Camillo Giamundo

In contracts with the government, when budgets are based on foreign currencies, exchange rate fluctuations must be borne by the contractor. However, excessive increases in the exchange rate may justify adjustments to restore economic and financial balance.

It is well known that in certain contracts with the government involving infrastructure projects and imported inputs and goods, the budget and the bidders’ commercial proposals are sometimes set in or based on foreign currencies (mainly dollars or euros). In these situations, art. 92, item XV of the procurement law (Law 14,133/21) requires the contract to set out the import conditions and the date and exchange rate for conversion, and the Federal Court of Auditors has held that mere exchange rate fluctuation, within normal volatility limits, must be borne by the private contractor, which bears the business risks and the costs associated with its business activity.

However, in situations of unforeseeability, or of foreseeability whose consequences are difficult to determine, a significant rise in the foreign currency that places an excessive burden on the contractor should allow the economic and financial balance of the contract with the government to be restored.

This is exactly the situation in the current Brazilian economic scenario.

According to data published by the Central Bank on its website, Brazil ended August 2023 with the dollar buying rate at BRL 4.92 and the euro at BRL 5.33 (8/31/23). Since then, over 12 months, both currencies have jumped by more than 14%, with the dollar ending August 2024 at BRL 5.49 and the euro at BRL 6.13 (8/26/24).

The currencies have continued to rise in recent months, affected not only by the international scenario — including the US elections, expected interest rate cuts and diplomatic conflicts, among other factors — but also by the domestic scenario, including meeting the fiscal target and other political issues that affect the exchange rate.

In practical terms, over the last twelve months this exchange rate variation has had a significant impact on international commercial transactions and, for the purposes of this article, may cause economic imbalance in public contracts based on foreign-currency budgets.

Situations like this call for the application of the theory of unforeseeability, which applies to events external to the contract, unforeseeable or foreseeable but with incalculable consequences, that affect the economic and financial balance regardless of the parties’ will.

For example, in Judgment 8,032/23, reported by Justice Benjamin Zymler, the TCU noted that “(…) exchange rate variations with the potential to place an excessive burden on either party may result in the need for an amendment to restore contractual balance“, and that “although there may be some predictability in exchange rate fluctuations, and even though there may be an upward or downward bias in the foreign currency – based on recent observations of the exchange rate – there will always be uncertainty in its rate. This is, in fact, the classic case of a foreseeable event with incalculable consequences“.

Judgment 1,431/17, reported by Justice Vital do Rêgo, had already noted that parameters and definitions must be observed, especially for contracts whose main object is the provision of services in Brazil with the import of goods or services, in order to consider exchange rate variation a factor capable of justifying price restoration in public contracts, namely:

• it must be an event whose consequences are incalculable and unforeseeable by the average manager when the contract is signed;
• it must cause a severe disruption of the economic and financial equation, imposing an excessive burden on one of the parties;
• The increase in costs must delay or prevent the performance of the contract.

In a notable precedent on this matter, the STJ ruled that the contractor should be compensated for the devaluation of the Brazilian currency in 1999. In REsp 1,433,434, Justice Sérgio Kukina stressed that the “abrupt” change in exchange rate policy, in that specific case, was 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 of the agreement’s economic and financial equation stems from the constitutional provisions of art. 37, item XXI of the Federal Constitution, which ensures that a private party contracting with the Public Administration retains “the effective conditions of the proposal“, while art. 124, item II, “d” of Law 14,133/21 (the public procurement and administrative contracts law) provides for the amendment of administrative contracts “to restore the initial economic and financial balance of the contract in the event of force majeure, fortuitous event or act of the sovereign, or as a result of unforeseeable events, or foreseeable events with incalculable consequences, that make it impossible to perform the contract as agreed“.

This stance is consistent with the government’s duty to compensate the contractor for the imbalance of the economic and financial equation, as established by art. 37, item XXI of the Federal Constitution, which guarantees the private party contracted by the Public Administration the maintenance of the effective conditions of the proposal, and by art. 104, §2 of Law 14,133/21, which requires the economic and financial clauses of the contract to be revised to maintain contractual balance.

In addition, the right to rebalancing is also based on the legal principle prohibiting unjust enrichment, set out in article 884 of the Civil Code, since the Administration would benefit from the services provided by the contractor without adequately paying for them.

Thus, given the current national and global economic scenario, it is entirely possible that public contracts with a foreign-currency budget basis need to be assessed in light of the theory of unforeseeability, given the high volatility and rise of the US dollar and the euro against the Brazilian real. Depending on the specific case, restoring the economic and financial balance of the contract is a duty of the government and a right of the contractor, and legal measures must be taken to guarantee this right if a solution cannot be obtained through administrative channels.

Originally published by Migalhas (in Portuguese).