The International Arbitration Review: Brazil
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 judicial system;
- a new Civil Procedure Code, which came into effect in 2016 to, among other things, 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;
- amendments to the 1996 Arbitration Act in 2015; and
- the enactment of a Mediation Law, also in 2015.
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. 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.
The year in review
i Measures taken in the face of the covid-19 pandemic
In 2020, the World Health Organization declared the coronavirus pandemic and made numerous recommendations to delay the spread of the new virus.
While the legislation with regard to arbitration has not been amended in Brazil because of the covid-19 outbreak, Brazilian arbitration practice is facing some changes in its procedures through resolutions and communiqués – with guidelines and revisions of procedures – issued by the national and international arbitration chambers and centres to adapt ongoing arbitrations (and to initiate new ones) to this new reality. The general intention of said rules is to transform an agenda that requires a physical presence in procedures into something that can be accomplished by remote means. For instance, hearings, at which a physical presence is usually mandatory, may be virtual (e.g., hosted in a conference call) and in loco expert diligences may be postponed. These efforts are being made to meet current needs amid the covid-19 outbreak (for instance, directives from the government regarding social distancing).
All of these new rules are specific and issued by each arbitration institution (so they can be different from one to another) and they apply only to the arbitrations under their institutional rules.
Notwithstanding, in some instances, such as when the parties to the arbitration agree or otherwise set out in the arbitration clause, hearings have been held semi-remotely, as long as all safety measures issued by local and international healthcare organisations and authorities are strictly followed.
ii Legislative developments
In the year of 2020, Federal Law No. 14.112 enected a new Law on Bankruptcy and Reorganisation, and brought with it specific provisions regarding the use of arbitration. On that note, it is important to highlight that it brought the exception to the rule. In that sense, a suit brought before a foreign court neither induces lis pendens nor prevents the Brazilian courts from hearing the same case. Accordingly, lis pendens and res judicata may only be acknowledged in Brazil upon recognition of the foreign decision by STJ. However, the newly enacted legislation allows the Lower Court to recognise the existence of a foreign judicial reorganisation proceeding without the need of resorting to the STJ.
Furthermore, some states and even municipalities have adopted local laws or regulations on the use of alternative dispute resolution methods involving their respective public entities. There has been discussion as to the constitutionality of some of these local provisions, under the arguments that they would conflict with the Arbitration Act.
iii Court rulings
As previously mentioned, the STJ 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 25 years. In 2020, the STJ continued to uphold the main principles that guarantee the credibility of arbitration as an effective means of solving disputes, such as the Kompetenz-Kompetenz principle and the limited ulterior jurisdiction of state courts to only set aside arbitration awards that are found null and void, as per the applicable stricted legal provisions.
Arbitration framework in brazil
The Federal Law No. 9.307/96 (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.
As previously mentioned, arbitration in Brazil has undergone a dramatic change. A new arbitration-friendly legal framework emerged from the enactment of the Arbitration Act, 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.
Nonetheless, the Arbitration Act has suffered many changes in favour of those once-sceptical to the current framework. For instance, through the amendment in 2015 of the Arbitration Act, it incorporated into the statute the possibility of submission of the state and state-owned entities to arbitration (Article 1, Paragraph 1), with the proviso that the arbitration must be at law, and not in equity (Article 2, Paragraph 3).
In addition to that, the amendment to the Arbitration Act made it clear that any interested party to a contract containing an arbitration clause may resort to the local state court that would have jurisdiction to resolve a dispute had arbitration not been contracted seeking provisional measures of protection and urgent reliefs prior to the constitution of an arbitral tribunal (Article 22-A). Also, once the arbitration has commenced, the arbitral tribunal will have jurisdiction for maintaining, modifying or revoking the provisional or urgent measures granted by the Judicial Authority (Article 22-B).
Moreover, 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. The Brazilian Corporation Law of 1976, for example, 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:
- Law on Concessions and Permissions of Public Services;
- General Telecommunication Act;
- Law on Restructuring of Maritime and Inland Transport;
- Law on Electric Power Wholesale Market;
- Law on Public–Private Partnerships;
- Law on Franchise Contracts; and
- Law on Bankruptcy and Reorganisation.
i Formalities under the Brazilian Arbitration Act to consider an arbitration agreement existent, valid and efficient
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 it fails to provide 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 this mechanism, the judiciary is to settle any issues that the parties have either not properly established in the arbitration clause or have 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 the validity of any contract under the Brazilian Civil Code (e.g., 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).
The Arbitration Act is technical and straightforward in defining the agents that may refer their disputes to arbitration (Article 1): 'those who are capable of entering into contracts may make use of arbitration to resolve conflicts regarding freely transferable property rights'. However, this clarity is not duplicated when it comes to determining the matters that can be referred to arbitration. Case law and the arbitration doctrine have been carefully studying and discussing these concepts to offer a solid argument of who can (not) address their requests and disputes to an arbitrator or arbitral tribunal, and what can (not) be submitted to an arbitrator or arbitral tribunal. The first concept, which relates to who has standing to participate in an arbitral proceeding, is known as subjective arbitrability. The second concept, which is associated to what can (not) be decided in an arbitral proceeding, is known as objective arbitrability.
Every individual who is both capable and authorised by law to enter into contracts may resort to arbitration for resolution of a dispute (subjective arbitrability). However, only disputes in relation to transferable property rights can be solved via arbitration (objective arbitrability).
Subjective arbitrability may be effortlessly verified because the Brazilian Civil Code provides a clear and direct definition of what legal capacity is. On the other hand, doctrine and case law have long discussed how judges and arbitrators could define which rights or matters could be surrendered to arbitration. There is no unambiguous definition of freely transferrable (or 'disposable') rights in Article 1 of the Brazilian Arbitration Act. In fact, it is only possible to fathom that disposable rights are related to the financial character of the dispute.
By contrast, non-disposable rights are those without immediate connection to economic realms, such as the right to life, liberty, physical integrity, name, honour and intimacy. Disposable rights, in their turn, are commonly classified as any right that may be assigned, conveyed, waived or settled. Hence, arbitration cannot be used as a method of dispute resolution in some areas of law in Brazil such as, for example, family-related disputes, some environmental law disputes, criminal law disputes, etc.
Moreover, in 2017, Brazil enacted its reform to the Brazilian Consolidated Labour Laws, upon which it was expressly provided the possibility of submitting individual labour disputes to arbitration. Although this reform was a landmark, it has found its shortcomings, mainly in the case law field, where in some instances national courts have upheld the validity of the arbitration clause and in similar situations have rejected this claim, on the basis of the alleged unavailability and non-waiver of labour rights, employee's under-sufficiency or even the offence to public policy.
iii Recognition and enforcement of foreign awards
Unlike the UNCITRAL Model Law, the Arbitration Act does not establish any difference between international and domestic arbitration. Instead, it 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 (STJ). Therefore, only awards rendered outside the Brazilian territory are considered foreign, in accordance with the provisions of the New York Convention (Article 1).
The recognition process prior to actual enforcement is required by the Constitution and is mirrored in the Arbitration Act (Article 35). The process of recognition of a foreign award is carried out before the STJ and aims at transforming said award into an enforceable decision within the Brazilian territory; that is, equivalent to any judgment rendered in Brazil.
However, 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 a foreign award, the STJ 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.
According to recent rulings of the STJ, this means that a foreign award will be recognised and enforced unless it is completely incompatible with the Brazilian legal system. The mere violation of a dipositive or mandatory rule is not sufficient to deny recognition and enforcement to a foreign award. It is indispensable that the award be entirely irreconcilable with the founding laws of Brazil.
That said, recent statistics have demonstrated that in the vast majority of cases, recognition is granted by the STJ without major setbacks, and subsequent enforcement is allowed upon evidence that a local defendant has been duly served process and given the full opportunity to present his or her case before the arbitrators, thus conforming to public policy.
The confidentiality of arbitration proceedings under the Arbitration Act is possible, but not mandatory. Therefore, unless otherwise agreed by the parties, an arbitration will be in principle public. However, the rules of the vast majority of arbitration institutions provide that arbitration proceedings are confidential, which provision the contracting parties usually incorporate into the relevant arbitration clause when cross-referencing with those institutional rules, as to avoid any doubts about their intent. Consequently, bearing in mind that institutional arbitrations are more common than ad hoc arbitrations, most Brazilian arbitration proceedings are confidential.
As to court actions related to arbitration (either prior to the constitution of the competent arbitral tribunal for the granting of urgent reliefs or after termination of the arbitration for enforcement or annulment of the arbitral award), Article 189 of the new Civil Procedure Code clarifies this issue by providing that 'although procedural acts are public, lawsuits are prosecuted under a gag order when they deal with arbitration, including the enforcement of arbitral decisions by means of a letter of request sent by the arbitral tribunal to the judiciary, provided the confidentiality stipulated in the arbitration proceeding is proven before court'.
Therefore, as long as the duty of confidentiality is clearly provided in the arbitration agreement or in the rules of the arbitral institution to which the arbitration clause expressly refers, the national court shall abide by the same duty of confidentiality.
Despite this fact, it is important to highlight that under Article 2, Paragraph 3 of the Arbitration Act, arbitral proceedings that involve state and state-controlled companies shall always comply with the principle of publicity, which does not entail the publication of all the procedural acts and facts. Notwithstanding, to the extent of the law, the public entity will be obliged to inform the control and supervisory bodies of the federal government, as well as the population, of any relevant facts.
v Local arbitral institutions and statistics
The Brazilian Arbitration Act is also satisfactory when it comes to the parties' freedom in choosing the features of the arbitration procedure, such as the language of the procedure, and whether or not to submit the arbitration to the rules of an arbitral institution.
The institutional arbitration, that is, the arbitration administered by – and under the rules of – an arbitral institution, is widely used in Brazil. No less than a dozen well-established arbitration institutions have settled in Brazil, many of which are private, and some of which are dedicated to handling disputes within specific sectors and professions, such as real estate, energy and engineering. Bilateral chambers of commerce also keep key arbitration institutions in Brazil.
Some of the most reliable domestic dispute resolution institutions that manage a large number of proceedings in Brazil are the:
- Arbitration and Mediation Centre for the Brazil–Canada Chamber of Commerce (CAM–CCBC), which is the oldest arbitration centre in Brazil, established in 1979;
- Conciliation, Mediation and Arbitration Chamber for the Centre/Federation of Industries of the State of São Paulo (CIESP/FIESP);
- Arbitration and Mediation Centre of the American Chamber of Commerce (AMCHAM);
- Business Mediation and Arbitration Chamber (CAMARB);
- Mediation and Arbitration Chamber of the Getúlio Vargas Foundation (FGV);
- Brazilian Centre for Mediation and Arbitration (CBMA);
- Market Arbitration Chamber of the Futures and Commodities Exchange and the São Paulo Stock Exchange – BM&F/BOVESPA (CAM-B3); and
- Mediation and Arbitration Chamber of the Commercial Association of the State of Paraná (ARBITAC).
These institutions follow almost all of the best international guidelines and standards, ensuring equal participation of the parties throughout the proceedings as well as the impartiality and independence of arbitrators.
There are no obstacles to having an arbitration with a seat in Brazil but administered and ruled by international institutions, such as the International Chamber of Commerce (ICC), the International Centre for Dispute Resolution (ICDR) or the London Court of International Arbitration (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 the ICC Court President, Alexis Mourre, 'The augmented presence of the Court Secretariat in São Paulo is a direct response to an ever-expanding Latin America arbitration market and a continuation of our efforts to bring ICC Arbitration services even closes to users in Latin America and beyond'.2
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, 101 in 2018, 97 in 2019, and 48 in the first half of 2020.
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), fifth in 2010 (74 parties, 3.45 per cent of the total); and now, according to the recent ICC Dispute Resolution 2018 Statistics, Brazil was ranked third with 117 parties involved in arbitrations under the ICC. Brazil also appeared as the fifth-ranked country (the same rank as Singapore) with the highest global number of nominations as the place of arbitration in 2018, with São Paulo as the seventh most common place of arbitration.
Outlook and conclusions
Alternatives to court litigation have developed dramatically in Brazil over the past 25 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 judicial 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, Federal 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 Luiz Vinicius Marinho Trajano is a legal assistant at Pinheiro Neto Advogados.