A couple of years of economic recession changed the optimistic forecast for the civil aviation sector in Brazil in terms of growth and profit. A major political crisis, following the impeachment of the president of the country in 2016 and the consequences of ‘Operation Car Wash', currently seen as the biggest criminal investigation in the world's history, has also contributed to pessimism in the evaluation of what the industry could see in terms of development in law and policies.
Even though the end of the 2016 Summer Olympic Games in Rio de Janeiro, following the 2014 FIFA World Cup in Brazil, could suggest that the time for relevant changes in the sector has gone, the past year was actually full of relevant changes, most of them very favourable to the market.
A new regulation on the general conditions for air transportation, issued by the National Civil Aviation Agency (ANAC) in the last days of 2016 significantly changed the structure of the passenger transportation market in the country. A decision from the Supreme Court (STF) recognising the supremacy of the Montreal/Warsaw Convention regime over the Consumer Protection Code brought hope to carriers used to an abnormal volume of litigation in the country. The developments on the discussion related to changes on foreign ownership limitations also suggested a friendlier market for investment, including foreign investment, in the near future.
In 2016, ANAC, created by Law 11.182/05, completed 10 years of activities. The change in the Brazilian market during those years is relevant and the perfect example of that change is the number of passengers transported per year in Brazil: 54 million in 2006 and 118 million in 2015.2
As the main regulator in Brazil, ANAC is the one regulating and auditing the activities related to civil aviation and airport and aeronautical infrastructure, and has powers to:
- a represent Brazil on negotiations with international bodies and negotiate agreements and treaties related to international air transportation;
- b issue regulations on general civil aviation and rules on safety including airport areas and aircraft;
- c concede, permit or authorise the exploitation of air services and airport infrastructure;
- d manage the Brazilian Aeronautical Register;
- e issue airworthiness certificates for aircraft, products, aeronautical procedures and maintenance facilities;
- f certify licences to professionals working with civil aviation;
- g authorise, regulate and audit aero clubs, schools and civil aviation courses; and
- h sanction infractions to the sector rules, including passengers' rights.
ANAC is also handling slots distribution systems for airports classified as coordinated airports, in which there is a lack of infrastructure. With the reduction on the activity in the country during the past few years, the existence of coordinated airports itself is currently under review.
For labour regulations, such as those that the recent discussion on the extension of outsourcing airlines could implement, the Civil Aviation Agency has little or no influence. Even though the political environment in Brazil has been challenging, last year was also good for the industry on the labour side since a new law protecting the right of airlines to outsource certain positions (something that was recently challenged by labour public prosecutors, before the new law passed).
II LEGAL FRAMEWORK FOR LIABILITY
Despite the fact that Brazil has ratified and implemented both Warsaw and Montreal Conventions, liability in Brazil, especially for passenger-related minor incidents such as flight delays and baggage loss, is quite a complex system.
The main source of conflict is the difference between the structures of the Brazilian Consumer Protection Code (Law No. 8.078/90), in which the main idea is to protect the right of a consumer to be as broadly indemnified as possible, and the idea on which the Warsaw/Montreal system was based, to somehow have uniform and predictable outcomes on similar incidents.
Even though there are precedents in Brazil recognising the applicability of the Montreal Convention, the relevant number of decisions ignoring the limitations of the international treaties is one of the main reasons for the outstanding number of passenger claims before courts in Brazil.
Recently, the STF decided two cases establishing a new and binding position recognising the supremacy of the international treaties in case of conflict with the Consumer Protection Code or other pieces of local law. As soon as this decision is published, relevant changes will be seen in courts' behaviour.
On the other hand, even though the decision could help significantly on the statutes of limitation and on the property damages discussions, the most relevant problem airlines face in Brazil is still untouched: the inclusion of moral damages on virtually any award granted by courts in the country.
If, during the judgment session that ended on the recognition of the international treaties' supremacy, the moral damages are expressly excluded from the limitation established by the Conventions, Brazilian courts are likely to maintain the current practice and include moral damages above the limitations, at least until new cases are brought to the Supreme Court to review this point specifically.
i International carriage
Brazil has ratified, among others, the following international treaties and conventions that are relevant for liability framework evaluation:
- a Warsaw Convention of 1929, implemented in Brazil through Decree No. 20.704/1931;
- b Chicago Convention of 1944, implemented in Brazil through Decree No. 21.713/1946;
- c Montreal Convention of 1999, implemented in Brazil through Decree No. 5.910/2006; and
- d Cape Town Convention of 2001, implemented in Brazil through Decree No. 8.008/2013.
As reported above, the main challenge on the application of the International Treaties is the discussion on whether the limitations brought mainly by Warsaw and Montreal Conventions somehow violate the full indemnification principle established by the Consumer Protection Code. As the STF has already clarified the property damages in a favourable way to the airlines, the next step is to bring to the attention of the STF the moral damages discussion.
ii Internal carriage
For the domestic market, in which the international treaties would not be directly applicable, Brazil passed the Brazilian Aeronautical Code (CBA - Federal Law No. 7.565/1986) over 30 years ago. Even though the vast majority of its 324 articles relates to operational matters, from the use of air space, air traffic control and licensing of operations, liability is also relevant, since the CBA follows the structure of the international treaties establishing standards for the payment of indemnifications on the most usual types of incidents and accidents.
Currently, the CBA suffers from the same challenges the international treaties have historically faced in Brazil. Courts usually follow the idea construed from the Consumer Protection Code, not only applying the full indemnification concept but also including moral damages to most decisions.
This is the main Brazilian internal law and it is under review by the Brazilian congress. As the current political landscape is not very clear, we do not expect any development for the next months, but some of the discussions are relevant on liability matters.
While experts working with the aviation industry have suggested the maintenance of a system based on the structure of the international treaties, aiming for not only uniform but also predictable decisions for both passengers and airlines, there is also pressure from consumer protection agencies that could influence the final model.
The options presented by such agencies are either to adopt the Consumer Protection Code system and work on a case-by-case evaluation with full indemnification or, as an alternative, work with much more relevant amounts for the standard limitations of liability.
iii General aviation regulation
The main source for liability regulation in Brazil is brought by its Civil Code and, in general terms, is applicable to several situations, not only for aviation.
Articles 186 and 187 establish that any person causing damages to a third party by practising an illicit act has the obligation to compensate such third party for the losses. Every action practised voluntarily by an agent, actively or through an omission, negligence or imprudence that causes any kind of damage to another person can be named as an illicit act.
For transportation, the Brazilian Civil Code, in its Article 734, establishes that the carrier is liable for damages caused to the people, assets and baggage carried, except in cases of force majeure. The idea behind the general regulation is still the link between the damages and a behaviour from the carrier.
The Brazilian Aeronautical Code (CBA) follows the same path, with the carrier being liable for damages caused during the transportation (Article 246), but the CBA includes limitations to indemnification that would only not be applicable in case of gross negligence or wilful misconduct.
Challenges of applying such rules include the Consumer Protection Code's principles against the liability limitation, and the fact that the structure established in such pieces of law is outdated and, in general terms, is not appropriate to the current moment of the industry and the country's economy. The amounts are established on monetary units that no longer exist and the entire regulation of the transportation contract is not appropriate for the electronic or digital model applied by most carriers today in most areas.
Apart from that, the other relevant challenge to apply such regulation is the current Court's position on force majeure allegations. Even though the original structure of carrier's liability used force majeure as a main source of exclusion of such liability, most courts in Brazil include most facts that could be qualified as force majeure under the risks of the activity, and, therefore, hold the carrier liable for its consequences.
iv Passenger rights
In the last days of December 2016, ANAC issued a new regulation, known as Resolution 400, concentrating on most pieces of regulation related to passenger rights. Several aspects were reviewed through Resolution 400, but to explain the current status of the passenger rights issue in Brazil, the first topic to be explored is the right of clear information.
Being a market not as mature as the European or North American ones, the first and main concern the regulator brings to this new piece of regulation is the obligation of a clear communication, in Portuguese and presenting prices in the local currency, as a way to help passengers, who are usually not very educated about air transportation, to make their choices.
As one of the main points on Resolution 400 was to deregulate matters such as the baggage allowance, there is a clear concern on how airlines would sell different services and how easy would it be for the passenger to understand what are the main characteristics of the ticket being purchased.
Even though the idea behind Resolution 400 was to allow carriers to compete and sell different products, some aspects of passenger rights were kept to a minimum, with a mandatory protection package to be included with every ticket.
The mandatory protection includes assistance in cases of delays, cancellations or denied boarding, including communication, food and in some cases lodging facilities; the right to regret within 24 hours, with full reimbursement if the ticket is purchased at least seven days prior to the flight; the right to be able to correct the spelling of the passenger's name until check-in time; cash payment in case of involuntary denied boarding; and a complete review on the time frame for reimbursements and indemnification in cases of problems on baggage delivery with periods as short as seven days for payment.
vi Other legislation
Along with consumer claims, which are usually outstanding in absolute numbers for Brazil (it is usual to have airlines declaring they have more ongoing judicial claims in Brazil than they do in the rest of the world combined, including their headquarters), labour is probably the second main source of liability and legal expenses for most carriers.
Even though the Labour Laws (Decree 5.452/1943) are under review in Brazil, the system is still based on a very protective environment for employees and, more than anything, on a cheap and risk-free judicial system. As employees pay absolutely nothing to file a claim against a company, a large number of them are used to filing claims when leaving a company, no matter what the reason is.
The main source of problems for carriers in Brazil is usually the use of outsourcing companies, as carriers might be held liable and are usually included in claims against such employee's original employer.
A careful and very well designed structure on the outsourcing contracts is important to avoid unnecessary risk, mainly foreseeing events such as bankruptcy or judicial restructuring.
Based on the system created by Federal Law 12.529/2011, which structures the Brazilian Competition Protection System, carriers and their employees are liable for infractions against the economic order, mainly those acts affecting free competition.
Cartel cases in the aviation industry in Brazil are rare, but there are already decisions issued based on this system, and on a relevant cargo case in 2013 the fines reached an amount of roughly 300 million reais.
Based on concepts brought by Federal Law 12.846/2013, Brazil has a system that evaluates the administrative impacts of the act and applies penalties that could reach the dissolution of the legal entity, as well as the criminal liabilities of the agents involved in the relevant facts.
In terms of liability, the environmental law is one of the main sources of risk to be considered by companies operating in the country. Both the entity itself and the individuals involved in the act are liable in three different areas: repairing the damage, paying administrative fines and facing criminal prosecution.
Created through different pieces of law, including the Federal Constitution, the system is based on the idea of repairing and punishment with no exclusion of such liability, even in force majeure cases. The only evaluation made is based on the link between the activity and the damage, and if this link can be identified the liability cannot be excluded.
The aviation industry was recently involved in several discussions related to environmental regulation in Brazil. The two main examples are: (1) the Class Actions filed by the Public Prosecutor in Guarulhos against carriers in order to have them repair the damages and indemnify the city for the emission of greenhouse gases; and (2) the Brazilian Institute for the Environment and Natural Resources (IBAMA) sending carriers an official letter requesting them to enrol and provide information through a system that controls hazardous material.
III LICENSING OF OPERATIONS
i Licensed activities
ANAC is the governmental body issuing the licences and authorisations for the operation of aviation-related services. Maintenance companies and personnel, and pilots are certified by ANAC, and carriers for domestic or international flights, and regular or non-regular services including air taxi have to go through a process of licensing before they can operate.
For international regular flights, after the designation by the country where the company is established, carriers need to go through a two-step process that starts with authorisation to function in the country (involving an evaluation of the corporate documents of the company) and authorisation to operate in Brazil (focused on the operation itself). This process is explained in detail in subsection iii, infra.
ii Ownership rules
Brazil has a limitation for foreign capital in Brazilian carriers as the Aeronautical Code's Article 181 requires Brazilian citizens to own at least 80 per cent of the voting shares of the company.
This percentage was changed recently by a provisional measure (with the share for foreigners increased from 20 per cent to 49 per cent), but this was not converted into law, so the limits went back to the original 20 per cent.
The foreign-ownership limitation has been a hot topic in Brazil for a long time, and the discussion has increased during the past few years, with the Brazilian Ministry of Transport confirming the limit would be changed through a new provisional measure. Because of political constraints, that decision was changed after being publicly released and the matter was sent to the Congress for discussion.
The current political crisis in Brazil suggests this will not be changed within the coming months, even though there is a general feeling that the current rule is not reasonable and should be changed in the near future.
iii Foreign carriers
In order to operate in Brazil, there are three main requirements brought by the Brazilian Aeronautical Code: (1) designation by the country where the company is established; (2) issuance by ANAC of an authorisation to function in Brazil; and (3) issuance by ANAC of an authorisation to operate in Brazil.
After those three requirements are fulfilled, the carrier will have to present documents before the local Board of Trade and obtain from the tax authorities a Taxpayer ID number. Other local requirements depending on the state and city where the carrier will operate may be applicable.
Apart from the designation by the country where the company is established, the two main steps to be taken in Brazil are based on the following documents and measures.
The authorisation to function in Brazil is issued by ANAC after the Agency evaluates if the corporate documents presented by the company meet the requirements of the Brazilian Aeronautical Code (CBA) and if the company has a local legal representative.
The documents evaluated are the evidence of the designation itself, the articles of incorporation or similar document, the complete list of shareholders, a copy of the document through which the company decided to operate in Brazil and the latest published financial statement.
The legal representative is person that is able to represent the company locally, having the power to receive summons, and can be either a foreigner with a Brazilian Taxpayer ID or a Brazilian. A copy of the personal documents and the signature on a document issued by ANAC accepting the position of legal representative will also be necessary.
For the authorisation to operate, the documents are related to the operational security programme and the operational specifications, and at this point documents to prove the non-existence of debts in Brazil with the government and with ANAC will also be requested.
The approval of an operational security programme is part of the steps required to have authorisation by ANAC to operate in Brazil.
Apart from that rule, the CBA has a chapter dedicated to investigation and preventive measures related to accidents. This chapter was recently changed by Law No. 12.970/2014, and one of the changes was to outline that the investigation on incidents or accidents has as its goal the identification of facts that somehow contributed to the accident and to work on preventive measures to avoid new incidents or accidents. One of the rules to increment the information related to accidents, created by the same Law, is that any person who has any information related to an accident is obliged by law to inform the closest public authority.
Investigations are currently being conducted by the Aeronautical Accidents Investigation and Prevention Centre (CENIPA), according to a Regulation issued by the Aeronautic Command.
Brazil also has regulations related to the safety against acts of illicit interference (RBAC 108), which were recently updated by Resolution ANAC 410/2017.
As a general rule for operating in Brazil, any person or company exploring an aircraft has the legal duty to hire insurance covering, at least, damages to passengers, crew, the value of the aircraft itself and damages on the ground.
The amount involved in the insurance policy has to be calculated considering the liability limitations established in the CBA and the international treaties to which Brazil is a party. The issuance or renewal of the airworthiness certificate depends on the proof of the valid insurance policy.
Aircraft on foreign registers need, based on the CBA requirements, the same level of coverage as established for aircraft on the national register.
The Brazilian System of Competition Defence (SBDC), created by Law No. 12.529/2011, is based on several principles included in the Brazilian Constitution, such as the free initiative (or free enterprise), free competition, social function of the properties, consumer protection and repression of economic power abuse.
At the centre of the SBDC and issuing decisions related to acts that could somehow affect competition, both in anticompetitive behaviour evaluation and mergers and acquisitions approval, is the Administrative Council for Economic Defence (CADE).
In evaluating anticompetitive behaviour, such as cartel cases, the penalties CADE applies may reach significant amounts, such as 20 per cent of the group's income in the year prior to the filing of the administrative procedure. Penalties to a company's officers are also relevant, and could include not only fines, but also imprisonment, as cartels are not only established as anticompetitive behaviour but also as a crime against the economic order.
For alliances, cooperation agreements, joint ventures, and mergers and acquisitions the evaluation is made both by CADE and ANAC. CADE adopts the previous approval model, so the control is made before the closing. To decide whether an agreement has to be submitted to CADE, one of the main factors would be evaluating the gross revenue of both groups in Brazil on the previous year. Notification would be mandatory if one of the groups registers a gross revenue higher than 750 million reais and the other registers a gross revenue higher than 75 million reais.
VII WRONGFUL DEATH
As in most cases before Brazilian courts, moral damages are a relevant part of wrongful death cases in the country. Based on the idea that the family of the deceased suffers immaterial damages, courts in Brazil usually award amounts that have no criteria defined by law for calculation and are decided on a case-by-case basis.
In addition to that, funeral and other expenses related to the incident plus loss of dependency calculated based on the income, age, life expectation and number of dependents are usually awarded.
VIII ESTABLISHING LIABILITY AND SETTLEMENT
Discussions held directly before passenger and airline (through customer care services), discussions mediated by the Consumer Protection Agency (Procon) and claims filed in the small claims courts inside the airports have no judge, and a settlement is the only possible outcome that could end the matter definitively.
Apart from those cases, most passenger claims in Brazil are filed before small claims courts, in which the lawsuit follows a simpler procedure. That is also the procedure for cases filed in the airport that are not settled, as they are sent to the court that is closer to the passenger's residence.
In a small claims court case, the awards are decided by each judge on a case-by-case basis, and the timeline for a judgment after filing is usually between six and 12 months. Settlements can be reached at any time between the parties.
If a claim is filed before a civil court, the timeline for a judgment increases significantly, and could easily reach two or three years, and settlements can still be reached at any time.
For final decisions, the timelines increase a lot considering the variety of appeals one can file, mainly in civil court cases.
The limitation period for bringing claims was for a long time a major issue as the five-year statute of limitation established by the Consumer Protection Code was applied by the courts much more than the two-year period established by the international treaties (the Warsaw/Montreal Conventions regime).
That position is now changing rapidly, since in May 2017 the STF finally recognised the supremacy of the Warsaw/Montreal Convention over the Consumer Protection Code, especially on statutes of limitation. It is already possible to notice a change in judges' behaviour and the most recent decision applied the two-year period.
In consumer claims in Brazil, which are the vast majority of the claims related to aviation, all parties that somehow form the chain of supply might be held jointly liable for the damages. Usually the defendants are the airlines, and sometimes travel agencies, but other companies that somehow participated in the facts of the case (such as manufacturers in case of accidents or incidents related to the aircraft itself) might be added as defendants.
ii Carriers' liability towards passengers and third parties
When dealing with claims from passengers, as they are consumer claims, the liability is strict and there is no evaluation on fault or intent. Service providers such as airlines or travel agents are liable based on an evaluation of the damage, an act or omission from the company, and a link between both.
For third parties, considering they are not consumers, liability would not be strict, and following the system created by the Civil Code an evaluation on a voluntary action or omission, negligence or imprudence that caused damages to someone would create the obligation to repair such damages.
The limitations brought by the Warsaw and Montreal Conventions and the limitations created by the CBA are usually disregarded by the courts based on the idea that the Consumer Protection Code protects the right of full indemnification on consumer claims. The recent decision from the Supreme Court recognising the supremacy of the international treaties regime protects the limitation on property (material) damages but still allows courts to award moral damages that could bring the actual awards to an amount higher than the original limitation established by such treaties.
iii Product liability
As a general rule, if the operator of the aircraft is registered at the Brazilian Aeronautical Registry, the owner of such aircraft should not be held liable for any damage arising from the use of the aircraft. The identification of the operator should be enough to have the liability concentrated in this specific company.
The exception would be consumer cases in which each and every company that could somehow be considered part of the supply chain could be considered jointly liable, including the manufacturer of the aircraft mainly in accident cases.
In terms of liability from manufacturers and owners to the operators, the general civil rule based on the identification of the act or omission, the damage and the link between to evaluate liabilities should be applicable.
Even though most countries evaluate compensation considering accidents the most relevant situation, owing to the outstanding amount of claims based on consumer claims related to operational problems such as flight delays and baggage loss, the latter are definitely the most relevant kinds of situation to be considered when analysing the compensation system in Brazil.
For most claims, the main challenge is dealing with moral damages, usually included in awards granted in day-to-day situations such as short flight delays. This kind of damage is also relevant to baggage claims, where it is not unusual to see a higher award for moral damages than for material damages.
In terms of accidents, as explained in Section VII, supra, the awards might include funeral costs and other property damages, moral damages and the loss of dependency based on the criteria clarified in Section VII, supra.
IX VOLUNTARY REPORTING
The Brazilian Aeronautical Code establishes the obligation for anyone who has any information on an accident to communicate with the closest authority. The rules regulating the procedures followed by CENIPA are not solely based on the idea of voluntary reporting. They also expressly guarantee that the investigation will be performed with the only goals being the identification of facts that somehow contributed to the accident and working on preventive measures to avoid new incidents or accidents, and not for civil or criminal liabilities purposes.
X THE YEAR IN REVIEW
From a regulatory standpoint, the latest developments in the country were favourable to the industry as a reduction in the amount of regulation was seen and some relevant pieces of regulation were removed, such as the mandatory baggage allowance being revoked and after a judicial battle involving several lawsuits, it was removed from several carriers' tickets.
Considering the main carriers operating in the country, demand started to recover after some tough years, and the results of the local carriers has also reversed from significant losses in 2015 and 2016 to profit in the first months of 2017.
The decision from the Supreme Court, favourable to the application of the international treaties when conflicting with the Consumer Protection Code, is also a great sign of a development of the understanding of how the industry functions by the judges in the country.
The period of political turmoil that Brazil is currently facing could affect the development of relevant issues for the country, such as discussion of the change of foreign-ownership limitation and the review of the Brazilian Aeronautical Code.
The review of labour laws could also significantly affect carriers' operation in Brazil, and part of the discussion is directly related to professionals in the aviation industry.
The full implementation of Resolution 400 is likely to change the structure of the market, mainly considering the changes to the baggage allowance system, and the consequences are still uncertain. The same can be said of the judicial decisions following the Supreme Court's ruling in favour of international treaties in aviation-related claims.
The decision to privatise airports seems to be even stronger than before and after a successful round in early 2017, new rounds are expected, thus increasing the participation of private capital in the airport administration area.
A review on some ANAC regulations, including the slot allocation procedures and the current rules that classify some airports as coordinated because of overcrowding, is a relevant measure, since the use of airport infrastructure in Brazil has changed significantly and none of the Brazilian international airports is now overcrowded. This means that, even though a slow recovery is apparently in place, there should be no obstacles to a new operator starting flights to any Brazilian destination, or for any international operator increasing its flights, at least in relation to slots.