A competitive business climate
demands legal certainty
LEGAL CERTAINTY
A competitive business climate demands legal certainty
The State plays an essential part in ensuring predictability
B razil is a consolidated democracy and ranks in the top ten largest economies in the world. That said, what is missing for economic agents to have more interest in investing in Brazil? The answer resides in the notion of legal certainty, that is, guaranteed, predictable conduct from the monitoring bodies, regulatory agencies and government authorities.
Risks are inherent to any business. Economic agents are aware of this, yet are still not willing to submit themselves to risks caused by third parties, caused by regulations that are in constant flux or suffer from low technical quality, causing uncertainty. An investor in infrastructure, for example, will not develop his project in a country with chronic legal uncertainty.
The shadow of legal activism also affects investment in Brazil. There is, still, a lack of expertise seen in companies regarding the drawing up of agreements that lack the robustness necessary for certain sectors and situations.
These factors hamper a correct, stable and predictable legal footing that is duly justified and motivated with the aim of ensuring justice. Only an environment of cooperation among the actors involved would allow for a healthy and sustainable business climate in Brazil.
Legal certainty should be seen as a duty by public authorities and as a right by economic agents. According to Mattos Filho partner, Fernando Dantas, legal certainty “is measured by the level of confidence that a given regulatory guideline will be observed by the legislator as it was in identical or similar cases in the past; when legal certainty exists, there is a balance between precisely this legitimate expectation by economic agents and government conduct”.
On the right track
T he regulations aimed at legal certainty and predictability are recent in Brazil. The progress made over the past few years in the legislation and the Constitution seek to increase legal certainty. The Federal Constitution, for example, already includes obligatory compliance mechanisms through judges of the first and second instances, for rulings by the Supreme Federal Court.
The Law of Introduction to the Regulations of Brazilian Law, in turn, was recently amended with the clear objective of prohibiting sudden, unjustifiable or aimless changes in the application of the law. This allows for more predictability, thus facilitating investment. “Investors can no longer be surprised after entering into an agreement. They have to have this protection, and this law was amended precisely to avoid these surprises”, explains partner Lauro Celidonio.
Another step was the new Code of Civil Procedure, of 2015, that places value on concentrated judgments, aligning decisions for repetitive appeals and cases with general repercussion. Therefore, rulings can be applied to other cases that deal with the same subject, and so allowing for some predictability. According to partner Glaucia Lauletta Frascino, “the new Code of Civil Procedure allows for the law to be a facilitator of the legal process and not an obstacle to conflict resolution”.
The recent Labor Reform was also a step forward for more legal certainty by generating a history of rulings that provide predictability for the actors involved.
A ccording to partner Vilma Toshie Kutomi, “the questions over outsourcing were resolved in the Labor Reform. A company that outsources a good part of its activities, from the point of view of lawfulness, there is now a law that supports that outsourcing. This is a problem solved. That is legal certainty”.
In tax law, Supplementary Law No. 160, of 2017, which deals with tax conflicts between states and municipalities, represents an improvement. Before it, the Supreme Federal Court considered unilateral tax exemptions to be non-compliant with the law, causing financial harm to companies that were already established and operating in Brazil as they were forced to collect taxes that had not been foreseen when they were started. Supplementary Act 160 promoted a transition, making the collection of these taxes more rational and imposing limits on the conflict.
The outlook is optimistic, although it is normal to lack alignment between theory and practice at the beginning of the application of laws. The advances are being made and the business climate is more secure. “Legislative change, which is the engine of law, has already happened. Now, these concepts need to solidify, but we are on the right track”, explains Fernando.
POINTS FOR IMPROVEMENT
Investments across a broad range of sectors of the economy are essential for infrastructure growth and, consequently, for a country’s socio-economic development.
T here is no doubt that the path to recovery for Brazil’s economy passes through greater participation from the private sector. The big question is: how to avoid uncertainty for investors?
Legal certainty is affected by a hesitant application of the law, by unstable interpretations and also by excessive and sudden change, impacting the credibility of the business climate in Brazil. Lauro points out, that in “the regulated sector, it is essential to understand the directions regulations are taking and to try to predict the alternatives to a less favorable regulation”.
On the companies’ side, there are still a lot of poorly conducted negotiations. In the private sector, it is essential to have a well drawn up agreement and to conduct proper due diligence. “In the private sector, legal uncertainty also arises from poorly written agreements and a lack of due diligence on the contracting party and its conduct”, Lauro emphasizes.
However, with all the legal changes that have taken place over such a short period, the role of corporate law has been given new meaning. For Vilma, “we have to have the creative capacity to tell clients that points exist in the legislation on which they can find solid footing to mitigate legal uncertainty”, and, “mapping out risks in advance is absolutely necessary, because they will continue to affect the value of companies and all negotiations involved”.
IS IT POSSIBLE TO INCREASE LEGAL CERTAINTY
The past decade has seen a series of legislative changes that point to an ascending curve for legal certainty. However, there is still much to do for all the agents involved.
For companies, it is important to be well informed for the drawing up of a consistent risk matrix and, above all, to draw up an agreement that is clear and suited to Brazil’s legal framework.
For regulators, reducing the interference of the State in negotiations and protecting investors from legislative changes are essential. The focus should be on avoiding surprises for those who are investing resources into the country. In this sense, the federal government recently signed Executive Order number 881 (“MP 881/19”), also known as the “Executive Order of Economic Freedom”, which institutes the declaration of rights of economic freedom and establishes guarantees of free will.
According to partner Fernando Dantas, the executive order helps the country’s economic development by following the precepts of legal certainty. “By stimulating innovation, recovering the parties’ free will in contracting and reaffirming the importance of legal certainty to economic activity, Executive Order 881 presents itself as a powerful tool to improve the business climate and drive the country’s economic growth.”
The order is based on the principles of freedom, such as the “freedom to modernize”, “freedom to work and produce” and “entrepreneurial freedom”, which emphasizes the role of private regulation of commercial relationships, as partner Lauro Celidonio explains: “Starting with the assumption adopted by the executive order, the negotiation and drawing up of agreements and the private regulation of commercial relationships, across a variety of sectors, gain significant importance”.
According to Laruo, the signing of the executive order can open up new pathways to foster the national economy. “Although we know that the debate in Congress will be intense, we hope that the executive order’s basic concept – of encouraging free will and deregulating the private sector – will endure, or, rather, will be reinforced by even more encompassing amendments”, he concludes.