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Breach of contract37

Under Portuguese law, standards of performance require, in general, that a party to a contract performs exactly what he or she undertook to do (point by point of the contract). This standard of performance is called princípio da pontualidade in Portugal. Besides this standard of performance, Portuguese law also requires that the parties to a contract, when fulfilling their contractual obligations, comply with good faith principles.

Commercial contracts are subject to this general standard of performance with some other specific features. One of these specific features is the principle of conformity. In fact, inspired by Article 35 of the United Nations Convention on Contracts for the International Sale of Goods, Portuguese scholars understand that goods delivered pursuant to a commercial contract must meet the quantities, quality and other features established in the contract. Based on this principle of conformity, Portuguese scholars also believe that the classic model of commercial contracts based on caveat emptor (i.e., the buyer alone is responsible for checking the quality and suitability of goods before a purchase is made) has evolved into a caveat venditor model (i.e., the seller is responsible for checking that the quality and suitability of goods meets the standards set out in the agreement). This evolution is especially evident in consumer contracts (Decree-Law 67/2003).

Based on the above-mentioned demanding standard of performance, there are three main forms of breach of commercial contracts:

  1. non-compliance;
  2. delayed performance; and
  3. defective or improper performance.

Any of these breaches may – under certain circumstances – entitle the creditor to terminate the contract or claim compensation for damage.

For the non-breaching party to claim compensation for breach of contract it must prove that the following legal requirements are met:

  1. that the breach of contract was intentional;
  2. that the debtor was at fault;
  3. that there was actual damage or loss; and
  4. that there is a causal link between the (illicit and intentional) act and the loss or damage suffered by the creditor.

In relation to contractual liability, the defaulting party's culpability is presumed. However, the defaulting party may rebut this presumption. The loss suffered by the non-breaching party includes both actual loss and loss of profits.

Although Portuguese law includes a rebuttal presumption in terms of culpability, the party claiming compensation has the burden of proving the existence of a breach of contract, the loss or damages and the causal link between the act and the loss or damage suffered by the creditor. All means of evidence are valid to this end. In practical terms, the most common evidentiary issue is proving the existence of loss or harm.

Under Portuguese law, if the non-defaulting party terminates the commercial contract, how compensation is to be calculated is a contested issue. The traditional view is that compensation should restore the non-breaching party to its position before the commercial contract was executed. However, the current view is that compensation should be calculated in such a way that the non-breaching party is put in the position he or she would have been in had the commercial contract been properly fulfilled. The difference between both approaches is quite substantial. Portuguese courts tend to favour the traditional approach, although relevant contemporary scholars prefer the new approach.

Defences to enforcement

Parties generally present several defences to avoid the enforcement of contractual obligations or challenge claims for breach of contract.

One of the most common defence mechanisms is to argue that, based on the facts, there was no breach of contract. This is a purely factual argument that is common in Portuguese litigation.

Parties to a commercial contract usually also allege liability exemption for breach (Article 428 of the Portuguese Civil Code) as a means of defence. In fact, a party to a contract may, owing to the other party's breach, be entitled to consider himself or herself released from all liability to perform his or her own obligations. For instance, in supply agreements, it is common for parties to raise this defence to claim that they are not obligated to pay for the goods because they are defective.

With regard to debts arising from commercial contracts, it is common for parties to resort to compensation as a means of defence in order to settle – or, at least, reduce – the debt (Article 847 of the Portuguese Civil Code).

In addition, parties to commercial contracts may also claim that the performance of their contractual obligations is impossible in order to be released from having to fulfil them (Article 790 of the Portuguese Civil Code). However, this impossibility should not be mistaken as the debtor's difficulty to comply with its contractual obligation. In this case, the debtor is not released from its obligations.

It is also common for parties to allege a lack of required legal form to claim that the commercial contract is unenforceable. However, upon checking certain requirements, Portuguese courts tend to consider that raising this argument constitutes an abuse of law.

Under certain circumstances, parties may also argue the existence of an unusual change in circumstances to require the court to modify or terminate the commercial contract and, therefore, release them from their contractual obligations (Article 437 of the Portuguese Civil Code).

In Portugal, it is not unusual for parties to include limitations of liability in commercial contracts. If such a clause is included, the liable party will certainly use this clause as a secondary defence mechanism. However, under Portuguese law, limitations of liability (exclusion or reduction) are only valid in cases of minor negligence.

Finally, it is not uncommon for parties to argue that the commercial contract breaches public policy, and thus that it should be declared null (Article 281 of the Portuguese Civil Code). The concept of public policy is obviously wide and, in general, Portuguese courts tend to be strict when applying it.