COVID-19: A SYSTEMIC RISK TO THE ECONOMY AND THE JUDICIARY IN BRAZIL Marcos Nobrega Visiting Scholar at the Massachusetts Institute of Technology (MIT), Professor at the Faculty of Law of Recife (UFPE) article May 17, 2020 COVID-19: A SYSTEMIC RISK TO THE ECONOMY AND THE JUDICIARY IN BRAZIL by Rodrigo Caldas de Carvalho Borges and Marcos Nóbrega* While health and public policy experts and researchers discuss measures to contain Covid-19’s progress, the economic impacts of the pandemic already cause many doubts in the legal environment, especially due to the impossibility of maintaining contractual conditions negotiated before the emergence of the pandemic. The measures of social isolation resulted in a drastic reduction in economic activity, making it impossible to maintain past commitments in the most varied sectors, from services to the automobile industry and infrastructure. Covid-19 is a systemic risk that causes drastic effects on supply and demand sides, causing disruptions in several markets at the same time, such as supply chain, tourism, airline tickets and services. In this way, the crisis “blew up” the balance of the markets and, therefore, judicializing will not solve the problems – they will probably intensify them. The question is, why shouldn’t I go to the judiciary? The transaction cost is already large (it takes time to resolve), plus an indirect (or subjective) transaction cost given by the cognitive bias that is increased by the complexity of the situation. Faced with this dilemma, governments around the world have been looking for measures to avoid a flood of lawsuits involving the rebalancing of commercial relations after the pandemic, since these measures, in addition to overloading the Judiciary, could result in an even greater collapse of the economy. While legislation, especially those protecting consumer rights, is not adequate, common sense in relations is fundamental to the parties, otherwise the cold application of the law may result in even greater damage to society. Along these lines, some countries that faced the pandemic before Brazil, such as Singapore and the United Kingdom, adopted measures that aim to relieve companies, in order to give them a survival expectation in this moment of global economic crisis. In April, one of the first laws in this regard was passed in Singapore, by which companies and individuals were given six (6) months protection against lawsuits that may be filed in the course of the pandemic situation. The measure covers any contracts entered into before the Covid-19 crisis, including, for example, hotel reservations, rentals and weddings, which should be discussed after the protection period has elapsed. In the United Kingdom, the government has approved an emergency aid worth 60,000 pounds to family members of healthcare professionals who die from being infected with Coronavirus. This measure aims to alleviate the legal discussions that have arisen regarding the responsibility of hospitals and other private health entities in relation to the health of their professionals. In the United States, where the culture of judicialization and, especially of class actions, is very strong, jurists have questioned the extent to which it would be worth to promote legal claims, under the allegation of “majeure force”, to seek the termination of contracts and restitution of credits. The North American government has been pressured by jurists to create a safeguards package, such as occurred after the 9/11 or the 2008 crisis, in order to prevent an explosion of cases in the judiciary, as this eventually cases would would hardly be paid without that thousands of jobs were lost. In Brazil the situation is not very different, imagine the economic impact of judicial decisions demanding the immediate return by the airlines of amounts paid for trips not taken at this moment of a 90% reduction in demand, it would be catastrophic. In the same vein, the appearance of judicial decisions to demand compliance with minimum volume obligations, at this time of low or even no demand, is unthinkable. Recently, the National Association of Motor Vehicle Manufacturers reported that automobile production plunged 99% in April. Thus, the damaging impact of requiring that said industry maintain the minimum volume in energy supply contracts is undeniable, when there is practically no production and, consequently, revenue. In view of this scenario, several bills are being discussed before Congress that aim to relax some rules to minimize the impacts of the pandemic, such as the suspension of the period of acceptance to file a claim in Court (Bill of Law 1,179 / 20), suspension of new registrants in credit register institutions (Bill of Law 675/2020) and ban on eviction (Bill of Law 936/20). Such projects are under discussion in the legislature and, depending on the implementation period, these measures may fail to have the desired effect. For this reason, a fundamental point to be analyzed at this moment is the balance of the relationships, being fundamental for the parties to renegotiate the contracts, either by direct renegotiation or mediation, so that they find the new balance point in the relationship, which will certainly not be achieved by a simple analysis of the contract and/or the law. After all, prevailing good faith and common sense, nobody better than the parties, inserted in a certain market, to define the bases to define the viability of the relationship. On the other hand, in relations where there is an imbalance between the parties, as in consumer relations, sectoral authorities gain special relevance in this scenario of instability. In this sense, the National Health Agency has been closely monitoring and proposing measures and negotiations with health plan operators to minimize conflicts. The National Consumer Secretariat has encouraged agreements between consumers and suppliers, in order to avoid the judicialization of issues that, as previously stated, simply applied the existing law, would bring even greater damage to society. Until the moment, guidelines have been issued regarding airline tickets, educational institutions, gyms, abusive pricing and events. Moments of economic and social instability, such as that experienced with the Covid-19 pandemic, require the preservation of the “economic theory of the contract” rather than the “theory of unforeseen circumstances”. Thus, the main measure to be adopted in this scenario is the preservation of contracts, with mutual concessions, in order to avoid the unfeasibility of business and to promote, albeit gradually, economic recovery. *Rodrigo Caldas de Carvalho Borges. Lawyer, Managing Partner at CB Associados. Marcos Nóbrega. Visiting Scholar at the Massachusetts Institute of Technology (MIT), Professor at the Faculty of Law of Recife (UFPE).