The claimant, a US company, granted the respondent, a Brazilian company, a licence to manufacture and commercialize products under its trademark in Brazil. The claimant accused the respondent of failing to fulfil its contractual obligations with respect to royalty payments. The respondent argued that the devaluation of the Brazilian currency had made the performance of the contract extremely onerous for it and raised in its defence the doctrine of unforeseeabilty. The parties' contract contained a clause stating that it should be interpreted in accordance with Brazilian law.

La demanderesse, une société établie aux États-Unis, avait accordé à la défenderesse, une société brésilienne, une licence l'autorisant à fabriquer et commercialiser au Brésil des produits de sa marque. La demanderesse accusait la défenderesse de ne pas remplir ses obligations contractuelles en matière de paiement de redevances. La défenderesse arguait que la dévaluation de la monnaie brésilienne avait rendu l'exécution du contrat extrêmement onéreuse pour elle et invoquait pour sa défense la théorie de l'imprévisibilité. Le contrat des parties contenait une clause stipulant qu'il devait être interprété conformément à la loi brésilienne.

El demandante, una empresa estadounidense, concedió una licencia al demandado, una empresa brasileña, para fabricar y comercializar productos bajo su marca en Brasil. El demandante acusó al demandado de incumplir sus obligaciones contractuales en relación con el pago de cánones. El demandado argumentó que la ejecución del contrato se había vuelto extremadamente onerosa para él debido a la devaluación de la moneda brasileña y planteó en su defensa la doctrina de la imprevisibilidad. El contrato de las partes incluía una cláusula que estipulaba que el mismo debía interpretarse de acuerdo con la ley brasileña.

'Respondent's Statements

1. Respondent did not refute the validity of the License Agreement entered into . . . between [Claimant] and [Respondent].

2. However, Respondent stated that the provisions of the Agreement must be interpreted considering the political and economic changes that occurred in Brazil since the Agreement was signed by the parties.

3. In this respect, Respondent described in its statements the evolution of the foreign exchange policy in Brazil from 1994 to 1999. Respondent reported that the exchange rate in force in Brazil was, in October 1998, US$ 1.00 to R$ 1.19, which reflected the financial stability brought by the new economic and financial rules issued in 1994, when the Brazilian government implemented the exchange policy of parity between the Brazilian currency (Real) and the American dollar.

4. Additionally, Respondent reported that, at the time the Agreement was signed (October 1998), there were no foreign or national indicators that would lead to the belief that the basic rules of the Real Plan of 1994 would be changed.

5. However, the unexpected modification of the Brazilian exchange policy in 1999, when parity was replaced by a floating exchange rate, led Respondent and Claimant to amend the Agreement, in order to correct the effects that the exchange distortion would have over the contract.

6. Respondent declared that it has paid to Claimant, from 1999 to 2002, the amount of . . ., which is [some US$ 10,000] greater than the total amount provided for in the amended Agreement, pursuant to Minimum Guaranteed Royalties, for the years of 1999, 2000 and 2001 . . .

7. Based on the facts described above, Respondent stated that it has no debts owed to Claimant. According to its answer to the claim, Respondent would have complied with the payment of Sales Royalties (5% over net sales) in all years of the validity of the Agreement, demonstrating its best efforts in exceeding the "target of sale of . . . products", which was accomplished through the reduction of its profit margin by more than 33%.

8. However, Respondent alleged that despite its efforts to comply with the provisions of the Agreement, the continuous devaluation of the Real prevented Sales Royalties (5% over net sales) from reaching the Minimum Guaranteed Royalties amounts, notwithstanding the increase in production made by Respondent.

9. Respondent reported that its effective sales increased by more than 253% in a period of three (3) years, and that such an increase has resulted in a greater valuation of the Claimant's trademark.

10. Furthermore, Respondent presented a comparison between inflation and exchange indexes in Brazil, from 2000 to 2002, concluding that the accumulated increase of value of the American dollar during that period was 203.20%, whereas the accumulated inflation reached 60.91%, which contributed to the alleged asymmetry between the parties' obligations.

11. Respondent reported its disagreement with regard to the audit conducted by Claimant, who, according to Respondent, did not consider Brazilian accounting principles or the "peculiarity of the taxes incident upon manufacture and commercialization of . . . products in Brazil". In spite of the disagreement with respect to the audit, which was expressly manifested in Respondent's letter of December . . . 2002, Respondent agreed with the Claimant's proposal of reducing the amount ascertained due by its auditor in order to "improve the relationship between the parties and aiming at the total renegotiation of the contractual values".

12. Respondent emphasized that, since the Agreement is governed by Brazilian law (Section 21.3 of the Agreement), Articles 478, 479 and 480 of the Brazilian Civil Code (Law no. 10.406/2002) are applicable. Such articles provide that in agreements of continuous or deferred performance, if the obligation of one of the parties becomes excessively onerous with an extreme advantage to the other party by virtue of extraordinary and unforeseeable events, the debtor may request termination of the Agreement, which may be avoided if the defendant offers to change the conditions of the Agreement on an equitable basis. Furthermore, the Civil Code provides that if obligations are attributed to only one of the parties, such party may claim a reduction of its obligation or modification of the enforcement of the obligation in order to avoid an excessive burden.

13. According to Respondent, the applicability of such provisions has been repeatedly ignored by Claimant, as the new draft of the License Agreement which the parties were negotiating in the second semester of 2002, and which was submitted by Claimant, made Respondent's obligations more onerous, instead of balancing the situation of the contracting parties (This draft was attached to the Respondent's answer).

14. Furthermore, Respondent alleges that the condition for early termination, provided for in Section 3.3 of the Agreement, has not occurred, since [Respondent] has complied with the minimum revenue required.

15. Finally, Respondent declared that it did not intend to renew the Agreement, and that at the expiration date December 31, 2003 [Respondent] would cease to use the . . . trademark.

Claimant's comments on Respondent's Answer

1. Claimant contended that [Respondent]'s "Excessive Onerousness" defense is not applicable because the 2002 Brazilian Civil Code was not in force at the time the License Agreement was entered into.

2. Claimant further contended that [Respondent] had not met the requirements for invoking the common law Unforseeability Theory because: (i) devaluation of the Real was not unforeseeable or unexpected; (ii) the License Agreement was not excessively onerous; and (iii) devaluation of the Real had not resulted in any unjust enrichment for the benefit of Claimant.

3. Claimant asserted that [Respondent] had not met the preconditions for invoking the 2002 Brazilian Civil Code or the Unforeseeability Defense because: (i) [Respondent] had not affirmatively sought termination or modification of the License Agreement as required by the Code and Brazilian common law; and (ii) [Respondent]'s prior default and indebtedness to [Claimant] precluded it from seeking protection under the Unforseeability Theory.

4. Claimant argued that the License Agreement is valid and [Respondent] has no defense to its enforcement.

5. Claimant alleged that [Respondent] has been unjustly enriched because [Respondent] admitted that it continued to sell products bearing the licensed trademark without paying any Royalties to [Claimant], including Royalties earned on its admitted sales.

Additional written statements

A) Claimant's Post Hearing Memorials

1. Claimant reaffirmed that [Respondent] had breached the Agreement causing to [Claimant] damages in the amount of . . . for failure to honor its obligations pursuant to Guaranteed Minimum Royalty Payments, Marketing Payments, Audit Payments and interest.

2. Claimant alleged that the summary chart submitted by [Respondent] in its Specification of Evidence-utilized to argue that the amount that would have been transferred to [Claimant] from 1999 to 2003 is actually greater than what was owed pursuant to the Agreement-is flawed. According to Claimant, the amounts listed were not actual payments in dollars. Instead, the numbers had been calculated by multiplying the dollar amounts that were actually paid by the average exchange rate on the date of the payment, with the exchange rate at the time of execution of the Agreement as the baseline. Such a calculation was not allowed under the contract. In addition, the mentioned chart included amounts paid pursuant to Marketing Payments, while such payments could not be included in the total amount that Respondent claimed to be due under the Minimum Royalty Payments. Furthermore, Audit Payments should also not be included in the amount that Respondent claimed to be due under this rubric. Finally, while the amounts [Respondent] used to compare its obligations are figures which included the tax gross-up, the number reflected in the column which is supposed to reflect its obligations towards Claimant are in fact after tax numbers. According to Claimant, these facts demonstrated the improper comparison made in such a chart.

3. Claimant reaffirmed its allegations with regard to the validity of the Agreement, inapplicability of the Unforseeability Theory, and inapplicability of Articles 478, 479 and 480 of the Brazilian Civil Code (Law no. 10.406/2002).

4. Claimant further alleges that [Respondent] rejected the termination letter, which, in accordance with the Agreement, did not allow for a sell-off period, and continued to sell . . . products throughout 2003 and into 2004, continued to manufacture . . . products at least until July 2003, sold inventory of . . . products to a third party and thus "divested itself of control over the handling of the mark and the pricing that . . . products would have in the marketplace".

5. In connection with the above-mentioned infringement, Claimant stated in its Post-Hearing Memorials that it has lost all Royalties and Marketing Payments that it would have received if [Respondent] had not done the reported infringement of the Agreement. [Claimant] stated, thus, that it is entitled to compensation for trademark infringement damages, in an amount of the Minimum Royalties which would have been due for the year of 2004 . . .

6. Moreover, Claimant states in the Post-Hearing Memorials that its mark has been significantly damaged by the transfer of the . . . products inventory to an unauthorized party, allowing . . . products to be sold at reduced prices and commenting to . . . customers that the brand would no longer be commercialized in Brazil. As a result of this willful use of the licensed mark, Claimant requests the Sole Arbitrator to additionally award it moral damages in the amount of . . .

7. Finally, Claimant asked for legal fees and expenses associated with the prosecution of its claims . . .

B) Respondent's Post Hearing Memorials

1. In its Post Hearing Memorials Respondent reaffirmed that it has paid to [Claimant] an amount [some US$ 10,000] greater than the minimum payment set forth in the Agreement . . .

2. Respondent further reaffirmed the applicability of the Unforseeability Theory, based on the 200% devaluation of the Brazilian currency since the execution of the Agreement. According to Respondent, the requisites for the applicability of such theory are present: a) the Brazilian Superior Court of Justice had recognized the foreign exchange variation as an unforeseeable supervening circumstance in several cases; b) the Agreement had indeed become excessively onerous due to the 200% variation of the exchange rate; and c) [Claimant] was unjustly enriched under these circumstances, as [Respondent] had to sacrifice its profit margin in order to make the payments of Minimum Royalties set forth in the Agreement.

3. Respondent stated that the suspension of payments was due to [Claimant]'s intransigence in accepting that the Agreement had become excessively onerous to [Respondent].

4. Respondent further stated that Claimant's allegation that [Respondent] did not claim termination or amendment of the Agreement should not be considered, since there were countless negotiations between the parties centered on the imbalance of the Agreement.

5. Respondent alleged that the letter sent by [Claimant in May 2003] was not sufficient to terminate the Agreement because it did not take into account the excessive onerousness of the Agreement.

6. Furthermore, according to Respondent, the Termination Letter had the purpose of collecting values that exceeded the actually due amounts. For that reason, it did not have the power to terminate the Agreement.

7. Considering its rejection of the Termination Letter, Respondent further alleged that the actual date of termination of the Agreement was December 31, 2003.

8. Respondent stated that pursuant to sales made from [the date of the termination letter] to December 31, 2003, the amount due to [Claimant] pursuant to Royalties should be restricted to 5% on the net value of sales-instead of the excessively onerous Minimum Royalties-and should further be borne by the parties on a 50/50 basis.

9. Alternatively, Respondent requested that the . . . Minimum Royalties for the year of 2003 be equally borne by the parties on a 50/50 basis.

10. Furthermore, Respondent stated that no Marketing Payments were due for the year of 2003, since Claimant did not receive any marketing materials that would justify such payment.

11. Respondent alleged that no interests were due because the parties never agreed as to the amount owed by the Licensee.

12. Finally, Respondent stated that this Arbitration became necessary due to Claimant's intransigence in admitting the excessive onerousness of the Agreement. For that reason, expenses in connection to the Arbitration should be equally borne by the parties, on a 50/50 basis.

. . . . . . . . .

Preliminary comments: issues to be determined by the Sole Arbitrator

The result of the Sole Arbitrator's analysis regarding the items listed in the Terms of Reference as "Issues to be Determined" and other additional issues which have arisen in the course of the arbitration proceedings are as follows:

1. As per the written statements, testimonies and declarations of the parties, there is no controversy between Claimant and Respondent as to the validity and enforceability of the License Agreement entered into by [Claimant] and [Respondent] on . . . as amended.

2. Pursuant to the Agreement and evidence collected, Licensee owed Licensor the following amounts on [the date of the termination letter] . . .

3. The Agreement provided for certain penalties in the event of breach. As set forth in Section 13.2 of the Agreement, the failure to cure any default within fifteen (15) days after notice would entitle [Claimant] to terminate the Agreement by written notice, which was actually done on [date of the letter of termination]. Upon termination, and according to Section 15.1 of the Agreement, [Claimant] would become entitled to receive any payments then owed (see preceding paragraph), as well as the total Guaranteed Minimum Royalty Payment remaining unpaid for the balance of the then current annual period, i.e. the remaining 7/12 of [amount]

4. The requirements provided in Section 13.2 of the Agreement for the early termination of the Agreement were all met according to the evidences brought to this proceeding. Several default notices were sent to the Licensee. Licensee repeatedly admitted its breach and agreed to enter into payment plans, which were not complied with. Since there was no cure 15 (fifteen) days after the breach notice . . . [Claimant] was entitled to terminate the Agreement, as it did on [the date of the termination letter].

5. The requirements for invoking the Unforesseability Theory have not been met in the present case. The Brazilian Civil Code of 2002 has codified the rules which were developed by the Brazilian courts and which comprise the Unforseeability Theory (teoria da imprevisão). In this sense, the requirements provided for in Article 478, 479 and 480 of the 2002 Civil Code could be applied to the Agreement, even if the Agreement was entered into in 1998, because the Code did not change the substance of applicable Brazilian law in this regard.

6. Article 478 provides that:

In contracts of continuing or deferred performance, if the obligation of one of the parties becomes excessively onerous, with disproportionate advantage to the other party, as a result of unexpected and extraordinary events, the debtor may require the termination of the agreement. The effects of the decision will retroact to the date of the service of summons.

7. Article 479 provides that:

The termination may be avoided if the defendant offers to modify the conditions of the contract.

8. Article 480 provides that:

If the obligations of the agreement are attributed solely to one of the parties, such party may claim reduction of its obligations, or modification of its performance, in order to avoid excessive onerousness.

9. Brazilian courts have not recognized the foreign exchange variation as an unexpected and extraordinary event for the purposes of these articles, except in the context of a consumer relationship. Even in the consumer cases, the courts have decided to divide the burden caused by the devaluation between the consumer and the supplier of consumer products, as shown by the case law presented by the parties and other decisions handed down by the Superior Court of Justice in Brasilia:

The increase of the American dollar in the month of January 1999 represents a supervening fact that may give rise to a contractual review, the burden thereof to be shared by creditor and debtor. (Special Appeal number 537662-SP, 2003/0047049-0)

The increase of the value of the American dollar towards the Real is a supervening fact that may give rise to review of the commercial leasing agreement linked to the dollar. Such increase shall be equally borne by the creditor and the debtor. (Special Appeal number 541208-RS, 2003/0076334-6)

10. Furthermore, it is not clear in the present case that the Claimant enjoyed the disproportionate advantage required by Art. 478 of the Civil Code.

11. In the present dispute, there is another aspect which must be taken into account: the parties have renegotiated the Minimum Royalty Payments and the monetary obligations of the Respondent on at least five different occasions, during which certain accommodations were expressly agreed to by the parties. On each of such occurrences, there had been a substantial devaluation of the currency. Respondent would have had the opportunity to raise the excessive onerousness caused by the devaluation on any one of these negotiations, but there is no evidence that this was done in any serious manner. Quite the opposite seems to have occurred, as the Respondent repeatedly reiterated in writing its intent to comply with the agreement as stipulated, but was prevented from doing so because of its financial difficulties.

12. In addition, in 2000 and 2001, after the first renegotiation took place, the Minimum Guaranteed Royalties were less than the 5% Royalties on Net Sales as shown by the Audit Payments which were and still are owed by the Respondent . . .

13. Therefore, any excessive onerousness could have impacted the Respondent only in 2002 and 2003. The stipulated Minimum Royalties for these years were . . . Thus, the excessive onerousness for the year 2002 would have been approximately . . ., and for the year 2003, approximately . . .

14. Therefore, even in equity (according to the law this defense would not be admissible), the defense of the Unforseeability Theory is not adequate to explain a default which [is more than three times higher than the excessive onerousness calculated in the preceding paragraph]. In spite of its allegations, Respondent did not produce any acceptable calculations showing to what extent the devaluation impaired its ability to fulfill its obligations under the contract, nor did it pay to Claimant the Audit Payments and Marketing Payments which had become due, or offered to deposit the 5% Royalties on Net Sales for the year 2003, while disputing the Minimum Royalty Payments.

15. Moreover, it is worth mentioning that, pursuant to the negotiations which took place in the second semester of 2002, as testified by both witnesses at the Hearing, the Minimum Royalties for 2003 would have been reduced to . . ., had [Respondent] cured its default in order to renew the agreement. Additionally, a devaluation clause would have been applied to the renewed agreement, which would thereby further reduce the difference referred to in Section 14 above.

16. The foregoing reasoning as to the non-applicability of the Unforseeability Theory to this case is sufficient to reject Respondent's allegation of this theory as both: A) a defense to Claimant's claim and B) as a claim to amend the terms of the Agreement at this stage.'