International - Construction - Law - Review - January 2018 MANAGING - LEGAL - RISK - TO - MINIMISE - DISPUTES - DESIGN - RISK - UNFORE

MANAGING LEGAL RISK TO MINIMISE DISPUTES:
DESIGN RISK, UNFORESEEABLE GROUND

CONDITIONS AND TIME FOR COMPLETION –
THE BRAZILIAN LAW OVERVIEW 1
ALEXANDRE AROEIRA SALLES

AND
MARIANA BARBOSA MIRAGLIA
Founding Partner and Partner, Aroeira Salles Advogados2
I. INTRODUCTION
This article provides an overview of the legal background and key principles
for risk management involved in construction law under the perspective
of Civil Law, and, more specifically, Brazilian law.
Before the main topics are considered it is important to first make a
very important distinction. Brazilian construction law is essentially divided
into two different systems – public and private. In Brazil, the public system
is generally more relevant due to the strong participation of the State in
the national development. In fact, there are several examples of public
construction contracts among the major projects developed in Brazil during
the last 40 years.
The key principle that should be understood in relation to public
contracts in Brazil is that the regime grants the Public Administration the
power to modify several aspects of the contract in benefit of the public
interest, for example, to terminate the contract or to modify its scope.3
The Federal Constitution does, however, protect the original economic-
financial balance of the contract, which must be maintained, even if the
Public Administration exercises one of its prerogatives of modification.4
This regime, therefore, establishes the need for an equivalence of
1
Presentation given at the International Construction Law Association – ICLA Bi-annual Conference
2017, held on 26 January 2017 at the British University in Dubai, Dubai (UAE).
2
The views expressed herein are those of the authors and not necessarily those of the law firm
or organisation with which they are affiliated. The authors are grateful to Francisco Freitas de Melo
Franco Ferreira, John Oyama and Rodrigo Domingues Almeida Reis, their colleagues at Aroeira Salles
Advogados, for their comments on this paper in draft. However, only the authors are responsible for its
contents.
3
Federative Republic of Brazil. Law no 8.666. Regulates article 37, XXI, of the Federal Constitution,
©Informa null - 28/11/2018 17:17
establish rules for bids and contracts with the Public Administration. (1993) Brasília: The Presidency of
the Republic of Brazil. Available from http://www.planalto.gov.br/ccivil_03/leis/L8666cons.htm. (Last
accessed: 15 November 2017). Article 58, I.
4
Federative Republic of Brazil. Constitution of the Federative Republic of Brazil. (1988) Brasília:
The Presidency of the Republic of Brazil. Available from http://www.planalto.gov.br/ccivil_03/
Constituicao/Constituicao.htm. (Last accessed: 15 November 2017). Article 37, XXI.
© Informa UK plc. No unauthorised copying or sharing of this document is permitted

Pt 1] Managing Legal Risk to Minimise Disputes 5
the mutual consideration provided by the parties at the outset of the

agreement and throughout contract performance. In practice, in
construction contracts, this means that the parties are under the constant
obligation to maintain this equilibrium, affecting the whole scenario of
risk management, as will be demonstrated further on.
Regarding private contracts, under Brazilian private law (especially civil),
the provisions relating to contracts are generally suppletive meaning that
the parties have the right to derogate from such provisions and determine
their own rules for their particular relationship. However, there are certain
provisions (called “public order provisions”) that cannot be derogated
from by the parties as they reflect precepts relating to collective interests
that transcend those of the parties directly involved.
This means that, although the parties are free to choose contractual forms
and their contents, there are universal contractual rules set out by statutory
law that must be followed. Moreover, the parties must act in good faith5 and
the contract must fulfill its social purpose.6
In addition to these general rules, the Brazilian Civil Code also lays out a
series of contract types, in a non-exhaustive manner, meaning that the parties
are free to select a contract type as provided by the Code or create their own
type of contract. These limits and the way they affect risk management,
including the possibility for opting-out of some of these requirements, will
be considered later on in this article.
Among the contract types provided for in the Civil Code, the one
applicable to construction projects is the “Empreitada”, which can be
loosely translated as a contract of works. It should be noted, however, that
the rules defining the contract of works do not encompass the complexity
of large construction projects. One of the implications of this lack of
legislation is that there are no specific legal provisions for prevailing
international contract models, for example, EPC and standard contracts
such as FIDIC.
While there are differing and conflicting views on how construction
contracts are dealt with in the Civil Code, as typical or atypical contracts,
this distinction should be given a great deal of attention when negotiating
private construction contracts in Brazil as it has a significant impact on risk
management, as will be further described.
It is generally possible, under Brazilian Law, for private parties to have a
pragmatic risk allocation when entering into construction contracts with
the allocation of risks to the party best suited to manage them tending to
reduce costs and also risks. Environmental licenses, liberating areas for the
©Informa null - 28/11/2018 17:17
5
Federative Republic of Brazil. Brazilian Civil Code. Law no 10.406. Chapter VIII. (2002) Brasília:
leis/2002/L10406.htm. (Last accessed: 15 November 2017). Article 422.
6

6 The International Construction Law Review [2018
project, interface management and soil conditions are a few examples of

risks that should be allocated to the party with more power to administer
them. This is highly recommended and may bring several advantages to the
project and more legal security to the parties, as will be addressed in further
detail in the main topics of discussion.
II. DESIGN PROCESS AND INTERFACE MANAGEMENT
In analysing construction risk management under Brazilian law, the first

element to be considered will be the design process. Here, it is important to
emphasize that the law imputes joint liability to the professionals (engineers
and architects) responsible for the execution of a design and this will be
applicable whether the contract is public or private.
Regarding private contracts, based on the principle of party autonomy,
Brazilian legislation offers no restriction on whether the contractor may or
may not also be in charge of the engineering and design process. However,
the civil code has important rules that apply to construction contracts:
1. In the contract of works the contractor providing materials is liable
for the soundness and safety of the works for five years due to
materials and soil.7
2. Also, if the constructor is not the author of the design, the latter is
only liable for damages resulting from flaws in the design, meaning
that there is no joint liability between the designer and the contractor
for the execution of the works.8
3. If the parties are silent regarding the allocation of risks in case
of force majeure, the general rule is that each party will bear
their own damages. The exception is where the event of force
majeure requires the design to be modified to a point where the
contractor’s obligations become excessively onerous, in which case
the party affected will have the option to renegotiate the contractual
conditions or terminate the contract.9
Parties to private contracts also have the freedom to choose from
any model of interface management such as having the constructor
responsible for all the activities from design, procurement and construction
7
©Informa null - 28/11/2018 17:17
8
9
leis/2002/L10406.htm. (Last accessed: 15 November 2017). Article 625, II.

to commissioning and handover of the project or having a third party

responsible for all or some of these activities, accepting any kind of
variations the parties agree to.
On the scope of interface risk management, it should be noted that the
contractor in a private contract, as a general rule, assumes the risks of the
entire operation and is liable for damages incurred by the Owner and third
parties, even if some parts of the works are sub-contracted. Moreover, the
sub-contractor will be jointly liable for the works performed.
In relation to public contracts, there are two main topics that must be
considered: first, the state’s liability with regard to the design; and second,
the issue of risk allocation in the bidding documents.
The general rule is that the bidders in a public bid in Brazil must
compete under equal conditions.10 In order to create such conditions the
State is obliged to provide the bidders with a project design.11 Therefore,
public construction contracts are generally restricted to procurement and
construction, and do not feature the engineering activities, as in a typical
EPC Contract. This creates significant implications to risk management in
the design process that we must address:
(a) Separate parties must carry out the design and the construction.12
(b) The Law imputes general liability to the State with regard to the
basic design. As a general rule, flaws and miscalculations in the
design are fully attributed to the State, with joint liability with
the author.
(c) The executive project is, in general, also under the responsibility
of the State. This means that problems that may eventually
arise at the stage of construction because of flaws in the design
fall under the State’s liability. In other words, the contractor
in these cases is a mere executor of the project, meaning that
their liability is limited to the solidity and security of the works.
The risks derived from the design are completely imputed to the
State.
(d) The general rule for public contracts also imputes to the State the
liability for unpredictable or predictable events with incalculable
consequences that delay or impede the execution of the contract,
10
Constituicao/Constituicao.htm. (Last accessed: 15 November 2017). Article 37, XXI.
11
©Informa null - 28/11/2018 17:17

accessed: 15 November 2017). Article 7.
12
accessed: 15 November 2017). Article 9, I.

events of force majeure, and extraordinary facts that fall out of the
economic and contractual risk allocation.13
Despite the general rule, a new model for public EPC or turn key contracts
is being introduced recently in Brazil in specific cases, usually for major
and priority Government Projects, but still subjected to the constitutional
protection of the original economic-financial balance of the Contract. The
new model, however, restricts the possibility of amendment to these public
contracts only to cases of force majeure and technical adaptation of the
project requested by the government.
It is important to consider a more general aspect of public construction
contracts: the bidding documents. As has been demonstrated, many of the
factors that directly affect risk management on the scope of the design
process are specified in the bidding documents, such as the possibility
of integrated contracting and the allocation of risks. It should be noted,
therefore, the binding nature of these documents, meaning that what is
provisioned at the time of bidding has to be necessarily complied with by
the contractor. There is not much room for manoeuvre in the contract
if the aspects are established by the bidding documents. It is vital to have
in mind, therefore, the importance of making enquiries and requesting
clarifications concerning the provisions of the bidding documents.
Regarding the interface management in public contracts, any
arrangement must have the Public Administration as responsible for the
general management, even in the case of the new Public EPC Contracts.
It is allowed and fairly common to have third parties contracted to
manage the main or specific activities, but they will still be joint liability
with the State. Furthermore, under the regime of public contracts, the
Contractor is entitled to subcontract parts of the construction. However,
the law establishes that this possibility must be provided for in the bidding
documents, and that every request for sub-contracting must be submitted
for approval by the respective public body.14 This provides a significant
restriction for sub-contracting in the case of public construction contracts,
which may become a burden for large ventures. It should also be noted
that sub-contracting does not exempt the Contractor from legal liability
of the sub-contracted parts. As a result, the Contractor shall be held
accountable for any damages resulting from parts of the operation that have
been sub-contracted.
13
©Informa null - 28/11/2018 17:17

14

III. UNFORESEEABLE GROUND CONDITIONS
Unforeseeable ground conditions and how to manage the risks involved

in these circumstances will now be considered. This is an aspect that is
encompassed by every relevant piece of legislation, concerning both the
public and private sector.
Regarding private contracts, as has been mentioned, the parties will be
generally free to allocate risks relating to ground conditions and modify the
non-binding applicable rules. If the parties do not specifically allocate any
of the risks the general rules from the civil code and other applicable laws
will regulate the agreement.
One important rule is the five-year liability of the Constructor for
soundness and safety of the works due to materials and soil, which tends
to be applicable to all construction contracts due to its nature of a public
order rule.15
Because these provisions may vary from standard international contracts
it is always important to ensure that standard contracts are being adapted
to the Brazilian applicable law and according to a pragmatic risk allocation
approach.
Another general but suppletive rule relates to the possibility of suspension
of the works. If the parties are silent in the Contract regarding the
possibility of suspension of the works, where the Contractor, who is not also
the designer, identifies difficulties resulting from geological, hydrological
or other similar causes that render the Contract excessively onerous and
the owner opposes to the price adjustment, the Contractor is entitled to
suspend the works and eventually terminate the Contract without liability
for damages.16
When considering the subject of unforeseeable conditions in public
construction contracts, it is important to bear in mind, again, that the
regime implies the possibility of contractual amendment in cases where
the economic financial balance of the contract has been shifted generally
due to “unpredictable events” such as unforeseeable ground conditions.
Therefore, it is important to note that, in order for this situation to occur,
the conditions must be unforeseeable and not attributable to any of the
Contractor.17
15
16
©Informa null - 28/11/2018 17:17

leis/2002/L10406.htm. (Last accessed: 15 November 2017). Article 625, II.
17
accessed: 15 November 2017). Article 65, II, d.

IV. TIME FOR COMPLETION
Regarding the last topic of this article, time for completion, it is important
to have in mind that, under Brazilian law, the construction contract is
considered an “obligation of result”, meaning that the contract is deemed
to have been fulfilled only when the works are finished and the final
object is delivered. This general rule applies to both public and private
contracts.
In the private sector, a contractor delayed in completing a construction
contract due to its own actions or omission, will be liable for the
corresponding and effective damages18 and also lost profits. The Contractor
is also subject to a general duty to mitigate losses, deriving from the principle
of good faith.19
The private parties are free, however, to stipulate otherwise, excluding a
party’s responsibility, liquidating damages or determining a cap on liability.
Moreover, the parties may agree on a penalty clause, limited to the main
obligation amount20 and observing that the penalty may be reduced by
the judge if the main obligation is fulfilled or if the penalty is considered
excessive in view of the nature and purpose of the agreement.21
Apart from these legal aspects, it is important to consider the possibility
that the parties stipulate in the contract that damages may be claimed in
a court of law. In this case, the amount of liquidated damages provided
for in the Contract will have to be regarded by the judge as the minimum
compensation.22
In the scope of public contracts, it is important to note that the duration of
public construction contracts must be compliant with so-called budgetary
credits.23 This provision means that the public entity is restricted to
establishing contractual deadlines in accordance with the public funding
it receives. In addition, the law covers the possibility of contractual time
18
leis/2002/L10406.htm. (Last accessed: 15 November 2017). Articles 394 to 401.
19
leis/2002/L10406.htm. (Accessed: 15 November 2017). Article 187.
20
21
22
©Informa null - 28/11/2018 17:17

leis/2002/L10406.htm. (Last accessed: 15 November 2017). Article 416, sole paragraph.
23

extension. The law very clearly establishes that the deadline may be
extended without prejudice to other aspects of the contract in situations
of force majeure or when the public entity alters the project. In these
cases, the economical financial balance of the contract will have to be
maintained.24
The law establishes the penalties the Contractor will be subjected to
where it fails to conclude the works on time for reasons not attributable
to the Administration. This may range from a warning or monetary fine
to the suspension of the rights to contract with the public administration
and will be regulated in the bidding process documents.25 This aspect once
more emphasises the importance of thoroughly analysing the bidding
documents so as to better determine the risk implications of entering into
public construction contracts in Brazil.
24
©Informa null - 28/11/2018 17:17

accessed: 15 November 2017). Article 57, §1.
25
accessed: 15 November 2017). Articles 86 and 87.

International - Construction - Law - Review - January 2018 MANAGING - LEGAL - RISK - TO - MINIMISE - DISPUTES - DESIGN - RISK - UNFORE

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

International - Construction - Law - Review - January 2018 MANAGING - LEGAL - RISK - TO - MINIMISE - DISPUTES - DESIGN - RISK - UNFORE

Uploaded by

Copyright:

Available Formats

MANAGING LEGAL RISK TO MINIMISE DISPUTES:

DESIGN RISK, UNFORESEEABLE GROUND

ALEXANDRE AROEIRA SALLES

Founding Partner and Partner, Aroeira Salles Advogados2

© Informa UK plc. No unauthorised copying or sharing of this document is permitted

the mutual consideration provided by the parties at the outset of the

© Informa UK plc. No unauthorised copying or sharing of this document is permitted

project, interface management and soil conditions are a few examples of

II. DESIGN PROCESS AND INTERFACE MANAGEMENT

In analysing construction risk management under Brazilian law, the first

© Informa UK plc. No unauthorised copying or sharing of this document is permitted

to commissioning and handover of the project or having a third party

the Republic of Brazil. Available from http://www.planalto.gov.br/ccivil_03/leis/L8666cons.htm. (Last

© Informa UK plc. No unauthorised copying or sharing of this document is permitted

the Republic of Brazil. Available from http://www.planalto.gov.br/ccivil_03/leis/L8666cons.htm. (Last

© Informa UK plc. No unauthorised copying or sharing of this document is permitted

III. UNFORESEEABLE GROUND CONDITIONS

Unforeseeable ground conditions and how to manage the risks involved

The Presidency of the Republic of Brazil. Available from http://www.planalto.gov.br/ccivil_03/

© Informa UK plc. No unauthorised copying or sharing of this document is permitted

IV. TIME FOR COMPLETION

The Presidency of the Republic of Brazil. Available from http://www.planalto.gov.br/ccivil_03/

© Informa UK plc. No unauthorised copying or sharing of this document is permitted

the Republic of Brazil. Available from http://www.planalto.gov.br/ccivil_03/leis/L8666cons.htm. (Last

© Informa UK plc. No unauthorised copying or sharing of this document is permitted

You might also like