Pricing, payment and financingFixed-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.Price increases
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.Refund guarantees
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.