Mandatory registration of legal entities involved in the construction industry

Brazilian law requires that the legal entities formed with the purpose of carrying out construction works or are linked to engineering, agronomy, geology, geography and other similar activities must be registered with the Regional Engineering and Agronomy Council (“CREA – Conselho Regional de Engenharia e Agronomia”). The registration must be made in the State where the legal entity has its head office.

Likewise, the professional who will act as technically responsible for the legal entity or for a particular project must also be registered with said entity.

Building Rules and Standards and Permitting

Brazil has several rules and standards for civil construction. For industrial construction there are approximately 800 rules that must be observed. For residential construction the newly published Standard ABNT NBR 15.575 is to be observed. There are specific rules relating to the employment of labor, individual protection equipment, safety, and construction standards published by the Ministry of Labor that must be observed.

For all construction, demolition, reconstruction, earthworks and removal of vegetation a permit issued by the municipality where the project will be carried out will be necessary. For the granting of the permit the project design must have been previously approved. Upon completion of the project a Completion Certificate will be issued by the concerned authority.

Environmental Licensing

For construction and infrastructure works (such as highways, bridges, hydroelectric power projects, ports and airports), it is mandatory for the owner to perform the Environment Impact Study (“Estudo de Impacto Ambiental- EIA”) and Environmental Impact Report (“Relatório de Impacto Ambiental - RIMA”) in order to obtain the environmental licensing. This study must contemplate the potential impacts concerning erosion, silting up, native species, preservation of headwaters and hydric resources, as well as sensitive environment such as rivers, dunes, lakes, mountains and others.

In addition, depending on the nature of the project the following studies must be performed: (i) Environmental Control Report (“RCA”); and (ii) Environmental Control Plan (“PCA”).

The environmental licenses that are require are (i) the Previous License, to enable the planning of the works; (ii) the Installation License, for the execution of the project; and (iii) the Operation License, which is granted upon completion of the construction works. In case the project requires substantial removal of vegetation a specific authorization must be obtained vis-a-vis the Brazilian Institute for the Environment and Natural Renewable Resources (“IBAMA”).

Government Contracts

The Brazilian regulatory framework for government contracts consists basically of Federal Law No. 8,666 of 1993 (the “Public Bidding Law”). The fundamental principle that governs the contracts generally entered into with the public authorities is the mandatory bidding. Such requirement applies to all companies controlled by the federal government, states, federal district and municipalities, either directly or indirectly.

This principle was reflected in the newly-issued Federal Law No. 13,330 of 2016 (“Government-Controlled Companies Law”), whereby the agreements entered into by third parties covering the rendering of services to government-controlled companies, the acquisition, lease or sale of assets, as well as other works shall be subject to public bidding, except in certain specific cases, such as (i) hiring of concessionaires or entities that hold a permission or authorization for the supply of electric power or natural gas and other public utility companies (public service providers) pursuant to applicable law, as long as the object of the contract relates to public service; (ii) transfer of assets to legal entities of the Public Administration; (iii) donation of movable assets for social interest purposes; or (iv) purchase and sale of shares, credit instruments and debt securities or assets produced or traded by such government-controlled companies. As a general rule, the sale of assets shall also be subject to an appraisal of the assets to be sold.

Besides the technical qualification for the performance of the services or works involved the concerned government entity must define the parameters to be observed for the bidding in order to assure broad competition among the participants and the best technical and commercial proposal for the Public Administration.

The participation of foreign legal entities in internal biddings is allowed in the form of consortia provided that, in this case, the leadership must be exercised by a Brazilian member of the consortium. In case a consortium wins a bidding procedure it must formalize its formation before the Register of Commerce and the Internal Revenue Service. As a rule of thumb the foreign legal entities that participate in consortia or as shareholders of Brazilian legal entities must appoint a legal representative with power to receive service of process and respond in administrative or judicial proceedings.

A Special Regime for Public Procurements (RDC) was introduced by Federal Law No. 12,462 of 2011. The RDC was originally established to answer the demand for infrastructure works in connection with the 2014 FIFA World Cup and the 2016 Olympic Games in Rio de Janeiro, but has also been applied to implement other types of public works and services, including those under the Federal Growth Acceleration Program (a public works program conceived to expedite the offering of infrastructure and logistics in the country), and works related to the Unified Health System (“SUS”), the public education and security systems, and CONAB, the national food supply agency.

The concession contracts are regulated by Federal Law No. 8,987 of 1995 (the “Concessions Federal Law”) and Federal Law 9,074 of 1995, which establish specific rules for granting public utilities contracts to the private sector. Under the ordinary concession system the payment of the concessionaires consists only of the payment of fees by the final users. The services granted under this system are rendered at the exclusive risk of the concessionaire.

A new regulatory framework for implementation of infrastructure works was created by Federal Law No. 11,079 of 2004 (the “PPP Federal Law”) which sets forth rules for Public Private Partnerships. It establishes special rules about public procurement and PPP contracting, and creates new types of concessions for public utilities: sponsored concessions and administrative concessions. A sponsored concession is the same as the “common concession” provided under the Concessions Federal Law but the concessionaire’s remuneration consists of fees paid by final users in addition to a compensation paid by the respective public administration. Under an administrative concession the concessionaire’s compensation consists exclusively of the payments made by the public administration.

The PPP contracts must have a value greater than 20 million Reais and a term ranging from a minimum of 5 and a maximum of 35 years. Another distinguishing factor from the ordinary concession contracts is that the risks deriving from the PPP are distributed among the parties.

Contract Guarantees

According to Federal Law No. 8,666 the government contract may provide for a performance guarantee to be supplied by the private party. Such a guarantee may range from 5 to 10% of the total contract amount and may be in the form of (i) cash deposit or government bonds; (ii) performance bonds, and (iii) bank guarantees. In addition, the government entity may require a bid bond in the amount of 1% of the estimated contract value.

Insurance

The government contract will usually provide for the obligation of the private party to retain the following types of insurance: (i) Contractors All risks, to guarantee the payment of indemnification in case of events occurred during the execution of the services or works (usually up to 0.3% of the contract value); (ii) performance bond to guarantee the due fulfillment of contract obligations and payment of indemnifications, penalties and other costs (from 5 to 10% of the total contract amount); and (iii) insurance against third party civil liability.

Construction Risks

Pursuant to article 393 of the Brazilian Civil Code the engineering works will have a 5-year guarantee from the date of completion, as far as solidity is concerned, except in case of force majeure or acts of God that may affect the solidity of the works.

Professional liability

It is usual for contractors and consultants to subscribe annual insurance against liability for breach of professional (typically design) duties.

Dispute Resolution

Since the enactment of Federal Law 9,307 of 1996 the trend is that government contracts will increasingly adopt arbitration as a means of dispute resolution. To reinforce this trend, the Concessions Federal Law, the PPP Federal Law and the Government-Controlled Companies Law expressly provide that the parties may elect arbitration to resolve disputes arising out of the contract.