Administrative contracts based on foreign currencies may be revised for economic and financial rebalancing purposes in situations of exceptional exchange rate fluctuation
It is not uncommon, especially in contracts with the Government involving infrastructure projects and imported inputs and goods, for the private contractor’s budget and commercial proposal to be set in dollars or euros.
In most such cases, exchange rate fluctuations within normal volatility levels must be absorbed by the contractor, which must bear the business risks and the costs arising from its business activity.
However, in unforeseeable situations, or foreseeable situations with incalculable consequences, the excessive burden that a rise in the foreign currency exchange rate places on a private contractor allows, according to case law precedents, the economic and financial balance of the contract with the Government to be restored.
This is exactly the situation in Brazil in the current economic scenario resulting from the COVID-19 pandemic.
According to the Central Bank, Brazil ended 2019 with the dollar buying rate at BRL 4.03 and the euro at BRL 4.52 (12/31/2019), at a time when the coronavirus was not even a global concern, being merely a reported local epidemic in China. From December 2019 to the end of January 2020, both currencies jumped by around twenty centavos, with the dollar ending the first month of the year at BRL 4.26 and the euro at BRL 4.72 (01/31/2020).
The currencies continued their strong upward trend in February, rising significantly after the first coronavirus case in the country was confirmed, reported on 02/26[1], with the dollar at BRL 4.47 and the euro at BRL 4.91. Experts were already considering the possibility of the U.S. currency reaching BRL 5.00, which was confirmed on March 17, when it closed at BRL 5.04, by which date the country already had 349 people infected with the new virus and European stock markets were plunging to their lowest level since 2012 as the coronavirus pandemic spread across Europe[2].
April followed the trend of previous months, ending its first week with the dollar at BRL 5.29 and the euro at BRL 5.72.
It can thus be seen that, from the last 2019 quotation of the foreign currencies to the first days of April, the dollar rose by approximately 31% and the euro by just over 26%.
In practical terms, in just three months the currency fluctuation had an undeniable impact on international commercial transactions and, for the purposes of this article, a relative imbalance of around 30% in public contracts entered into on a foreign-currency budget basis.
Situations such as this call for the application of the theory of unforeseeability, which applies when events external to the contract occur — unforeseeable, or foreseeable but with incalculable consequences — affecting the economic and financial balance beyond the will of both contracting parties.
For example, on 07/05/2017, in Judgment 1,431/2017, with Justice Vital do Rêgo as reporting justice, the Federal Court of Accounts ruled on the possibility of economic and financial rebalancing of administrative contracts due to exchange rate fluctuations, establishing new parameters and definitions, specifically for contracts whose main object is the provision of services performed in Brazil involving imported goods or services. In that decision, the TCU recognized that an unexpected and significant exchange rate fluctuation may be sufficient to give rise to economic and financial rebalancing of the contract, with the limitation that such procedure applies exclusively to the human and material inputs acquired where the services are provided.
According to the reporting justice, there are three criteria for considering exchange rate fluctuations a factor capable of giving rise to price adjustments in public contracts: (1) it must be an event with incalculable consequences, that is, whose consequences could not be foreseen by the average manager when the contract was entered into; (2) it must cause a severe disruption of the economic and financial equation, imposing an excessive burden on one of the parties. To this end, the exchange rate fluctuation must go beyond the typical fluctuation of a floating exchange rate regime; and (3) it is not enough for the contract to become burdensome; the increase in costs must delay or prevent performance of the agreement, as provided for in art. 65, item II, subparagraph “d”, of Law 8,666/1993.
The Superior Court of Justice, in a similar case, also ruled in favor of compensating the private contractor due to the devaluation of the Brazilian currency in 1999. In Special Appeal No. 1,433,434, Justice Sérgio Kukina stressed that the “abrupt” change in exchange rate policy, in that specific case, constituted an extraordinary situation, making it fair to renegotiate the terms or, since the contract had already been performed, to compensate for the losses suffered.
Nor could it be otherwise. The Government’s duty to compensate the contractor for the imbalance in the agreement’s economic and financial equation stems from constitutional precepts set out in article 37, item XXI of the Federal Constitution, which guarantees private parties contracting with the Public Administration the maintenance of “the effective conditions of the proposal”, while article 65 of Law 8,666/1993 (Public Procurement and Administrative Contracts Law) provides for the possibility of amending administrative contracts “to restore the relationship originally agreed by the parties between the contract’s burdens and the administration’s consideration for fair remuneration (…) with a view to maintaining the contract’s initial economic and financial balance”.
Moreover, the right to rebalancing also stems from another legal principle: the prohibition of unjust enrichment, expressly set out in article 884 of the Civil Code, since the Contracting Administration would benefit from the services provided by the private party without, however, remunerating it adequately.
There is no doubt that the current scenario facing the country may mean, in many public contracts, the application of the theory of unforeseeability, given the high volatility and rise of the U.S. dollar and the euro against the real, so that, depending on the specific case, restoring the contract’s economic and financial balance is a genuine duty of the Government and a right of the private contractor, and the necessary legal measures may be taken to have this guarantee recognized if it is blocked through administrative and voluntary channels.
[1] https://saude.estadao.com.br/noticias/geral,ministerio-da-saude-confirma-1-caso-de-coronavirus-medidas-de-cuidado-continuam-as-mesmas,70003210635
[2] https://economia.uol.com.br/cotacoes/noticias/redacao/2020/03/17/bolsas-europeias-abrem-em-alta.htm
Article originally published on Portal Fator Brasil (in Portuguese), on 04.28.2020.
