Construction and projects in Brazil: overview
A Q&A guide to construction and projects law in Brazil.
The Q&A gives a high level overview of the main trends and significant deals; procurement arrangements; transaction structures and corporate vehicles; financing projects; security and contractual protections that funders require; standard forms of contracts; risk allocation; excluding liability, including caps and force majeure; contractual provisions covering material delays and variations; appointing and paying contractors; subcontractors; licences and consents; projects insurance; employment laws; health and safety; environmental issues; corrupt business practices and bribery; bankruptcy/insolvency; public private partnerships (PPPs); dispute resolution; tax and mitigating tax liability; and proposals for reform.
To compare answers across multiple jurisdictions, visit the construction and projects Country Q&A tool.
This Q&A is part of the global guide to construction and projects law. For a full list of jurisdictional Q&As visit www.practicallaw.com/construction-guide.
Overview of the construction and projects sector
Brazil and its construction market have been facing a very turbulent political and economic situation since the beginning of 2015. This is mainly due to the so-called ''car wash operation'' (operação lava-jato), where political leaders and businesses have been investigated for tax evasion, bribery or misuse of public funds. Brazil's major construction companies have been at the centre of these investigations and have therefore suffered from lack of credit and lack of opportunities.
Due to the decrease of public financing for infrastructure projects, the government created the programme of investment partnerships (Programa de Parcerias de Investimentos) (PPI) to increase the contribution of private capital to infrastructure projects in Brazil. The purpose of the PPI is to expand and strengthen the relationship between the state and the private sector through partnership contracts (including concessions, public private partnerships, permissions or leasing of public assets and any other public private arrangements that have the same legal structure).
Due to the deterioration of the major construction companies involved in the ''car wash'' operation, there is likely to be an increase in activity of medium-sized construction companies in the construction market, especially in the concession of highways nationwide.
A key trend for the next few years relates to projects in the energy sector. The government intends to increase the supply of energy and strengthen the transmission system to ensure that energy is supplied at competitive prices and give priority to clean and renewable sources. During the first half of 2016, the government auctioned 3,042 km of transmission lines to be built up to 2020.
One of the biggest infrastructure projects in the pipeline in Brazil for the next years is the construction of the hydroelectric power plant of São Luiz do Tapajós in the state of Pará, with an estimated capacity of 6,133 MW. However, due to environmental licensing and indigenous land constraints, the feasibility of the project is still uncertain.
In addition, the upcoming concession auctions of four major Brazilian airports (Porto Alegre, Salvador, Fortaleza and Florianópolis) are significant, as they will allow the bid winners to carry out major construction works to the airports.
Most of the projects developed in Brazil use bespoke contracts (that is, contracts specifically drafted for a particular project) rather than standard form contracts. However, it is becoming more common to use contracts based on international standard forms like the Fédération Internationale des Ingénieurs-Conseils (FIDIC) and the New Engineering Contract (NEC) when a foreign party is involved (such as a foreign sponsor, partner or lender). These projects, however, still represent a very small percentage of the total projects developed in Brazil. See also Question 6.
The contractual structure depends on various aspects (mainly the risk allocation and the sophistication of the parties involved), however, the most common structures used in Brazil are the following:
Engineering, procurement and construction (EPC) contract. An EPC contract provides for a single point of responsibility. The employer hires a contractor to provide the design, all necessary materials, equipment and the construction services for the project. In large projects involving construction and erection works as well as equipment supply (such as power plants and factories), the contractor can be hired to provide its services on a turn-key basis, in which case it becomes responsible for taking over the project to allow the employer to be ready to operate it on completion of the works by the contractor.
Engineering, procurement and construction management (EPCM) contract. This type of contract reflects the arrangement known as management contracting, in which a contractor acting as an agent of the employer enters into separate contracts with different contractors who provide the materials, equipment and construction services necessary for the project.
Design-bid-build (DBB) contract. An employer hires a designer to provide the basic design of the project and once the basic design is concluded, the project is submitted to a bidding process involving several contractors. The selected contractor will be in charge of detailing the basic design and, once it is approved by the employer (or by the employer's technical adviser/engineer), the contractor must perform the construction services in accordance with this detailed design.
Alliance agreement. This is a co-operative method of contracting, which still represents a very small portion of the projects developed in Brazil. The parties work together and align their commercial interests, sharing the risks and rewards arising out of the contract. It is also common to establish in the contract the goals to be achieved by the parties in exchange for a bonus and with penalties for underachievement.
In Brazil, the special purpose vehicle (SPV) (that is, a legal entity that is set up to develop a particular project within a given period) is the most common structure used in local projects. The primary advantage of the SPV is the segregation of certain assets and risks in an effective way within a project.
The consortium is another corporate vehicle that is widely adopted, mainly in high-cost local projects. Unlike the SPV, the consortium does not have a legal identity. The consortium members are solely obliged by the conditions provided under the consortium contract and each member is responsible for its own obligations. Although there is no presumption of joint and several liability, in general, construction contracts will state that all consortium members are jointly and severally liable for any and all obligations under the contract.
The joint venture is also used in Brazil. It differs from a SPV as t it is not usually set up for one specific project and it is common to have one joint venture in respect of several projects relating to a specific sector of the economy.
The corporate vehicles used in Brazil are the same for those used in international projects.
The Brazilian Development Bank (BNDES) has been playing a dominant role in long-term financing in Brazil. BNDES' projected financing for 2015 to 2018 is BRL177 billion. The other two big state-owned banks, Caixa Econômica Federal and Banco do Brasil have also increased their market share. Commercial banks have reduced their presence in the market, but continue to provide bridge loans, bank guarantees (to BNDES) and BNDES on-lending facilities.
BNDES now requires project companies to find multiple sources of financing, including commercial banks, export credit agencies and project bonds (debentures). However, it has been challenging for them to find commercial banks willing to provide such long-term loans and investors with the appetite to buy project bonds.
In project finance transactions, BNDES normally requires sponsor guarantees (that is, parent guarantees) in respect of the entire project finance debt until financial completion. ''Financial completion'' varies from project to project, but usually occurs when all of the following is satisfied:
There has been no breach of the financing/project documents.
All licences are valid and in full force.
The reserve account is fully funded.
Works have been completed.
There is a debt service coverage ratio (DSCR), which is usually calculated as the ratio of EBITDA (that is, earnings before interest, taxes, depreciation and amortisation) minus the taxes over the total debt service, higher than 1.2 or 1.3 (depending on the sector) in the past 12 or 24 months. The DSCR requirement is usually the obstacle to a project reaching financial completion.
BNDES strongly relies on its form of credit agreement and the provisions applicable to BNDES agreements (that is, a set of rules and provisions that are incorporated by reference to the credit agreement). However, it has recently shown some flexibility in negotiating certain provisions.
Security and contractual protections
Most project financings in Brazil rely on one or more of the following security packages:
Pledge or fiduciary sale of shares.
Pledge or fiduciary sale of assets.
Pledge or fiduciary assignment of rights and receivables.
Mortgage of land and buildings.
In most cases, perfection of the lenders' security interest in personal property is achieved by registering the security agreement with the relevant public registry, which depends on the type of the asset and its location, although specific requirements must be also observed when applicable (for example, notification to the counterparties of the rights assigned).
There is no equivalent to a ''blanket lien'' in Brazil and specific agreements are required to cover different categories of assets. Additionally, Brazilian law requires the following, among others:
The security agreements clearly identify the assets put forward as collateral.
The obligations being secured are described in the security agreements (for example, principal amount, additional secured obligations, schedule of amortisation and interest payment and interest rate).
The Brazilian Development Bank usually requires a parent guarantee until the financial completion of the project (see Question 4). Therefore, it will not usually review the construction agreements in detail. However, due to recent discussions in the market, which aim to shift the risk allocation from the sponsors to the other contractual counterparties, it is becoming increasingly important for construction agreements to be viable for lenders.
Step-in rights are less common in Brazil, but due to recent changes in the Brazilian legal framework (for example, the Public Private Partnerships Act (Law No. 11,079/2004) and the Concession Act (Law No. 8,987/1995)), the authors expect them to be widely adopted in the future.
Standard forms of contracts
Most of the projects developed in Brazil use bespoke contracts rather than standard forms. However, the standard forms like the Fédération internationale des ingénieurs-conseils (FIDIC) and the new engineering contract are becoming more popular in recent years due to the emergence of international players. When the parties decide to adopt a standard form for a project, they usually use the forms published by FIDIC, including, but not limited to, the following:
The Red Book: conditions of contract for construction for building and engineering works designed by the employer.
The Yellow Book: conditions of contract for plant and design-build for electrical and mechanical plant, and for building and engineering works, designed by the contractor.
The Silver Book: conditions of contract for engineering, procurement and construction/turnkey projects.
The standards forms used for local projects are the same for international projects.
The allocation of risks depends on the type of construction contract. In engineering, procurement and construction (EPC) lump-sum contracts, for example, the contractor is fully responsible for the implementation of the project and for all risks arising from or related to it. Although Brazilian law establishes that the risk of unforeseen ground conditions must pass to the employer when they are considered an extraordinary supervening event that places an excessively onerous obligation on a contractor, usually in EPC lump-sum contracts, the parties agree that even in such extraordinary cases, the risk of unforeseen ground conditions lies with the contractor. In order to mitigate this risk and others involved in the project, generally the price of EPC lump-sum contracts is 30% higher than the other construction contracts.
Brazilian law expressly excludes from the liability of the parties indirect damages, although the definition of indirect damages has been heavily debated.
Parties can also contractually limit or exclude their liability. It is usual to limit the contractor's liability to a certain percentage of the contract price and to exclude from the parties' liability, indirect and consequential damages and loss of profits.
Caps on liability
Generally, construction contracts establish a cap on a contractor's liability, the level of which depends on the contract value and type of project. However, the following are usually excluded from this limitation of liability:
Third parties' claims, including subcontractors' claims.
Breach of law.
Payments received from insurance companies as compensation for losses covered by a relevant insurance.
Amounts that should have been received from insurance companies if the insurance had been contracted by contractor as established in the contract.
Gross negligence, fraud or wilful misconduct.
Although it is common in construction contracts to expressly exclude from the cap on liability gross negligence, fraud and wilful misconduct, scholars and case law understands that any limitation of liability related to those should be considered null and void, even if the contract does not expressly provide for such exclusion.
Force majeure is defined as ''a necessary event which is impossible to avoid or impair'' (Brazilian Civil Code).
The affected party must not be responsible for losses resulting from force majeure events, unless this responsibility is expressly stated in the contract. It is common to expressly exclude from force majeure certain events, such as:
Changes affecting the economic balance of the contract, even if the contract becomes uneconomic.
Labour or materials shortage.
Acts or omissions of the contractor's and subcontractor's employees (including strikes that are not the result of a general strike of national, state or municipal nature).
To mitigate the risk of delay in the completion of the works, construction contracts commonly establish liquidated damages in the event the works are concluded after the agreed contractual date. Additionally, it is becoming more common to have penalties for certain interim milestones that are required to ensure the work is concluded on time.
In private contracts, the employer can order variations on the works at any time prior to taking over the works.
Generally, construction contracts include ''change order provisions'' whereby parties can discuss the impact of the respective variation and, in the case of material changes, negotiate a price adjustment and/or an extension of time.
If the contract does not provide for these variations provisions, the Brazilian Civil Code will apply and the employer will be responsible for paying the additional costs arising from the variations requested by it. If the variations requested by the employer are disproportional to the design already approved, the contractor can refuse the variations, even if the employer agrees to pay the additional costs.
Additionally, variations to reduce the scope of work are only allowed if expressly provided for in the contract and/or agreed between the parties, otherwise the employer may be required to indemnify the contractor for the losses and damages arising from such reduction.
With respect to public contracts, the employer can unilaterally vary the works whenever it is necessary to either:
Modify the design or the project specifications to better achieve the technical aims of the project.
Increase or reduce the scope of the works.
In both cases the contractor must accept the variations under the same contractual conditions, provided that the increases or reductions to the works, services or purchases are not higher than 25% of the original price. This limit can be increased by up to 50% when related to the restoration of buildings or equipment. In all cases, the economic-financial balance of the contract must be ensured.
Other negotiated provisions
The following contractual provisions are usually heavily negotiated by the parties:
Commercial conditions (for example, the price and payment conditions).
Allocation of risks related to site conditions.
Events entitling a contractor to an extension of time.
Events allowing the increase/decrease of the contract price (for example, a change in the law) and the reimbursement of the costs incurred by the contractor (for example, suspension of the works).
Events excluded from force majeure.
Guarantees (for example, value, type and validity terms).
Liability, penalties and indemnification provisions, including caps on liability.
Conditions for provisional acceptance of the works.
Suspension of works provisions.
Termination provisions and its consequences (such as payment of costs and termination fee).
Architects, engineers and construction professionals
In private projects there is no mandatory tender procedure. Usually, the employer sends a request for a proposal to certain companies or professionals and on receipt of their commercial and technical proposals, the employer will make its decision. If a government entity is the employer of the project, the selection takes place through a bidding process (Federal Law No. 8,666/1993).
The provision that is most heavily negotiated in the contract by and between the employer and the construction professional (for example, architect or engineer) is the caps on liability.
If a professional is hired to provide design services, the designer can perform the services either:
Without any interference in the performance of the works.
With the additional incumbency to supervise the works and give directions to contractor.
In the first case, the responsibility of the professional is limited to the soundness and safety of the works relating to the project for a five-year term from the issue of the taking-over certificate of the works. With respect to the second case, the designer is also responsible for the damages caused to the employer for any omission related to the supervision of the performance of the works.
Under Brazilian law, the employer cannot modify the design without approval of the designer, except if the change is not relevant or if it is required due to supervening events or technical reasons, making the project inconvenient or excessively onerous. If the design is changed without the designer's approval, the designer will not be liable for any damages resulting from the change.
Payment for construction work
Methods of payment
Payment methods are based on the contract. There are two common methods of payment:
Physical progress of the works, whereby the contractor is paid on a monthly basis based on the measurement report approved by employer.
Payment by milestone, whereby the contractor is paid on completion and approval of the milestones provided in the payment schedule.
Although the payments under the construction contracts can be secured by any form of collateral permitted under Brazilian law (such as pledge of shares, pledge of credits and so on), parent company guarantees, letters of credit or bank guarantees are more common in construction contracts.
Contractors can usually subcontract certain portions of the works to any third party if this is previously approved by the employer in writing. The employer does not usually have a contractual relationship with subcontractors and the contractor remains responsible for the entire scope of the works, including the works executed by its subcontractors.
Engineers and agronomists must be registered with the Regional Council of Engineering and Agronomy and architects and urban planners must be registered with the Council of Architecture and Urbanism. Without these registrations, professionals may face sanctions (both of a civil and criminal nature), which may affect the development of the project. International contractors and construction professionals who want to execute works in Brazil must also be registered before these councils; otherwise similar sanctions may be applied.
The main licences and permits to be obtained prior to the commencement of the construction works will depend on the nature of the project (for example, energy project, port, airport and so on) but at least will usually include:
Preliminary and installation environmental licences.
Construction project approval by the municipality.
Construction permit issued by the municipality.
During the performance of the works, other licences may apply (for example, licences related to explosives, transportation and use of hazardous materials).
Licences depend on the nature of the project, but at least will usually include:
Environmental operating licence.
Approval of the fire protection project by the fire department.
Fire department inspection certificate.
Annotation of the conclusion of the construction in the certificate of record of the property.
The main general types of mandatory insurance relate to the following (Article 20, Decree-Law No. 73/1966 (regulated by Decree No. 61,867/1967)):
Bodily injury and physical damage to passengers in commercial flights.
Civil liability for aircraft owners and air carriers.
Civil liability for real estate contractors of urban zone constructions with respect to bodily injury and physical damage injuries and property damage.
Assets encumbered as guarantees of loans or financings granted by public financing institutions.
Guarantees of the real estate developer and builder.
Guarantees of payment of the borrower related to construction, including real estate obligations.
Buildings divided into autonomous units.
Fire and transportation of goods relating to entities located in or transported throughout Brazil.
Export credit, whenever deemed convenient by the National Counsel of Private Insurance.
Bodily injury and physical damage to individuals caused by roadway automotive vehicles and vessels, or by their cargo.
Civil liability of land, maritime, river and lake transporters for damages caused to the cargo.
In addition, the following mandatory provisions on insurance specifically relate to the construction industry:
All buildings must be covered by insurance against fire or total/partial destruction (Article 1346, Brazilian Civil Code).
All units of residential buildings must be insured against fire and other casualties that may cause full or partial destruction of the building (Article 13, Law No. 4,591/1964).
The buyer of a financed real estate building with a maximum value of 300 times the minimum wage in Brazil must purchase life insurance (seguro de vida de renda temporária) (Articles 1 and 2, Law No. 4,864/1965).
There is an obligation to purchase performance bond insurance for public services and construction if this is requested in the invitation to bid (Article 56, section II, paragraph 1, Law No. 8,666/1993).
Contractors and related service providers will usually purchase additional coverage relating to the following:
Third parties' civil liability.
Employer's civil liability.
Bodily injury and physical damage and life coverage for builder's employees.
Coverage for the transportation of equipment to be used in the construction works.
It is advisable for companies to seek the assistance of an insurance broker, who can assess all risks inherent to a given project and determine the most suitable coverage for each type of project.
The employer is the entity or individual that (Article 2, Brazilian Labour Code (CLT)):
Assumes the risks for the economic activity.
Pays salary and directs the rendering of personal services.
The employee renders non-occasional services to an employer, under his direction, and receives a salary (Article 3, CLT).
Brazilian law does not require the execution of a written employment contract. However, in order to eliminate any possible doubts relating to conditions of employment, companies usually execute written employment contracts with their employees, which establish all the rights and duties to be performed by the parties. In some situations, such as for temporary workers, a written contract is required.
It is mandatory to record the details of any employment contract in the social security card (Carteira de Trabalho e Previdência Social) and the employment registration form (this is known as annotating the employee's social security card of an employee).
The employment relationship can be permanent or temporary (that is, when the employment is valid for a pre-fixed period for the execution of specific services or for a specific upcoming and pending event).
The temporary employment relationship cannot be valid for a period longer than two years and can be executed in any of the following circumstances:
It is a contract for a probation period (a maximum period of 90 days, after which the relationship automatically becomes permanent).
The fixed period is justified by the nature of the work or its periodical character.
The employment is related to periodical business activities.
Employment benefits provided by law, collective bargaining agreements or employer policies/practices must be paid to the employees.
Brazilian law applies to all work performed in Brazil, even when the employee works for a foreign company or is a non-national employee (in this case, specific visa regulations apply). It is not possible to override this by specifying a different set of regulations chosen by the parties and included in the employment contract. Therefore, an employer must provide foreign nationals with equal rights and it is advisable that these employees are included in the local benefits policy.
When hiring non-nationals, employers are subject to specific visa regulations. Labour regulations also limit the number of non-nationals hired as employees in a company to one-third of the employees and/or one-third of the cost of the payroll.
Employees' basic labour rights are contained in the Federal Constitution, which also establishes the minimum conditions that must be complied with in employment relationships. The labour rights and minimum conditions are also contained in federal laws and most of them are restated in the Brazilian Labour Code. In addition, there are mandatory regulations, established by means of collective bargaining agreements executed between one or more employers' unions and one or more trade unions representing employees. However, the Brazilian Civil Code governs the relationship between employers and contractors.
Hiring service providers through an intermediary company is possible as long as they are not involved in the hiring company's core business. This is so because the Superior Labour Court in Precedent 331 found that outsourcing a company's core business is illegal. Precedent 331 also found that contracting companies are liable for any labour claims filed against the outsourced company, provided that the claim is related to the period in which the employee rendered services to the contractor. Therefore, if the worker files a labour lawsuit against both its employer and the contractor, regarding any labour right derived from the period in which services were rendered, the contracting party will be liable for the payment of the adverse judgment.
However, under Precedent 191 of the Superior Labour Court, there is no subsidiary liability in cases involving construction agreements, as long as the constructing services are not related to the main activity of the contractor.
Unless provided in a collective bargaining agreement (which are rare), the law is silent on statutory redundancy in Brazil.
However, if an employment agreement is terminated by the employer without cause, the employer is responsible for paying statutory severance (that is, a penalty equivalent to 40% of its deposits in the Employee Severance Indemnity Fund) to the employee.
Health and safety
In Brazil, health and safety are among the main concerns in a construction contract and are regulated by the following:
Federal Constitution, which establishes the employee's rights and includes, among others, the reduction of risks inherent to works through compliance with health, hygiene and safety rules.
Brazilian Labour Code.
Administrative rulings (Ordinance No. 3,214/1978 of the Ministry of Labor and Employment).
Rules and standards issued by the Brazilian Standards Association.
International Labour Organization conventions.
The Ministry of Labour and Employment enacted the Normative Resolutions regarding Health and Safety norms, which established rules that must be complied with by employers and employees. The key provisions are as follows:
Previous inspection. The company must request a previous inspection by the Ministry of Labour and Employment before starting its activities.
Specialised work safety and medicine services (Serviços Especializados em Engenharia de Segurança e em Medicina do Trabalho (SESMET)). Companies hiring more than 50 employees must have SESMET, aiming to promote the protection of health and safety in the workplace. The size of SESMET will vary in accordance with the risk of a company's business (established by law) and the number of employees.
Accident prevention commission (Comissão Interna de Prevenção de Acidentes (CIPA)). Companies hiring more than 20 employees must have an accident prevention commission, aiming to prevent occupational accident or disease. The size of the CIPA will vary in accordance with the number of employees.
Programme for medical control of occupational health (Programa de Controle Médico de Saúde Ocupacional (PCMSO)). The PCMSO aims to promote and maintain the health of employees, emphasising the clinical and pathological aspects instrumental in addressing the relationship between health and work, from both an individual and collective perspective.
Personal protective equipment (Equipamentos de Proteção Individual). The employer must provide its employees with personal protective equipment, aiming to neutralise/reduce their exposure to chemical, physical and/or biological agents.
Environment risk prevention programme (Programas de Prevenção de Riscos Ambientais). The environment risk prevention programme aims to provide consulting services in the assessment and control of environmental risks, such as noise, heat, chemical agents and so on.
Obtaining an environmental licence is mandatory for the construction, installation, enlargement, modification and operation of facilities and activities that use environmental resources or could cause any environmental damage (Article 10, Brazilian Environmental Policy (Federal Law No. 6,938/1981)). Licences are always valid for a specific term and their effectiveness depends on compliance with the technical requirements previously established, which may vary according to the activity and facility. Requirements relating to environmentally sensitive aspects, such as air emissions, water quality, contaminated areas and waste disposal, must also be observed. The technical requirements of these aspects have been outlined in federal rules, some of which are provided below.
Air is regulated by CONAMA Resolution No. 03/1990. However, this is a general federal regulation and each state can establish its own specific regulation on matters such as air emission standards in construction activities.
Some of the key local laws on water are:
Federal Law No. 9,433/1997 (the National Policy on Water Resources) on water quality.
Environmental National Council (CONAMA) Resolution No. 357/2005.
Some of the key local laws on waste are:
Federal Law No. 12,305/2010 (the National Policy on Solid Waste) on general waste disposal.
CONAMA Resolution No. 307/2002 on construction waste disposal.
Specific authorisations regarding the disposal of solid waste, release of water effluents and use of contaminated lands may also apply, regardless of the environmental permitting process.
Environmental impact assessments (EIAs)
Activities that may cause a significant impact must provide an environmental impact assessment and report (EIA/RIMA) during the licensing proceeding, which must describe the potential environmental impacts of the activity and facility and propose preventive and control measures to reduce them. The EIA/RIMA is mandatory for activities that may have a severe environmental impact, such as oil and gas facilities, energy generation and transmission, mining and so on (CONAMA Resolution No. 1/1986). In addition, the environmental agency responsible for the environmental licensing process can require other types of environmental studies, according to the impact that the project may have.
Sustainable development is a fundamental right in Brazil under Article 225 of the Federal Constitution and by thousands of specific environmental rules. Some of the most important instruments created by Brazilian legislation to guarantee the achievement of sustainable development are the environmental permitting process (that is, the legal obligation to obtain specific permits prior to develop any potentially polluting activity) and the environmental liability regime (in which a polluter can be held liable to compensate or remediate a damage regardless of the existence of an actual fault, in addition to criminal and administrative sanctions that may be also applicable).
Brazil is a party to the United Nations Framework Convention on Climate Change (UNFCCC) and was also a signatory to the former Kyoto Protocol, but no direct reduction goals for the country were established at that time. Brazil performed a leading role in the trading of allowances derived from clean development mechanisms, registering more than 2,500 projects. Brazil has also developed its own national policy on climate change (Law No. 12,187/2009), which is the main local legislation and establishes a voluntary commitment to achieve a greenhouse gas emissions reduction of between 36.1% and 38.9% by 2020. The new UNFCCC international climate change agreement (Paris Agreement), which was recently signed by Brazil in December 2015, will:
Boost initiatives from public authorities.
Expand local markets.
Stimulate mitigation and adaptation measures and also relevant funding mechanisms.
The effectiveness of the Paris Agreement requires the enactment of a legislative decree, which was recently approved by the Brazilian Congress and ratified by the President. It now remains for the decree to be published.
No direct measures regarding the reduction of carbon emissions for new buildings and construction projects were established so far, but this is expected to occur in light of this new legislation. Local environmental agencies are expected to be the relevant entities to inspect and to control the reduction of carbon emissions.
Prohibiting corrupt practices
The Brazilian rules that prohibit corrupt business practices and bribery are outlined below.
Brazilian Penal Code (Law-Decree No. 2,848/1940)
This law imposes criminal penalties on individuals who offer or promise any unlawful advantage to a domestic or foreign public official to constrain him to do, omit or delay any official act. Brazilian law does not impose criminal liability to companies for corruption.
The offence is imprisonment for up to 12 years and a fine. Penalties may be increased by one third if, as a result of the advantage or promise, the public official delayed or omitted an official act or infringed his duties.
Anti-Corruption Statute (Law No. 12,846/2013)
This law imposes strict administrative and civil liability and sanctions on companies for acts that are harmful to the domestic or foreign government, regardless of fault or intent. The following is caught by this law:
To promise, offer or give, directly or indirectly, an undue advantage to a public official, or a third person related to him.
To finance, fund, sponsor or in any other manner subsidise the practice of illegal acts.
To use third parties, physical persons or legal entities and to hide or disguise real interests or the identity of the beneficiaries for the acts.
To defraud, manipulate, prevent or frustrate public biddings or contracts.
To hinder investigations or oversight by agencies, entities or public officials, or interfere in their act and activities, including regulatory agencies.
The penalties for these offences are:
Administrative sanctions, enforceable by means of administrative proceedings, such as:
fines ranging from 0.1% to 20% of gross revenues of the fiscal year prior to the initiation of administrative proceedings, excluding taxes; and/or
extraordinary publication of the administrative decision.
Civil sanctions enforceable by the courts, such as:
seizure of assets, rights, or value gained from the illegal act;
partial suspension or prohibition of activities;
compulsory dissolution of the implicated legal entity; and
prohibition against the receipt of donations, grants, subsidies or funding from public entities and public financial institutions from one to five years.
Federal Public Procurement Act (Law No. 8,666/1993)
This governs the consequences for breach of administrative contracts awarded through fraudulent public bids. Penalties and sanctions include the following:
Contractual consequences (provided for in the public procurement documents or in the respective administrative contracts awarded by the government), including:
compensatory damages; and/or
other termination or indemnification provisions, which may be provided in contractual terms and conditions.
Other statutory consequences and sanctions, which may include:
termination of the governmental contract without compensation for damages (if the contract is ongoing);
suspension of rights to participate in public bids for up to two years; and/or
ban on entering into contracts with the government.
This law includes a ban on public bids or contracting with the public authorities.
Law against Improbity in Government (Law No. 8,429/1992)
Although this law is primarily targeted at public officials, it can also be applied to any individual or entity that, directly or indirectly, contributes or benefits from the improbity act. Therefore, companies can also become liable and are subject to sanctions arising from their actions. Penalties and sanctions include:
Removing illegally obtained profits.
Indemnifying the government for damages suffered.
Prohibition from entering into government contracts and receiving subsidies, tax incentives and public credit for up to ten years.
Payment of a fine of up to three times the monetary value of the illegal advantage or up to 100 times the salary of the public agent involved.
Contracts involving a bankrupt entity are not automatically terminated with the bankruptcy decree (Article 117, Brazilian Bankruptcy Act (Law No. 11,101/2005)). On the approval of the creditors' committee (if any), the trustee appointed by the court can decide whether the contract executed by the bankrupt entity should be terminated or not, aiming to protect the bankrupt estate's interest. In the event of bankruptcy of the contractor, the client can notify the trustee within 90 days from his nomination by the bankruptcy court, to declare if the contract will be performed or not. Any possible credit owed by the bankrupt entity due to an early termination of the contract should be included in the creditors' list as unsecured credit.
As the bankruptcy decree determines the termination of the business' activity, services agreements (including construction contracts) are usually terminated. However, in the event of judicial recovery proceedings, since the insolvent entity continues its business activity, contracts can be terminated in accordance with the agreement of the parties and/or under the Brazilian Civil Code.
The judicial recovery proceedings filed by Oi Group in the Rio de Janeiro trial court ordered that any provision for early termination of agreements based in the filing for judicial recovery is ineffective. Therefore, a client and/or the funder may not be able to terminate a contract with a company under judicial recovery due to its insolvency.
PPPs are specific concession models under Federal Law No. 11,079/2004, which differ from ordinary concessions under Federal Law No. 8,987/1995, in relation to the economic-financial feasibility of the project. In ordinary concessions, the levying tariffs on users of the services granted determines the feasibility of projects, while under the PPP model the main element of feasibility are payments made directly by the granting government entity.
Brazilian PPPs are suitable for projects that are not self-sustainable or that depend on a significant amount of investments prior to the operation phase. PPPs must involve the provision of long-term services.
The Brazilian PPP regulatory framework has allowed private investment in a variety of infrastructure projects. In general, all the infrastructure sectors in Brazil can benefit from the PPP model such as:
Healthcare, such as the construction and operation of the public emergency suburban hospital in Bahia in 2010 and the construction and provisions of services for technical maintenance in São Paulo in 2014.
Education, such as the construction of school facilities and provision of non-educational services in Belo Horizonte/Minas Gerais in 2012.
Transport, such as the construction and operation of federal roads and urban mobility projects (such as the São Paulo metro line number four in 2006 and number six in 2013).
General statutory framework
The main general laws that apply to PPPs are the:
Federal Law No. 8,987/1995 (for ordinary concessions and general framework for concessions in Brazil).
Federal Law No. 11,079/2004.
Sector-specific statutory regulation
The main sector-specific laws that apply to PPPs are the:
Federal Law No. 12,815/2013 (for concessions of ports infrastructure).
Federal Law No. 11,445/2007 (for concession of sanitary sewage services).
State and municipal statutory regulation
The main state and municipal laws that apply to PPPs are the:
State Law No. 11,688/2004 (for the state of São Paulo).
Municipal Law No. 14,517/2007 (for the state of São Paulo).
State Law No. 14,868/2003 (for the state of Minas Gerais).
Municipal Law No. 9,038/2005 (for the state of Minas Gerais).
State Law No. 9,290/2004 (for the state of Bahia).
Municipal Law No. 6,975/2006 (for the state of Bahia).
Prior to the bidding process, PPP projects can be drawn up either by the government or by private parties. Investors can prepare bidding documents at the government's request or can present unsolicited proposals authorised by the government.
Unsolicited proposals are useful for obtaining public studies on infrastructure projects that benefit from private expertise. They begin with a formal request by any interested party to the government seeking to assess the feasibility of a specific PPP project. On receipt of the public studies, the government will review the documentation presented by the private interested parties.
The government entities must hold a bidding process, whereby the successful bidder will execute the PPP agreement. Before the biddings, drafts of the invitation to bid and PPP agreement must be presented to public audiences, which are held for a minimum period of 30 days. These audiences are conducted to guarantee that private parties comment on the proposed documentation. Public audience documents and the corresponding announcement must be issued in the official press, newspapers of general circulation and in electronic media. The publication must indicate the grounds for the bidding process, the scope of works and services to be granted and an estimate of the PPP agreement's value.
The notice for request of proposal must be issued at least seven days after the publication of the final version of the bidding documents. The notice for the request of proposal must include all of the following:
An announcement of the dates for presentation of proposals.
The studies related to the technical, financial and economic, environmental and legal feasibility of the project.
An invitation for contributions by private parties on the methods and systems for implementing the project.
A cost-benefit analysis for implementing the PPP model in comparison with alternative methods.
A demonstration that the proposed PPP has been designed to be consistent with the most appropriate model.
Feasibility studies of the concession.
Prior to the presentation of the proposals, parties can request additional clarification from the government entity conducting the bids.
Typically, the bidding phase commences with the qualification of the private parties willing to participate, when bidders must provide evidence that they comply with the requirements set out in the request for proposals. This is followed by the awarding stage, when the proposals are judged and ranked. Alternatively, the bidding documents can provide for the reversal of the order of the qualification and awarding stages.
After the winning bidder is declared, the government entity conducting the bid must validate the result, adjudicate the winning bid and proceed to the execution of the agreement.
Formal dispute resolution methods
If no amicable settlement is reached, disputes are usually resolved by institutional arbitration. However, if there is no arbitration clause in the construction agreement, the dispute is resolved by court litigation.
Arbitration is more common in international disputes and for complex cases. It is also provided for in the bid rounds in government contracts, in order to attract foreign investors.
Courts and arbitration organisations
The courts of the domicile of the defendant have jurisdiction over any lawsuit and the parties can provide for an election of forum clause (Brazilian Code of Civil Procedure), which is very common in construction agreements. Therefore, the jurisdiction can vary depending on the contract terms and whether the action has been brought by the client, funder or contractor. Federal courts may have jurisdiction depending on the involvement of federal public entities.
Most international construction dispute cases are settled under the rules of the International Chamber of Commerce. For domestic cases, several institutions have administered construction cases. The most prevalent institution in Brazil is the Centre for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada. Other relevant institutions include the:
Centre for Conciliation, Mediation and Arbitration of CIEP/FIESP, which has relevance in São Paulo.
Câmara de Arbitragem Empresarial – Brasil, which is headquartered in Belo Horizonte and has offices in São Paulo and Rio de Janeiro.
Brazilian Center for Mediation and Arbitration, which has offices in Rio de Janeiro.
Mediation and dispute boards (which are panels formed in relation to construction agreements to either recommend a solution to (dispute resolution board) or directly solve (dispute adjudication board) technical disputes occurring during the performance of the construction agreement) are the most commonly used ADR methods in Brazil, usually in conjunction with arbitration.
The Mediation Act 2015 regulates the use of mediation in both judicial and extrajudicial proceedings. It governs matters such as penalties for parties that fail to appear in mediation and the appointment and qualification of mediators.
Dispute boards are commonly used on bigger projects involving infrastructure. Expert determination is also provided in some infrastructure contracts. However, this is quite rare and usually only in relation to cross-border and international agreements. There are no statutes governing dispute boards or expert determination.
Construction services are subject to the municipal tax on services (ISS), which is levied based on the value of the services. The taxable basis of ISS must not include the value of the goods and materials produced by the service provider outside of the construction site, which are subject to the state value added tax (ICMS).
ICMS issues can arise when providers of construction services cannot demonstrate where the goods and materials applied in the projects were produced. Additionally, certain municipalities determine ISS payments based on estimated calculations that take into consideration the constructed area and the type of construction. This estimated collection regime is often disputed in the courts.
Governmental entities (specifically the federal government, federal district government, states and municipalities) can require the payment of a contribution (contribuição de melhoria), which is due on the increase in real estate value generated by a public infrastructure project (improvement). This contribution must be used to fund the project.
Brazilian law does not provide for any methods for construction companies to mitigate tax liability on projects. However, construction companies usually adopt structures generally available for Brazilian taxpayers (such as special purpose vehicles (SPVs)). SPVs can tax their income according to the presumed profit method (available for companies with an annual gross revenue of under BRL78 billion), according to which the corporate income tax is levied on a percentage of the gross revenue, resulting in a lower overall tax burden.
With regards to infrastructure construction companies, Brazilian law provides for a special regime that eliminates revenue taxes on the domestic acquisition or importation of goods and services by the beneficiary company.
In addition, Brazilian law also provides for incentives relating to the municipal tax on services and state value added tax, which are granted (individually) to specific infrastructure projects after negotiation with governmental entities.
Other requirements for international contractors
International contractors must either:
Form a consortium with a Brazilian company.
Create a subsidiary, which is more common.
The subsidiary must comply with Brazilian laws and be registered with the National Register of Legal Entities (Cadastro Nacional da Pessoa Jurídica).
Foreign professionals must validate their diploma to operate in Brazil. The approval must be performed by a higher educational institution accredited by the Education Ministry (Ministério da Educação), usually a federal university. Typically, this process will take six months, as it requires input from the National Education board (Conselho Nacional de Educação) and the Co-ordination for the Improvement of Higher Education Personnel (Coordenação de Aperfeiçoamento de Pessoal de Nível Superior). After the validation, the professional can register with the Regional Council of Engineering and Agronomy (see Question 18).
A new public bidding and public contracts law proposal is being discussed within the Brazilian Senate. However, it is not clear when it will be published.
Regarding reforms which were recently passed, on 12 May 2016, the federal government published Provisional Measure No. 727/2016, which establishes the investments partnership programme. This initiative aims to foster the development of new infrastructure projects in Brazil and prioritise public-private projects, which are not only feasible but also attractive to private investors. However, this provisional measure is not yet law and there is likely to be some changes to its provisions.
In addition, the Federal Law No. 13,303/2016 (enacted on 30 June 2016) governs state owned companies' procurements and contracts. The act provides for state-owned companies to instruct the private sector, not only to execute construction projects but also to prepare basic and engineering projects and construction tasks (such as integrated contract (contratação integrada) (that is, a public contract practice in Brazil)).
Main construction organisations
Brazilian Chamber of the Construction Industry (Câmara Brasileira da Indústria da Construção) (CBIC)
Main activities. The CBIC is made up of 81 labour unions and employers' associations that are responsible for the political representation of the construction and real estate industry.
National Industry Confederation (Confederação Nacional da Indústria) (CNI)
Main activities. The CNI is the official and highest-level organisation representing the Brazilian industry. It is responsible for defending domestic business and manufacturing interests and acting as the main interlocutor with the executive, legislative and judicial branches of the Brazilian Government, as well as with various organisations and entities in Brazil and worldwide.
Engineering Institute (Instituto de Engenharia) (IE)
Main activities. The IE is a civil non-profit organisation that provides courses, events and technical visits. Its objective is to ensure that Brazil's professionals and technological and scientific advances develop to the highest level.
Federal Council of Engineering and Agronomy (Conselho Federal de Engenharia e Agronomia) (CONFEA)
Main activities. The CONFEA is a public authority that regulates the activities of engineers, agronomists, geologists, geographers, meteorologists, technicians and technologists. CONFEA works with the Regional Councils of Engineering and Agronomy (Conselhos Regionais de Engenharia e Agronomia), which are responsible for monitoring the exercise of the above professions at regional level.
Description. Official government website that contains original and revised versions of federal legislation.
House of Representatives – São Paulo
Description. Official government website that contains the law that establishes the public private partnerships in São Paulo.
Finance department – Bahia
Description. Official government website that contains the law that establishes the public private partnerships in Bahia.
House of Representatives – Minas Gerais
Description. Official government website that contains the law that establishes the public private partnerships in Minas Gerais.
Environmental National Council (CONAMA)
Description. Official Government website that contains all the resolutions issued by CONAMA.
Description. Unofficial website that contains all the municipal laws of Brazil.
Bruno Werneck, Partner
Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados
Professional qualifications. Law, São Paulo State University; LLM, Columbia Law School
Areas of practice. Infrastructure; energy; mining; project finance; public and regulatory.
Eduardo Damiao Goncalves, Partner
Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados
Professional qualifications. Law, São Paulo State University; Post-Graduation in International Law, The Hague Academy of International Law; Master of Laws in Private International Law and International Commerce with specialisation in Arbitration, Université de Paris II; PhD in Law, São Paulo State University
Areas of practice. Arbitration; dispute resolution; infrastructure and environment.
Flávio Spaccaquerche, Partner
Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados
Professional qualifications. Law, Pontifícia Universidade Católica de São Paulo; Specialisation in Consumer Relations Law, Pontifícia Universidade Católica de São Paulo; Master in International Economic Law, Université Pantheón-Sorbonne
Areas of practice. Complex court litigation; domestic and international arbitration, involving infrastructure; corporate; cross-border transactions; international commerce; energy and construction.
Languages. Portuguese, English, French, Spanish.
ICC YAF Latin America Representative.
Contributor for the ITA Latin America Arbitration Forum (ITAFOR).
Brazilian Arbitration Committee (CBAr).
IBA Arbitration Guide, Brazilian Chapter.
PLC Practice Note on Arbitration in Brazil.
IBA Arbitration News 2014. GONÇALVES, Eduardo Damião; BARBOSA, Flávio Spaccaquerche. ''Bill to renew the Brazilian Arbitration Act''.
''The Enforcement of International Investment Arbitral Awards: is There a Better Way?'', in TDM Latin America, Special Edition, December 2009, Vol. 6, issue #4.
Thiago Moreira, Partner
Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados
Professional qualifications. Law, Pontifícia Universidade Católica do Rio de Janeiro; Extension Course Program in Negotiation for Lawyers – Basic Negotiation, Harvard University; LLM in Construction Law and Arbitration, Robert Gordon University Aberdeen Business School
Areas of practice. Infrastructure; construction; contracts; pre-litigation and negotiation; project development.
Legal assistance in the analysis and negotiation of four shipbuilding contracts of tugboats.
Legal assistance in the analysis, negotiation and management of the engineering, procurement and construction (EPC) contract for the implementation of transmission lines of approximately 1,126km.
Legal assistance in the analysis, negotiation and management of the engineering, procurement and construction management contract for the implementation of a data centre.
Legal assistance in the analysis and negotiation of the EPC contract for the implementation of a thermal power plant.
Languages. Portuguese, English, Spanish
Society of Construction Law of London.
International Construction Projects Committee of the International Bar Association.