Paying the Price to Terminate Early

So you signed a contract, but you want to get out. Circumstances changed; money’s tight; whatever the reason, contracts are meant to lock people in. So much so that in the US, termination is generally not a remedy for breach of contract. That’s where damages come into play.

But in Brazil, the concept of the multa changes things slightly. Under Brazilian law, a contract can include agreed-upon fines to compensate for breach. Multas are designed to deter and punish nonperformance; the goal is to make people think twice whether breaching the contract is worth the financial consequences.

Take, for example, the case of soccer players under contract with teams in Brazil. A player may have a contract term of five years but may also have the right to pay a fine to terminate early and sign with another team. The fine would be explicit in the language of the contract.

In the case of a lease agreement, failure to pay rent on time may subject a tenant to a fine. Again, the contract would specify the amount.

US contracts are different. As a general rule, fines are not allowed unless they’re deemed to be “liquidated damages.” We’ll skip the lecture on US Contract Law 101, but suffice to say that Brazil does it differently.

The next time you’re signing a contract in Brazil, check to see if there are provisions that include multas. If not, think about whether it makes sense to add them in for a bit more flexibility.