I INTRODUCTION

While 2016 saw many changes in terms of law and new regulations, 2017 was comparatively quiet, largely owing to the fact that bureaucracy has prevented the development of legal and regulatory matters. In addition, the political environment remained complicated, with ongoing developments in Operation Car Wash.

However, after years of adjusting to a new reality owing to the country's recession, which saw a reduction in domestic capacity, high prices and continually unfavourable financial results, 2017 brought better numbers, a recovery in capacity and much stronger results for the Brazilian carriers.

The enforcement of Resolution 400, a new regulation on the general conditions for air transportation issued by the National Civil Aviation Agency (ANAC) at the end of 2016, as well as the consequences of the new Labour Law and the Supreme Court decision on the supremacy of the Montreal/Warsaw Convention regime over the Consumer Protection Code, affected the market.

Other events such as the approval of the Open Skies Agreement signed by Brazil and the US in 2011, the review of foreign ownership limitations, and the development and approval of the new Aeronautical Code, demonstrate that 2017 was not fruitful in terms of legal development, apart from the enforcement of what was already approved and published months before.

II LEGAL FRAMEWORK FOR LIABILITY

Despite the fact that Brazil has ratified and implemented the Warsaw and Montreal Conventions, liability in Brazil, especially for passenger-related minor incidents such as flight delays and baggage loss, is quite complex.

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 the Supreme Court recognised the supremacy of the Montreal Convention, a large number of decisions have ignored the limitations of the international treaties. This is one of the main reasons for the significant number of passenger claims before the Brazilian courts.

Two recent cases of the Supreme Court established 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 legislation. The decisions on both claims, which were published in November 2017, clarified that the two-year statute of limitations is being applied by the majority of the Brazilian courts, as well as the limitation on 1,131 special drawing rights (SDR) to compensate for property damage as a result of baggage loss.

However, the most relevant problem airlines face in Brazil is still unresolved: the inclusion of moral damages in virtually any award granted by the courts.

Unfortunately, as moral damages were expressly excluded from the limitation established by the Supreme Court based on the Warsaw and Montreal Conventions, Brazilian courts are likely to maintain their 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:

  1. Warsaw Convention of 1929, implemented in Brazil through Decree No. 20.704/1931;
  2. Chicago Convention of 1944, implemented in Brazil through Decree No. 21.713/1946;
  3. Montreal Convention of 1999, implemented in Brazil through Decree No. 5.910/2006; and
  4. Cape Town Convention of 2001, implemented in Brazil through Decree No. 8.008/2013.

As mentioned above, the main challenge regarding the application of the international treaties is whether the limitations (brought mainly by Warsaw and Montreal Conventions) somehow violate the full indemnification principle established by the Consumer Protection Code. As the Supreme Court has already clarified the SDR with regard to property damage in a favourable way to the airlines, the next step is to bring to discussion on moral damages to the attention of Supreme Court.

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.

The CBA faces the same challenges the international treaties have historically faced in Brazil. Courts usually follow the Consumer Protection Code by applying the concept of full indemnification and including moral damages in most decisions.

The CBA is the main Brazilian internal law and is being reviewed by Congress. As the current political landscape is not very clear, no developments are expected in the coming months, but some of the discussions on liability are relevant.

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 industries, not just aviation.

Articles 186 and 187 establish that any person that causes damage to a third party by carrying out an illicit act has the obligation to compensate the third party for the loss. Every action undertaken voluntarily by an agent, actively or through omission, negligence or imprudence that causes any kind of damage to another person can be considered an illicit act.

For transportation, Article 734 of the Civil Code establishes that the carrier is liable for damage caused to the people, assets and baggage carried, except in cases of force majeure. The idea behind Article 734 is still the link between the damage and the behaviour of the carrier.

The CBA follows the same path, with the carrier being liable for damages caused during transportation (Article 246), but it includes limitations to indemnification that would only not be applicable in case of gross negligence or wilful misconduct.

The challenges in applying these rules include the Consumer Protection Code's principles against the liability limitation, and the fact that the structure established in these pieces of legislation is outdated; the amounts are established in 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. Despite this, the rules are still applied to the industry and the economy.

Apart from that, the other relevant challenge that arises in applying such regulation is the courts' position on force majeure allegations. Even though the original concept of carrier liability used force majeure as an exception, most courts in Brazil include events that could be qualified as force majeure under the risks of the activity, and, therefore, hold the carrier liable for the consequences.

iv Passenger rights

Resolution 400, which was issued at the end of 2016 and became effective in March 2017, consolidates most of the regulations related to passenger rights. Several aspects were reviewed through Resolution 400, the most relevant of which in this context is the right of clear information with regard to passenger rights.

The Brazilian aviation market is not as mature as that of Europe or North America, therefore the principal focus of Resolution 400 is the obligation of clear communication in Portuguese and presenting prices in the local currency as a way to help those passengers who know little about air transportation to make their choices.

As one of the main aims of Resolution 400 was to deregulate matters such as baggage allowance, there was concern surrounding how airlines would sell different services and how easy would it be for the passenger to understand what is included in 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 cancel 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 reimbursement and indemnification in case of problems with baggage delivery, with periods as short as seven days for payment.

v Other legislation
Labour law

Along with consumer claims, of which there are a high number in Brazil (it is common for airlines to declare that 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.

Law No. 13,467/2017, which modified the Labour Law (Decree 5,452/1943), was approved in July 2017. The aim of this law is to introduce more flexibility when negotiating contracts, including adding outsourcing options.

The main source of problems for carriers in Brazil is still the use of outsourcing companies, as carriers might be held liable and are usually included in claims against the employee's original employer. This risk will still remain after Law No. 13,467/2017 comes into effect.

For that reason, a careful and well-designed structure on outsourcing contracts is important to avoid unnecessary risk, mainly foreseeing events such as bankruptcy or judicial restructuring.

Competition law

Based on the system created by Federal Law 12,529/2011, which provides the framework for 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 in a cargo case in 2013 the fines reached approximately 300 million reais.

Anti-corruption law

Based on concepts brought by Federal Law 12,846/2013, Brazil has a system that evaluates the administrative impact of an act of corruption and applies penalties that could result in the dissolution of the legal entity, as well as criminal liability of the agents involved in the act.

Environmental law

In terms of liability, environmental risk is one of the main factors that companies should consider when operating in the country. Both the entity itself and the individuals involved in in an act of environmental damage are liable in three different areas: repairing the damage, paying administrative fines and facing criminal prosecution.

The system, which was created through different pieces of law including the Federal Constitution, is based on the idea of reparation 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 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 that issues 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 regular international 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.

ii Ownership rules

Brazil has a limitation on foreign capital in Brazilian carriers as Article 181 of the CBA requires Brazilian citizens to own at least 80 per cent of the voting shares of the company.

This percentage was recently changed by a provisional measure (the share for foreigners increased from 20 per cent to 49 per cent), but this was not converted into law, so the limit 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 been brought to the fore in the past few years, with the Brazilian Ministry of Transport confirming that 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 Congress for discussion.

As Brazil is in an election year there is less focus on regulatory matters, which is unlikely to change in the coming months, even though there is a general feeling that the above-mentioned limitation 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 CBA: (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 a Taxpayer ID number from the tax authorities. 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 it evaluates if the corporate documents presented by the company meet the requirements of the CBA and if the company has a local legal representative.

The documents evaluated are 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 a 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.

IV SAFETY

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 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.

V INSURANCE

As a general rule for operating in Brazil, any person or company exploring an aircraft has the legal duty to obtain insurance cover, at least in relation to damage to passengers, crew, the value of the aircraft itself and damage 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.

VI COMPETITION

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 dependants are usually awarded.

VIII ESTABLISHING LIABILITY AND SETTLEMENT

i Procedure

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 limitations established by the Consumer Protection Code was applied by the courts much more frequently than the two-year period established by the international treaties (the Warsaw/Montreal Conventions regime).

That position is now changing rapidly as in 2017 the Supreme Court finally recognised the supremacy of the Warsaw/Montreal Convention over the Consumer Protection Code, especially on statutes of limitation. There has already been a discernible change in judges' behaviour and the most recent decisions have applied the two-year period and the limitation for compensation in baggage loss claims.

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. This scenario changed with 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 in 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.

iv Compensation

Even though most countries evaluate compensation based on accidents, 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, 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.

IX VOLUNTARY REPORTING

The CBA establishes the obligation for anyone who has any information on an accident to communicate with the authority in the closest proximity. 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

Even though there were few legal and regulatory developments in 2017, the enforcement of the newest pieces of legislation (some of them from late 2016) was favourable for the industry as there was a reduction in the number of legal requirements. In addition, the Labour Law introduced more flexibility on employment options.

When analysing the main carriers operating in the country, it is clear that demand recovered significantly after some tough years, and the results of the local carriers have also reversed from significant losses in 2015 and 2016 to profit in 2017 and in the first months of 2018.

XI OUTLOOK

Political turmoil in Brazil, which is likely to become worse because 2018 is an election year, is likely to affect the development of relevant issues for the country, such as discussion of the change of foreign-ownership limitation and the review of the CBA.

The new Labour Law is affecting carriers' operations in Brazil, but there are still several topics being discussed and reviewed that could affect directly the aviation industry.

The full implementation of Resolution 400 changed the structure of the market, including changes to the baggage allowance system. There is still a lot of discussion on whether this change was favourable to passengers or not, and consumer protection agencies are still filing judicial claims to discuss and eventually revert this change.

The decision to privatise airports seems to be even stronger than before and after a successful round of privatisations in early 2017, new rounds are expected this year, thus increasing the participation of private capital in the airport administration area.

A review of 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 seem to be as problematic as they were when the current rules were designed. This means that, even though recovery has only just started to take place, there should be no obstacles to a new operator starting flights to any Brazilian destination, or for any international operator increasing its flights.