Over the past two decades, Brazil has undertaken a number of significant legal and practical measures to improve and modernise its dispute resolution framework to cope with the economic development the country has experienced. To that end, several statutes, laws and rules have been altered, amended or enacted in keeping with this new strategy. Among the significant changes are:
- Constitutional Amendment No. 45/2005, overhauling the judiciary system;
- a new Civil Procedure Code, which came into effect in 2016, among other things, to tackle the problem of a judiciary overburdened with an excessive repetition of lawsuits with the same cause of action or revolving around the same or very similar legal issues;
- significant amendments to the 1996 Arbitration Act in 2015; and
- enactment of a Mediation Law, also in 2015.
ii Brazilian legal system
Brazilian laws are structured by source, scope and extent of applicability. These elements define the hierarchy of laws. The Federal Constitution is the Brazilian supreme law and, as such, preempts all other forms of legislation. Supplementary laws, in turn, detail the constitutional rules and subordinate the ordinary (statutory) laws. The Brazilian legislation is mostly composed of ordinary laws and codes, such as the Civil Code, the National Tax Code, the Penal Code, the Consolidated Labour Laws and the Civil Procedure Code.
The Constitution also establishes that, for purposes of integrating the legal system of domestic law, an international treaty must undergo a process initiated by the President of the Republic, eventually culminating (after negotiations) in its signing. Once signed, there is an internal legislative procedure for its approval via legislative decree, which returns to the President for ratification.
iii Enactment of the Arbitration Act and further legislative developments
Arbitration in Brazil has undergone a dramatic change over the past 20 years. A new arbitration-friendly legal framework emerged from the enactment of the Brazilian Arbitration Act,2 followed by a robust body of decisions increasingly in line with modern arbitration laws and with the interpretation given to them by other well-known arbitration centres around the world.
Another major contribution was the ratification of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, signed in New York on 10 June 1958 (New York Convention). The then-President Fernando Henrique Cardoso only signed Decree No. 4,311 on 23 July 2002, approving the wording of the New York Convention and validating its terms throughout Brazil. Until 1995, Brazil had only signed and ratified the Geneva Protocol of 1923, which recognised the validity of an arbitration clause or agreement for the signing parties, but had little effect in domestic law.
Although the Inter-American Convention on International Commercial Arbitration of 30 January 1975 (Panama Convention) was already effective in Brazil since 1996, it is undeniable that the delay by the government in ratifying the New York Convention had serious negative commercial repercussions abroad. Many foreign companies were reluctant to accept the inclusion of arbitration clauses (which usually make transactions easier to negotiate and even reduce costs) in the belief that an arbitration award would not be enforceable in Brazil because the country was not a party to the New York Convention. This is one of the reasons why the Brazilian legal and business communities warmly welcomed the ratification of the New York Convention by Brazil in 2002.
Over the past two decades, once-sceptical Brazilian lawmakers began to foster arbitration in many important and strategic sectors. Along with the Arbitration Act, several federal laws were created, reviewed and amended to regulate and encourage the use of arbitration. As a relevant example of this trend, the Petroleum Law of 1997 created the National Petroleum Agency, which expressly acknowledged that Petrobras - Petróleo Brasileiro S/A, a government-controlled company, is entitled to settle its disputes by arbitration. Similarly, the Brazilian Corporation Law of 1976 was amended in 2001 to expressly provide that the by-laws of business corporations could elect arbitration for settling disputes between shareholders and a company or between controlling and minority shareholders.
Other federal laws enacted or amended to establish arbitration for the resolution of disputes involving the public administration include:
- the Law on Concessions and Permissions of Public Services;
- the General Telecommunication Act;
- the Law on Restructuring of Maritime and Inland Transport;
- the Law on Electric Power Wholesale Market; and
- the Law on Public–Private Partnerships.
In 2015, the Arbitration Act was amended with a three-pronged approach:
- a wider adoption of arbitration, from subjective and objective perspectives;
- greater freedom for parties to nominate arbitrators; and
- adding a clear definition of the state courts' activities before arbitration is commenced.
Among the main changes is the express election of arbitration as a mechanism to resolve disputes involving direct and indirect public administration entities.
iv Arbitration legal framework
The Arbitration Act has drawn on several pieces of modern arbitration legislation, and its main sources are the UNCITRAL Model on International Commercial Arbitration and the Spanish Arbitration Law of 1988. The New York Convention and the Panama Convention were also instrumental in the process that culminated in the enactment of the Arbitration Act.
Unlike the UNCITRAL Model Law, however, the Arbitration Act does not establish any difference between international and domestic arbitration, having opted instead to regulate how a foreign arbitral decision is to be recognised and enforced in Brazil after due process of ratification (homologation) before the Superior Court of Justice.
Brazilian law only differs foreign from domestic awards based on the place where they were rendered (Article 34, sole paragraph); this territorial approach has been recognised in decisions rendered by the Superior Court of Justice. Therefore, only awards rendered outside the Brazilian territory are considered foreign, in accordance with the provisions of the New York Convention (Article 1).
Arbitration awards rendered in foreign countries need no longer be ratified on the merits by a court there, but must be submitted to the Superior Court of Justice to become enforceable in Brazil.
The recognition process prior to actual enforcement is required by the Constitution. The process of recognition of a foreign award is carried out before the Superior Court of Justice and aims at transforming said award into an enforceable decision within the Brazilian territory, that is, equivalent to any judgment rendered in Brazil.
A defendant cannot raise merits-based defences or any other defences related to the scope of a foreign award. Through the process for recognition of the foreign award, the Superior Court of Justice will solely analyse whether formal requirements under Brazilian law have been satisfied, and whether the foreign award is in accordance with national sovereignty, public policy and the dignity of human beings.
Recent statistics demonstrate that in the vast majority of cases, recognition is granted by the Superior Court of Justice, and subsequent enforcement is allowed upon evidence that the local defendant has been duly served process and given full opportunity to present his or her case before the arbitrators, thus conforming with public policy.
The Arbitration Act has kept the distinction between an arbitration clause (Article 4) and an arbitration commitment (Article 9). Nevertheless, arbitration commitments are now only required when the parties' contract contains no arbitration clause at all or when the arbitration clause is open or vague, or fails to provide the details on the applicable arbitral rules or on the appointment of arbitrators (pathological, empty or blank arbitration clauses) and the parties want to avoid court interference. Therefore, full arbitration clauses do not require an arbitration commitment to set aside the jurisdiction of the courts. That is the case, for example, when the parties agree on a self-executing procedure for setting in motion arbitral proceedings by referring to the rules of any administering organisation, or to any ad hoc rules (such as the UNCITRAL Rules).
When there is an empty arbitration clause and the parties are unable to agree on an arbitration commitment, Article 7 of the Arbitration Act provides a specific mechanism for mandatory compliance with (or specific performance of) that clause. According to such mechanism, the judiciary is to settle any issues that the parties have either not properly established in the arbitration clause or failed to agree upon afterwards (Article 6). The judge's ruling will operate as a court-ordered arbitration commitment (Article 7, Paragraph 7), subjecting the parties to arbitration as originally intended. This mechanism is commonly called an Article 7 action, or an action for the enforcement of arbitration proceedings.
In view of the contractual nature of the arbitration agreement, in general any individual with full legal capacity or any legal entity represented by individuals with due powers may enter into an arbitration agreement and will be bound to it. Arbitration agreements must also satisfy the requirements for validity of any contract under the Brazilian Civil Code, to wit:
- powers and capacity of the parties;
- valid consent;
- lawful and possible subject matter; and
- compliance with the legally prescribed form.
The arbitration clause must be in writing, and may be inserted in the contract itself or in a separate document that refers to it (Article 4, Paragraph 1). A special formality is required in adhesion contracts, where the arbitration clause is only enforceable if the adhering party initiates arbitration or expressly agrees to it, as long as the clause is written in a separate document or in bold type, and is duly signed (Article 4, Paragraph 2).
v Judiciary system
The Brazilian judiciary system is composed of common and specialised jurisdictions, each subordinated to specific higher courts, but all subject to the Superior Court of Justice on federal law matters, and to the Federal Supreme Court on constitutional matters. The Constitution divides the judiciary branch into federal (specialised or common) and state courts, each with distinct jurisdictions.
The Civil Procedure Code generally establishes, in relation to territorial jurisdiction, that lawsuits involving personal rights and real rights over movable property must be brought before the courts of the place where the defendant is domiciled. In actions involving real rights over immovable property, jurisdiction lies with the courts of the place where property is located. However, exceptions to these rules abound.
Common federal and state courts, each with different jurisdictions and broken down into lower courts and courts of appeal, comprise the common jurisdiction.
Under Article 109 of the Constitution, the federal courts are competent to hear, among other special cases, those to which the federal government or any of its related entities are either a party or legally interested in as plaintiff, defendant, privy or intervener. The lower federal court decisions may be appealed at federal regional courts, which are divided into five regions within the Brazilian territory.
The state courts have jurisdiction to hear the remaining cases, according to the jurisdictions set forth in the Constitution of the respective states. Lower state court decisions may be appealed at the state court of appeals: one per state and one for the Federal District.
The specialised jurisdiction (also composed of federal courts) consists of the labour, electoral and military courts, specialising in each of their respective areas and broken down into lower, intermediary and superior courts.
There is no specialised arbitration jurisdiction. All actions related to arbitration (either in preparation for or in aid of arbitration) where the federal government or any of its related entities is not a party are heard by a competent state court. In some states, however, organisation rules may select one or more local courts to preferably hear and decide on actions related to arbitration.
vi Local arbitral institutions and statistics
Arbitral institutions are plentiful in Brazil, many of them also offering mediation services. Several arbitral institutions in Brazil are private, commercial operations, but some are run by trade associations to handle disputes within specific sectors and professional areas, for example real estate, energy and engineering. There are also arbitral institutions under the auspices of bilateral chambers of commerce.
The institutions most referred to as being more reliable and active in Brazil are the following:
- Center for Arbitration and Mediation of the Brazil–Canada Chamber of Commerce (CAM-CCBC);3
- Conciliation, Mediation and Arbitration Chamber for the Center of the Federation of Industries of the State of São Paulo;4
- Market Arbitration Chamber of BOVESPA, the Brazilian stock market;5
- Business Arbitration and Mediation Chamber;6
- FGV Mediation and Arbitration Chamber;7
- Arbitration and Mediation Center of the American Chamber of Commerce for Brazil;8
- Brazilian Centre for Mediation and Arbitration;9 and
- Mediation and Arbitration Chamber of the Commercial Association of the state of Paraná.10
There are no obstacles to having an arbitration with a seat in Brazil but administered and ruled by international institutions, such as the ICC, ICDR or LCIA.
Although the majority of the cases under the ICC's administration are in Paris, the ICC has recently opened a branch in São Paulo with a view to having a local administration and competing with local arbitration chambers, establishing a table of costs in Brazilian reais.
According to statistics, the number of arbitration proceedings brought before the various local institutions has grown steadily. The CAM-CCBC, for example, reported 112 cases initiated in 2015, 98 in 2016, 141 in 2017 and 101 in 2018.
There has been also an exponential growth in the number of Brazilian parties in arbitration proceedings brought before the ICC. While between 1950 and 1992 there were 44 cases with Brazilian parties before ICC arbitration proceedings, between 1998 and 2007 there were nearly 30 cases per year, which resulted in 267 proceedings during that period. In 2009, Brazil ranked fourth as regards parties in ICC arbitrations (86 parties, 4.11 per cent of the total), and fifth in 2010 (74 parties, 3.45 per cent of the total). Brazil also appeared as the 10th, 11th and seventh-ranked country with the highest global number of nominations as the place of arbitration in 2009, 2010 and 2011, respectively, with São Paulo as the 10th-most-common place of arbitration in 2011.
ii THE YEAR IN REVIEW
i Legislative developments
Solving labour disputes through arbitration had long been controversial in Brazil, as employees were historically seen as economically disadvantaged in relation to their employers and, as such, in need of state protection.
Constitutional Amendment No. 45-2005 added to Paragraph 2 of Article 114 the possibility of resolving labour disputes by arbitration before going to court. However, labour-related arbitrations were still very rare in view of the highly protective labour regime in place in the country.
On 11 November 2017, major reforms to Brazil's labour laws took effect (Law No. 13,467 of 2017) to update the Consolidated Labour Laws, which is the governing framework for labour regulation in Brazil that has been in effect since shortly after World War II.
The main purpose (from a legal perspective) was to establish that mutual employer–employee arrangements in many circumstances prevail over general labour laws. In addition, the new legislation gave senior employees unprecedented leeway to solve labour disputes out of court. Employees with a university degree and earning a monthly wage of at least approximately US$3,500 can negotiate most terms of their employment agreement and can consent to an arbitration clause to resolve disputes.
There have been no relevant court precedents on this matter to date, but it is believed that the possibility of arbitration as an effective and reliable means of solving high-level employment disputes will facilitate the work of expatriates in Brazil, thus encouraging foreign investors to send them into the country.
ii Court rulings
As previously mentioned, the Superior Court of Justice is the highest court in Brazil on federal law matters. Its main role is to protect prevailing laws and harmonise their application.
It is common sense that the election of the seat of arbitration in international arbitration has much to do with local courts' attitude towards this out-of-court mechanism of resolving disputes. Contracting parties usually look for an arbitration-friendly jurisdiction to guarantee that a possible future arbitration is not halted by anti-arbitration injunctions, that local courts are supportive in terms of granting emergency relief in preparation for or in aid of arbitration, and that local courts would easily enforce a final arbitration award. Fortunately, Brazil has gradually qualified as an arbitration-friendly jurisdiction over the past 20 years.
The reliability of arbitration as an effective means of settling conflicts has found growing support in the Brazilian judiciary. Court decisions are increasingly recognising the binding nature of the arbitration clause, as well as the Kompetenz-Kompetenz principle, leading parties to arbitrate even when one of them tries to fall back on his or her commitment to submit to arbitration. Likewise, the judiciary has guaranteed enforcement of awards rendered in Brazil and abroad.
In addition, the judiciary has not failed to grant emergency relief to assure the institution and opening of an arbitral tribunal and to warrant the effectiveness of the award to be rendered in due course. As to anti-arbitration suits, Brazilian courts have also been more and more restrictive in analysing and granting injunctions to halt arbitrations instituted in reliance on valid arbitration arrangements.
With the recent Civil Procedure Code that came into effect in 2016, the Brazilian courts have been more and more granting confidentiality over arbitration-related matters (in which there is a previous confidentiality agreement between the parties), which is the exception to the rule of publicity of civil court proceedings in Brazil.
At any rate, it should be emphasised that the Brazilian judiciary has in fact tipped the scales towards the effectiveness of arbitration clauses and the enforceability of awards issued by arbitral tribunals. One of the main reasons for such strong and steady development is the unquestionable support of Brazilian courts, in particular the Superior Court of Justice, responsible for deciding the last appeals on court cases and for recognising foreign arbitral awards for future enforcement in Brazil. Arbitration is receiving more and more support from the judiciary, the superior courts (the Federal Supreme Court and the Superior Court of Justice), state courts and local judges.
From time to time, the Secretariat of the Superior Court of Justice issues a legal report compiling the prevailing views and understandings of the Court on certain matters. These are not binding precedents, but serve as an important guide to the respective recent rulings of the Court.
On 22 March 2019, the Secretariat issued Legal Report No. 122, which focused on arbitration. Some of the theories identified as recurrent at the Superior Court of Justice are as follows:11
- if an arbitration agreement is prescribed by contract, this entails an acknowledgment that the arbitral tribunal has primary jurisdiction in relation to the judiciary to decide, whether on its own initiative or at the parties' request, on the existence, validity and enforceability of the arbitration agreement and of the contract containing the arbitration clause (Kompetenz-Kompetenz doctrine);
- service of a foreign arbitral award by any verifiable means poses no obstacle to its recognition, provided that there is manifest evidence of receipt of information on the existence of the arbitration proceeding;
- consumer protection laws prevent the prior and compulsory adoption of arbitration at the time a contract is executed, but do not prohibit an arbitration from being later instated by mutual agreement of the parties if a dispute arises; and
- there is no legal obstacle to an arbitration agreement by the government, notably by mixed-capital companies, for resolution of disputes relating to disposable economic rights.
iii Investor–state disputes
In the late 1980s and early 1990s, many Latin American countries finally ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, also known as the Washington Convention, as proposed by the World Bank in March 1965 and effective as from 14 October 1966.
The adhesion of most Latin American countries to the Washington Convention and to the World Bank's International Centre for Settlement of Investment Disputes (ICSID) three decades ago was enthusiastically celebrated in international economic and legal communities. In practice, however, it ended up showing that such massive adhesion was a result of the concerns of some Latin American states that hostility toward the ICSID could hamper access to World Bank credit, rather than a genuine willingness to accept and adopt that dispute resolution system. This may explain why Brazil did not follow this trend of adhering to the ICSID and remains as the only major economy in Latin America that has never signed the Washington Convention.
Irrespective of its denial to formally adhere to the Washington Convention, Brazil soon realised that fostering efficient methods of resolving disputes between public and private entities was instrumental as a means of adjusting the state to the new demands of the contemporary world. This proved particularly true in view of the privatisation wave that spread across Brazil in the 1990s.
The resolution of disputes arising out of a contractual relationship between public and private parties in Latin America was invariably marked by uncertainty in view of the absolute supremacy of the state's interests over private interests that historically prevailed in the region. Even under the newly enacted Arbitration Act in 1996, many scholars and judges in Brazil were reluctant to accept that the state and public entities could be subject to an out-of-court arbitration panel sometimes seating outside of the country.
In the early 2000s, COPEL v. Araucaria put the credibility of arbitration to a test that caught the attention of the international legal community. UEG-Araucaria, the Brazilian subsidiary of a US company, initiated an ICC arbitration in Paris against COPEL, a Brazilian state-controlled power company, in a dispute arising out of a turnkey contract for a power plant in Brazil. A series of first instance and appellate instance decisions ordered a stay of arbitration under the argument that – albeit the parties had indeed agreed to resort their controversies to arbitration and the dispute was of an economic nature between the parties – the dispute was not arbitrable because it involved public interests.
The COPEL case was settled before a final decision was granted, but the disruption it caused in the arbitral legal community only ceased in 2005 when the Superior Court of Justice ruled on AES Uruguaiana v. CEEE. The former was a private power company, the latter a mixed-capital company controlled by the state of Rio Grande do Sul, and the dispute related to a contract for the construction and operation of a 600MW gas-fired power plant. As in the COPEL case, the first instance court ruled that the dispute could not be submitted to arbitration because it concerned a state-controlled entity whose assets were affected by 'public finality' and therefore could not be disposed of. Furthermore, the appellate instance court refused to recognise the negative effect of the arbitration agreement, and invoked the principle of universal access to justice as set forth in the Constitution to conclude that the presence of an arbitration clause in the contract could not prevent a dispute from being heard by state courts.
The issue of the arbitrability of rights and obligations arising from public contracts is so sensitive in civil law jurisdictions influenced by the Napoleonic Code that the Brazilian legislator deemed it appropriate to make the law clearer on this. As seen in 2015, some of the provisions of the Arbitration Act of 1996 were amended to set aside any doubt as to the possibility of direct and indirect public administration resolving conflicts involving freely transferable property rights.
Despite the evident development of arbitration in public–private commercial disputes, however, Brazil is unlikely to sign the Washington Convention in the near future.
iii OUTLOOK AND CONCLUSIONS
Alternatives to court litigation have developed dramatically in Brazil over the past 20 years. Despite praiseworthy efforts in Brazil to speed up the administration of justice by reducing the number of judicial proceedings and their duration, the Brazilian judiciary system is still far from meeting the conditions required by Brazil's economic development with regard to some specific disputes.
Consequently, the need for more efficient and appropriate means of resolving certain conflicts created a unique opportunity for the consolidation of arbitration, as seen above. Other alternative dispute resolution mechanisms are also becoming reliable as efficient systems. Mediation has gained traction, and several studies and programmes have been put in place to develop mediation as a well-established and effective method for dispute resolution in Brazil. In late 2015, Law No. 13,140, which regulates court and out-of-court mediation proceedings, came into effect, and is poised to foster use of this method.
Further, conciliation and dispute boards are gradually turning into important tools for dispute resolution in Brazil. The use of dispute adjudication boards, dispute review boards and combined dispute boards is increasing in Brazil to become a real choice for investors and stakeholders to resolve disputes.
It is expected that these new extrajudicial methods of solving disputes will be as successful as arbitration in Brazil in the years to come.
1 Gilberto Giusti is a partner and Douglas Depieri Catarucci is an associate at Pinheiro Neto Advogados.
2 Federal Law No. 9,307 of 23 September 1996.
11 Refer to http://www.stj.jus.br/SCON/jt/toc.jsp for all the following theories.