Commercial/civil law – substantive

Rules and industry standards

Describe any industry-standard form contracts used in the energy sector in your jurisdiction.

Industry-standard form contracts are used in the energy sector in Brazil, more particularly in the case of contracts awarded through public bidding or as part of an auction conducted by regulatory agencies.

The exploration, development and production of oil and gas shall be carried out through concession agreements with the federal government upon bid rounds conducted by the Brazilian Petroleum, Natural Gas and Biofuels Agency (ANP). The terms and conditions of such concession agreements basically follow the same standard, even though certain changes are made from bid round to bid round. 

Similar mechanism is adopted in the electric power sector, where the winning bidder shall be granted with a concession agreement for public services of electric power transmission, distribution or for use of a public asset (hydropower potential), among others. In addition, in case of power generation auctions conducted by the Brazilian Electric Power Agency (ANEEL), when the winning bidder shall sell power in the Regulated Contract Environment – ACR, a standard power purchase agreement shall be entered into with the applicable distribution companies (the ACR PPA). 

What rules govern contractual interpretation in (non-consumer) contracts in general? Do these rules apply to energy contracts?

Contractual interpretation is mainly governed by:

  • the rights and principles under the Brazilian Federal Constitution;
  • the Brazilian Civil Code (Law No. 10,406 of 10 January 2002);
  • Law No. 13,874 of 20 September 2019, which established certain economic freedom rights under Brazilian law;
  • the Brazilian Civil Procedure Code (Law No. 13,105 of 16 March 2015); and
  • the Law of Introduction to Brazilian Norms (Decree-Law No. 4,657 of 4 September 1942).

Besides the legislation mentioned above, energy contracts shall be also subject to applicable regulation.

In summary, the following principles, among others, shall apply to Brazilian contracts, including energy contracts:

  • Brazilian parties shall observe good faith in both the negotiation and in the performance of agreements;
  • the interpretation of contracts shall consider the intention of the parties over the literal meaning of the language;
  • freedom to contract shall be limited by the social purposes of the contract, provided that private transactions shall be subject to minimum intervention and contract revision shall be an exception to the rule; and
  • no party shall be allowed to enrich itself without cause or to abuse its rights.

 

Describe any commonly recognised industry standards for establishing liability.

Liability would be generally subject to concepts of wilful misconduct (voluntary act or omission) negligence and imprudence (lack of the necessary diligence, entailing a disregard or breach of the duty to act in a diligent and careful manner as required by specific circumstances), as well as abuse of rights based on their economic and social purposes, good faith or good morals. In addition, strict liability shall apply when expressly provided by law or when the activities performed by the damaging party imply, by their very nature, risks to the rights of others.

In the oil and gas industry, standard form contracts (eg, concessions contracts) usually contemplate in certain provisions that the concessionaire shall follow best practices of the oil industry in the performance of their obligations. This concept is broadly defined in the contract itself.

Performance mitigation

Are concepts of force majeure, commercial impracticability or frustration, or other concepts that would excuse performance during periods of commodity price or supply volatility, recognised in your jurisdiction?

Brazilian law defines acts of God and force majeure events as ‘the necessary fact, the effects of which could not be avoided or impeded’. As a general rule, the party affected by an event of force majeure or an act of God shall not be liable for losses resulting thereof, unless the party has expressly agreed otherwise.

Brazilian law also establishes in contracts with continuing or deferred performance that, if the obligation of one of the parties becomes extremely burdensome, with excess advantage for the other, by virtue of extraordinary or 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 excess burden.

Although the application of such concepts would always be on a case-by-case analysis, periods of commodity price or supply volatility have been argued as force majeure or events causing extreme burden but could also be classified as ordinary risk of business, depending on the specific transaction and circumstances.

Nuisance

What are the rules on claims of nuisance to obstruct energy development? May operators be subject to nuisance and negligence claims from third parties?

Although Brazilian law does not expressly contemplate the concept of nuisance, the Brazilian Civil Code embraces the principle that the party that, by wilful action, omission, negligence or imprudence, violates any rights and causes damage to a third party is obliged to indemnify, in addition to strict liability being applicable in certain events.

The indemnity will seek to restore the situation of the adversely affected party to that prior to the injuring act, and the damaged party would have the burden to prove in court the losses and damage suffered and the amount thereof.

Brazilian law also establishes certain situations where governmental authorities, such as ANP and ANEEL, are entitled to expropriate and create administrative easements over private property in the public interest, mitigating operators’ risks. As a general rule, the owner of a private property over which a right-of-way is created shall be indemnified for the losses suffered as a result.

Moreover, energy projects are subject to the grant of environmental and other permits, which are dependent on the impact on affected populations.

Liability and limitations

How may parties limit remedies by agreement?

As a general rule under Brazilian law, the indemnity shall be measured by the extension of the damage caused. Therefore, it is not unusual for parties to agree on an express contractual liability limitation, in which case the parties shall 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 that case, the penalty value must stand as a minimum indemnity, and the creditor must prove the excess damage.

It is also customary for Brazilian parties to negotiate no liability for indirect damage or consequential damage, as well as loss of profits.

Is strict liability applicable for damage resulting from any activities in the energy sector?

Yes. In addition, strict liability usually applies in the Brazilian energy sector for environmental damage or injuries caused to third parties affected in any way by the damage, such as employees, service providers, neighbours, fishermen, etc, which may sue the company for recovery of health injuries, actual damage, loss of profits or even for property damage.

Specifically, as regards environmental damage, Brazilian law establishes that all those who benefit economically from a pollutant activity may be held strictly liable for the environmental damage caused by that activity. This position has been consistently adopted by public prosecutors in Brazil.