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21 May 2019
Brazil now has its own Declaration of Economic Freedom, which was instituted by Presidential Provisional Measure 881/2019 of 30 April 2019.
Designed to curtail the state's undue interference in economic activities performed by individuals and companies, the law (which is subject to confirmation by Congress) is also expected to affect new and existing litigation.
The provisional measure modifies certain provisions of the Civil Code – namely, those concerning contract interpretation and the piercing of the corporate veil.
While the eighth (out of 10) right set out in the provisional measure does not specifically modify the Civil Code, it contains an important new (albeit controversial) canon of contract interpretation: party autonomy should prevail over general principles of corporate law, so that a party that freely contracts against a particular rule of mandatory application (public order law) cannot invoke it later.
It is reasonable to expect that this exception to public order may influence how the courts construe certain statutes (of allegedly mandatory application), including:
The declaration also makes clear that the state – whether the executive, legislative or judicial branch – should refrain from interfering with private contractual relationships, so that any contract revision is dealt with on an exceptional basis.
This particular provision is expected to strengthen party autonomy (and, consequently, the business judgement rule), particularly within corporations, thereby preventing court intervention in manners that are sufficiently regulated by bylaws.
The new law also highlights the work of attorneys during contract negotiations, stating that "doubts regarding the meaning of ambiguous clauses should be construed in favor of the non-drafting party". Because of such newly acquired evidentiary relevance, the early drafts of a particular transaction are likely to surface during litigation.
Finally, as regards contract interpretation, the provisional measure adds two articles to the Civil Code that also strengthen party autonomy – namely, in commercial (ie, business-to-business) relationships.
Under Article 480-A, parties are authorised "to set forth objective parameters concerning contract revision or termination". By its turn, Article 480-B requires judges to assume that parties to a commercial agreement enjoy equal bargaining power and that their previously defined allocation of risks should be respected.
Going forward, these two new articles may inform court decisions with respect to, for example, penalty and limitation of liability clauses.
As of 30 April 2019 (the provisional measure is effective immediately), the lifting of the corporate veil of legal entities is subject to certain requisites – namely, the existence of an abuse of legal status characterised by the deviation of corporate purpose or the commingling of assets.
'Deviation of corporate purpose' is defined as the intentional use of a company to defraud creditors and perpetrate any type of criminal activity. 'Commingling of assets' is understood as the absence of separation between an individual's and a company's assets, such as:
These definitions are largely based on the prevailing precedents regarding the piercing of the corporate veil. However, the crystallisation of such concepts into law may make it difficult to attach assets of bad faith debtors, particularly in cases of deviation of corporate purpose, as it is always difficult to prove intention to defraud. As a result, judicial proceedings regarding credit enforcement may favour bad faith debtors.
On its face, the Civil Code modification seems positive. However, it is unclear how the courts will react to these novelties, especially those dealing with the public policy exception and the piercing of the corporate veil.
As regards the latter, while its new parameters have been enacted to protect good faith entrepreneurs against judicial activism and outreach, their rigid form may have the unintended consequence of tipping the scale of judicial proceedings regarding credit enforcement in favour of bad faith debtors.
Likewise, the public policy exception is expected to generate some confusion, at least until Congress finally enacts the provisional measure into law and the courts start deciding unsettled issues regarding the mandatory application of certain laws and regulations.
For further information on this topic please contact Fernando Eduardo Serec or Antonio M Barbuto Neto at TozziniFreire Advogados by telephone (+55 11 50 86 50 00) or email (firstname.lastname@example.org or email@example.com). The TozziniFreire Advogados website can be accessed at www.tozzinifreire.com.br.
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Fernando Eduardo Serec
Antonio M Barbuto Neto