Participation and ownership
Restrictions on foreign participation and investment
Is the shipbuilding industry in your country open to foreign participation and investment? If it is open, please specify any restrictions on foreign participation.
The Brazilian shipbuilding industry is open to foreign investments and there is no restriction on the participation by foreigners in Brazilian shipyards. There are very few limitations to foreign capital investment in Brazil expressly contemplated by Brazilian legislation, as would be the case in the fishing industry, newspapers and radio companies.
Foreigners may either incorporate a company as a local subsidiary in Brazil to act as a shipyard (greenfield) or acquire (either majority or minority) corporate participation in an already existing company (brownfield). Unincorporated joint ventures by means of consortium would also be possible.
Foreign companies willing to operate through a branch (rather than by having a subsidiary), on the other hand, would be generally subject to authorisation by decree in accordance with Brazilian national interests. Almost all activities subject to government approvals, however, require that a company incorporated in Brazil (rather than a branch) be the grantee.
The Brazilian federal government is responsible for the operation of any sea, river or lake ports. The construction and operation of port areas is regulated by the Port Law, whereby the right to construct or operate port areas is granted either under concession (organised port), authorisation (outside an organised port) or lease (inside an organised port). The granting of concession is subject to applicable public bidding requirements, while the granting of authorisation is subject to applicable consultation requirements, in any case, through the Brazilian Waterways Transportation Agency.
As to restrictions to foreigners, the Federal Attorney General’s Office published an opinion on the restrictions to foreign acquisition of rural land in August 2010, which has become binding for all purposes, and the restrictions shall apply to direct and indirect ownership of shares. Shipyards, however, are unlikely to be located in areas of rural land.
The acquisition of beneficial ownership of ‘tide land’ in turn shall require federal government authorisation. Tide land is the property of the federal government and, under applicable law, the use of such land may only be transferred to private entities under certain assignment or lease arrangements. Pursuant to Brazilian law, tide lands are defined as ‘coastal zone of 33 (thirty-three) meters horizontally measured landward from the position of the average high tide level of 1831 affecting the islands and the coast, river and lake margins, up to the place where tidal influence is observable’. The ownership of tide lands is subject to the ‘fee farm system’. No foreign person may be the recipient of any conveyance, concession or assignment of the beneficial ownership rights in tide lands, unless otherwise authorised by the President of Brazil.
From an antitrust perspective, joint venture arrangements would be subject to antitrust clearance in Brazil, through the Administrative Council for Economic Defence (CADE), a federal government agency linked to the Ministry of Justice. Transactions with direct or indirect impact in Brazil must be previously submitted to CADE for approval whenever: the economic group of at least one of the parties reported, in its previous balance sheet, annual gross revenues or a volume of business in Brazil higher than 750 million reais; and the economic group of at least one other party involved in that transaction reported, in its previous balance sheet, annual gross revenues or a volume of business in Brazil higher than 75 million reais.
Government ownership of shipbuilding facilities
Does government retain ownership or control of any shipbuilding facilities and, if so, why? Are there any plans for the government divesting itself of that participation or control?
We are not aware of any government-owned shipyard destined to build commercial vessels in Brazil. The Brazilian navy has shipyards that are responsible for the construction, repair and renovation of war vessels and for production of equipment for the defence sector.
The Brazilian navy is currently focused on investing in the expansion of the Brazilian naval force and development of the defence industry. Most of the investment efforts are being focused on the Submarine Development Programme (PROSUB). PROSUB will equip the Brazilian defence industry with nuclear technology and will prioritise acquisition of components produced in Brazil for the submarines, supporting Brazilian industrial parks. The Brazilian Navy may enter into public-private partnership arrangements to develop such projects.
Key contractual considerations
Are there any statutory formalities in your jurisdiction that must be complied with in entering into a shipbuilding contract?
There is no specific statutory formality required for entering into a shipbuilding contract. As a general comment, however, the Brazilian Civil Code establishes that the validity of manifestations of intent does not depend on any special form, except when expressly required by virtue of law (as it would be in the case of mortgages, for instance).
Contracts executed abroad must be signed before a notary public and then sent for legalisation either with the nearest Brazilian consulate or to be apostilled. Such contracts must be translated into Portuguese by a certified translator and be registered with the Registry of Deeds and Documents for admissibility as evidence in Brazil.
The maritime register office shall be competent to draw up contracts by public deed as well as register other maritime contracts in written form generally, whenever required by law or as the parties thereto so decide.
In order to be valid against third parties, the ownership rights and security interests over Brazilian vessels must be registered with the Maritime Court. The Maritime Court is an administrative body under the jurisdiction of the Navy Commander of the Ministry of Defence.
Ownership over a vessel may be acquired through the construction of such vessel or by any other regular mean permitted by law. However, the transfer of a vessel’s ownership shall only be perfected through registration of the vessel with the Maritime Court or, in a few specific cases, through the enrolment of the vessel with the appropriate Port and Coastal Authority.
Registration of ownership (title) of a vessel in Brazil (Registration of Maritime Property - RMP) shall be made when the owner of the vessel is either an individual resident or domiciled in Brazil; or a government or private entity subject to Brazilian law. The exception to this rule is the case of sport or recreational vessels, which may be owned by foreign individuals and registered in Brazil.
The RMP grants the nationality, validity, assurance and publicity of the vessel’s ownership in Brazil. The applicable request shall include the deed of acquisition or, in case of construction, the respective licence and evidence of payment of the price to the shipyard (except regarding any guarantee portion).
Brazilian companies operating a foreign vessel may provisionally register such vessel to fly a Brazilian flag (the Special Brazilian Registration, also known as REB) during the relevant period of utilisation of the vessel, subject to compliance with specific requirements, in order for such Brazilian company to have certain tax and other benefits. Brazilian vessels are also eligible for registration with REB. Registration of shipbuilding contracts with the Maritime Court shall be required for the provisional enrolment with REB of vessels under construction in a Brazilian shipyard, aiming at obtaining said applicable benefits.
Choice of law
May the parties to a shipbuilding contract select the law to apply to the contract, and is this choice of law upheld by the courts?
According to the rules on conflict of laws in Brazil, obligations arising from acts of the parties are governed by the law of the country in which they are created, although the parties are free to choose another law to govern their relationship. If the parties do not specify the applicable law in the contract, the law to be applied will be that of the place where the contract was made. There are a few cases where Brazilian law must govern a contract, such as those with respect to real property located in Brazil. Brazilian courts would accept the choice of a foreign law to govern a contract, to the extent that such foreign law does not contravene Brazilian national sovereignty, public policy or good morals.
As a general rule, contracts entered into by Brazilian parties shall be governed by Brazilian law, while contracts also involving a foreign party could be governed by a foreign law, with a few exceptions.
Based on our experience, the choice of law will very much depend on the acceptance by the relevant stakeholders of the project, including lenders and, depending on the project structure, government authorities.
In Brazil, ownership rights over vessels must be governed by the laws of the country of the flag that the vessel is flying.
Nature of shipbuilding contracts
Is a shipbuilding contract regarded as a contract for the sale of goods, as a contract for the supply of workmanship and materials, or as a contract sui generis?
Shipbuilding agreements are not expressly regulated by Brazilian law. Brazilian law generally states that there is freedom to build vessels in the form and conditions that may be suitable; operation thereof, however, shall depend on official inspection and compliance with applicable regulations.
In Brazil, shipbuilding agreements could usually be characterised as a turnkey contract, whereby the shipyard shall be required generally to provide material, equipment and services in connection with the construction or modernisation of a vessel. In such contractual arrangement, one of the parties undertakes to carry on (either by itself or with third-party assistance) a certain job or service, in consideration of a pre-set price. The contractor undertakes to achieve a certain result by employing labour and, sometimes, material. The outcome is instrumental in a turnkey contract and stands as one of the major features that distinguishes it from a service contract.
As to service contracts generally, the Brazilian Civil Code contemplates in turn that the term of duration of service agreements (other than labour contracts and such other services subject to special regimen) shall not exceed four years, including in cases of performance of a specific work, which shall be considered terminated upon the expiry of such period, even if the construction is not completed.
Pursuant to legislation regulating the naval construction industry in Brazil, more specifically, the shipyard shall be responsible for the construction of a ship or vessel in accordance with the terms of the agreement, which shall provide for: the plan and specifications; the construction schedule; and the classification society and conditions of inspection of the works, as well as the preliminary and final tests to which the ship or vessel shall be subject.
The shipyard will also be liable for: the specifications and acquisition of raw material, engines, equipment and spare parts; and the production, assembling and workmanship of the ship or vessel, until the delivery to the ship owner in accordance with the terms and conditions established under the construction agreement.
Is the hull number stated in the contract essential to the vessel’s description or is it a mere label?
Although the hull number would not be expressly required to be reflected in the shipbuilding contract, we understand that, as a general rule, such agreements would refer to such information, more particularly for the purpose of better identification of the asset.
Brazilian law regulating maritime property generally establishes that any interested party may request the registration of security interests and other liens thereon, upon presentation of a contract with the following information: the main characteristics of the vessel, gross tonnage, the deadweight tonnage and other information that may properly identify the vessel; and the statement confirming that the vessel is properly insured. The request for such type of registration shall be submitted to the Maritime Court by the interested party or its legal representative.
From a ship financing security practice standpoint, Brazilian legislation requires that the hull number be expressly reflected in the applicable mortgage or other lien in order to be registered with the Maritime Court for perfection of security interests.
This information, including hull number, is required in standard application forms in various licensing procedures before Brazilian public authorities.
Deviation from description
Do ‘approximate’ dimensions and description of the vessel allow the builder to deviate from the figure stated? If so, what latitude does the builder have?
In the particular case of turnkey contracts, Brazilian law establishes that, once the works are concluded as agreed or pursuant to the local practice, the owner shall accept the same, provided that the owner may reject the works if the contractor has not observed the instructions and plans received or the technical requirements applicable to works of such nature. Alternatively, the owner may claim a price reduction instead of rejecting the works.
In any event, any material deviation is likely to give grounds for a party to claim indemnification for any potential losses and damages pursuant to the relevant contract.
Guaranteed standards of performance
May parties incorporate guaranteed standards of performance whose breach entitles the buyer to liquidated damages or rescission? Are there any trade standards in your jurisdiction for coating, noise, vibration, etc?
The parties would be able to establish specific standards under the relevant shipbuilding agreement and applicable default penalties or termination events, according to maritime industry practice. See question 9.
Do statutory provisions or previous cases in your jurisdiction give greater definition to contractual quality standards?
The Brazilian Maritime Rules (NORMAM) No. 1 expressly determines certain construction specifications to safeguard naval construction and maritime operation in Brazil, in accordance with the international codes and conventions to which Brazil is a party, as well as resolutions taken by the International Maritime Organization and adopted by Brazil. For instance: the International Convention for the Safety of Life at Sea (SOLAS) 1974; the International Convention on Load Lines 1966; the International Convention for the Prevention of Pollution from Ships (MARPOL) 73/78; and the Sub-Committee on Standards of Training and Watchkeeping (STW). Brazilian maritime regulations also indicate that the maritime authorities may adopt the criteria established by recognised classification societies, on a case-by-case basis.
Where the builder contracts with the classification society to ensure that construction of the vessel leads to the buyer’s desired class notation, does the society owe a duty of care to the buyer, or can the buyer successfully sue the classification society, if certain defects in the vessel escape the attention of the class surveyors?
The classification society could generally be held liable by the purchaser of a vessel for any act, omission, negligence, recklessness or malpractice that causes losses to the purchaser, in accordance with the applicable regulations and the relevant contract. The Brazilian Civil Code adopted the principle of strict liability whereby one who develops an activity that, by its nature, may endanger someone shall be liable to repair the injury caused to that person even if it was caused without negligence, recklessness or malpractice.
The burden of proof as a general rule is on the damaged party to show in court the losses and damages suffered and the amount correspondent to the same. Any clause providing for the limitation or exclusion of the obligation to indemnify shall not be binding on third parties that are not signatories to such agreement.
The peculiarities of each transaction shall be considered on a case-by-case basis.
Have the flag-state authorities of your jurisdiction outsourced compliance with flag-state legislation to the classification societies? If so, to what extent?
NORMAM No. 6 establishes the requirements and procedures for acknowledging the classification societies to act on behalf of the Brazilian Maritime Authorities in the regularisation, control and certification of vessels. The full list of accredited classification societies and certifying entities with the Brazilian Maritime Authorities is available at https://www.dpc.mar.mil.br/pt-br/ssta/sociedade-classificadora:
- American Bureau of Shipping;
- Bureau Veritas Ltda;
- Bureau Colombo Ltda;
- DNV GL;
- Lloyd’s Register do Brasil;
- Nippon Kaiji Kiokai do Brasil;
- Registro Italiano Navale;
- Registro Brasileiro de Navios e Aeronaves;
- Certificadora Brasileira de Embarcações e Sist;
- ABS Group Services do Brasil;
- Record Certificação Naval Ltda; and
- AWS Eng, Consultoria, Inspeção e Certificação.
Registration in the name of the builder or the buyer
Does your jurisdiction allow for registration of the vessel under construction in the local ships register in the name of the builder or the buyer? If this possibility exists, what are the legal consequences of this registration?
Registration of a vessel under construction in the name of the builder or the buyer is an important element to define who owns the vessel under construction, in order to protect from insolvency and bankruptcy risks and for the bankability of a project.
Under Brazilian law, the request for maritime property registration, transfer of title to reflect new ownership or the filing of conditional sale agreements shall be made by the buyer within 15 days of the term of delivery by the shipyard, when the vessel is built in Brazil; the arrival at the port where the vessel shall be registered, when it is acquired or built abroad; or the time of change of ownership or, in case of conditional sale agreements or sale with title retention, when such right is given.
Vessels under construction may be provisionally enrolled with the REB, at the request of the buyer, aiming at obtaining financing at a competitive rate from the Marine Merchant Fund (FMM) and certain tax benefits.
Any interested party may request the registration of security rights and other liens upon presentation to the Maritime Court of an agreement with the following information: the main characteristics of the vessel, gross tonnage, the deadweight tonnage and other information that may properly identify the vessel; and the statement confirming that the vessel is properly insured.
Brazilian law requires that the hull number of a vessel be expressly reflected in the applicable mortgage or other lien, in order to be registered with the Maritime Court for perfection of security interests.
Title to the vessel
May the parties contract that title will pass from the builder to the buyer during construction? Will title pass gradually, upon the progress of the vessel’s construction, or at a certain stage? What is the earliest stage a buyer can obtain title to the vessel?
In Brazil, ownership over a vessel may be acquired through the construction of such vessel or by any other regular means permitted by law. However, the transfer of a vessel’s ownership shall only be achieved through registration of the vessel with the Maritime Court or, in a few specific cases, through the enrolment of the vessel with the appropriate port and coastal authority.
Transfer of title to movable assets in Brazil shall be achieved (with a few exceptions) upon actual delivery of the asset. Ships, however, are movable assets subject to registration requirements, that is, ownership over a vessel shall be achieved upon registration of the relevant deed of transfer at the Maritime Court.
The parties may agree that title shall pass from the builder to the buyer during construction, as well as gradually, in milestones, upon progress of the vessel’s construction. In order to be able to evidence that transfer of title has occurred, it will be necessary to identify the vessel or its parts (especially upon completion and acceptance of the hull construction), otherwise the equipment and material related to other construction work may be mixed on the shipyard.
The project should be structured in a manner satisfactory to the financiers, including lenders and insurers.
Passing of risk
Will risk pass to the buyer with title, or will the risk remain with the builder until delivery and acceptance?
As a general rule, transfer of risks shall be made upon delivery and acceptance of the vessel. Such risk allocation (construction, completion, operation, among others), however, may vary depending on the terms and conditions of the applicable project documentation, involving builder, buyer, insurers and financiers and even suppliers.
May a shipbuilder subcontract part or all of the contract and, if so, will this have a bearing on the builder’s liability towards the buyer? Is there a custom to include a maker’s list of major suppliers and subcontractors in the contract?
The shipbuilder may subcontract part of the contract in Brazil or abroad, except if otherwise expressly established under the relevant agreement. As a general rule, the shipbuilder shall remain liable for the relevant part of the work subcontracted.
As we understand it, the terms and conditions of each agreement will very much depend on the negotiation by the parties, provided that main suppliers or subcontractors may be expressly referred to in the shipbuilding agreement.
Outsourcing, which is a controversial matter in Brazilian labour courts, was regulated in Brazil in 2017. Under such new legislation, employers can hire services from independent contractors (even related to the company’s core activity) provided that such services are clear, determined and specific and that subcontractors and their employees do not report to the principal. Brazilian labour courts have traditionally ruled that outsourcing was not permissible when dealing with the principal’s core business. It is still uncertain how courts are going to decide disputes involving outsourcing arrangements. In any event, the principal will be, at all times, subject to secondary liability under labour and social security laws (that is, if the direct employer of such workers fails to pay their salary and benefits, the principal will be required to pay those amounts to them).
The subcontracting of supply of materials or services shall also take into account the different tax implications in Brazil.
Must the builder inform the buyer of any intention to have certain main items constructed in another country than that where the builder is located, or is it immaterial where and by whom certain performance of the contract is made?
As shipbuilding agreements are not expressly regulated by Brazilian law, the parties shall specify the terms and conditions thereof in a mutually satisfactory manner, including with respect to foreign supply and construction partially abroad.
The Brazilian government has adopted a local contents policy applicable to different industries, as a condition to obtain competitive financing from banks controlled by the government or as an element of the essence for a successful outcome in public biddings.
In the oil and natural gas industries, for instance, extraterritorial construction, assembling and usage of foreign parts may be key aspects of a project. In such case, different tax regimens as well as local contents requirements may apply, such as: special customs treatments for the import or export of goods, usually carried out by means of synthetic inflow or outflow of goods, temporary admission or drawback system; and special customs ruling for import and export of goods destined for activities of research and exploitation of oil and natural gas (also known as REPETRO). This allows the import, under temporary admission, of specific equipment to be used directly in activities related to the oil and gas sector, including suspension of federal import taxes, federal value added tax, Contribution for Social Integration Programme, Contribution for Financing Social Security (COFINS-Import), as well as additional fees for renewal of the merchant marine (also known as AFRMM), which would be levied on the temporary import of the equipment.
The following entities would be eligible for REPETRO: the operator of oil exploration, concessionaires, authorised companies or companies contracted under the production-sharing regimen to perform activities of research and drilling of oil and natural gas reservoirs in Brazil; and specific entities headquartered in Brazil described in the applicable regulation, as long as they are indicated by the operator of the oil exploration. REPETRO regulations also list the equipment eligible for such system, including vessels, machines, oil rigs, vehicles, lines, pipelines, among others. Such equipment must be used for exploration and production activities in the oil and gas sector in Brazil.
Vessels provisionally imported into Brazil may enjoy certain tax benefits, whereby the import and federal value added taxes would not be levied on the import, if there is no transfer of ownership, and the applicable Brazilian tax would be paid for each month that the vessel stays in Brazil. To such effect, the Brazilian importer should pay, for each month, an amount equivalent to 1 per cent of the taxes that would be due if the vessel were imported on a definitive basis. If the period of stay of the vessel in Brazil is extended, the Brazilian importer shall pay an additional tax amount corresponding to such extension period, which is not limited to 100 per cent of the taxes due under a definitive import.
Local content requirements may vary depending on the specific bidding round called by the Brazilian Petroleum, Natural Gas and Biofuels Agency (ANP), offering oil fields for exploration in both regular areas (through concession) and pre-salt areas (production sharing regimen). The applicable bidding rules and concession agreements shall provide for specific percentages of local content requirements, which may vary depending on the stage of the concession.
Pricing, payment and financing
Fixed-price and labour-and-cost-plus contracts
Does the law in your country have different provisions for ‘fixed-price’ contracts and ‘labour-and-cost-plus’ contracts?
Under Brazilian law, it would be possible to enter into a construction contract providing either for a fixed price or a labour-and-cost-plus price.
In Brazil, the contractor or builder who furnishes materials on a turnkey basis shall bear all risks until delivery of the work, to the satisfaction of whoever ordered it (buyer), if the buyer has not delayed acceptance of the work. To such effect, the builder shall be liable for completion of the work based on the previously agreed price, according to the terms and conditions of the contract.
On the other hand, in case of a turnkey project where the contractor only provides manpower, the burden with all the risks not caused by the contractor shall be borne by the owner or buyer.
If the scope of work or project is changed, the builder may have grounds to seek a review of the terms and conditions of the contract, including price, depending on the reasons and approvals obtained in connection with the relevant change.
Does the builder have any statutory remedies available to charge the buyer for price increases of labour and materials despite the contract having a fixed price?
Unless otherwise stipulated, a contractor who undertakes to carry out work under Brazilian law, according to a plan accepted by whoever ordered it, shall not have the right to demand an increase in the price, even if modifications are made to the plan, except if such modifications result from written instructions given by the owner of the work.
Even if written authorisation was not given, however, the owner of the work is required to pay the contractor for increases and additions in the amount determined by expert appraisal if the owner was always present at the work because of frequent visits, and could not have been unaware of what was occurring but never challenged it.
If there is a reduction in the cost of materials or labour greater than one-tenth of the overall agreed price, such overall price may be revised upon application by the owner of the work so as to give him or her the benefit of the difference.
Retracting consent to a price increase
Can a buyer retract consent to an increase in price by arguing that consent was induced by economic duress?
Pursuant to Brazilian law, in contracts with continuing or deferred performance, if the obligation of one of the parties becomes extremely burdensome, with excess advantage to the other, by virtue of extraordinary and unforeseeable events, the debtor may apply for dissolution of the contract. Dissolution may be avoided if the defendant offers to modify the conditions of the contract, on an equitable basis. If only one of the parties has obligations under the contract, that party may petition that its obligations be reduced, or that the manner of performing them be modified, so as to avoid excessive burden.
Brazilian law also provides that whenever, for reasons that could not be foreseen, the value of the due obligation and its value at the time of performance becomes clearly disproportionate, the judge may correct it, at the request of the party, in order to ensure, as much as possible, the actual value of the obligation.
In addition, whoever enriches without good cause to the detriment of the other shall be obliged to return what was unduly earned, adjusted for inflation.
If a given agreement becomes detrimentally burdensome only to one party to the benefit of the other, the economic and financial balance of such agreement would be deemed to have been lost. In such scenario, a party that is adversely affected may claim that the conditions of the agreement (ie, price level) shall be reviewed, in order to restore the economic and financial balance thereof, if the situations described above are verified.
Exclusions of buyers’ rights
May the builder and the buyer agree to exclude the buyer’s right to set off, suspend payment or deduct certain amounts?
The procedure for offset of credits contemplated by Brazilian law may only be carried out upon fulfilment of certain requirements, namely: each of the parties must be the debtor and creditor under a main obligation; the obligations must contemplate fungible items of the same kind and quality; and the debts must be matured, enforceable and certain.
In cases not contemplated by law, debts and credits may be offset debts, without meeting all necessary requirements by virtue of law. However, implementation of such a type of setoff by virtue of contract shall require the express agreement of both parties, under a type of compromise in which the parties shall make mutual concessions.
If the contract price is payable by the buyer in pre-delivery instalments, are there any rules in regard to the form and wording of refund guarantees? Is permission from any authority required for the builder to have the refund guarantees issued?
An uninterested third party who pays a debt in its own name shall have the right to reimbursement of the amount paid, but shall not be subrogated to the creditor’s rights.
If payment is made before the debt is due, it has the right to reimbursement only after the due date.
Under Brazilian law, guarantees are divided into two different groups: personal guarantees, where all the assets of the guarantor, without distinction, represent the security; and security interest, when a particular asset or assets either movable or immovable are set aside as security (such as in the case of a mortgage or a pledge, for example).
Advance payment and parent company guarantees
What formalities govern the issuance of advance payment guarantees and parent company guarantees?
If, at the time a contract is made, one of the parties gives to the other, as earnest, money or other movable property and the contract is performed, the earnest must either be returned or computed to the contractual amount due, if the earnest is of the same kind as the main obligation.
If the party that gave the earnest defaults, the other party may deem the contract to be undone and retain the earnest. On the other hand, if the party who received the earnest fails to perform, the party who gave the earnest may consider the contract to be undone and demand the return of the earnest in double.
Financiers may require a parent guarantee, in order to give evidence that the owner is committed to the project, including with respect to construction, completion and operation, as applicable.
Financing of construction with a mortgage
Can the builder or buyer create and register a mortgage over the vessel under construction to secure construction financing?
It is possible to register a Brazilian mortgage over a vessel under construction in favour of the builder or the lender. In order to be valid against third parties, title and security interests over Brazilian vessels must be registered with the Maritime Court. Mortgages over vessels will be governed by the laws of the country of the flag that the vessel is flying.
As a general rule to be applied to all types of security interest, including ship mortgages, Brazilian law determines that any provision that allows the creditor to retain the property in discharge of the debt is void. Enforcement of the mortgage can only be made through court proceedings, owing to the fact that the guarantee does not transfer to the creditor title over the object of the guarantee.
Mortgages over Brazilian vessels are made by public deed, governed by Brazilian law and expressly indicate the following in order to be effective:
- the exact amount of the debt, its estimate or the cap amount thereof;
- the term for repayment of the debt;
- the interest rate;
- the main characteristics of the mortgaged vessel, its gross gauging and tonnage capacity, among other information that may properly identify the vessel; and
- a declaration attesting that the vessel is properly insured (except in case the mortgage is related to vessels under construction).
Priority of claims against a bankrupt company in Brazil shall be determined by law and may not be freely modified by creditors or the debtor. Under the Brazilian Bankruptcy Law, applicable to judicial corporate restructuring and bankruptcy proceedings administered in Brazil under Brazilian law generally, claims in bankruptcy shall be classified in the following order of priority:
- claims related to employment, limited to 150 minimum wage per employee (claims for damages caused by accidents at work will be paid with the same priority without any cap limitation);
- secured claims, up to the value of the secured asset;
- tax and social security claims, except for tax penalties;
- claims enjoying special privilege;
- claims enjoying general privilege;
- ordinary claims, including also labour claims exceeding the abovementioned amount;
- contractual penalties and monetary penalties for breach of criminal or administrative laws, including tax penalties; and
- subordinated claims.
Brazilian law establishes that the credits held by a creditor that either has fiduciary ownership of movable or immovable properties, among other cases, or holds title under a sale agreement with title retention, shall not be subject to the effects of judicial reorganisation, out-of-court reorganisation or bankruptcy. In case of bankruptcy of the debtor, the fiduciary owner may require that direct possession of the property be given to him or her. Property given in guarantee under fiduciary alienation cannot form part of the bankrupt estate of the debtor, as it belongs to the fiduciary owner.
Under the Brazilian Civil Code, fiduciary ownership can only relate to non-fungible movable assets and transfers to the creditor ownership and indirect possession of the property on a dissolving condition. The debtor has direct possession of the property and is liable for the duties of a bailee in relation to it.
Brazilian law contemplates the fiduciary alienation over Brazilian vessels in case of vessels to be constructed, enlarged, converted, modernised or repaired in Brazilian shipyards with financing provided with funds obtained from the FMM. The fiduciary alienation of such vessels shall only be valid and effective upon its annotation on the Maritime Property Registration, which is made with the Maritime Court, and shall be regulated by the existing legislation, as applicable.
For such reason, most ship finance transactions in Brazil have resorted to the fiduciary alienation, in order to better protect the rights of financiers of the project against insolvency and bankruptcy risks of the shipbuilder or ship owner.
Default, liability and remedies
Liability for defective design (after delivery)
Do courts consider defective design to fall within the scope of poor workmanship for which the shipbuilder is liable under the warranty clause of the contract?
Under Brazilian maritime law, whenever defects of the vessel deriving from manpower or material employed by the contractor or builder in default with the legal requirements are evidenced, a penalty shall be applied to the builder and the lack of payment of such penalty shall result in suspension of applicable licences of the builder.
Pursuant to Brazilian law, the asset received in connection with a bilateral agreement may be rejected owing to latent defects that may cause such asset to be unfit for the purposes to which it is destined or to have its value reduced. The purchaser may opt to claim a reduction of the price instead of rejecting the asset by terminating the agreement.
If the seller was aware of the defect, the seller shall reimburse what it has received and shall be liable for losses and damages. If it was not aware of the defect, it shall only reimburse the amount received as well as the expenses of the agreement. The seller’s liability shall survive the destruction of the asset in possession of the purchaser if such destruction is caused by a latent defect already existing at the time of the transfer.
Under Brazilian law, as a general rule the buyer shall have 30 days as from the date of actual delivery of the asset to the buyer to claim redhibition (termination of the transaction and return of the asset), or ask for a price reduction, in case of movable assets. When the defect may only be verified later by its nature, on the other hand, the term for claiming redhibition or seeking a price reduction shall be counted as from the date on which the buyer becomes aware of such defect, provided that it does not exceed 180 days as from delivery of the relevant movable asset to the buyer or one year in case of immovable assets. Such deadlines shall not apply, however, if there is a warranty clause, provided that the buyer shall give notice to the seller with respect to the defect within 30 days as from the date such defect is verified, under penalty of forfeiture.
Remedies for defectiveness (after delivery)
Are there any remedies available to third parties against the shipbuilder for defectiveness?
Any third party affected by a defect of a vessel would claim losses and damages from the owner of the vessel at the time of the incident.
If the builder has already transferred title to the vessel, we understand that the ship owner would have a right of recourse against the builder, in accordance with the terms and conditions of the relevant project documentation.
Brazilian law provides for specific performance of obligations to do or refrain from doing something, or to deliver a specific asset, and the obligation is converted into a suit for losses and damages when specific performance is found to be unfeasible.
Liquidated damages clauses
If the contract contains a liquidated damages clause or a penalty provision for late delivery or not meeting guaranteed performance criteria, must the agreed level of compensation represent a genuine link with the damage suffered? Can courts mitigate liquidated damages or penalties agreed in the contract, and for what reasons?
There are two kinds of penalty clause under Brazilian law: the compensatory clause; and the default clause. The compensatory clause refers to the case of total breach of an obligation, whereas the default clause relates to breach of one particular clause or a simple act of default.
In the case of a compensatory penalty, the creditor may, in the event of a breach, demand performance of the contract or payment of the penalty. The creditor cannot avail itself of more than one of these remedies. For default penalties, a creditor may demand both payment of the penalty and also performance of the principal obligation. The amount of any penalty agreed upon by the parties cannot exceed the amount of the main obligation.
In the event of default, or partial breach of the obligation, or an extremely burdensome penalty amount in light of the nature and purpose of the deal, a court may order the debtor to pay only a portion of the penalty.
Preclusion from claiming higher actual damages
If the building contract contains a liquidated damages provision, for example, for late delivery, is the buyer then precluded from claiming proven higher damages?
As a general rule, the indemnity shall be measured by the extension of the damage caused. If there is an express contractual liability limitation, then the parties may be subject to the specific amount established thereunder.
When the damage is higher than the amount imposed by a penalty clause, the creditor cannot seek additional indemnification, unless otherwise expressly established by the parties. In such case, the penalty value must stand as a minimum indemnity, and the creditor must prove the excess damage.
Are the parties free to design the force majeure clause of the contract?
Brazilian law defines acts of God and force majeure events as ‘the necessary fact, the effects of which could not be avoided or impeded’. The debtor shall not be liable for losses resulting from acts of God or force majeure, unless such debtor has expressly agreed otherwise.
Considering that the legal concept of acts of God or force majeure is very broad, the parties may decide to include a specific list in the agreement to clearly identify the situations that shall characterise acts of God or force majeure in a specific contract, in order to mitigate the risk of acts of God or force majeure as between the relevant parties, as well as to regulate which party shall bear the risk of which specific group of force majeure events. Such list to be added to the contract may purport to be complete (exhaustive list) or merely to specify certain events for illustration purposes (illustrative list).
Is certain ‘umbrella’ insurance available in the market covering the builder and all subcontractors of a particular project for the builder’s risks?
The insurance market in Brazil is subject to the regulation issued by the Brazilian Private Insurance Authority (SUSEP), based on the guidelines determined by the Brazilian Private Insurance Council. Insurance may only be contracted abroad by individuals or companies resident or domiciled in Brazil to:
- cover risks for which there is no insurance offer in Brazil, provided that it does not result in a breach of applicable law;
- to cover risks abroad, when the individual contracting the insurance is resident in Brazil and the validity term of the insurance is restricted to the period of time in which the insured is abroad; and
- insurances that are subject to international agreements ratified by the Brazilian Congress.
Legal entities may contract insurance abroad to cover risks abroad, in which case they shall provide information to SUSEP within the term and in the conditions determined by such authority.
There are mandatory insurance requirements for vessels operating in Brazil.
In the case of foreign vessels registered with REB, SUSEP regulations establish that a company domiciled in Brazil shall have the right to contract in the international market coverage for insurance and reinsurance of the hulls, machinery and civil liability of the vessel, under the terms of the applicable maritime legislation (that is, if the domestic market does not cover such type of risk or in case of non-compatible prices in comparison to the international market rates).
Insurance policy in the modality ‘all risks’, where the risks not covered are expressly identified, would be available in the Brazilian market.
Disagreement on modifications
Will courts or arbitration tribunals in your jurisdiction be prepared to set terms if the parties are unable to reach agreement on alteration to key terms of the contract or a modification to the specification?
In the case of turnkey contracts, once the works are concluded as agreed or pursuant to the local practice, the owner shall accept the same, provided that the owner may reject the works if the contractor has not observed the instructions and plans received or the technical requirements applicable to works of such nature. In such event, the owner may claim a price reduction instead of rejecting the works.
In construction contracts for buildings and other sizeable constructions, a contractor for materials and execution is liable for the solidity and the safety of the work, considering both the materials and the soil, for a period of five years, which may not be reduced, provided however that such liability shall not prevail if the owner does not sue the contractor within 180 days after the defect appears.
In such a situation, the parties, arbitrators or judge may also resort to technical experts.
Acceptance of the vessel
Does the buyer’s signature of a protocol of delivery and acceptance, stating that the buyer’s acceptance of the vessel shall be final and binding so far as conformity of the vessel to the contract and specifications is concerned, preclude a subsequent claim for breach of performance warranties or for defects latent at the time of delivery?
As a general rule, the buyers’ acceptance would preclude a subsequent claim for breach of performance. Brazilian law, however, establishes that the buyer will have 30 days to claim redhibition, or ask for a price reduction, when the asset is a movable one. Such 30-day period shall be counted as from the date of actual delivery of the asset to the buyer. When the defect may only be verified later by its nature, on the other hand, the term for claiming redhibition or seeking a price reduction shall be counted as from the date on which the buyer becomes aware of such defect, provided that it does not exceed 180 days as from delivery of the relevant movable asset to the buyer.
Liens and encumbrances
Can suppliers or subcontractors of the shipbuilder exercise a lien over the vessel or work or equipment ready to be incorporated in the vessel for any unpaid invoices? Is there an implied term or statutory provision that at the time of delivery the vessel shall be free from all liens, charges and encumbrances?
Privileged claims under the Brazilian Commercial Code, which shall create a statutory mortgage over a vessel, are as follows:
- salaries owed for on-board services;
- all maritime fees and taxes (that is, fees due to the ports administrators and tax obligations);
- expenses for surveillance and maintenance of a ship;
- crew payment;
- overdue payment of a ship’s purchase price;
- debts arising from the ship construction agreement; and
- repair expenses involving a ship and its equipment. Such credits must have been duly posted and filed for registration.
See also question 34.
Reservation of title in materials and equipment
Does a reservation of title by a subcontractor or supplier of materials and equipment survive affixing to or incorporation in the vessel under construction?
As a general rule, the material supplied to the builder and incorporated to the vessel shall be deemed as property of the builder or buyer, provided that such material does not have any lien or fiduciary assignment in favour of the supplier.
The parties, however, may also consider a conditional sale agreement, whereas the buyer shall only be entitled to the immediate possession of the asset while the seller reserves the full title to the asset until the moment the amount owed is fully paid. Therefore, the vessel would only become a part of the debtor’s assets upon payment in full of the debt.
To such effect, it will be necessary to clearly identify the relevant asset subject to such lien or encumbrance.
A clause for reservation of ownership shall be stipulated in writing and must be registered in the buyer’s domicile to be valid against third parties. Material and equipment that is not susceptible of exact description, in order to be distinguished from others of the same kind, cannot be the object of a sale with title retention.
Brazilian law regulating maritime property generally establishes that any interested party may request the registration of security interests and other liens thereon, upon presentation of a contract for registration with the Maritime Court.
Third-party creditors’ security
Assuming title to the vessel under construction vests with the builder, can third-party creditors of the builder obtain a security attachment or enforcement lien over the vessel or equipment to be incorporated in the vessel to secure their claim against the builder?
As long as the vessel under construction and her parts remain as property of the builder, third parties may generally obtain judicial attachments and enforce their rights against the assets of the builder. In addition, refer to privileged credits discussed in question 32.
Subcontractor’s and manufacturer’s warranties
Can a subcontractor’s or manufacturer’s warranty be assigned to the buyer? Does legislation entitle the buyer to make a direct claim under the subcontractor’s or manufacturer’s warranty?
As a general rule, the builder shall be liable for all warranties related to the construction of the vessel, except if expressly provided otherwise under the construction agreement.
Warranty is generally given by the shipbuilder, except if the supplier or subcontractor performs a substantial role in the construction of the vessel.
If the execution of the work is entrusted to third parties, the liability of the author of the project, provided he or she does not assume the conduct and inspection of the work, shall be limited to damages resulting from defects as discussed in question 30.
See also questions 24, 25 and 44.
Default of the builder
Where a builder defaults in the performance of the contract, is there a legal requirement to put the builder in default by sending an official notice before the buyer’s remedies begin to accrue? What remedies will be open to the buyer?
The construction agreement usually regulates notification procedure, characterisation of default and cure periods, which depending on the subject shall be complied with for performance of any judicial measure (as it would be in the case of characterisation of default).
The judicial or extrajudicial notification of the builder would give better evidence of builder’s default, in preparation for a dispute.
In any event, once the builder is in default, the buyer may request the specific performance of the defaulted obligation or claim indemnification for losses and damages arising from such default.
Remedies for protracted non-performance
Are there any remedies available to the shipowner in the event of protracted failure to construct or continue construction by the shipbuilder apart from the contractual provisions?
Besides the usual judicial remedies, including specific performance lawsuits and indemnification for losses and damages, we understand that the builder may request a performance bond or other type of guarantees from the builder in case of material default.
Upon the occurrence of a default by the builder, one alternative to the ship mortgage that might be considered under Brazilian law would be the ‘fiduciary alienation’. Fiduciary alienation is a type of guarantee applicable to vessels to be constructed, enlarged, converted, modernised or repaired in Brazilian shipyards with financing provided with funds obtained from the FMM. The fiduciary alienation of a vessel and its parts shall only be valid and effective upon its annotation on the RMP, which is made with the Maritime Court, and shall be regulated by the existing applicable legislation.
Would a buyer’s contractual right to terminate for the builder’s insolvency be enforceable in your jurisdiction?
As a general rule, bilateral contracts are not (automatically) terminated as a result of a company’s bankruptcy or judicial reorganisation.
In bankruptcy liquidation, absent specific provisions governing the early termination of the contract, these contracts may continue to be performed at the discretion of the trustee if this is of interest to the bankrupt estate and, if applicable, upon authorisation of the creditors’ committee (specific rules apply to certain types of contracts).
Under Brazilian law, acts performed free of charge during the two years preceding the bankruptcy are ineffective with regard to the bankruptcy estate, regardless of whether or not the contracting party was aware of the debtor’s economic and financial distress and whether or not the debtor intended to defraud creditors. Likewise, payments and other acts performed during the stay period in case of bankruptcy or judicial restructuring shall be ineffective. The stay period in case of bankruptcy or judicial restructuring shall be fixed by the bankruptcy judge and may retroact up to 90 days before the bankruptcy request, the judicial restructuring request or the date of first protest.
Judicial proceedings or arbitration
What institution will most commonly be agreed on by the parties to decide disputes?
The submission of a Brazilian private company to arbitration proceedings under the project documentation is generally legal, valid and binding under the laws of Brazil. Any foreign arbitration award obtained in relation to operative documents will be recognised and enforceable by the courts of Brazil (to the extent that Brazilian courts may have jurisdiction) without reconsideration on the merits, after such arbitration award is ratified by the Superior Court of Justice in Brazil.
Some of the most frequently chosen arbitral institutions in Brazil are:
- the International Chamber of Commerce (ICC):
- the Brazil Canada Chamber of Commerce;
- the Brazilian Center of Mediation and Arbitration;
- the Chamber of Conciliation, Mediation and Arbitration (Ciesp/Fiesp); and
- the Mediation and Arbitration Chamber of the Fundação Getúlio Vargas (FGV).
There are also many others to choose from. A well-known specialised court in maritime disputes is the Brazilian Centre for Maritime Arbitration, whose creation was driven by the remarkable growth in the Brazilian naval industry in recent years, to serve the offshore oil industry.
Buyer’s right to complete construction
Would a buyer’s contractual right to take possession of the vessel under construction and continue construction survive the bankruptcy or moratorium of creditors of the builder?
Brazilian law establishes that bilateral agreements are not immediately terminated in case of bankruptcy of a party thereto, as the trustee in bankruptcy may decide to perform the relevant agreement to mitigate the liabilities of the bankrupt company.
Subject to the terms and conditions set forth in the specific construction contract, a buyer’s contractual right to take possession of the vessel under construction and continue construction shall survive the bankruptcy or moratorium of creditors of the builder. See question 38.
In your jurisdiction, do parties tend to incorporate an ADR clause in shipbuilding contracts?
ADR clauses are becoming more and more common in Brazil, in face of the increasing recognition of the biding nature of ADR clauses and of the guaranteeing enforcement of awards rendered in arbitration. An exponential growth in the number of Brazilian parties in arbitration proceedings brought before the ICC was noted. For instance, Brazil was the fifth country in the world with most parties in ICC arbitrations in 2010, and the seventh country with the highest global number of nominations as a place of arbitration according to the 2011 Statistical Report, ICC International Court of Arbitration Bulletin.
Default of the buyer
Where the buyer defaults in the performance of the contract, what remedies will be available to the builder? What are the consequences of the builder’s cancellation of the contract?
The rights generally available to the builder would be the right of retention of the vessel or its parts and equipment, either in a scenario of termination of construction contract or not, to be later sold at a private or public auction, in accordance with the terms and conditions established in the construction contract.
Contract forms and assignment
Standard contract forms
Are any standard forms predominantly used in your jurisdiction as a starting point for drafting a shipbuilding contract?
Different forms of construction contract may apply, depending on the specific shipyard involved. The Brazilian market has not adopted a specific standard form.
Assignment of the contract
What are the statutory requirements for assigning the contract to a third party?
Brazilian law establishes that a credit may be assigned, to the extent that such assignment does not contravene the nature of the obligation, the law or the agreement with the debtor. Except if expressly contemplated otherwise, assignments of credit shall in addition comprise the related ancillary rights.
In order to be opposed against the debtor, Brazilian law requires that the assignment of credit rights must be notified to such debtor. The debtor shall be deemed to be notified whenever it acknowledges the assignment in writing.
In order to be valid against third parties in Brazil, on the other hand, assignments of credit rights made in a private instrument must be signed by the parties indicating the place of execution, the particulars of the parties, the date, purpose and scope of the assignment and be registered with the appropriate public registry in Brazil.
Update and trends
Are there any emerging trends or hot topics in shipbuilding law in your jurisdiction?
Updates and trends
After years of downturn in the Brazilian shipping industry, particularly affected by reduced demand in the oil and gas sector, the general expectation is for a better year in 2019. Despite the general higher projections for the coming years of the Brazilian economy, the upturn in the oil and gas sector with long-awaited adjustments, such as the regular offering of oil exploration blocks bidding rounds and the reduction of local content to more sustainable percentages aligned with Brazilian industry capacity, and recent changes in the Brazilian energy matrix with a growth of the natural gas stake suggest stronger activity in the shipping industry.
Those changes are reflected in the 2019 financing projects approved by the Merchant Marine Fund (FMM), which is an accounting fund destined to provide resources for the development of the merchant marine and the Brazilian shipbuilding and renovation industry. The FMM is managed by the new Ministry of Infrastructure - the former Ministry of Transports, Ports and Civil Aviation was merged into this new Ministry in January 2019 - by means of the Merchant Marine Fund Board of Directors (CDFMM). The last board meeting of CDFMM in 2018 approved an amount of 6.7 billion reais for the financing of projects in the shipbuilding industry.
The Brazilian Navy is expected to carry out an international public bidding in the total amount of US$1.6 billion for war vessels equipped with anti-aircraft, anti-submarine and anti-surface warfare weapons. The bidding is expected to occur within the first half of 2019 and contemplates the production of at least four corvettes. To such effect, in order to foster the relevant shipping industry being considered for certain tax benefits granted by other states, the state of São Paulo has enacted Decree No. 64123 of 1 March 2019 granting state tax benefits to shipyards engaging in activities related to the construction, repair and renovation of war vessels and other government vessels not destined for commercial operation.
The growth of the natural gas stake in the Brazilian energy matrix, as an alternative for the lower production of electric power due to low rain volume as well as fulfilling the objective of providing a destination for the natural gas produced in the exploration and production segment, has boosted the demand related to liquefied natural gas (LNG) equipment and facilities, such as Floating Storage Regasification Units (FSRUs) and LNG terminals in Brazil. In this context, a recent controversy involving the regulatory authorisation for the operation of stationary FSRUs resulted in several administrative proceedings with the Brazilian Waterways Transportation Agency (ANTAQ) regarding the applicability of maritime rules to such operation. If such rules are to apply, this would ultimately restrict the operation of foreign-registered FSRUs, resulting in additional requirements including the qualification of the charterer being a Brazilian shipping company (Empresa Brasileira de Navegação). There is a general recommendation by ANTAQ to standardise its decision on the matter, as several references have been made to the unification of such administrative proceedings and a precedent for operation of FSRUs in Brazil might be rendered in the coming months.
Legislative reactions are also expected for this matter, and currently a draft Legislative Decree No. 1091/2018 (also known as Projeto de Decreto Legislativo 1091/18), which prohibits the operation of foreign vessels engaged in the transportation of natural gas without complying with charter rules provided under Brazilian maritime legislation, is being handled by the Brazilian House of Representatives. The status of such draft legislation may be consulted at the following link: www.camara.gov.br/proposicoesWeb/fichadetramitacao?idProposicao=2187403. Draft Legislative Decree No. 1091/2018 evidences political concern about local contents and Brazilian market protection specifically related to FSRUs, and this will be an ongoing discussion for this important segment in 2019.
A logistic project in the northern region of Brazil regarding barges fuelled by liquefied natural gas is also expected to increase the demand of Brazilian shipyards, with an estimated production of 20 barges and five or six tugboats.
Another green field segment still awaiting the construction of a legal framework is related to offshore wind and solar farms. There is currently a Bill of Law No. 11247/2018 being handled in the Brazilian House of Representatives that purports to authorise such types of projects. The creation of a legal framework and an environmental rule for licensing such projects are required to foster potential projects that are already being considered by major oil companies in Brazil.
The shipbuilding industry may also benefit from the current stage of Brazilian offshore facilities, which has reached the decommissioning phase for certain assets, and several alternatives are being considered for such purposes. Public authorities are holding several regulatory discussions to review the legal framework for this segment, and a decision is expected in 2019.
After the collapse of the Brumadinho mining dam of Vale in February 2019, environmental concerns involving risky activities in Brazil are expected to raise regulatory standards, as well as closer and stricter inspection routines. The shipping and offshore industries are probably going to be targeted for such revisions, which may enhance certain demands on specific segments but may also increase the burden of current players.
The nationwide trucking strike over fuel prices in Brazil in 2018, with hundreds of trucker roadblocks sealing off highways, has highighted the high dependency on this transportation modality and triggered relevant discussions involving the regulatory policy for cabotage navigation. Further discussions on the matter involving the government are expected in 2019, and the regulatory policies for maritime navigation will also be influenced by the outcome of the administrative reform being carried out by the new government in Brazil. One change that has been considered is the creation of a new super-regulatory agency consolidating several segments of the logistic industry, such as maritime (ANTAQ), road (the Brazilian Road Transportation Agency) and airways (the Brazilian Civil Aviation Agency).
It is also worth mentioning that port terminals are also being considered as a key feature of Brazilian logistics infrastructure, which suffered unexpected setbacks after a regulatory reform intended to boost the sector. Among the reasons for port terminal auctions being withheld are corruption scandals and challenges by the Federal Budget Oversight Board as to the bidding rules at the time. With a government recently elected and waterways transportation being held in high regard, the port terminals auctions are being targeted as a priority and several governmental bodies have been engaged in these discussions. Higher investment in port terminals will also result in a greater demand for waterways infrastructure, particularly vessels, consolidating an important transportation modality for the Brazilian economy.