Liability for Breach of Contract: What a Company Can Claim or Defend Against

A contract is one of the main tools for ensuring legal certainty in business relationships. However, even with well-drafted clauses, contractual obligations may be breached, causing financial and reputational impacts for one of the parties.

In this article, we explain when a breach of contract occurs, what liabilities are assigned to the defaulting party, what can be claimed in court, and how companies can protect themselves or mount a defense, in accordance with Brazilian law.

1. What Is a Breach of Contract?

A breach of contract occurs when one of the parties fails to perform, in whole or in part, the agreed obligations without just cause. This may occur through:

·         Absolute nonperformance: when the obligation is not fulfilled and late performance is no longer useful (e.g., failure to deliver within an essential deadline);

·         Relative nonperformance (default/mora): when there is delay or defective performance, but fulfillment is still possible and useful.

The injured party may seek contract termination, compensation for losses and damages, and specific performance, depending on the circumstances.

2. Legal Basis for Contractual Liability

Liability for breach of contract is governed by the general rules of the Brazilian Civil Code, based on the principles of objective good faith, the social function of the contract, and balance between the parties’ obligations.

Key applicable provisions:

·         Art. 389, Civil Code – Establishes the duty to compensate for losses and damages, interest, and monetary adjustment in case of nonperformance;

·         Art. 395, Civil Code – Liability of the debtor for losses and damages, even if nonperformance results from unforeseen events, when the debtor is in default;

·         Art. 475, Civil Code – Allows the injured party to terminate the contract and claim damages if the breach is essential;

·         Art. 927, Civil Code – General provision on civil liability, including contractual obligations.

3. What Can Be Claimed in Case of Breach of Contract

The injured party may seek:

Specific performance of the contract

If fulfillment is still useful, it is possible to demand the obligation in court (delivery of goods, performance of services, etc.).

Contract termination

When the breach makes the agreement unviable, it is possible to request termination with restitution of payments, when applicable.

Compensation for losses and damages

This includes:

·         Direct damages (dano emergente): immediate and direct losses (e.g., amounts paid, investments made);

·         Loss of profits (lucro cessante): gains that were lost due to the breach.

Contractual penalty (liquidated damages)

If stipulated, the penalty clause may be enforced without prejudice to additional indemnities, in accordance with Art. 416 of the Civil Code.

4. Limits of Liability and Excluding Factors

Not every contractual breach automatically results in indemnification. Case law recognizes excluding factors such as:

·         Force majeure and unforeseeable events (Art. 393, Civil Code): unpredictable and unavoidable events that prevent performance;

·         Third-party act: when the breach is caused by a third party unrelated to the contractual relationship;

·         Lack of fault or exclusive fault of the creditor: when the injured party’s own conduct contributes to or prevents performance.

Liability may also be limited by contractual clauses, provided they are valid and not abusive (e.g., setting a cap on damages or excluding lost profits in business contracts).

5. Recent Case Law on Breach of Contract

Brazilian courts have taken a balanced approach to contractual breaches, recognizing the right to termination or indemnification, but also requiring clear proof of damages.

“Contract termination for essential breach is admissible, with restitution of the parties to their prior state and indemnification for duly proven lost profits.” (STJ – REsp 1.046.513/SP)“A penalty clause stipulated in a commercial contract is valid, provided it does not infringe the principles of objective good faith and contractual balance.” (TJSP – Civil Appeal 1008739-72.2021.8.26.0100)

6. How to Avoid or Mitigate Risks of Breach of Contract

Companies can adopt best practices to prevent disputes arising from nonperformance:

·         Draft contracts with clear and detailed terms, specifying obligations and deadlines;

·         Include tolerance and extension clauses to avoid automatic breach from minor delays;

·         Establish penalty clauses proportional to the risks involved;

·         Provide for force majeure and contractual adjustment in case of unforeseen events;

·         Keep formal records of all communications and notices as evidence;

·         Encourage alternative dispute resolution methods, such as mediation or arbitration.

7. Final Considerations

Breach of contract is a common reality in commercial relationships, but its effects can be minimized through proper legal planning. The defaulting party may be held liable, including for full compensation of damages caused, provided the legal requirements are met.

On the other hand, the party alleging breach must proceed with caution, as termination or specific performance will only be granted with clear proof of nonperformance and of the damages actually incurred.

In all cases, preventive legal advice is essential to structure well-drafted contracts, resolve disputes efficiently, and preserve the commercial relationship between the parties.