Brazilian legislators are known for their frustrated attempts at re-inventing the wheel. After a major failure with the Constitution of 1988, a straightjacket without precedents in international law, a notable flop ensued with the Civil Code of 2003. If the reveries and eccentricities of the Constitution can be explained by a country thirsty for the rule of law after twenty two sombre years of military dictatorship, the Civil Code has no such excuses, as it was enacted seventeen years after the restoration of democracy. However, dictatorships cast long shadows onto the future of nations and, accordingly, the original draft of the project of the Civil Code (which has substantially survived) was commissioned by the military rulers in 1967 to a group of jurists who were unsurprisingly collaborationists of the regime. This commission was led by Professor Miguel Reale, a legal philosopher who had been the secretary of doctrine and propaganda of the Brazilian fascist movement known as Integralismo. A project was ready by 1972 and had been approved by the military rulers by 1984. Sent to Congress, it remained there largely forgotten for the most of twenty years, at the end of which a cursory adaptation to the democratic Constitution was effected and promulgated into law.
The new Civil Code has thus some grave inspirational failures and numerous shortcomings resulting either from the anachronism of the treatment of several legal institutes or from poor understanding of the issues at hand and their respective implications. Poor drafting and inadequate use of the language did not help and a substantial and solid knowledge of the relevant legal framework is essential for ascertaining which are the necessary precautions to be taken. Therefore, proper legal advice is strongly recommended prior to any dealings in relation to Brazil.
The new Brazilian Civil Code, Law 10.406 of 10 January 2002 came into force on 11 January 2003 with substantial amendments to previously prevailing legal provisions, including those relating to companies and contracts.
In this article, we mention some relevant new legal aspects to be considered by anyone with a business interest in Brazil. For ease of reference, we have divided this article into this introduction, a section on company law, a section on contracts and a conclusion.The new Code has been divided into two parts: one general part and one special part. Book II of the Special Part of the New Brazilian Civil Code rules on business individuals, associations and legal entities, revoking the first part of the Brazilian Commercial Code. The Commercial Code had been of great importance for business and corporate activities since 1850 and now, it will prevail in relation to maritime law only.
The first substantial amendment introduced by the new Civil Code in relation to company law relates to the replacement of the theory of the acts of commerce – which distinguishes civil from commercial companies – by the theory of the enterprises – which distinguishes business corporations from simple companies.
In accordance with the new Civil Code, Business entrepreneurs or corporations have, as their object, the economic activity organised for the production or circulation of goods or services, whilst simple companies have, as their object, any activity not related to the production or circulation of goods or services, such as those of an intellectual, scientific, artistic or literary nature, except for professional activities forming part of an enterprise. For example, although a hospital has a scientific object, the medical and scientific professional activity is part of an enterprise and hospitals are classified as business corporations. Farmers may choose to be classified as business entrepreneurs.
As to the form, the new Civil Code allows for the following kinds of companies:
(1) Companies without a legal capacity of their own, being either:
(a) “de facto” (common); or
(b) unincorporated partnerships with one ostensive partner and one hidden partner;
(2) Legal entities, with a legal capacity distinct from that of the individuals or entities forming them, being either:
(a) Simple; or
(b) Business Corporations
Business corporations may take any of the following forms:
(1) “Sociedade em nome coletivo” (formed only by individuals, all of them remaining jointly and unlimitedly liable for the entity obligations);
(2) limited partnership;
(3) companies of limited liability;
(4) companies by shares; or
(5) limited partnership by shares.
Simple Companies may take any of the forms allowed for business corporations, as referred to above. If a simple company does not take any one the forms allowed for business corporations, it will be subject to the provisions of the Civil Code applicable to simple companies. Instead, if a simple company does take one of the forms of the business corporations, it will be subject to the provisions applicable to the relevant specific form.
However, even if simple companies take one of the forms of business corporations, provided that the nature of the social object is that of a simple company, then they will still be considered simple companies .
By legal definition , companies by shares (which are still subject to the apposite legislation, Law 6404/76, as amended) are always classified as business corporations, regardless of their object. Therefore, it is not clear weather simple companies can take the form of companies by shares, because if they do, they would become business corporations and not simple companies.
Co-operatives are always classified as simple companies, regardless of their object .
The distinct legal capacity of the simple companies, as well as of the business corporations depends on the registration of their corporate documents. If registration is not completed within thirty days of the date of the celebration of the initial corporate document, then the corporate legal capacity will be valid only as of the date of registration. Business corporations or business individuals must be registered with the Commercial Registry and simple companies must be registered with the Civil Registry. In accordance with article 1150 of the new Civil Code, if simple companies take one of the forms of business corporations, the registration will still be effected with the Civil Registry, but the civil registration will need to be effected in accordance with the rules applicable to commercial registration. Only business corporations or business individuals are subject to bankruptcy.
Existing companies need to adapt their corporate documents to the new legal provisions by 11 January 2004.
In this article, we will restrict to analyse the provisions applicable to the simple companies, to the business corporations of limited liability and the general provisions applicable to all kinds of companies ruled by the new Civil Code.Simple companies are subject to articles 997 to 1038 of the new Civil Code. However, as mentioned above, simple companies may take any of the forms allowed for corporate companies and, in this case they will not be subject to the rules applicable to simple companies. Instead, they will be subject to the provisions applicable to the specific form of company chosen only .
This is important because some of the rules applicable to simple companies contain obligations which will not be adequate in many cases. Therefore, depending on the specific case and the rules applicable to the forms of business corporations, the choice of one of those forms of business corporations may be the solution for avoiding the undesired provisions applicable to simple companies.
We analyse below some of the relevant and/or contradictory and/or polemic provisions applicable to simple companies.
Article 997 of the new Civil Code can be translated as follows:
“Article 997. The company is constituted by a public or private written agreement, which, besides the clauses stipulated by the parties, shall mention:
VIII – if the quotaholders answer, or not, for the social obligations in a subsidiary manner.”
However, article 1023 establishes as follows:
“Article 1023. If the company assets are not enough to cover its debts, the quotaholders shall answer for the shortfall, in the proportion of their participation in the social losses, except for joint responsibility clause.”
There is already a proposal by the centre of judicial studies of the Federal Justice Council to the effect that item VIII of article 997 should be amended to establish that the articles of association (contrato social) should determine if the quotaholders are jointly liable (instead of liable in a subsidiary manner) or not. However, until such time as article 997 is so amended or the judiciary decides on a different interpretation, in accordance with the strict interpretation of the above-mentioned articles 997 and 1023, the responsibility of the partners of a simple company is always subsidiary and unlimited, the articles of association specifying only if the partners (unlimited) responsibility is joint or several.
Another innovation of the new Civil Code was introduced in its article 1003, sole paragraph, which establishes that a partner assigning all or part of its participation in the company, shall remain jointly liable with the assignee, for all the social obligations of the partners, for a period of two years starting on the date of registration of the amendment of the articles of association containing the assignment of the social participation. Furthermore, in accordance with article 1003, the assignment of a participation in the social capital is subject to the written approval of all the other partners.
Also, partners joining a simple company after its constitution are liable for the obligations preceding the date when they joined the company .
Another provision of the new Civil Code in relation to the responsibility of the partners of simple companies is contained in article 1004, which establishes that the partner defaulting its obligations towards the company, as foreseen in the articles of association, after thirty days of being notified to comply with the relevant obligations, shall be liable for the damages caused. Alternatively, should the majority of the other partners prefer, the partner in default after thirty days of the relevant notification may be excluded from the company.
Revocation of Managing Powers 
The partner nominated as a manager in the articles of association, can only be removed from the management of the company by a judicial procedure initiated by another partner demonstrating fair cause for the destitution.
Partners nominated as managers in separated acts, other than the articles of association, as well as non-partners managers, can be removed from the management of the company, at any time, as a result of a decision of the partners representing the absolute majority of votes.
In accordance with article 999 of the new Civil Code, the following amendments to the articles of association must be approved by all the partners:
(1) name, nationality, marriage status, profession and residential address of the partners, if individuals, or social denomination, nationality and address of the headquarters of the partners, if entities;
(2) social denomination, object, address of headquarters and term of the company;
(3) company capital, in Brazilian currency, which may be formed by any kind of assets susceptible of pecuniary evaluation;
(4) each partner´s participation in the company´s capital and the relevant payment conditions;
(5) specification of the consideration due by any partner who is to contribute with services;
(6) the natural persons responsible for the company´s management, their powers and attributions;
(7) the participation of each partner in the profits and losses;
(8) the liability of the partners for the social obligations in a subsidiary manner, or not.
All the other amendments may be approved by the majority votes, unless the articles of association establish amendment by unanimous approval.
In principle, the absolute majority depends on votes representing more than half the amount of the social capital. However, the new Civil Code innovates in its article 1010, establishing that in case of draw in the social deliberations, the decision of the majority of partners shall prevail and, worst, remaining the draw, the question shall be subject to the judiciary.
It is lamentable the inclusion in the new code of a provision denying, without any justification, the decision power of the majority partner and subjecting an internal administrative decision of the company to the judiciary.
Acts Beyond the Social Object
In relation to companies subject to the rules applicable to simple companies, the new Civil Code has introduced the express recognition of the ultra vires theory, which has already been recognised by the doctrine and jurisprudence for most companies. In accordance with article 1015, sole paragraph, item II, companies subject to the rules applicable to simple companies are not bound for obligations contracted by their managers when those obligations are evidently beyond the social object.
The new Civil Code has revoked the Decree Law 3.708 of 1919, which previously ruled on limited liability companies in a very concise manner, allowing great flexibility for the partners to decide on the best provisions for the articles of association. Prior to the new Civil Code, the limited liability companies were subject primarily to the provisions of Decree Law and secondarily to the provisions of their articles of association. Only those subject matters omitted both in the Decree law 3.078 and the articles of association were then subject to the law on company by shares. This flexibility proved very successful for the period of eight four years of validity of the Decree Law 3.078, with more than ninety percent of the Brazilian companies being formed as a limited liability company, which was also the preferred vehicle for foreign investment and joint ventures.
Now, however, the limited liability company is primarily regulated in Book II, Chapter IV, articles 1052 to 1087 of the new Civil Code which eliminates, almost completely, the previous flexibility of limited liability companies.
The great problem is article 1053 which determines that any matter not ruled by articles 1052 to 1087 of the new Civil Code shall be ruled either by (i) the provisions of the new Civil Code applicable to the simple companies; or (ii) the provisions applicable to the companies by shares, if there is an express choice to this effect in the articles of association. In order words, the articles of association cannot contain any provisions which would be contrary to either the provisions applicable to simple companies or to those applicable to the companies by shares.
Another consequence of article 1053 is the creation of two alternative sub-forms for the limited liability companies: (i) those secondarily subject to the provisions applicable to simple companies; and (ii) those secondarily subject to the provisions of the companies by shares. We will start considering the rules applicable to all the limited liability companies. Subsequently, we will compare some of the provisions applicable to different kinds of limited liability companies.
Limited liability companies have only a single class of partners, the limited liability quotaholders.
The capital of a limited liability company is divided into quotas of same or different value and the quotaholders may have one or more quotas . The quota represents the amount (in money or other assets) that a quotaholder contributed to the formation of the company. The law expressly forbids contribution through the rendering of services.
In according with article 1054, the following information must be contained in the articles of association:
(1) name, nationality, marriage status, profession and residential address of the partners, if individuals, or social denomination, nationality and address of the headquarters of the partners, if entities;
(2) social denomination, object, address of headquarters and term of the company;
(3) company capital, in Brazilian currency, which may be formed by any kind of assets susceptible of pecuniary evaluation;
(4) each partner´s participation in the company´s capital and the relevant payment conditions;
(5) the natural persons responsible for the company´s management, their powers and attributions;
(6) the participation of each partner in the profits and losses.
The Articles of Association may be amended by resolution of the quotaholders to, inter alia:
(1) increase or decrease the company capital;
(2) extend the term of the company duration;
(3) change the company name;
(4) change the company´s registered office;
(5) admit new quotaholders;
(6) recognise the withdrawal of a quotaholder; or
(7) remove a former quotaholder´s name from the list of partners, if provided for in the articles of association.
Quotaholders who disagree with an amendment to the articles of association have the right to withdraw from the company.
The total dissolution of a limited liability company may take place in the following cases: (i) at the end of its term as set forth in the articles of association; (ii) by the unanimous resolution of all quotaholders; (iii) by the resolution of quotaholders representing an absolute majority, in companies with an undetermined term of duration; (iv) by the existence of only one quotaholder, if the minimum of two is not re-established within one hundred and eighty days; (v) if applicable, due to the expiration of its license to operate; and (vi) by bankruptcy (if a limited liability company has the object of a business corporation and is thus registered with the commercial registry).
Liability of Quotaholders
Quotaholders are jointly liable for the payment of the entire amount of the company´s capital. After the payment of the capital the quotaholders do not have further responsibilities towards third parties who contract with the company .
However, as seen above, if the Articles of Association do not contain as express choice for the secondary submission to the rules applicable to companies by shares, limited liability companies will be secondarily subject to the rules on simple companies  and a possible subsidiary liability of quotaholders may prevail as explained above in relation to the simple companies.
Furthermore, any quotaholders approving social decisions contrary to the articles of association or the law will become unlimited liable .
Finally, should quotaholders contribute to the social capital with assets, no previous evaluation will be required. However, all the quotaholders will be jointly liable for the exact estimate of the value of the assets for a period of five years counting from the registration of the articles of incorporation .
Assignment of Quotas
Quotas are not represented by securities or certificates but instead their ownership is registered in the articles of association. Consequently, any transfer of title of the quotas requires an amendment to the articles of association.
In accordance with article 1057 of the new Civil Code, in the absence of a provision to the contrary in the articles of association, quotaholders may assign their quotas to another quotaholder, independently of the approval of the others . Assignments to third parties depend on the approval of quotaholders representing three fourths of the social capital.
In case of death of any of the individual quotaholders, his or her heirs will inherit the rights to the economic value of the quotas. However, for the heirs to be admited as quotaholders, there must be a provision to that effect in the articles of association.
Quotaholders leaving or being excluded from limited liability companies, or their heirs, remain responsible for a period of two years preceding and two years after registration of the respective amendment to the articles of association .
Another innovation of the new Civil Code is the possibility of appointing individuals who are not quotaholders. Individuals who are quotaholders may also be appointed as managers
In the past, only quotaholders could be appointed as managers, who could then nominate delegated managers.
Now, limited liability companies can have one or more individuals, partners or not, as managers, who will be appointed in the articles of association or in a separated act.
Appointment of “non-partners” managers will depend on the unanimous approval of the partners, if the capital is not completely paid up, and of partners representing two thirds of the social capital after it is completely paid up.
It is also worth mentioning the sole paragraph of article 1060, which establishes that the administration attributed to all the partners in the articles of association is not extended to those which subsequently become partners.
Contrary to simple companies, a partner appointed as manager of a limited liability company may be removed from office by quotaholders representing two thirds of the company´s capital, except if there is a different provision in the articles of association.
The manager is not personally responsible for the company liabilities. A manager will however, be personally liable to the company or third parties for any acts which exceed the limits of his or her authority or which violate the law or the company´s articles of association.
Statutory Audit Committee
The new Civil Code expressly allows limited liability companies to have a statutory audit committee. This was already possible with the previous subsidiary application of the law on company by shares.
If adopted, the statutory audit committee, shall be composed of three or more members and their respective substitutes, quotaholders or not, resident in Brazil. Their election shall happen in annual assemblies, and minority quotaholders representing at least one fifth of the company´s capital are assured the right to elect a separated member.
Members of the statutory audit committee have the attributions foresaw in article 1069, very similar to the powers of the statutory audit committee of a company by shares.
Articles 1071 to 1080 of the new code relate to the acts depending on the quotaholders´ deliberation, and requirements for the necessary deliberations. Acts depending on the deliberation of the partners include the following:
(1) approval of financial statements prepared by the administration;
(2) appointment, remuneration and destitution of managers;
(3) amendments to the articles of association;
(4) incorporation, merger and the dissolution of the company, or the interruption of its liquidation;
(5) appointment and destitution of the individuals promoting the liquidation and consideration of their accounts;
(6) request of composition with creditors.
Deliberations of the partners will be made during an assembly or meeting of partners and should comply with the rules of article 1010. In other words, in principle, the absolute majority depends on votes representing more than half the amount of the social capital. However, in case of draw in the social deliberations, the decision of the majority of partners shall prevail and, worst, remaining the draw, the question shall be subject to the judiciary.
As mentioned above in relation to the simple companies, it is lamentable the inclusion in the new code of a provision denying, without any justification, the decision power of the majority partner and subjecting an internal administrative decision of the company to the judiciary.
Also, the new Civil Code creates a number of different minimum quorums for approval of different matters as explained in other parts of this article, such as:
(1) three fourths of the social capital for the amendment of the articles of association, incorporations, mergers and interruption of the liquidation of the company ;
(2) three fourths or totality of the social capital for nomination of managers;
(3) totality of the partners for the transformation into another kind of company (unless the article of association provide in a different manner, in which case any partners disagreeing are entitled to leave the company) ;
This will create an additional complexity. Partners now need to be extra careful with the different quorums to avoid possible disputes in relation to the validity of the deliberations.
In the event that the company has more than ten partners, an assembly is compulsory for a decision to be made. However, if all partners agree, in writing, on the subject intended, the assembly becomes dispensable.
A General Assembly should be held at least once a year, four months after the end of the social year, with the objective of considering the financial statements prepared by administration, nominating new managers when necessary and discussing any other matter included in the agenda.
Formal requirements for holding and installing an assembly include the following:
(1) At least three publications of the summoning. The first publication should occur at least eight days before the assembly, and the other publications five days in advance. However, these requirements are not applicable when all the partners attend the assembly or declare in writing that they are aware of the date, venue and agenda for the assembly ;
(2) The financial statements to be considered during the assembly must be made available to the quotaholders at least thirty days before the scheduled date for the assembly;
(3) Partners representing three fourths of the company´s capital should attend the assembly. If that does not occur, the assembly needs to be rescheduled for another day, when it will occur with any number of partners attending.
Increase and Reduction of the Social Capital
The new legislation adopts an even stronger restriction to capital increase, which previously applied only to companies by shares.
The capital of a limited liability company may now be:
(1) Increased after being fully paid up, by resolution of quotaholders representing at least three fourths of the social capital; or
(a) when the capital has been eroded by losses;
(b) when the capital exceeds the amount necessary to achieve the company´s objectives; or
(c) when a quotaholder fails to pay-up his subscribed quotas.
In any event, the capital reduction will be suspended for a period of ninety days counting from the date of publication of the minutes of the meeting approving the reduction. During this period, unsecured creditors are allowed to dispute the reduction.
In accordance with article 1158 of the new Civil Code, limited liability companies may adopt the name of one or more partners or a different social denomination, integrated with the word “limited” or its abbreviation at the end of the name. However, if a social denomination is chosen, the partners should designate the company´s object in the name.
Managers using the social denomination with the omission of the word “limited” become jointly and unlimited liable.
Provisions Applicable to Different Subtypes of Limited Liability Companies 
As mentioned above, one of the consequences of article 1053 is the creation of two alternative sub-forms for the limited liability companies: (i) those secondarily subject to the provisions applicable to simple companies, which we will call “subtype 1”; and (ii) those secondarily subject to the provisions of the companies by shares, which we will call “subtype 2”.
Partial dissolution of limited liability companies of subtype 1 is possible in five cases as follows:
(1) Death of a partner: In case of a partner´s death, the law establishes that his quota will be liquidated . Thus, in this case, the general rule determines the partial dissolution of the company. A specific balance sheet will be necessary to mensurate the value of the quotas of the deceased and pay the estate within ninety days.
There are three exceptions to this general rule:
(a) Article 1028, item I, establishes that the articles of association can establish that the death of the partners will not result in the dissolution of quotas. An example of this can be a contract between the partners establishing that in case of death, the heir(s) of the partner will substitute the deceased;
(2) Dissolution of quotas upon the request of a creditor of a partner. This is one of the most unfortunate innovations of the new Civil Code. The sole paragraph of article 1026 determines that a partner´s creditor may require the dissolution of the partner´s quota and the deposit of the corresponding amount (determined in a special balance sheet) within ninety days counted from the liquidation. Therefore, the creditor will be allowed to apply to the judge for the dissolution of the quota of his debtor, as well as the dissolution of the company, if the partner which has a debt does not have sufficient assets to pay the debt.
(3) Motivated withdrawal. The motivated withdrawal may occur:
(a) when a partner disagrees with the deliberation of the majority partners in subjects that cause modification in the articles of association, merger or incorporation (of the company by another company or vice versa). In these cases, the partner disagreeing with the decision may leave the company demanding payment for his/her/its quotas ;
(b) when a partner of a limited liability company of the subtype 1, constituted for a determined period, decides to leave the company before the regular termination, provided that said partner can prove, in a judicial proceeding, that there is a fair reason for the withdrawal.
(4) Unmotivated withdrawal. This is the main reason causing this subtype of limited liability company to be very unstable. Partners of a limited liability company of the subtype 1, constituted for undetermined period, may leave the company at any time, without any motivation. The desire of not being a partner anymore will authorise the partner to receive the investment done and to be reimbursed for the participation. To receive the payment, the withdrawing partner only needs to notify the others sixty days in advance .
(5) Partner expulsion. This is the last possibility of partial dissolution of a limited liability company. The partner expulsion can only be done extra-judicially if the articles of association expressly allow it. It is also necessary that the partner to be excluded incurs in a grave conduct, capable of threatening the continuity of the company. This is the case, for example, of a partner that competes with the company or releases secret information of the company to a competitor. A simple allegation of problems with the “affectio societis” is no longer enough. Finally, the extra-judicial expulsion also needs to be decided during an assembly of partners specially summoned for the purpose, with the notification to the partner to be excluded, allowing the defence of said partner .
Any provisions of the articles of association of limited liability companies of subtype 2 (including provisions allowing the partial dissolution of the company), which are contrary to the law on companies by shares, will be invalid. Furthermore, the subtype 2 of limited liability companies is not subject to the rules applicable to simple companies.
Therefore the partial dissolution of subtype 2 may only occur in two hypotheses: motivated withdrawal or expulsion of partners as explained in items (3) and (5) in relation to subtype 1 above.
By comparison, subtype 2 is far more stable than subtype 1, because the partial dissolution of subtype 2 is not possible in case of the death of a partner, or upon the request of a creditor, or as a result of a non-motivated withdrawal.
Other Differences Between Subtypes 1 and 2
Other differences between the two types limited liability companies include:
(1) Draw in the Social Deliberations. In the limited liability companies of the subtype 1, as mentioned before, in case of draw in the social deliberations, the decision of the majority of partners shall prevail and, worst, remaining the draw, the question shall be subject to the judiciary .
On the other hand, in the limited liability companies of subtype 2, the majority of the social capital always prevails, with no other possibilities. In case of draw in the social deliberations, the question shall be reconsidered in a new general assembly after sixty days. After that, remaining the draw with no provision in the articles of association and no agreement between the partners as to a solution for the problem, the question may be submitted to a judge, who will need to decide in the best interest of the company .
(2) Destination of Results. In the limited liability companies of subtype 1, partners representing the majority of the social capital decide on the destination of results, being able to freely decide for the reinvestment of the totality of the profits generated or for the distribution of all of the results.
The articles of association of limited liability companies of subtype 2 must establish the minimum portion of profits to be distributed annually, as dividends to the quotaholders. In case of omission, at least half of the adjusted liquid profit, after all the reserves required by law, will need to be distributed as dividends . For foreign companies to operate in Brazil, an authorisation by Presidential Decree is necessary – an alternative which is rarely used in view of the bureaucracy involved.
However, the Brazilian Law on companies by shares allows the participation of foreign partners in the capital of Brazilian corporations.
Thus, prior to the enactment of the new Civil Code, by analogy, as established in article 18 of the Decree 3708/19 (former law on companies of limited liability, now revoked by the new Civil Code), this possibility was also applicable to the companies of limited liability, which could automatically rely on the law on companies by shares for any legal provisions missing in their articles of association. Notably, in view of their simplified structure and their reduced operational costs, in most cases, companies of limited liability of the former regulation were chosen as the preferred vehicle for the participation of foreign entities or individuals in the capital of Brazilian companies.
With the new Civil Code, it is no longer possible to automatically extend the possibility of foreign participation in the limited liability companies. Instead, the new Civil Code seems to expressly restrict foreign participation to company by shares. Accordingly, article 1134 maintains that foreign companies, as well as their affiliated companies, need governmental authorisation to operate in Brazil. The same article creates an exception allowing foreign companies to become partners in Brazilian companies by shares.
This causes a confused understanding which may lead to the conclusion that foreign entities are no longer allowed to participate in Brazilian companies other than companies by shares, even if the provisions of the new Civil Code which are applicable to the companies of limited liability are silent as to foreign participation and even if subtype 2 of the limited liability companies are secondarily subject to the law on companies by shares.
The strict interpretation of article 1134 would prevent the constitution of new companies of limited liability by foreign partners and would require that all the existing limited liability companies with foreign capital (the vast majority of companies of foreign capital) be transformed into companies by shares, by 11 January 2004.
Article 1134 has been enormously criticised and there are solid grounds for it to be revoked, because the Brazilian Federal Constitution in force ensures equal treatment to companies organised in Brazil, regardless of the nationality of their partners. Therefore, if Brazilian partners are allowed to chose any of the possible types of legal entities, foreign partners should have the same right.
Although article 1134 has not been revoked yet, it has not been applied in practice and both the Civil and Commercial Registries keep on registering companies of foreign capital which do not take the form of companies by shares.
All companies permitted under Brazilian law may spin-off a portion of their assets, transform to another type of entity, merge into or consolidate with another legal entity.
Transformation alters a company´s legal type to another without dissolving it. A merger is an operation by which one or more companies are absorbed by another. Consolidation unites two or more companies to form a new company which will succeed the consolidated entities in all rights and obligations. A spin-off is an operation whereby a company transfers all or part of its assets and liabilities to another company, already in existence or to be incorporated. If a company spins-off all of its assets and liabilities, it will be dissolved.
Foreign entities or individuals holding shares or quotas in Brazilian companies must maintain an attorney resident in Brazil with powers to receive services of process in legal actions involving its holding of shares or quotas.
Corporate names are protected in Brazil under Law n. 8.934 of November 18, 1994 (regulated by Normative Instruction n. 53 of the National Department of Commercial Registry). This protection is granted automatically in the state where the company´s head-offices are located, upon registration of the articles of association or by-laws with the competent Commercial Registry. However, as Brazil is composed of twenty six states plus its capital, the Federal District, to extend the protection to any additional state after the incorporation, specific applications must be made before the Commercial Registry of each state where protection is intended.
Prior to registering the articles of association, a name search must be performed to determine the availability of the proposed corporate name. Priority is given to the company that first registers a corporate name, without consideration of any existing trademark registration(s) or application(s). Reservation of a name is not possible in Brazil.
Regardless of the legal structure adopted by the company, it is necessary to indicate the company´s objectives to some extent in the company name. Brazilian legislation did not contain the necessary basis for the piercing of the legal personality. This has caused the institute to be arbitrarily used by magistrates, leading us to a socialisation of risks and a consequent discouragement towards entrepreneurial activities.
A very important innovation of the new Civil Code is the institutionalisation of the piercing theory. Although the new Civil Code has no specific provision expressly referring to the “piercing of the corporate personality”, it contemplates norms producing similar effects.
Accordingly, article 50 of the new Civil Code establishes that in the event of abuses of the legal personality, characterised by the deviation of the social objective or by the financial confusion, the judge may decide, upon the request of an interested party or of the public prosecution service, that the effects of certain and determined obligations be extended to the particular assets of the managers or partners of the legal entity.
There is an understanding to the effect that article 50 should only be applied when there is an illicit act and in relation to managers and partners involved in the same .
As mentioned above, the new Brazilian Civil Code has some serious failures and numerous shortcomings, which must be clearly understood for the necessary adaptations to be incorporated in the relevant specific documentation.
In the area of obligations, for instance, the principle of the social function of the contracts is upheld in article 421 which reads: “The liberty of contracting will be exercised as a result of and within the limits of the social function of the contract.” In addition, the sole paragraph of article 2035 says that no contracts will prevail in case they contradict precepts of public order established by the Code in order to ensure the social function of property and of the contracts. Of course, nowhere does the Code define what should be interpreted as the social function of property and of contracts.
In addition, without a proper definition, in the event that exercise would be possible, the Civil Code establishes the principle of objective good faith in contracts. Accordingly, parties are obliged to maintain probity and good faith in the conclusion as well as in the performance of a contract (article 422). The enforcement of a right outside the limits of its economic or social purpose, or good faith, is to be interpreted as a fraud (article187). As a result, the judiciary has not only wide berth to define whether the boundaries have been breached, but will similarly need to interpret legal transactions in accordance with good faith and uses in the place the deal was reached (article 113).
If this alone was not enough to caution the observer against enforcement risks in contracts under Brazilian law, the Civil Code has innovated in the creation of the institutes of so called state of danger and lesion, within the defects of the legal act. The state of danger occurs when a party assumes an excessively onerous obligation with the view of avoiding a grave damage to oneself or one´s family (article 156). This institute is linked with another legal pearl, the lesion, which occurs when a person, under the pain of necessity or by inexperience, accepts an obligation disproportionate with the counterpart received (article 157). As defects of the legal act, both institutes are case for the annulment of a given transaction (article 138 et. seq.). If, however, the obligation was not disproportionate when the transaction was celebrated, but in the normal course of business the same effect became manifest, then the party under disfavour may ask for the rescission of the contract as better explained below. The effects of the citation will be retroactive to the date of the citation (article 478, in fine). The Civil Code failed miserably to recognise the differences between distribution and agency contracts. Distribution contracts are internationally understood as agreements by which the manufacturer sells the product to a distributor, with or without exclusivity, for the distributor to sell the same on its sole account to the market. On the other hand, agency contracts are those agreements by which the agent promotes and sells the product which is the property of the manufacturer receiving a commission on the sales effected, or a similar compensation for services rendered.
The new Civil Code, under a chapter denominated Agency and Distribution, deals erroneously with agency in article 710, as being differentiated from distribution only by the effective possession of the goods, in the case of the latter.
Agency is thus defined when a party assumes, on a regular basis, the obligation to promote certain transactions in a given area, on another party´s account and against payment. Therefore, some very interesting problems do arise when trying to adapt international reality and practices to Brazilian law.
In other areas too, the new Civil Code´s drafting proves incompetent and adverse to business. One of those areas pertains to sale and purchase transactions. In accordance with the new Civil Code, if the documents to be delivered to buyers include an insurance policy covering transportation costs, these are to be borne by the buyer.(article 531).
Well, this is contrary to INCOTERMS and to the clauses Cost, Insurance and Freight (CIF) and Freight, Carriage and Insurance (CIP), in accordance with which the seller has the obligation to ensure the costs of transportation of the relevant goods.
It will be interesting to observe how this discrepancy will be resolved by Brazil´s judiciary, well known for its abysmal ignorance of matters of international law and practices.
From the moment a contract is concluded until its termination, the parties are bound to its clauses. In other words, the terms of a contract must be fulfilled and performed according to the will of the parties. This is the so called pacta sunt servanda principle. Thus, if any of the parties breaches any clause of a contract, he must indemnify the other party for the damages caused.
The pacta sunt servanda is a basic principle of civil and international law. In its most common sense, it refers to both national and international contracts, stressing that agreed terms are law between the parties.
Much has been discussed about the fairness of this principle. The discussion involves the right or not to revise a contract when there are significant changes in its terms, owing to unforeseen or extraordinary events such as economic crises, war, oil shock, etc. There is an understanding that once a contract is concluded its terms may not be amended by one of the parties without the previous consent of the other party (pacta sunt servanda).
On the other hand, there is also an understanding that a contract may be revised if agreed terms become extremely harmful to one of the parties and no longer expresses the initial intention of the parties, owing to unforeseen or extraordinary events. This possibility to revise a contract in force expresses the core idea of the rebus sic stantibus principle. According to this principle, contracts shall cease to be obligatory or will be revised as soon as the state of facts and conditions upon which they were based has substantially changed.
In this regard, the new Brazilian Civil Code, in force since 11 January 2003, regulates the rebus sic stantibus principle, allowing the revision of contracts upon judicial decision. This principle is regulated in article 478 of the New Brazilian Civil Code stating that “… in contracts in which the obligation of one of the parties become excessively harmful, with extreme advantage to the other party, owing to extraordinary and unforeseen events, the debtor may request the termination of the contract”.
Therefore, the rebus sic stantibus principle may affect both domestic and international contracts. Despite the fact that domestic contracts may be affected, international contracts are more vulnerable to extraordinary and unforeseen events and accordingly, to be revised.
Moreover, the applicability of article 478 of the new Brazilian Civil Code may indirectly allow, for instance, a party to a contract, acting in bad faith, to breach a previously agreed contract alleging extraordinary and unforeseen event. This possibility may cause insecurity to the legal system and consequently the default of many international contracts. For this reason, it is essential that an international contract determine and stipulate clauses foreseeing as many as possible events which may waive responsibility of one of the parties as well as clauses concerning force majeure and fortuitous events. Hence, international contracts must be drafted more accurately avoiding breaches and ambiguous interpretations.
Accordingly, the enactment of the new Brazilian Civil Code which includes the rebus sic stantibus principle challenges lawyers dealing with cross-border transactions to find solutions which prevent their clients from being exposed to potential judicial claims.
The new Brazilian Civil Code includes for the first time provisions on adhesion contracts (articles 423 and 424), and envisages the “social purpose” of the contract, rather than the principles of property and individuality of the Former Brazilian Civil Code of 1916. The inclusion of the concept of “social purpose” of the contract intends to keep adhesion contracts balanced and protect the public interest in them when challenged by private interests.
Even though the provisions on adhesion contracts are new to the Civil Code, the Brazilian Consumer Protection Code “CDC” (Law 8.078/90) already regulated (and still does) adhesion contracts (articles 47 and 54), based on the “social use” of the contract.
The CDC defines adhesion contracts as those with: “… clauses that have been approved by the competent authorities or established unilaterally by the supplier of the products or services, without being properly discussed or modified by the consumer.”
The new Brazilian Civil Code neither excludes nor derogates any of the principles of the CDC, which only relates to consumer relations. Thus, even if a principle of the new Civil Code conflicted with the CDC, the CDC would always prevail in so far as consumer nexus is concerned. The provisions of the new Civil Code, on the other hand, are applicable to transactions of all nature, depending only on the single test of the standardisation of the relevant contract.
Article 423 of the new Brazilian Civil Code sets out the rule “contra proferentem” which determines that:
Accordingly, the new Brazilian Civil Code also regulates adhesion contracts, which were previously regulated only by the CDC. Hence, even though there is not a consumer nexus, an adherent will be protected owing to the characteristics of this type of contract. The inclusion of adhesion contracts in the new Brazilian Civil Code has the objective of protecting the weaker party in contracts that are not protected by the CDC. It should be stressed that any contract which falls within the scope of articles 423 and 424 of the new Brazilian Civil Code will be subject to special protection.
In accordance with article 424 of the new Brazilian Civil Code, contractual clauses by which the adherent waives rights are considered abusive and considered null.
Thus, an adhesion contract which involves, for example, a guarantor (such as a loan or financing agreement), must not establish that the guarantor waives the benefit of order set out in article 827 of the new Brazilian Civil Code. The benefit of order is the right given to the guarantor to only have its assets involved in enforcement proceeding after the same is enforced against the debtor´s assets.
In accordance with article 427 of the new Brazilian Civil Code, the offer for a contract binds the offeror, unless the contrary results from the terms of the offer, the nature of the business or the circumstances of the case.
A public proposal also in general, and thus subject to exceptions, obliges the proponent when it contains the essential prerequisites of a contract (article 429).
Article 432 of the new Civil Code establishes that if the business is one of those for which the express acceptance of the offer is not customary, or if the offeror expressly agrees not to depend on the express acceptance, the contract shall be reputed to be celebrated if the non-acceptance is not received in a timely manner.
Should an offer be validly accepted and the offeror eventually decides not to honour it, or should the object of the offer become impossible for reasons attributable to the offeror, the offeree is entitled to loss and damages in accordance with articles 247, 248 and 249 of the new Civil Code.
In accordance with article 462 of the new Civil Code, the preliminary contract must contain all the essential requirements of the intended final contract, except those in relation to the form of the contract.
If a preliminary contract is celebrated in accordance with article 462 referred to above, unless the preliminary contract expressly allows the parties to subsequently decide not to enter into the final agreement, any of the parties shall be entitled to demand celebration of the final contract. For that, the claimant will need to give the respondent a period of time for execution of the contract and the preliminary contract will need to be registered with the public register with jurisdiction . Provided that the claimant has an original counterpart of the preliminary agreement, registration will be easily done . Should the respondent fail to celebrate the final contract in the given time, the judge may determine that the preliminary contract be considered as the final contract, at the request of the claimant and provided that the nature of the relevant obligation so allows.
Alternatively, if one of the parties does not perform its obligations under a valid preliminary contract, the other party may consider the preliminary contract terminated and claim loss and damages .
In accordance with article 466, which is an article within the chapter of preliminary contracts, if the promise of a contract is unilateral, the offeree must manifest its intentions within the term prescribed in the promise, failing which within the term granted by the offeror. Thus, it is clear that even an offer for a contract may constitute a preliminary contract as referred to above.
In accordance with article 461 of the Brazilian Code of Civil Proceedings (“CPC”) , the judge will grant specific performance of obligations or determine steps producing a practical result equivalent to the defaulted performance. The obligation shall only be converted into loss and damages (with or without fine) if the claimant so request or if it is impossible to have the specific performance, or equivalent practical results . Specific performance may also be granted as an interlocutory measure in accordance with the third paragraph of article 461 of the CPC.
Also, in accordance with article 641 of the CPC, if a respondent is condemned to make or accept a binding offer by a final judicial sentence without possibility of resources, then such a final judicial sentence will produce all the effects of the offer or acceptance not completed.
There are many instances in which a party of an abortive contract has initiated proceedings in Brazil, trying to prove that there was a binding obligation of the other party to celebrate the final agreement, as a result of a valid offer or a valid preliminary agreement or even as a result of terms proposed or accepted during initial negotiations. The Brazilian case law in this respect is vast and includes disputes against foreign companies. However, so far, all the existing case law is based on the former Civil Code which was in force until the beginning of January 2003.
The new Civil Code introduced a small improvement in determining that preliminary contracts must have all the essential requirements of the intended final contract, as mentioned above. However, during the negotiations, it is possible that the parties somehow discuss possible final terms and conditions and/or it is possible that possible final terms and conditions may otherwise be implied from similar business with third parties (especially, for instance, in the case of standard non-exclusive patent license agreements).
Should a preliminary contract be characterised, unless it expressly allows the parties to subsequently decide not to enter into the final agreement, if the final contract is not eventually celebrated, any of the parties shall be entitled to demand celebration of the final contract or to claim loss and damages. In the first case, depending on the circumstances as referred to above, the judge may determine that the preliminary contract be considered as the final contract. The possibility of the preliminary contract being considered as a final contract was also an innovation introduced by the new Civil Code, which has been very controversial because in many cases it would be far better to keep only the previously existing possibility of specific performance of the preliminary agreement, with the resulting forced celebration of a separate final agreement.
Thus, it is always advisable, whenever possible, to conduct the negotiations with the assistance of a Brazilian lawyer, who can consider, in view of the particulars of the case, which would be the most effective measures to mitigate the risk of possible claims for non-performance of obligations undertaken during the negotiations.
As seen above the numerous problems brought by the new Civil Code demand extremely careful consideration and skills for conducting negotiations, choosing the appropriate legal vehicles and drafting the relevant documentation.
In relation to company law, the rules regarding the corporate name will be affected, as companies are now required to make reference to the company´s objectives within the company´s name. Also, the powers of administration maybe be granted to individuals, even if they are not partners of the company, provided that they have the unanimous approval of the partners when the social capital has not been fully paid and at least two thirds of the quotaholders approval after the social capital has been fully paid up.
There are many other modifications and the new rules are more rigorous. Companies already established must review their articles of association in order to adapt them by 11 January 2004.
As regards simple companies and limited liability companies, in principle, the absolute majority depends on votes representing more than half the amount of the social capital. However, the new Civil Code innovates in its article 1.010, establishing that in case of draw in the social deliberations, the decision of the majority of partners shall prevail and, worst, remaining the draw, the question shall be subject to the judiciary.
It is lamentable the inclusion in the new code of a provision denying, without any justification, the decision power of the majority partner and subjecting an internal administrative decision of the company to the judiciary. Unfortunately, the Brazilian judiciary is in crisis, overburden, inefficient and lacking the necessary understanding of many business disputes.
Also, the new Civil Code creates a number of different minimum quorums for approval of different matters in limited liability companies, such as three fourths of the social capital for the amendment of the articles of association and three fourths or totality of the social capital for nomination of managers. This will create an additional complexity. Partners now need to be extra careful with the different quorums to avoid possible disputes in relation to the validity of the deliberations.
Prior to the enactment of the new Civil Code, depending on the characteristics of each project, investors would normally chose between limited liability companies or companies by shares, the two vehicles restricting the liability of the partners to the social capital. Now, the limited liability companies are not as flexible as they used to be and investors must chose between three possible vehicles: (i) limited liability companies secondarily subject to the rules on simple companies; (ii) limited liability companies secondarily subject to the rules on companies by shares; or (iii) or company by shares. In this article we tried to indicate some of the differences, advantages and disadvantages of each alternative. However, a proper professional consideration must be made in each case, so that the choice of the vehicle and the drafting of the documentation correctly protect the investors´ interests.
In relation to Contracts, the matter of proposals, preliminary agreements, or heads of agreements, quite common in other jurisdictions, has become a minefield in Brazil. As mentioned above, a preliminary agreement, with the exception of the form, must contain all prerequisites that are essential for the contract to be executed. This legal condition can be potentially dangerous, as the essential prerequisites required by law are puny in comparison with the business requirements and practices, which very often vary in accordance with the economic sector. In case the preliminary agreement does not have a clause contemplating repent, any of the parties may demand the execution of the final contract. Failure to perform will be resolved by losses and damages as further elaborated above.
Also, Brazilian international contracts now have to foresee as many as possible events and clauses concerning force majeure and fortuitous events to prevent a possible judicial dispute of the contract on the basis that the state of facts and conditions upon which it was based have subsequently changed in a substantial manner.
The new Brazilian Civil Code also regulates adhesion contracts, which were previously regulated only by the CDC. Hence, even though there is not a consumer nexus, an adherent will be protected owing to the characteristics of this type of contract. The inclusion of adhesion contracts in the new Brazilian Civil Code has the objective of protecting the weaker party in contracts that are not protected by the CDC. It should be stressed that any contract which falls within the scope of articles 423 and 424 of the new Brazilian Civil Code will be subject to special p
Lawyer admitted in Brazil, England and Wales and Portugal. GATT and WTO panelist. Brazilian government ad-hoc representative for the Uruguay Round of the GATT. Post-graduation professor of the law of international trade.