Contracts must now include a pandemic clause

Date

5/20/2020 11:31:25 PM

(MENAFN- Brazil-Arab News Agency (ANBA)) Thais Sousa

São Paulo – In a moment when many companies must reinvent themselves to deal with the crisis ushered in by the COVID-19 pandemic, renegotiating legal contracts is one concern. The need to provide for major events like this in contracts was one recommendation from Brazilian and Arab specialists that were brought together in the 6th webinar hosted by the Arab Brazilian Chamber of Commerce on Wednesday (20). In the 'International Business and Legal Safety: Adaptations to the New Scenario' webinar, they talked about the impacts on national and international contracts, suggestions to mitigate risks, and trends for global trade.

The lecturers stressed that are major difference between contracts signed before the spread of the pandemic, in the first days into the pandemic, and after it had spread.

Fábio Amaral Figueira believes that contracts must includes clauses on events such as the pandemic

Veirano Advogados partner Fábio Amaral Figueira believes that events such as the pandemic may not be included anymore as 'acts of God' or 'force majeure.' Acts of God or force majeure are events that can't be avoided, such as the COVID-19 pandemic. 'Thinking ahead, [it may be] established more clearly that some events won't be considered as force majeure or that the debtor should take some responsibility in the case of an act of God or force majeure. The pandemic will make the business world review some ideas,' he considered.

He believes that a resolution clause – concerning the termination of a contract – could cover eventual effects of pandemics. 'Some situations can lead to an unavoidable impediment of the relationship's continuity,' Figueira said.

Dib: Now is not possible to have the theory of unpredictability anymore

Arab Chamber legal director William Adib Dib Jr. pointed out the importance that companies now have clauses allowing for contract reviews in the case of events that change the scenario, such as the pandemic. As for companies with contracts signed after the pandemic has started, they face another reality. 'Signing a contract now is signing a contract amid the pandemic. It's important to include clauses because now we can't have the theory of unpredictability anymore. You must find the best way to eventually solve the contracted option without incurring in further problems,' Dib pointed out.

Figueira explains that the next months will see a legal trend for contract decisions. As for international deals, he stresses the need to analyze if the law governing the contract is the Brazilian or the Arab country's law. 'It's also important to have in mind what the party really wishes at the moment – if it's to discontinue the service or terminate it entirely, and remember the business issues, not just the legal decision, if the party is to maintain a good contractual business relation in the Arab country and vice versa,' he said.

A second point raised by the lawyer were the legal costs involved in taking the cases to justice. Figueira points out that cheaper alternatives, such as mediation, can be the solution. 'At first, it's interesting that the parties negotiate between them. If it doesn't yield any results, then maybe it's the case of thinking on mediation. The mediator is a facilitator.' Another option, he says, is contractual risk allocation, when where the parties discuss to specify the risks that each of them should sustain.

Arab countries' legislation

Baker & McKenzie Habib Al Mulla partners Tarek Saad and Pietro de Libero (pictured on top) also participated in the webinar and addressed how force majeure and unpredictable events are treated by the Arabs. According to the UAE-based office's partners, the code followed in most of the Arab countries is based on the Egyptian code, which is derived from the French code, so the same rules apply in most of those countries.

'In the case of force majeure, the contract is completely terminated if the obligation of one party is made completely impossible or partially terminated if it's made partially impossible. In the latter, this contract is still in force concerning the part of the obligation that can be met, and the consideration is reduced accordingly,' contract law specialist Libero explained.

Tarek Saad talked about cases where 'force majeure' and 'unpredictable events' apply

According to him, even if the contract does not provide for force majeure, the rule can still apply because of the civil code. 'It apply only if the event causes an impossibility that wasn't there when the contract was signed and had an impact before the obligation was met or when the event makes the obligation impossible,' he pointed out.

In the COVID-19 scenario, the specialist mentions discontinuation of transport, lockdown measures and obligatory closing of production plants as examples of impossibilities of one party to meet its obligation to deliver or produce something. 'In these cases, the contract terminates, and any payment already made must be returned,' he pointed out.

There are also cases when meeting an obligation is possible but became extremely costly. Libero explains that the judge can find a solution that balances the obligations of both parties. 'For example, delivering a heavy machinery that can't be delivery by sea. The only possibility would be delivering it by air. Although it's possible, the transport cost would be ten times higher. Therefore, the seller would lose the sales margin and suffer an economic damage. In that case, the judge can change the terms of the contract. Our experience shows us that these two provisions are now very relevant,' the specialist pointed out.

Tarek Saad explained that legal decisions are different for contracts signed in different periods. 'In contracts signed before the spread of the virus and before it became a pandemic, there are cases when maybe one party can't meet its obligations because it would result in the closing of its plants or the impossibility of the transport. In that case, the party can adjudicate the process, asking for exemption from meeting the obligations and returning the contract money. That's a contract termination,' he considered.

On the other hand, in cases when the party can supply a smaller quantity of the contracted product, it can adjudicate a case to ask for a reduced obligation. 'We call this the theory of unpredictability. Unlike force majeure, it won't lead to contract termination because the court would reduce the obligation. In that case, both parties would share the damage,' Saad explained.

As for contracts signed in the first days after the spread of the coronavirus, Saad believes that the theory of unpredictability still applies, but force majeure doesn't. Finally, in contracts signed after the spread of coronavirus, neither force majeure nor unpredictability apply – this includes facemask supply contracts, the specialists explains.

In addition to labor laws, Pietro explains that many countries have adopted specific decrees. 'Considering how employers can react and how they can reduce labor costs, many provisions were taken in the Arab countries. In the UAE, we saw the adoption of measures concerning layoffs and other procedures. The general provisions for force majeure usually overlay labor decisions,' he said.

The specialist pointed out that the recommendation is starting with lighter measures, such as remote work, unpaid leaves, and temporary pay cuts, and only if these are not enough, start layoffs.

The partners said that the office has what they call 'coronavirus center,' which they feed with updates concerning the topic and share among their peers. Baker & McKenzie Habib Al Mulla has an office in Brazil and, Libero said, has advised on international contracts in the coronavirus context.

Arab Chamber president Rubens Hannun, who moderated the webinar, talked about the important of the legal area for the relations between countries and companies to not be harmed. 'Each country has faced a different reality, so this legal relation also suffers with the pandemic,' he said. The webinar also featured KPMG Brasil market leader André Coutinho, Marriott Hotels – Brasil sales and marketing director Nina Mazziotti, as well as Arab Chamber secretary-general Tamer Mansour and Travel Plus Turismo CEO Renato Aureliano.