Even though the legislation applicable to each project may vary depending on the industry sector, as well as per the state and municipal regulations applicable to the project’s location, the main laws governing project development and construction at a federal level in Brazil include the following.

• Federal Law No 10,406/2002 (Brazilian Civil Code), which establishes the general rules regarding private, commercial and business relationships, and the key provisions governing the execution and performance of contracts in Brazil.
• Federal Law No 14,133/2021 (Brazilian New Public Procurement Law), which establishes the general rules on tenders and procurement regarding works, services, purchases, divestiture and leases by the public administration in Brazil.
• Consolidation of Labour Laws (Decree-Law No 5,452/1943), which establishes the general rules regarding labour relations in Brazil.
• Complementary Law No 140/2011, which establishes general rules regarding environmental licensing proceedings.
• Federal Decree No 8,437/2015, which further details Complementary Law No 140/2011 with regards to federal environmental licensing proceedings.
• Brazilian National Tax Code (Federal Law No 5,172/1966), which establishes general rules regarding taxation in Brazil.

Most of the construction contracts entered into in Brazil are tailor-made contracts, not prepared around standard forms (eg, FIDIC, NEC, JCT). In recent years, however, due to the increased influx of international players in the Brazilian project development and construction markets, the use of standard forms has gained some popularity.

In this sense, when parties opt to use standard forms to enter their contracts, there is a noticeable preference for FIDIC contracts in comparison to other standard forms, with the FIDIC Rainbow Suite standard forms being the most used, especially the Silver Book, considering the overall preference of the sponsors and lenders offering project financing for procurement through engineering, procurement and construction (EPC) in a full-turnkey arrangement.

Employers in construction projects in Brazil include public entities and private companies, such as national and foreign project development companies and investment funds.

Employers’ rights under construction contracts entered into in Brazil usually include provisions related to:

• having the works performed by the contractor in accordance with the performance requirements and deadlines provided in the contract;
• monitoring and inspecting the works performed by the contractor or its subcontractors;
• approving key subcontractors (eg, above a certain threshold or for a list of critical activities);
• requiring the contractor to remedy any defects identified in the works during construction or under the contractor’s defect liability period; and
• remedies for breach by the contractor of its obligations under the contract, such as delay liquidated damages, performance liquidated damages and, in case of a material default, the employer’s right to terminate the contract due to the contractor’s default.

Construction contracts usually define as obligations to be carried out by the employer:

• providing the contractor with continuous access to the site, as necessary for performance of the works in accordance with the deadlines defined in the contract;
• obtaining and maintaining the licences under the employer’s responsibility as per the contract;
• co-operating with the contractor for obtainment and maintenance of the licences under contractor’s responsibility;
• paying the contract price in accordance with the payment schedule and invoicing provisions of the contract; and
• bearing eventual increase in the contract price and/or the extension of the completion date upon the occurrence of certain events defined in the contract (eg, scope variations, force majeure, change in law).

Generally, considering the overall preference of the Brazilian construction market for EPC arrangements, contractors are usually private companies with sufficient expertise and resources to carry out complex construction projects.

Contractors’ rights under construction contracts generally include:

• the right to receive the contract price in accordance with the payment and invoicing provisions of the contract;
• remedies for breach by the employer of its obligations under the contract, such as late payment penalties, suspension of the performance of the works such as in the case of the employer’s failure to pay for undisputed amounts for a prolonged period, and the right to terminate the contract due to the employer’s material default; and
• the right to request the increase of the contract price and/or the extension of the completion deadlines upon the occurrence of certain events defined in the contract (eg, scope variations, force majeure, change in law).

Construction contracts entered into in Brazil usually provide as the contractor’s obligations:

• performance of the works in accordance with the requirements and deadlines provided in the contract;
• correction of defects identified in the works during construction or the contractor’s defect liability period;
• obtainment and maintenance of the licences under the contractor’s responsibility as per the contract; and
• co-operation with the contractor for obtainment and maintenance of licences under the contractor’s responsibility.

Furthermore, in most construction contracts entered into in Brazil, the contractor is entirely liable to the employer for any work performed by its subcontractors since there is no direct/implied contractual relationship between the employer and subcontractors. Most contracts contain provisions expressly reinforcing the exclusive liability of the contractor in this sense, regardless of the relevant subcontracting being carried on with the prior and written consent of the employer or in accordance with a list of pre-approved subcontractors established in the contract.

Subcontractors in construction projects in Brazil include a large array of private companies from different industry sectors, ranging from suppliers of materials (eg, cement, steel, asphalt) to suppliers of main equipment (eg, trackers, inverters, photovoltaic modules, cables) and providers of specialised services (eg, technical advisory, environmental management, vegetation removal, design of special works).

The relationship between the contractor and its subcontractors is governed through contracts entered into directly by such parties, which usually assign to the contractor the rights and obligations similar to those that would be assigned to the employer in respect of the relevant contractor under a regular construction contract. Furthermore, construction contracts may require the contractor to include certain provisions in the contracts entered into between the contractor and its subcontractors, including the employer’s right to step-in such subcontracts in case of termination of the construction contract.

In certain cases, to reduce the project’s cost burden (especially regarding the payment of taxes) it is usual to provide for the direct invoicing by subcontractors supplying goods and materials (and not services) to the employer. In such cases, except for the employer’s obligation to make payments to the relevant subcontractors (which shall be discounted from the contract price to be paid to the contractor under the construction contract), the contractor shall remain fully and exclusively liable for any works performed by the relevant subcontractors.

Third-party financiers in Brazil include private banks, both national and foreign, export credit agencies and, especially, local public banks, such as BNB (Bank of the Northeast of Brazil) and, mainly, BNDES (Brazilian National Economic and Social Development Bank).

Even though the relationship between financiers and the employer is usually governed by a specific loan agreement, construction contracts may include some provisions to improve the overall financiability of the project, such as:

• the right of the financing parties to step-in the contract, in substitution for the termination of the contract, in case a material event of default by the employer arises;
• the right of the employer to transfer, assign, encumber and/or pledge its rights and obligations under the contract in favour of the financing parties; and
• the obligation of the contractor to observe requirements and guidelines of the financing parties to enable the financing of the project.

Furthermore, considering that construction contracts are typically material contracts from a financial perspective, it is usual for the loan agreements entered into by the employer and financing parties to provide that any amendments or waivers under the relevant construction contracts shall be previously approved by the financing parties.

Designers are companies engaged to provide specialised engineering and architectural services for a range of projects. It is important to highlight that, considering the overall preference of the Brazilian construction market for EPC arrangements, designers are generally subcontracted by contractors under the EPC contracts and thus do not have any direct or indirect relationship with the employer.

The basic design, which is typically provided by the owner to the contractor, is closer to a conceptual design, with very little detailing, and most commonly prepared in-house (please refer to 3.3 Design).

A designer’s rights under its specific contracts generally include:

• the right to receive the contract price in accordance with the payment and invoicing provisions of the contract; and
• the right to request the increase of the contract price for scope variations requested by the employer and/or the contractor, under a subcontract.

A designer’s obligations under its specific contracts usually include:

• performance of the works in accordance with the requirements and deadlines provided in the contract and the scope requested by the employer and/or the contractor, under a subcontract; and
• the obligation to take full technical responsibility for the design and structural implications of such design.

In most construction contracts, the employer is the party responsible for determining the scope of the works. Such scope is usually defined by means of technical specifications and other requirements attached to the contract and, in some cases, also by means of the basic design of the works, in case it is provided by the employer. Depending on the technical expertise of the employer and the complexity of the project, such definition of scope may be carried on by the employer in-house or may require the engagement of third-party design professionals and technical advisers.

Furthermore, it is common for construction contracts, especially EPC agreements, to provide for fit-for-purpose obligations, in a manner that the contractor is responsible for performing all the supply, activities and services – even if not directly mentioned in the agreement, in technical specifications and requirements attached thereto – that are necessary for completion of the works in a manner that allows the full, safe and reliable operation by the employer. The compliance with such provisions and the contractor’s duty to abide by implied (not written) undertakings typically result in a scope of works larger than that expressly provided in the contract.

Finally, although more unusual in Brazil, in cases when there is the early engagement of the contractor, the determination of the scope of the works may be carried on jointly by the employer and contractor.

In case a contract does not contain specific procedures regarding variations, the provisions of the Brazilian Civil Code shall apply. In this sense, the employer may request variations provided that: (i) it reimburses the contractor for any additional costs arising from such variations; and (ii) the contractor may refuse to implement variations which are considered disproportional to the design of the works previously approved by the parties. Furthermore, it is worth noting that, as per the Brazilian Civil Code, if the contract does not provide otherwise, the employer shall be obliged to remunerate the contractor for any additional scope performed by the contractor, if the employer, constantly supervising the works, could not have been unaware of the performance of such scope and never expressed to the contractor its objection in this regard.

However, in most construction contracts for complex projects, the parties do detail how variations should be dealt with, so as to minimise – or even preclude in its entirety – the application of the Brazilian Civil Code. Among other provisions, construction contracts often set forth the employer’s right to require a variation, without the contractor’s prior consent regarding price and impacts to the project schedule, provided that such variation is technically feasible and accounts up to a certain percentage of the contract price. In this regard, construction contracts may provide mechanisms for preliminary definition of the variation’s impact in the contract price and/or the project schedule until the dispute is finally settled.

Most construction contracts in Brazil allocate the responsibility for the works’ design in accordance with the following methods:

• the contractor shall be exclusively responsible for the design of the works, with due observance of the technical specifications and requirements provided in the contract. In this case, the contractor shall be the single point of liability before the employer for any flaw or defect in the design of the works; or
• the employer shall be responsible for the basic design of the works, as prepared in-house by the contractor and/or with the engagement of third-party specialised professionals. The contractor shall then be responsible for detailing the basic design provided by employer. In this case, contracts usually provide one of the following two different scenarios, the first being more common than the latter:
1. the contractor must review the employer’s basic design of the works prior to the preparation of the detailed design, being, therefore, fully responsible for any flaw or defect in the design of the works, regardless if it arose from a flaw or defect in the basic design prepared by the employer; or
2. the employer shall be responsible for the correctness of the basic design it provided to contractor, and, therefore, the contractor shall not be responsible for a flaw or defect in the detailed design of the works if it resulted directly from a flaw or defect in the basic design prepared by the employer.

Usually, the employer is not responsible for performing any construction services necessary for completion of the works.

In most cases, the employer is also not responsible for supplying any goods necessary for performance of the works, but there are specific cases in which it makes sense for the employer, due to commercial reasons, to provide the main equipment, or part of it, that shall be installed and incorporated into the works by the contractor. In case of the latter, although is not common for the contractor to be liable for delays in the delivery of such goods, the contractor is responsible for duly inspecting them upon receipt, subject to assuming liability for the defects (except for defects not identifiable by means of the inspection procedures agreed by the parties) that are not notified to the employer under a timeframe defined in the contract, counted from the delivery of the respective goods.

With exception to the above, generally, the contractor is entirely responsible for the performance of all obligations, supplies and services necessary for completion of the works, being fully liable to the employer in this regard, regardless of part of them being performed by subcontractors, since there is no direct contractual relationship between the employer and subcontractors and most contracts contain provisions expressly reinforcing the exclusive liability of the contractor in this regard (please refer to 2.3 The Subcontractors).

Responsibility and risk for pre-existing site conditions (eg, archaeological finds, underground obstacles, geotechnical conditions) is usually agreed in contract by the parties and, therefore, the risks assumed by each party may vary depending on the risk profile of the parties to a specific contract.

Nonetheless, in general, risks related to real estate, archaeological findings and pre-existing hazardous material are assumed by the employer.

With regards to other risks, usually the employer provides the contractor with a limited set of information regarding the site and its conditions; such information being merely informative (ie, not implying any liability of the employer before the contractor with regards to its correctness and accuracy), the contractor being responsible to confirm and complement such information by means of its own data, research, testing and analysis. Other information provided is definitive and the employer is liable to the contractor for its correctness and accuracy, being obliged to compensate the contractor for any additional costs and/or extension of time resulting from the assessment and the extent to which the real site conditions differ from those informed by the employer.

The specific licences and permits to be obtained with regards to construction and operation may vary depending on the industry sector and specific conditions of each project.

Nonetheless, the construction of a project would generally require, at a minimum:

• preliminary and installation environmental licences;
• reports of technical responsibility for engineering and architecture services;
• permits related to specific activities to be carried on by the contractor (eg, permits regarding the use of explosives or hazardous materials; temporary or definitive disposal of waste; importation, transportation, handling and storage of certain goods);
• registry of the completion of the works in the certificate of title of the project’s site;
• inspection certificate and other permits issued by the local fire department; and
• occupancy permit and business licence (alvará de funcionamento).

Although Brazilian law usually defines the party on behalf of which certain permits shall be issued, the responsibility for obtainment and maintenance of permits may be agreed in contract by the parties, provided that each party shall co-operate for the obtainment and maintenance of the permits which are the other party’s responsibility, especially in case a permit shall be issued on behalf of the party which is not contractually responsible for its obtainment.

In this sense, contracts tend to provide that: (i) the employer shall be responsible for the obtainment of real estate easements, as well as the environmental and regulatory permits related to the permanent settlement of the project; and (ii) the contractor shall be responsible for the obtainment of all other permits necessary for performance of the works which are not the employer’s responsibility, as per the aforementioned criteria.

During the construction process, the contractor shall be responsible for preserving and maintaining the works, and bearing the risk of loss regarding the works. Upon completion/taking-over, however, the risk of loss regarding the works is generally transferred to the employer.

Maintenance of the works is usually addressed in specific contracts to be entered into either by the employer and contractor or by the employer and third parties, once the construction is completed and the project enters into commercial operation. In some industries, however, such as energy generation, it is usual for construction contracts to be negotiated jointly with long-term maintenance contracts for highly technological components, such as service and availability agreements (SAAs) for wind turbine generators; and long-term service agreements (LTSAs) for steam turbines, in either case due to the fact that no third party retains proprietary information nor the design and manufacturing capability of the related parts and spares.

It is not common for the performance of other functions related to the construction process (eg, operation, finance, transfer) to be provided under the construction contract entered into by the employer and contractor. Such functions are usually either performed by the employer itself or have their performance governed by means of specific contracts entered into between the employer and third parties.

The specific tests for completion of the works may vary depending on the scope and specific conditions of the works. Nonetheless, such tests usually include the inspection, cold commissioning and hot commissioning of the works.

Generally, the contractor is responsible for performing the tests for completion of the works, which may be inspected by the employer, third parties nominated by the employer and/or financing parties. With regards to some specific tests, such as the hot commissioning of the works, it could also be arranged that the employer shall provide the manpower necessary for execution of such tests, provided that the contractor shall provide such manpower with the relevant training and shall supervise and remain responsible for the outcome of those tests.

Finally, in case interfaces with third parties are required for performance of the completion tests, the parties may agree in contract which party shall be responsible for co-ordinating such interface and shall bear the related risks, as well as the consequences in case the performance of such tests for completion is impaired or delayed as a result of the lack of a satisfactory interface.

The processes of completion, takeover and delivery of the works are usually agreed in contract. In this sense, most construction contracts clearly define the conditions that shall be fulfilled and the procedures that shall be observed for the substantial and final completion of the works to be considered achieved.

Generally, the conditions for substantial completion of the works include completion of the entirety of the works, except for minor items that can be addressed by means of punch-lists, and the approval of the works in the tests to be conducted for completion works, as mentioned above. Generally, upon substantial completion, the risk of loss regarding the works is transferred from the contractor to the employer, the defect liability period (whether legal or contractual) begins, and the employer is allowed to commence the operation of the works.

For final completion of the works, requirements usually include the full completion of the works (including the items indicated in punch-lists) and the end of the contractual defect liability period, if the agreement provides for one.

According to Article 445 of the Brazilian Civil Code, an employer’s right to reject goods due to latent defects or to claim a proper reduction in price due to such defects expires in 30 days if such goods are moveable, and in one year, in case the goods are immovable; in both cases, counted from the delivery of the goods (in case of construction works, from their substantial completion). Furthermore, as per Article 618 of the Brazilian Civil Code, the contractor whose scope includes the supply of the works’ materials shall also be liable, exclusively with regards to defects affecting the safety and soundness of the works, for a period of five years after completion of the respective works, provided that employer sues the contractor within 180 days following the appearance of the relevant defect in this regard.

Furthermore, as per Article 446 of the Brazilian Civil Code, latent defects liability periods shall not be counted during contractual warranty periods, it being, therefore, possible to provide in contract for defects liability periods longer than those provided by law.

Usually, construction contracts in Brazil provide that the contract price shall be the total and sole compensation to the contractor for the proper and timely completion of the works, comprising all related direct and indirect costs (including taxes, financial costs, costs for obtainment of insurance policies and financial guarantees, costs with inputs and services supplied by subcontractors and contractor’s profit). The contract price is usually established in accordance with one of the following methods:

• lump sum price – the contractor agrees to carry out the works for a pre-agreed price. The price is subject to adjustment only in certain and limited circumstances, as specified in the contract (eg, variations, employer’s default, events defined as employer’s risks, escalation);
• price per unit – the contract price is determined by measuring the services and activities performed by the contractor for performance of the works and applying to such quantities’ rates agreed by the parties or other sort of valuation; or
• maximum guaranteed price – the sum payable by the employer to the contractor is determined by measuring the work performed by the contractor and further applying agreed rates to the quantities measured or other sort of valuation until a cap is reached (ie, the maximum guaranteed price). Any costs above the maximum guaranteed price shall be borne by the contractor.

Since most construction contracts in Brazil are tailor-made, the specific conditions for establishing the contract price may vary for each contract and may combine aspects of the different pricing methods mentioned above and include incentives to ensure that the contractor uses its best efforts to limit the cost and/or the quantity of services and materials for completion of the works. 

Considering that construction works for large projects normally last for extended periods, it is a very common practice for construction contracts in Brazil to provide for price indexation. Under Brazilian law, nonetheless, any stipulation for indexation with a period of less than one year is considered null and void (Law No 10,192/2001, Article 2, First Paragraph).

However, price increases due to change orders, changes of scope and/or any other cause affecting the projects are perfectly admissible in any time interval, thus not being subject to the one-year time limit, which relates solely to correcting the loss of the monetary value of the currency (ie, inflation).

Construction contracts in Brazil are normally construed under the following indexation parameters.

It is most common for construction contracts in Brazil to provide for monetary correction or adjustment based on general or sectoral price indexes (such as Índice Nacional de Preços ao Consumidor Amplo – IPCA, Índice Geral de Preços – Mercado – IGP-M and Índice Nacional de Custo da Construção – INCC, specific for construction), as well as other indexes and market references that reflect variations in the specific production costs or inputs used in the contracted works (eg, the use of price variation according to the London Metal Exchange in construction contracts for transmission lines, which are heavy in commodities). In addition, depending on the structure of the contract, other alternatives are also considered, such as parametric formulas and different indexes for different parts of the contracted scope.

The contractual allocation of the risk for large price fluctuations normally depends on the type of contract:

• for turn-key lump sum EPC contracts, on one hand, this risk of price fluctuation not encompassed by indexation is usually undertaken by the contractor – however, it is possible for the parties to allow for cost remedies in case of price fluctuations arising out of force majeure events; and
• for Guaranteed Maximum Price (GMP), open book and other management contracts, it is possible for the parties to agree on a different allocation of the risks, such as through the reimbursement of the actual cost (regardless of the fluctuation) or through a specific contingency for such price fluctuations.

It is common for construction contracts in Brazil to provide for an advance payment to be paid by the employer to the contractor at the beginning of the works to provide for the cash flow necessary for the performance of the works. Payment of the advance payment amounts is usually conditioned to the prior delivery by the contractor of an advance payment guarantee (generally a letter of credit or an insurance bond on the amount of the down payment) to be maintained in force until the advance payment is fully amortised.

To avoid late payment or non-payment by the parties, construction contracts in Brazil provide for various remedies that can be enforced by the non-defaulting party, the most common being:

• delay penalties – most contracts provide for delay penalties to be applied in case a party fails to timeously pay the other party any due amounts. Such penalties generally consist of applying monthly interest and escalation over the delayed amounts, plus a moratory penalty equivalent to a percentage of the delayed amounts;
• suspension – in case of the employer’s delay in paying the contractor, if any undisputed amount surpasses a certain number of days, the contractor may suspend the works for the employer’s fault, being entitled to claim extension of time and an increase in the contract price in order to deal with the impacts of such suspension;
• termination – either party is entitled to terminate the contract for cause in case the delay by the other party in paying an undisputed amount surpasses a certain number of days; and/or
• off-setting – the employer is usually entitled to off-set any uncontroversial amounts due by the contractor from any payments due by the employer to the contractor.

Although the specific conditions regarding invoicing of the works usually vary for each contract, especially considering that most construction contracts are tailor-made (without abiding to any standard forms), most contracts in Brazil usually abide by the following invoicing methods.

• Physical progress – The contract establishes unit prices for each service and activity to be performed by the contractor. Periodically, generally on a monthly basis, the contractor presents to the employer a measurement report indicating quantities of each service or activity performed by the contractor during the period under review. Upon approval of the measurement report, the employer shall remunerate the contractor by applying the unit prices to the quantities indicated in the measurement report.
• Payment milestones – The contract connects the payment of specific portions of the contract price to the achievement by the contractor of specific milestones related to the performance of the works. Upon achievement of a milestone, the employer shall notify the contractor in the measurement report or by means of a payment request, presenting evidence of the achievement. Upon approval of the measurement report or payment request, the employer shall pay the amounts connected to such milestone to the contractor.

Generally, the parties agree on a project schedule with the sequence of all activities to be performed, as well as the milestones and their relevant completion dates, which constitutes an integral part of the construction contract. Without prejudice to the project schedule, the contractor may also have the obligation to submit a working plan with the greatest possible level of details related to the scope of work to be executed. The working plan shall consider the completion dates established in the project schedule though.

Furthermore, most construction contracts provide for payment milestones, and the payments are due by the employer upon achievement of the relevant milestones by the contractor, which shall be completed according to the provisions of the agreement.

There are, however, milestones that are subject to delay penalties, which may or may not coincide with payment landmarks. Some milestones are part of the critical path, and therefore, they must be achieved on their relevant completion dates, otherwise the commercial operation date is affected. Depending on the period of delay, a prolonged failure to timely complete a milestone may also lead to the early termination of the agreement by the employer.

At last, the employer usually issues a taking-over certificate upon completion of the works by the contractor and its acceptance by the employer, which sets out the commencement date of the commercial operation as well as the defects liability period. Upon the expiration of such period and the completion by the contractor of the relevant repairs or replacements of any defective works, the employer shall issue a final acceptance certificate.

Construction contracts typically include detailed requirements for the contractor to request an extension of time in case of delay due to events not caused by the contractor. The list of events entitling the contractor to request such extension of time is mostly exhaustive and includes events like suspension due to the employer’s convenience or fault, failure by the employer to release the site area, failure by the employer to obtain its licences, and force majeure, among others, as further detailed in 5.4 Extension of Time). In this case, the contractor shall submit a notice to the employer evidencing that the event effectively affected the relevant completion date. The contractor may not be entitled to an extension of the commercial operation date in case the critical path is not affected.

The extension of time may be combined with the reimbursement of costs incurred by the contractor, as long as such costs are duly evidenced by the contractor. The list of events entitling the contractor to request the reimbursement of costs is also exhaustive, and such events are usually similar to the extension of time events with some exceptions, such as force majeure.

Independently, if the claim by the contractor relates to extension of time and/or reimbursement of costs, the contractor’s entitlement to such remedy shall be conditioned upon the contractor presenting its claim timeously (ie, formulating the relevant claim against the employer and presenting it with supporting evidence, within a pre-defined timeframe), so as to avoid the employer being surprised with a late claim.

In case the delay is due to events caused by the contractor, however, the contractor is required to submit a recovery plan describing the measures to be taken to recover such delay, without prejudice to any delay penalties to be applied. The activities necessary for the implementation of the recovery plan will be exclusively borne by the contractor.

With respect to concurrent delays, the parties may contractually agree on the consequences of such delays, otherwise each party will be liable to the extent of its fault. Under construction contracts, it is common for the contractor to be entitled to an extension of time proportionally to the employer’s period of delay. In this case, however, the contractor is not entitled to any reimbursement of costs, considering that the “time but no money” approach has increased among contractual arrangements in the past years.

In a manner that is different from the common law system, Brazilian law does allow the parties to establish penalties to be paid by the contractor in case of delay, which amount does not necessarily need to represent a genuine pre-estimate of losses incurred by the employer to be enforceable, although it may not exceed the value of the main obligation. Depending on the economic robustness of the parties and other circumstances, the judge/arbitrator may reduce any delay penalty, when it is deemed to be excessively high or if the main obligation has been partially performed. 

Notwithstanding the foregoing, delay penalties may apply regardless of actual damages incurred by the employer. The delay penalties mainly seek to ensure the completion of the works by the commercial operation date.

As an extra mechanism to ensure timely completion, construction contracts may expressly indicate that the delay penalty shall be applied without prejudice to the right of the employer to claim compensation for damages arising out of the breach. However, such compensation is not common, given that the losses to which the employer may be subject by the delay in operation are often much higher than the full construction price – what results from most of such contracts not being a back-to-back arrangement in relation to the employer’s offtake commitments before third parties.

Moreover, the application of delay penalties does not prejudice the rights of the employer to require the performance of the breached obligation or to terminate the agreement depending on the period of delay.

As further detailed in 5.2 Delays, there is typically a specific provision related to requests for extension of time under construction contracts, which establishes the requirements to be complied with by the contractor, so as to entitle it to any such request.

The contractor may only request an extension of time if the event causing the delay is expressly listed under the construction contract. In this case, the contractor shall submit a notice within the period established in the agreement with details of the impacts caused by the event, together with relevant evidence.

The extension of time is usually proportional to the impacts of the delays caused to the contractor, although the commercial operation date may be only extended in case the critical path is effectively affected. Furthermore, the contractor is also not entitled to an extension of time if the reason for the delay arises from any act or omission of the contractor.

The extension of time is usually measured in a compatible manner with the impact of the delays suffered by the contractor. Accordingly, such extension of time is not necessarily proportional and, depending on the actual impacts suffered by the contractor, it will not be on the basis of one day of extension for each day of delay. In any case, the impacts on the project schedule shall be evidenced by the contractor.

Moreover, the employer may replace the extension of time with the increase of the contract price, at its discretion, as a compensation for the necessary acceleration measures to be taken by the contractor to maintain the completion dates existing prior to the event that gave rise to the right to an extension of time, provided that such acceleration is technically feasible.

According to the sole paragraph of Article 393 of the Brazilian Civil Code, force majeure means “an unforeseeable event, whose effects were impossible to avoid or prevent”. Unless otherwise expressly agreed, the party affected by a force majeure event shall not be liable for any damages arising therefrom.

The parties, however, may exclude specific events from the concept of force majeure, which usually includes changes in the economic or financial conditions of any of the parties, strikes or work stoppages (except for general strikes and/or work stoppages of a national nature), any act of any governmental authority, if such act could have been avoided by the affected party, among others.

As legal consequences of force majeure events, Article 607 of the Brazilian Civil Code provides the termination of service agreements due to the impossibility of performance caused by force majeure, while Article 625, item I of the Brazilian Civil Code entitles the contractor to suspend the civil works due to force majeure events.

Notwithstanding the foregoing, Brazilian law allows the parties to allocate liabilities with respect to force majeure despite the legal provisions. Thus, construction contracts generally provide for the consequences in case a party is affected by a force majeure event. The impacted deadlines shall be proportionally extended for the period that the force majeure and its consequences last. With respect to the losses and damages resulting from a force majeure event, each party is most times liable for its own losses and damages in addition to any costs incurred during such period.

Moreover, a party may have the right to terminate the agreement without any compensation, indemnity or penalty should the force majeure event last longer than a contractually established period (typically, at least 180 days).

The Brazilian law provides the right to request the termination of a contract in case an extraordinary, unforeseen and supervening event affects the contractual obligations of a party, causing the economic-financial imbalance of the agreement. In this case, the compliance by the relevant party is still feasible, but it becomes excessively burdensome. Furthermore, according to Article 317 of the Brazilian Civil Code, where there is a clear disproportion between the value of the benefit due and that at the time of its performance, the judge may correct it, at the request of the relevant party, to ensure the actual value of the consideration to the extent possible. The right to the economic and financial rebalance of the agreement cannot be waived by the parties under the contract.

As further detailed in 3.5 Site, the contractual allocation of the risk of unforeseen site and soil conditions will depend on the type of construction contracts. Particularly in lump sum, turnkey agreements, the risk of such unforeseen conditions usually lies with the contractor, which has the opportunity to visit the site and to examine its actual conditions. Therefore, in this case, the contractor is usually not entitled to request an adjustment of the price, reimbursement of costs and/or extension of time due to any such condition.

Most often, construction contracts expressly indicate the events entitling the contractor to request an extension of time and/or reimbursement of costs, which includes disruption events especially caused by the employer (please refer to 5.2 Delays).

In general, although there are several rights which do allow the employer to monitor the contractor’s performance of the works and whether such performance is consistent with the schedule and technical specifications, should the employer affect the contractor’s ability to perform the works due to unreasonable (or not expressly provided for under the contract) interference, the contractor may be entitled to formulate a disruption claim.

Although there is no specific legal provision in this regard, contractual provisions limiting or excluding liabilities arising from (i) fraud, gross negligence or wilful misconduct; (ii) death and bodily injuries; and (iii) breach of law, would be considered void, according to the case law and the majority of scholars. Commercially, the parties might as well expand the list of exclusions which are not subject to the liability cap for other events, such as third-party claims, environmental damages, breach of confidentiality duties, and breach of compliance provisions. It is not entirely uncommon either that the parties agree on establishing that amounts eventually paid by insurers should not count towards the liability cap and that the latter applies only to out-of-pocket compensation from the indemnifying party.

Wilful misconduct is defined as the intent to cause harm by means of a party’s act or omission, or the undertaking of the risk that by acting in a certain way (or failing to act) a harmful outcome will result.

With respect to gross negligence, although there is no express legal text in Brazil defining it, the parties may agree on its definition for contractual purposes, which is most often similar to the common law definition of gross negligence. Due to the particularities of the scope of work and risks involved in a complex construction contract, the level of diligence and care expected for its performance is usually higher than other contracts.

Subject to 6.1 Exclusion of Liability, the parties may contractually agree on any limitation of liability. It is usual to include an overall liability cap under construction contracts, which may vary according to the contract price and/or the project, without prejudice to the exceptions to be agreed by the parties, as detailed in 6.1 Exclusion of Liability. The overall liability cap may not surpass the amount of the main obligation though, and therefore, a cap exceeding 100% of the contract price may be challenged.

According to Brazilian law, any losses and damages caused by one party to the other shall be indemnified by such party.

Furthermore, there is usually in construction contracts an indemnity provision, which establishes the obligation of each party to indemnify and hold the other party harmless from and against any third-party claims due to any: (i) breach of any obligation established in the agreement; (ii) act, omission, negligence, recklessness, malpractice, inefficiency, breach of legal duty and/or duty of care by the contractor and/or any member of the contractor’s personnel; (iii) breach of intellectual property of third parties; and (iv) failure by any of the parties in complying with the applicable laws.

These indemnity obligations, however, are subject to the exclusions and limitations of liability established in the construction contracts, except liabilities arising from third-party claims, which is most times an exception to the overall liability cap (please refer to 6.1 Exclusion of Liability and 6.3 Limitation of Liability).

Indemnity obligations are limited by law to direct losses and damages. Therefore, the parties are not liable for any indirect losses, nor punitive or consequential damages. However, since the concept of loss of profits is deemed as a direct damage under Brazilian law, it is necessary for it to be caveated contractually, otherwise the parties will be liable for it.

Typically, construction contracts provide for the obligation of the contractor to submit a performance bond to ensure the fulfilment of all of its obligations under such agreements. The performance bond may be a bank guarantee, an insurance bond, or a combination of both.

Considering the costs involved in obtaining and maintaining a bank guarantee throughout the term of the construction contract, the employers are currently more open to accept an insurance bond instead of a bank guarantee, even though the latter gives more protection to the employer, considering that bank guarantees work as if they were on demand in Brazil and, therefore, local banks will rarely challenge or discuss in case of foreclosure. 

The employer may also request the presentation of a parent company guarantee by the contractor as an alternative or complement to the bank guarantee or insurance bond. Such guarantee is usually intended to reinforce the financial standing of the contractor and give extra comfort to the employer in relation to the obligations that the contractor undertakes to comply with in the contract, especially when the contractor is a mere subsidiary or does not have a robust balance sheet compared to the price of its scope.

Finally, as a condition for the employer making any advance payment, the contractor generally needs to submit a bank guarantee to the employer in the same amount of such payment which will be enforceable until the full amortisation of the advances amount.

Decree-Law No 73/1966 provides certain mandatory insurances, which are regulated by Presidential Decree No 61,867/1967, including in relation to construction works, comprising (i) civil liability for real estate contractors of urban zone constructions with respect to bodily injury and physical damage injuries and property damages; (ii) guarantees of payment of the borrower related to construction, including real estate obligations; (iii) buildings divided into autonomous units; (iv) fire and transportation of assets or goods belonging to legal entities located in or transported throughout Brazil; (v) bodily injury and physical damage caused by automobiles and vessels (or by their cargo) to individuals, regardless of whether such individuals are being transported or not; and (vi) civil liability for land, maritime, river and lake transportation damages caused to cargo.

There are also other mandatory provisions on insurance specifically related to the construction industry, which include: (i) Article 1,346 of the Brazilian Civil Code: all buildings shall be covered by insurance against fire or total/partial loss; (ii) Article 13 of Law No 4,591/1964: all buildings or complex of buildings, including their units and common areas, shall be insured against fire and other casualties that may cause total/partial loss of the building; and (iii) Article 2 of Law No 4,864/1965: the buyer of a financed real estate building for housing purposes with a maximum value of 300 times the highest minimum wage in force in Brazil shall obtain temporary income life insurance (seguro de vida de renda temporária).

Nonetheless, in construction contracts, the contractor usually has a contractual obligation to obtain and maintain insurance covering the following: (i) engineering risks; (ii) property; (iii) third parties’ civil liability; (iv) automobile liability; (v) employer’s civil liability; (vi) bodily injury and physical damage and life coverage for contractor’s employees; (vii) coverage for the transportation of equipment to be used in the construction works; and (viii) environmental risks. Instead of obtaining and maintaining separate insurances for each of the risks indicated above, the parties may agree to have an “all risks policy” to be obtained and maintained by the employer or the contractor, as applicable. In any case, the other party (and its subcontractors, if any) shall be included as a co-beneficiary under the policy, without prejudice to the waiver by the insurer of its subrogation rights. Furthermore, surety bonds or performance bonds are usually required under bid contracts regarding public or private constructions to guarantee the fulfilment of the contracts.

Notwithstanding the foregoing, companies shall be assisted by an insurance broker to assess all risks related to a specific project and to determine the most suitable coverage.

Usually, construction contracts include “insolvency events” as one of the termination events, and therefore, any of the parties has the right to terminate the agreement in case an insolvency event occurs with respect to the other party.

The bankruptcy (similar to Chapter 7 of the US Bankruptcy Code) of a legal entity that is a party to a construction contract does not automatically terminate it, according to Article 117 of Law No 11,101/2005, which provides that the trustee may comply with the contract if it (i) reduces or avoids the increase of the indebtedness; or (ii) is necessary to preserve the assets of the bankrupt estate, assuming previous authorisation by the creditors’ committee. The termination will eventually occur when the bankruptcy proceeding determines the cessation of the “business activity” of the company.

In case of a judicial reorganisation (similar to Chapter 11 of the US Bankruptcy Code), however, the relevant company continues with its business activity, and the trustee may not intervene in its management. Thus, in this case, a construction contract may be terminated by the parties’ will, provided that such agreement includes the judicial reorganisation as a termination event, without prejudice to the right of the legal entity under judicial reorganisation to request an injunctive relief from the relevant court to prevent the counterparty from terminating it (ipso facto clause). The aim of the judicial reorganisation is mainly to enable the company to continue with its activities. Thus, the termination in this circumstance has been restrained by Brazilian courts, as opposed to a bankruptcy proceeding, which is a definitive and unrecoverable act entitling the immediate termination of contracts.

Construction contracts usually provide for the risks to be assumed by each party. Even though all main construction risks are typically transferred to the contractor (which is a single point of liability), the employer may assume other risks, depending on the negotiation between the parties before the execution of the agreements, such as risks related to force majeure events, geological risks, among others.

There are also other contracting models that allow the parties to share risks, such as alliance agreements, in which the parties may align their commercial interests, and share the risks and rewards arising from the contract, by means of an inherent collaboration.

However, more common than alliance agreements (which are extremely rare in Brazil), EPC contracts may apply for bonuses and penalties schemes, in order to balance more evenly the risks and rewards.

The risks shared between the parties in construction contracts are considered in the price as a contingency, which is usually expressed as a percentage of the base estimate and represents an allowance for unforeseen costs that may arise during a construction project due to uncertainties. Contingencies may be overestimated or underestimated based on the level of detail and information obtained by the contractor.

Under construction contracts, the contractor commonly ensures it has sufficient and experienced personnel on site for the performance of the works and bears all related expenses and charges, including transportation, accommodation, food, medical care, among others.

These agreements also provide for the contractor’s obligation to comply and make its personnel comply with the rules established in the Consolidation of Labour Laws and other applicable labour regulations, without prejudice to the internal health and safety rules of the employer.

Moreover, the contractor has generally the obligation to submit specific documentation on a monthly basis to the employer, as a condition for payment, to evidence the compliance with its labour and social security obligations, which includes, but is not limited to, the presentation of good standing certificates (certidões de regularidade) issued by the relevant governmental authorities.

It is also common for construction contracts to provide that: (i) the contractor’s personnel shall not be deemed in any way employees of the employer; and (ii) the contract does not imply any joint and several or subsidiary liability of the employer. Therefore, the contractor shall usually defend and hold the employer harmless against any losses and damages arising from acts and omissions of any contractor’s personnel.

Finally, some key personnel, such as the site manager and project director, may only be replaced by the contractor upon prior notice to the employer in this regard.

Most often, the contractors have the right to subcontract portions of the works to any third party. The subcontracting is typically subject to the employer’s prior written approval, unless it does not represent a critical subcontractor (ie, when the amount of the supply/service to be executed by the relevant subcontractor exceeds the amount defined in the contract in one or more contracts/purchase orders).

In general, as provided in 2.3 The Subcontractors, the employer does not have a contractual relationship with subcontractors and the contractor remains fully and completely liable to the employer for the execution of the works and all of its obligations under the agreement, as well as for all liabilities arising out of any subcontracting. Thus, the contractor shall defend and hold the employer harmless against any losses and damages arising from any acts and omissions of its subcontractors.

Generally, the contract establishes which party owns the intellectual property rights in relation to the design and operation of the property/facility. In most cases, the contractor grants to the employer a royalty-free, perpetual and untransferable licence for the use of such intellectual property rights for the operation and maintenance, as well as the adaptation and modification of the project by the employer or its contractors.

The contractor also normally represents and warrants that the performance of its scope does not infringe any intellectual property rights of third parties, and, in case a dispute arises from an allegation of infringement of such rights, the contractor is obliged to immediately take the necessary measures to obtain a licence or right of use over such intellectual property rights, so that the employer may regularly proceed with the use, operation and maintenance of the project, without any additional cost to the employer.

In case it is not possible to obtain the licence or right above, the contractor shall promptly modify the item or process under discussion by another item so that it does not violate intellectual property rights of third parties or replace the item or process under discussion with another item with equivalent functionality and effectiveness to the original item, and shall bear all the related costs, without prejudice to any compensation of losses and damages suffered by the employer and the obligation to hold it harmless from any claim of third parties in this regard.

In the event of breach, the non-defaulting party may be entitled to be indemnified for the losses and damages arising therefrom.

Moreover, in case of delay or other breaches (eg, default of performance and/or health, safety and environmental obligations), the parties may agree on specific penalties/liquidated damages to be applied (please refer to 5.3 Remedies in the Event of Delays).

The non-defaulting party may also have the right to suspend or terminate the construction contract, depending on the breach. However, the contractor’s suspension or termination events are usually narrower than the ones of the employer (please refer to 9.5 Retention and Suspension Rights and 9.6 Termination).

Subject to 6.1 Exclusion of Liability, the parties may contractually limit the remedies under construction contracts. Typically, the parties agree on an overall liability cap and exclusions of liability, as further detailed in 6.3 Limitation of Liability and 9.4 Excluded Damages.

Furthermore, it is usual for construction contracts to establish specific remedies to be applied in case of certain events. If the contractor does not achieve a key milestone on its relevant completion date, for instance, it generally pays delay penalties until the contractor recovers the delay. There are also penalties for other breaches, such as the ones applicable in the event of default of performance and/or health, safety and environmental obligations, as anticipated in 9.1 Remedies.

In recent years, it has become more common in construction contracts for the parties to agree on a delay penalties cap which, if reached, may result in the termination of the agreement by the non-defaulting party. Such termination trigger linked to a delay liquidated damages cap draws the line when the delay becomes unbearable, and the continuance of the contract will be more harmful to the employer than its early termination.

Sole remedy clauses may be included in construction contracts in Brazil, although in most cases such provisions are restricted to penalties (including for delay and/or breach of performance requirements) as well as to technical warranty obligations related to the works. These clauses may be enforced through the dispute resolution procedure agreed by the parties in the agreement, which typically includes arbitration.

In general, losses of profits, as well as any indirect and/or consequential losses and damages under construction contracts, including, but not limited to, loss of opportunities and businesses, are excluded from the liability of the parties, except in case of (i) fraud, gross negligence or wilful misconduct, (ii) death and bodily injuries, and (iii) breach of law.

Construction contracts may establish the right of the employer to withhold a percentage of the contract price to be released on the commercial operation date, except for the amount corresponding to the items of an eventual punch-list, which is released upon its completion by the contractor and acceptance by the employer. The withholding amount works as an additional guarantee in case of the contractor’s default.

Suspension rights are also available in construction contracts in Brazil. In general, the employer has the right to suspend the works for its convenience or an affected portion of the works for reasons attributable to the contractor, such as failure to comply with health and safety requirements. The contractor, in turn, may suspend the works in case of failure by the employer to make undisputed payments and other workstreams which may be affected by employer’s failure to comply with the contract, such as the granting of continued site access and the employer’s obtainment of its licences.

In case of suspension for the employer’s convenience or due to the employer’s default, the contractor shall be entitled to an extension of time and/or reimbursement of costs incurred due to such suspension, provided that such costs are reasonable and duly evidenced by the contractor.

In any case of suspension, as soon as the event triggering the suspension ceases, the contractor is required to resume the works within the period agreed by the parties in the construction contract.

According to the Brazilian law, a contract may be terminated in case of: (i) material breach; and (ii) unforeseeable extraordinary supervening event, which results in an excessively onerous obligation on the party claiming the termination and an extreme advantage to the other party, provided that, in such latter case, the defendant may prevent the termination if it agrees to equally modify the terms of the contract. It is worth mentioning that Brazilian courts and arbitration tribunals are quite restrictive in allowing termination on such basis, tending to prefer the rebalancing of the contract, as the safeguarding of contracts is a very robust principle under Brazilian law.

The employer may also terminate the agreement for its convenience, pursuant to Article 623 of the Brazilian Civil Code, as long as it pays for the expenses and profits related to the services performed, as well as a reasonable indemnity based on what the contractor would receive if the services were concluded. Instead of leaving the amount of the indemnity open, the parties may choose to establish (i) a lump-sum amount to be paid by the employer in case of termination for its convenience, or (ii) a schedule listing distinct amounts to be paid by the employer depending on the time the termination occurs.

Nonetheless, the parties may contractually agree on other termination events, which typically include: (i) termination for the employer’s convenience; (ii) insolvency events; (iii) delay of the contractor to complete a milestone; (iv) breach not remedied within a specific cure period; (v) force majeure events; (vi) employer’s delay in making undisputed payments; and (vii) achievement of the overall liability cap and/or the delay penalties cap.

Although the consequences of termination vary, the following are the most common consequences:

• in case of termination by the employer due to the contractor’s default, the contractor shall pay the greater of (i) the difference between the costs incurred by the employer to complete the works and the remaining balance of the contract price, and (ii) a termination fee, which is usually a pre-fixed percentage of the contract price; and
• if the contract is terminated by the contractor due to the employer’s default, the employer shall pay the following: (i) the reasonable and evidenced costs incurred by the contractor to terminate the subcontracts; (ii) the expenses duly evidenced and incurred by the contractor for the acquisition of goods and services directly related to the works, which have not been delivered yet to the employer and whose orders cannot be cancelled; (iii) demobilisation costs; and (iv) termination fee, which is most times a pre-fixed percentage of the balance of the contract price.

The contractor shall be entitled to the payment of the works already performed, regardless of the cause of termination.

Disputes regarding construction and projects in Brazil are usually settled by arbitration if no amicable solution is reached. International disputes are widely settled under the rules of the International Chamber of Commerce (ICC), and, in domestic cases, the most relevant institution administering construction cases is the Centre for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada (Centro Brasileiro de Mediação e Arbitragem do Centro de Comércio Brasil-Canadá) (CAM-CCBC). Other relevant institutions include the:

• Business Arbitration Chamber – Brazil (Câmara de Arbitragem Empresarial – Brasil – CAMARB) (Belo Horizonte, São Paulo, Rio de Janeiro, Recife, Brasília, Salvador, Goiânia and Itajaí);
• ICC Hearing Centre (launched in March 2018 in São Paulo to deal with Brazilian domestic cases);
• Centre for Conciliation, Mediation, and Arbitration of CIESP/FIESP (São Paulo);
• Brazilian Centre for Mediation and Arbitration (CBMA) (Rio de Janeiro);
• FGV Mediation and Arbitration Chamber (Rio de Janeiro); and
• Arbitration and Mediation Centre attached to the American Chamber of Commerce (AMCHAM) (São Paulo).

In addition, arbitration is provided for in the bid rounds in government contracts, as a strategy to attract foreign investors. Therefore, most construction agreements with state entities also have their disputes referred to arbitration.

Notwithstanding, in the absence of an arbitration clause in the agreement, most disputes will be resolved in the judicial courts, in accordance with the Brazilian law. Courts’ jurisdiction can vary depending on the contract terms and whether the client, funder or contractor has brought the lawsuit. The courts of the defendant’s domicile generally have jurisdiction over any lawsuit. Despite this circumstance, the parties are entitled to include an election of the forum clause, which is commonly used in construction agreements (if this clause provides for dispute resolution in the judicial courts, the applicable law must be Brazilian law).

Additionally, disputes regarding construction and projects in Brazil may also be solved through mediation and dispute boards.

Disputes regarding construction and projects in Brazil are usually settled by arbitration, in accordance with Federal Law No 9,307/1996 (Brazilian Arbitration Law). In addition to arbitration, mediation and dispute boards are the most used alternative dispute resolution methods in Brazil, usually jointly with and without prejudice to arbitration.

When opting for arbitration, the parties may choose the number of arbitrators, the seat and language of the arbitration, as much as several other procedural features (eg, the applicability of international soft law documents, the applicability of emergency arbitrator provisions, the establishment of specific evidence rules and proceedings, among others). Under Brazilian Arbitration Law, an arbitral award is equated to a judicial award, and it can only be subjected to an annulment proceeding, under a few exhaustive legal hypotheses, within a 90-day period from its receipt by the relevant party. If the arbitration seat is not in Brazil, the arbitral award must be subjected to a homologation proceeding by Brazilian courts (exequatur).

The adoption of mediation in both judicial and extra-judicial proceedings is regulated by Law No 13,140/2015 (Mediation Act). It governs matters such as non-attendance penalties and the appointment and qualification of mediators.

Dispute boards are usually assembled to deal with technical disputes that arise during the performance of the contract. A dispute board will recommend a solution by a dispute resolution board or will directly solve the issue itself as a dispute adjudication board. There are also combined dispute boards, mostly for contracts that adopt ICC and CAM-CCBC arbitration clauses.

There is a growing trend of dispute boards being provided for in construction contracts in Brazil, and, as a result, some Brazilian cities have created laws to regulate the possibility of dispute boards in contracts entered into by the public authorities of those cities, such as São Paulo (Municipal Law No 16.873/2018), Belo Horizonte (Municipal Law No 11.241/2020) and Porto Alegre (Municipal Law No 12.810/2021).

Additionally, Law No 14,133/21 (Brazilian New Public Procurement Law), which replaces Law No 8,666/93, allows for amendments to contracts to provide for alternative means of dispute resolution, such as dispute resolution boards.

Expert determination is also provided for in some infrastructure contracts. However, this feature is more usual in relation to cross-border and international agreements. There are no statutes in Brazil governing expert determination.