What is Compliance

Default is a term used to designate the status of someone who has fulfilled all obligations that fall within a relationship. It is the opposite of default, the state of those who have not fulfilled all their obligations.

Default example

The concept of default is quite abstract. To make it clearer, let’s use an example.

Imagine that Carlos and José are neighbors. Carlos decides to buy José’s car for R $ 30,000. Then, they make a contract (which does not need to be written) determining that Carlos will pay 50% of the agreed value the next day; after a week, José will deliver the car; and, at the end of the month, Carlos will pay the other 50%.

Note that, in these examples, Carlos’ obligations are two: pay R $ 15 thousand the next day and pay R $ 15 thousand at the end of the month. Meanwhile, José, even though he is the creditor, also has an obligation: deliver the car after a week.

Now, imagine that Carlos paid the first 50%, according to the contract. A week later, José did not deliver the car. The days went by and nothing. At the end of the month, José still hasn’t fulfilled his obligation; even so, Carlos pays the other 50%.

In this fictitious situation, we have that Carlos is in default, because he fulfilled all the obligations that he had in the relationship. Meanwhile, José is in default, despite being the creditor of the transaction, as he did not fulfill the obligation provided for in the contract.

Default and payment on consignment

We usually think of default as an obligation in itself: you have an obligation to fulfill your obligations. However, from a legal point of view, default can also be considered a right, since it is through it that you avoid possible legal consequences, such as the negative name of your name with the credit protection agencies.

One of the ways to guarantee the right to be in default is by means of consignment payment. It can be used by the debtor when the creditor refuses to receive or simply cannot be found. An example is when the tenant refuses to receive rent from the landlord, with the intention of creating grounds for eviction.

Effects of default

The main effect of default is the individual’s release from any possible collection, both judicial and extrajudicial. To generate this effect, as a rule, a discharge instrument is required.

Another important effect of default is that if the other party in the relationship is in default, the one that is in default has the advantage in negotiations.

Think of the example of Carlos and José. Since José is in default, while Carlos is in default, if the two sit at a table to try to resolve the impasse, it is José who will have the greatest power to make demands.

Substantial Default

Within the concept of default, there is another that deserves attention: substantial default.

There is a theory according to which, even if the individual does not fulfill 100% of the predicted obligations, if he fulfills the majority, there is a substantial performance. This theory is opposed to formal compliance, which is the total fulfillment of obligations, as we have seen so far.

If there is a substantial default, the other party cannot request a contractual termination, that is, termination of the contract due to default. It can only collect the part of the obligations that remain to be fulfilled.

Imagine again the case of Carlos and José, but in a different scenario. José sells the car in 15 installments, and delivers the vehicle. Carlos, in turn, pays all installments, up to the 13th.

The last two are missing. In this case, we can say that Carlos has fulfilled most of his obligations. Therefore, José cannot undo the sale; just charge the payment of the 14th and 15th installments.

The current understanding is that the substantial performance theory does not apply to contracts with fiduciary sale as collateral, such as property financing contracts in which the property is the payment guarantee itself.

 

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