020, or during the period of public emergency recognized by the federal government under Legislative Decree No. 6/20, with the objective of helping companies and other economic players restructure their businesses and minimize the impacts of the crisis.

Among the innovations brought about by PL 1,397/20, the following stand out:

• the creation of a period of legal suspension, for 60 days from the effective date of the law, during which legal actions of an execution nature involving discussion or performance of obligations due after March 20, 2020, as well as contract revision actions, are suspended;

• the creation of a voluntary judicial procedure called preventive negotiation, which may be initiated by economic players who meet certain formal requirements; and

• provisional amendments to the LFR, which will apply only to proceedings initiated or amended during the period of validity of the law proposed by PL 1,397/20.

According to the text of PL 1,397/20, the measures provided for in items (a) and (b) above shall apply to so-called economic players, defined in the bill as individuals and legal entities that exercise or have as their corporate purpose the exercise of economic activity in their own name, regardless of their registration or the business nature of their activity. The consumer, as defined in article 2 of Law No. 8.708/90, will not be included in such definition.

Legal suspension

During the legal suspension period, in addition to suspension of the suits indicated in item (a) above, the following acts are also prohibited: (i) judicial or extrajudicial execution of secured guarantees, unsecured guarantees, fiduciary guarantees and co-obligations; (ii) decree of bankruptcy; (iii) eviction due to lack of payment or other economic element of the contract; and (iv) unilateral termination of bilateral contracts, with any contractual provision to this effect being null, including early maturity.

This suspension period shall not apply to obligations arising from contracts entered into or renegotiated after March 20, 2020.

Preventive negotiation

At the end of the legal suspension period, an economic player with a reduction of 30% or more in revenue compared to the average of the last quarter, as attested to by an accounting professional, may begin a preventive negotiation procedure only once. The application shall be assigned to the court of the debtor's principal place of business.

If the application is granted by the judge, via merely formal examination of the necessary requirements, executions against the debtor will continue to be suspended for a maximum and non-extendable period of 60 additional days, with the debtor continuing to have the same protections applicable to the legal suspension period discussed above. No response, brief, or any kind of inquiry or expert investigation regarding the application for preventive negotiation shall be entertained.

During these 60 days, the debtor will seek to renegotiate the terms and conditions of its debts, with any agreements having binding force only in relation to the creditors who agree to them. If it is in its interest, the debtor may retain the help of a negotiator who will be paid at its own expense. The negotiator may be an individual or legal entity, with well-known credibility and professional capacity.

The bill establishes that, in the event that a petition for judicial reorganization is filed thereafter, the legal suspension period shall be deducted from the 180-day stay period already provided for in the LFR.

Provisional amendments to the LFR

Among the most relevant amendments (and which will certainly incite more controversy), the proposed text suspends the effectiveness of certain requirements and prerogatives of creditors in judicial and extrajudicial reorganizations and bankruptcies, in particular the rights against third party guarantors and co-obligors during the period of validity of the provisional amendments.

For new petitions for judicial reorganization and approval of out-of-court reorganization plans during the period of public calamity due to covid-19, the bill proposes relaxation of certain requirements, such as allowing new petitions by companies that have already benefited from these arrangements without restriction in time and reducing the quorum for approval of out-of-court reorganization to a simple majority of the creditors involved (today 3/5).

During the transitional arrangement, an application for approval of an out-of-court reorganization plan may be submitted with proof that creditors representing at least one third of all the claims of each type covered by the plan have agreed to it, with a commitment to reach the quorum laid down in the LFR within an non-extendable period of 90 days from the date of the application. At this point, it seems to us that the reference made in the current version of the bill to article 163, subsection II, of the LFR is mistaken, since the quorum required for approval of an out-of-court reorganization plan is provided for in the head paragraph of article 163 of the LFR. It is also necessary to clarify whether the legislator's intent in this type of advance filing was to maintain the quorum of 3/5 or whether the real intention is also to make it more flexible for a simple majority of the creditors involved.

The bill also provides for the granting of a stay period to the debtor in extrajudicial reorganization in view of the type(s) of creditor(s) included in each reorganization. The LRF does not provide for a suspension period for this type of proceeding, but case law already allowed for it. The question remains as to what the duration of this suspension would be, especially since article 6 referred to in paragraph 2 of article 10 of PL 1,397/20 does not provide for any time limit. This leads to the belief that this paragraph would actually be referring to article 6 of the LRF, and therefore within the time limit of 180 days.

In the case of bankruptcies, the minimum limit for a decree of bankruptcy for non-payment of a debt was raised from 40 minimum wages (i.e., R$ 41.8 thousand)[1] to R$ 100 thousand.

The transitional rules proposed in the bill also affect ongoing out-of-court reorganization, judicial reorganization, and bankruptcy proceedings: obligations assumed in ratified reorganization plans are not payable for 120 days, and during this period the possibility of conversion of the reorganization into bankruptcy due to noncompliance with the obligation established in the plan is suspended. In addition, debtors will be able to submit a new reorganization plan including claims which are subsequent to the assignment of the reorganization claim (normally excluded from these cases). The bill also stipulates that debtors will be entitled to a new stay period under the LFR.

With regard to the addition to the plan, the amount of the claims originally held by the creditors, less any amounts paid, shall be taken into account both for the calculation of the amount to be paid and for the counting of votes for approval of the amended plan.

With regard to receivables, generally the most liquid of the guarantees, the transitional arrangement that is contemplated by the bill allows for the release of 50% of the amount in favor of the debtor, against creditors that may hold security interests on them or even fiduciary ownership. The bill also provides that its original flow (lock) may be gradually re-established from the 6th month onwards and within 36 months.

For micro and small businesses, the bill establishes more beneficial rules for the debtor in the event of judicial reorganization, with a special plan providing for payment of the first installment within one year.

Perspectives

To be discussed by the Congress, the bill will certainly have a large impact and, in some points, despite the good intentions, may end up causing legal uncertainty. Although it is not scheduled to be voted on, it should be one of the priorities of parliamentarians.

[1] Based on the national minimum wage in force on the date of publication of this article, in the amount of R$ 1,045.00, as provided for in Executive Order No. 919, of January 30, 2020.