Commercial/civil law – substantive

Rules and industry standards

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

Generally speaking, except for the model concession contracts and production sharing contracts for oil and gas exploratory areas, there are no industry-standard form contracts in Brazil. In their private dealings local industry players typically use certain model contracts prepared by the Association of International Petroleum Negotiators (AIPN) adjusted to civil law principles. The standard form contracts for concession and production sharing agreements are updated and improved in every new bid round by the regulator (ANP) to adjust the draft to the current policies in place by the Brazilian federal government, for instance to adapt it to local content requirements. The ANP supplies English versions of these contracts online at www.brasil-rounds.gov.br/ingles/contratos_e_editais.asp.

Under the model concession contracts for exploratory oil and gas areas, concessionaires have to pay a signing bonus and submit financial and performance guarantees as per the ANP’s requirements.

The concessionaire undertakes all costs and risks in connection with the operations and its consequences, as well as several obligations to be complied with to keep the concession over the area. The concession is divided into two different phases - the exploration phase and the production phase.

The exploration phase commences on the execution of the concession contract and usually lasts from two to eight years, commonly divided into two different periods, each of them with specific obligations under the concession contract. During the exploration phase, the concessionaire has to, among other obligations:

  • attend the minimum exploration programme (PEM) agreed for both periods, as the case may be;
  • drill the well or wells agreed under the PEM at least to the depth agreed;
  • submit the annual work programme and budget plans;
  • pay the occupation fee; and
  • submit reports quarterly regarding local investments and expenditures.

In case there is a discovery in the area, the concessionaire has to notify ANP about the discovery, submit an evaluation plan for the prospect and if it is commercially feasible and submit a development plan for such prospect to be approved by ANP.

If the prospect is not economically interesting for the concessionaire, it can return the area.

Production phase starts with the declaration of commerciality of the prospect and in general lasts for 27 years. The concessionaire must carry out all operations in accordance with the development plan approved by the ANP for the area, which may be amended from time to time with the ANP’s acknowledgment. The concessionaire is obliged to notify the ANP prior to the beginning of the production of oil and gas as per the annual production plan submitted by the concessionaire to the ANP. During the production phase the concessionaire has to, among other obligations:

  • conduct the operations in accordance with the Development Plan and Annual Production Plan;
  • annually submit the Annual Production Plan for the following year;
  • submit monthly production reports and annual reserve report;
  • submit well status and completion reports; and
  • pay the occupation fee, royalties and special participation (if applicable).

The production sharing contract model provides for two phases: exploration phase, which includes the discovery and evaluation of commercial feasibility; and production phase, which includes the development phase; and will set forth, among other provisions:

  • the financial guarantees required to contractors;
  • limitations, terms, criteria of payment of cost oil and profit oil;
  • accounting rules and procedures for the ANP to follow and control the activities of exploration, evaluation, development and production;
  • minimum exploration programme (PEM);
  • criteria for the preparation of exploration and development plans, as well as work programme;
  • information, reports and data that have to be submitted to the ANP;
  • term of the agreement, which will not be longer than 35 years; and
  • health, safety, security and environment policies and contingency plans.

As in the concession regime, under the production sharing regime the contractor will undertake all costs and risks in connection with the operations and their consequences.

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

Contractual interpretation is not thoroughly ruled under the Brazilian Civil Code, which basically sets forth that:

  • the statements of the contracting parties should be interpreted in accordance with their real intention and not solely based on the literal wording;
  • waiver of rights should be interpreted restrictively;
  • contract provisions should be interpreted in light of the principle of good faith and in accordance with the practice and customs of the place where the contract is entered into; and
  • contradictory or ambiguous provisions should be interpreted in favour of the party who has not participated in the drafting of the contract, but has solely adhered to the conditions put forward by the other party.

As Brazilian legislation is not detailed in what regards contract interpretation, the doctrine has room to contribute on the matter. The majority of scholars in Brazil agree that contract interpretation needs to take into account the intention of the parties, but also understand that this should not be transformed into a way to allow the parties to change the original provisions under the argument that they do not accurately reflect the contracting parties’ intention. In other words, where the provision is clear and there is no room for doubt, the statement should be taken literally, with no innovations whatsoever.

Such rules generally apply to energy contracts.

Describe any commonly recognised industry standards for establishing liability.

Liability towards third parties is subject to the applicable law and therefore the operator shall be strictly liable for any damages to which it gives cause. Under agreements dealing with energy operations, however, the parties should be free to make their own arrangements, provided that they do not violate public order or any statutory legal provisions.

In such context, operations agreements in Brazil usually adopt the same standards as established in the AIPN model contracts and provide for the liability of the operators in case of wilful misconduct or gross negligence. It should be noted that this may change on a case-by-case basis as there are no specific rules preventing the parties from agreeing otherwise.

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 legislation does recognise some concepts that may release the contracting party from the obligation to perform under the contract in certain specific situations, such as in case of force majeure, which is defined under the Brazilian Civil Code as a necessary fact whose effects the party could not avoid nor prevent from taking place. It is worth noting that the party shall in principle not be discharged from its original obligations even in case this becomes an impossible obligation to comply with due to a force majeure event where such event takes place when the party is already in breach under a contract.

Brazilian legislation also provides for the right of the contracting party to the rebalancing of the rights and obligations under the contract in the event it becomes excessively onerous to one of them due to an unpredictable and unavoidable supervening event that triggers demonstrably substantial unbalance to one of the parties. According to the Brazilian Civil Code, this would grant the impacted party with the right to terminate the agreement, which is similar to commercial impracticability as defined under English law, but Brazilian doctrine and jurisprudence has evolved to understand that the contract should ideally be maintained, as an expression of the principle that determines that contracts should ideally be conserved in force.

As for the concept of frustration (as defined under English law), despite some controversy, Brazilian scholars tend to affirm that this is similar to our unpredictability theory, which is treated under the Brazilian Civil Code, as mentioned above. However, the theory should only apply in cases where the party can demonstrate the occurrence of extraordinary and unpredictable facts (albeit it is admitted also that facts with unpredictable consequences trigger the consequences set out in the Brazilian Civil Code).

Finally, it is worth noting that the loss of the contractual object also allows the termination of an agreement under Brazilian legislation and thus releases the parties from complying with the original contractual provisions.

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?

Nuisance is not a concept found under Brazilian law. However, under the Brazilian Civil Code, any party that causes damages to another party shall be liable to indemnify that party for the damages caused. In that sense, operators may be liable for negligence claims as long as the affected parties are capable of proving the existence of damages and negligence by the operator.

Liability and limitations

How may parties limit remedies by agreement?

Although widely adopted in several contracts governed by Brazilian law, contractual provisions that limit the liabilities of the parties are still the object of certain discussions among the Brazilian doctrine. However, the majority of Brazilian scholars understand that our legislation does not prevent parties from agreeing on such limitations provided that they do not offend public order or morals standards.

Brazilian legislation contains several provisions that confirm that limitations on liability are valid and available to the parties when negotiating a contract and this often serves as support to defend the validity and effectiveness of such provisions. It is also crucial to assess the nature of the contract, as such limitations shall probably be disregarded in courts if the parties are not negotiating in equal conditions.

This type of clause is particularly common for energy contracts, and is accepted as valid and enforceable as it deals with disposable interests and has a strong economic nature. Therefore, any provision for the limitation of remedies should always be considered and interpreted in line with the economic rationality of the contract and the rules contained in the Brazilian Civil Code.

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

According to article 927 of the Brazilian Civil Code, one shall be liable for the damages resulting from a risky activity even if there is no fault attributable to such person (ie, strict liability). There is no legal definition of risky activities and therefore this shall ultimately be decided by courts. However, considering its peculiarities, activities in the energy industry should be deemed as risky.

In a scenario where article 927 applies (ie, environmental damages), strict liability would be there in the case of damage caused to third parties but this would not change the liability regime defined in an energy contract. This means that the parties to a contract may agree that the contractual liability shall be fault-based even in the case of risky activities such as the activities inherent to the energy industry. Liability towards third parties shall, however, be strict.