Brazilian law financial, investment and commercial contracts will have greater legal certainty regarding the charging of default interest and monetary adjustment with new rules of the Brazilian Civil Code.
Federal law 14.905 amended the Civil Code and will impact contracts entered between companies, with financial institutions, fintechs, investment funds, credit card acquirers, among other market players whose contractual provisions are subject to the charging of default interest, monetary correction and other charges.
See below 4 key points about the new Brazilian Civil Code rules:
1. The New Rules of the Brazilian Civil Code Give Contractors Greater Freedom to Stipulate Default Interest and Monetary Adjustment: The new wording of article 389 and sole paragraph specify if “the obligation is not performed, the debtor is liable for losses and damages, plus interest, monetary adjustment and lawyer’s fees”. In the event that the monetary adjustment index has not been agreed upon, Brazilian moneraty index IPCA or the index that replaces it will be applied.
Due to the new wording of art. 389, it is essential that lenders and investors expressly and objectively stipulate default charges in the contract, including interest and monetary adjustment.
2. Monetary Adjustment Applicable to Losses and Damages Resulting from Contractual Default: According to the new wording of article 404 of the Civil Code, losses and damages resulting from contracts for which one of the parties has an obligation to pay in cash will be paid with monetary adjustment, as stipulated in the contract.
Previously, the rule was that monetary adjustment was done using the state official index. Based on the new rules, the index will be as stipulated in the contract and, if not stipulated, it will be the IPCA.
3. Stipulation of Default Interest in Contracts: The new wording of article 406 of the Civil Code establishes that when they are not agreed in a contract, or when they are agreed without a stipulated rate, or when they are determined by law, the interest will be set in accordance with the legal rate (Selic).
An important point is that, if the Selic presents a negative result for the period, it will be considered equal to zero for the purpose of calculating interest in the reference period, which protects creditors.
4. Non-Application of the Brazilian Usury Law to Contracts Between Companies and Others: Article 3 of Federal Law 14.905 innovates by providing that the so-called “Usury Law” (Decree 22.626/1933) does not apply (i) to contracts between companies, (ii) obligations represented by credit instruments or securities, (iii) obligations contracted with financial institutions and other institutions authorized to operate by the Brazilian Central Bank, (iv) investment funds, (v) leasing companies and simple credit companies; (vi) organizations dedicated to granting credit; (vii) obligations carried out in the financial, capital or securities markets.
This is a beneficial innovation for the legal security of the corporate, financial and capital markets in general, as the Brazilian Usury Law limits interest rates in contracts in geral to up to twice the legal rate.
By excluding its application to such contracts, the legislator will encourage more credit and structured operations for startups and companies in general, and potentially reduce legal disputes over the Usury Law in contracts.
It is important to note that the new Federal Law 14.905 did not modify Federal Law 4.595, which defines the activities which are restricted to financial institutions only.
The fact is that the new rules of the Brazilian Civil Code on charging default interest and monetary adjustment, and application of the Usury Law, bring greater legal certainty to commercial, financial and capital market contracts that establish payment obligations in cash.
