US blockade and tariffs drive up costs and spark a legal dispute. Photo: Freepik

Iran conflict and Strait of Hormuz crisis could lead to revision of Brazilian contracts

The blockade of the Strait of Hormuz and the threat of 25% tariffs imposed by the United States on operations linked to Iran are already beginning to produce legal effects on international contracts involving Brazilian companies. The crisis in the Persian Gulf affects energy, fertiliser and industrial input supply chains, putting pressure on logistics costs and bringing into question contractual clauses used in crisis situations.

The Strait of Hormuz is one of the world’s most strategic maritime routes. Around one-fifth of globally transported oil passes through this corridor between the Persian Gulf and the Indian Ocean. When oil tanker traffic is disrupted, the impact quickly spreads across energy, transport and international trade markets.

With traffic virtually paralysed and attacks in the Gulf, the price of oil has risen again, and shipping companies have begun to recalculate routes and costs. The diversion of ships via the Cape of Good Hope in southern Africa lengthens voyages and raises freight and insurance prices.

This scenario creates an immediate legal problem for companies that entered into international contracts before the crisis. Many of these operations were negotiated based on logistics costs and routes that have temporarily ceased to exist.

Brazilian companies importing energy, fertilisers or industrial inputs now face costs far higher than originally anticipated in their contracts.

The first natural reaction in these cases is usually to trigger force majeure clauses (cláusulas de força maior). These clauses serve to protect companies when an external, unpredictable event beyond the parties’ control makes it impossible to fulfil a contract.

The problem is that an increase in costs does not always legally qualify as force majeure.

‘The crisis in the Strait of Hormuz and United States sanctions on countries with trade relations with Iran are real and happening in real time, bringing immediate legal repercussions for Brazilian contracts,’ says Bianca Miranda, an analyst at the Centre for Energy, Finance and Development (CEFD).

According to specialists, the central point of the legal debate is whether the blockade of the strait makes contract fulfilment impossible or merely more expensive. In Brazilian law, force majeure is dealt with under Article 393 of the Civil Code. The rule stipulates that a party may be released from liability when an unavoidable event occurs that prevents the execution of the obligation.

If an alternative transport route still exists, even if longer and more expensive, courts tend to find that there was no absolute impossibility. This means the company could still fulfil the contract, albeit at a much higher cost.

‘From the perspective of Brazilian law, these situations are analysed in light of the contract revision rules provided for in the Civil Code and the consolidated case law of the Superior Court of Justice (STJ),’ explains Fabrício Bertini Pasquot Polido, a partner at L.O. Baptista.

When total impossibility does not exist, the discussion usually shifts to another legal field called excessive onerousness (onerosidade excessiva), or hardship. This concept appears in Articles 317 and 478 of the Civil Code and allows for the revision of contracts when an unpredictable event drastically alters the economic balance of the agreement.

This means that a contract that was viable at the time of signing can become economically unfeasible following a radical change in the international landscape. The COVID-19 pandemic served as an important precedent for this type of discussion within the Brazilian judiciary.

In rulings by the Superior Court of Justice, the court recognised that extraordinary external events can justify the temporary revision of contracts to restore the economic balance between the parties.

This type of judicial intervention seeks to preserve the contract rather than annul it, aiming to redistribute the impact of the extraordinary event between the parties involved. Even in these cases, contract revision does not occur automatically.

The STJ has already ruled that economic crises or global events do not authorise a generalised revision of contracts; each situation must demonstrate a concrete economic imbalance.

Another legal concept entering this discussion is the so-called duty to mitigate losses. This principle derives from objective good faith (boa-fé objetiva), provided for in Article 422 of the Civil Code. It establishes that an aggrieved party must take reasonable steps to reduce their own losses.

This can include, for example, seeking alternative transport routes or renegotiating costs with suppliers. “The increase in freight and insurance costs does not constitute absolute impossibility for the purposes of force majeure,” assesses Fabrício Bertini Pasquot Polido.

In practice, the law tends to require companies to try alternatives before seeking a judicial revision of the contract. At the same time, fulfilling this duty does not mean accepting any economic loss. If the increase in costs reaches extraordinary levels, companies can turn to the judiciary or arbitration to renegotiate values or even terminate contracts without fault.

Secondary Sanctions and Factum Principis

In addition to the logistics crisis, another relevant legal front involves potential trade sanctions from the United States. The US government is threatening to apply tariffs of up to 25% on operations related to Iran. These measures form part of a mechanism known as secondary sanctions.

This type of sanction occurs when a country attempts to punish companies from third countries that maintain trade relations with a specific state. This could affect Brazilian companies that have indirect contracts with production chains linked to Iran.

Some jurists are debating whether these measures could be classified as an international factum principis (act of the sovereign). In Brazilian law, the so-called fato do príncipe occurs when a decision by the state itself directly interferes with the execution of a contract.

This concept is common in administrative contracts, when a regulatory change affects a contract with the public authority. In the case of American tariffs, the situation is different.

“In principle, the imposition does not qualify as an international factum principis, as unilateral tariffs, such as those imposed by the United States, are applied with extraterritorial effects,” says Fabrício Bertini Pasquot Polido.

As it concerns a decision by a foreign government, the measure tends to be treated legally as an act of a third party (fato de terceiro). This type of event can also justify contract revision if it profoundly alters the economic conditions of the agreement.

Objective basis of the contract

Another relevant concept in this debate is the so-called breach of the objective basis of the contract (quebra da base objetiva do contrato). This principle stems from the idea that contracts are concluded based on a certain economic and logistical scenario. When this scenario changes drastically, there may be justification for revising the agreed conditions.

Brazilian courts have already analysed similar situations during economic crises and during the pandemic. In those cases, judicial decisions considered whether there had been a profound change in the conditions that existed at the time the contract was signed.

Specialists state that the geopolitical crisis in the Gulf could generate similar disputes in the coming months. Companies relying on maritime routes or energy inputs may face logistical costs far higher than anticipated.

In more recent international contracts, companies are already beginning to include specific clauses for geopolitical risks. Some contracts have started to expressly provide for risks linked to the Strait of Hormuz or international sanctions.

These clauses define in advance how additional costs will be distributed between the parties. In a scenario of prolonged geopolitical instability, this type of contractual provision tends to become more common.