• Adjustments Applied Retroactively To Financial Clauses in Contracts Executed With the Brazilian Public Administration
  • April 13, 2012 | Authors: Leonardo Define Gonçalves; Roberto Pádua Cosini
  • Law Firm: Miguel Neto Advogados - São Paulo Office
  • It is still very common that unexpected factors change the conditions prevailing for contracts entered into with the Public Administration. These factors interfere with the economic and financial balance of these contracts and may even jeopardize execution of the contracted object.

    Therefore, many companies contact the government agencies that engaged them to renegotiate the amounts related to these contracts administratively. However, they usually find great difficulty in this endeavor, given the Government’s unwillingness to correct adjust amounts that are due before the application for repricing.

    More often than not, many companies take weeks or months to determine the impact on the economic and financial equation; and when they finally formalize the application for repricing, the Public Administration refuses to make payments with retroactive effect to the application date until the triggering event.

    In so doing, however, the Public Administration fails to comply with article 37, XXI of the Brazilian Federal Constitution, which guarantees that contract repricing is a right to which contractor is entitled to preserve a fair, balanced economic and financial equation of the contract, as a way to maintain the actual conditions of the proposal signed with the Government.

    So much so because the economic and financial equation is essential to the existence of the contracts entered into with the Public Administration, which must prevail throughout its effective term, from its initial effective date through its final term, when execution of the subject matter thereof is terminated. Therefore, there is no doubt that by denying contractor the right to retroactive repricing, the Public Administration commits an arbitrary act. This is also the understanding expressed by the Federal Attorney-General’s Office in its opinion AGU/JTB 01/2008: “it is widely known that the legal effects from a relation emerge immediately after a given right is perfected, unless otherwise provided for by law. From the moment the right arises, in principle, the pertinent statute of limitation alone would have the power to extinguish the claim of the contracted party (...) If the contractor has experienced an increase in its financial burden for a reason not attributable to it, the Public Administration cannot disregard the economic and financial equation of their contracts, compelling the private contractor to bear a burden it did not cause. This means that the financial effects arising from the right must apply from the occurrence of its triggering event, keeping the original relationship between costs and benefits.”

    Moreover, this is the guidance provided by the Higher Court of Justice (STJ) in its records of Appeal No. 554.375, reported by Justice Castro Meira, concluding that specifically in cases of repricing motivated by a salary increase for a professional category, “the initial term to be observed for keeping the contract balance is the date on which the salary increase in the professional category that gave rise to the revision for adjustment became effective”.

    Likewise, the Federal Audit Court, by way of Plenary Session Decision No. 1828/2008, agrees that “inasmuch as contractual repricing is a right stemming from the law (article 40, item XI of Law No. 8666/93), and the law takes effect immediately, it must be recognized that this case is not a matter of retroactive effect or not for repricing. The question one poses here regards the attribution of immediate effectiveness to the law, which grants the contractor the right to adjust the prices of the contract for ongoing services to new market prices. From the date on which the salary increase of the professional category that gave rise to the revision for adjustment came to effect, the contractor began to have the right to renegotiate prices.”

    As one can see, this controversial matter has been settled between the authorities of the Federal Attorney-General’s Office, the Higher Court of Justice and the Federal Audit Court, and in view of these opinions, there is no reason, will and drive that could justify the denial by the Public Administration to enforce the retroactive effect for repricing.

    Insisting on such denial is comparable to turning a blind eye to a stated right while nonperforming an obligation under article 422 of the Civil Code: “In performing and eventually terminating their contract, the contracting parties are required to observe the principles of uprightness and good faith.”

    The uprightness and good faith principles express the social function of contracts in connection with the possibility of revision upon occurrence of predictable but hardly measurable or unpredictable events, whose effects impose a heavy burden on one of the parties. Thus, in spite of the constitutional order and the recurring decisions by the Brazilian authorities, the Public Administration must make up for the contracted company as appropriate, restoring the economic and financial balance since occurrence of the triggering event that led to repricing, regardless of the fact that the administrative application had been filed weeks or months after the triggering event that caused the imbalance (bearing in mind, of course, the respective statutes of limitation).