On 16 December 2015, the Brazilian Superior Court of Justice rendered a decision, published on 22 February 2016, which put an end to a protracted dispute over the validity of an arbitration clause providing alternatively for “arbitration or mediation.”
The dispute involved the holding companies of the Odebrecht and the Gradin families, respectively named Kieppe and Graal. Those are the main shareholders of Odebrecht, one of Brazil’s largest conglomerates. The former is the majority shareholder (circa 62%) and the latter a relevant minority shareholder (circa 20%).
The parties entered into a shareholder agreement whose dispute resolution clause stipulated that “the doubts or controversies arising out of this shareholders agreement shall be resolved by mediation or by arbitration, in accordance with the law […].“
In 2010, the Odebrecht family (Kieppe) attempted to acquire the participation of the Gradin family (Graal) and filed a judicial lawsuit, which prompted Graal to raise the existence of an arbitration clause.
As the dispute resolution provision did not include all the information required to initiate arbitration, Graal had to request court assistance in order to compel Kieppe to arbitrate, as prescribed by the Brazilian Arbitration Act.[1] The trial judge convened a hearing in order to supplement the deficiencies of the arbitration agreement through a document subjecting the parties to arbitration (compromis).
Kieppe then filed an interim appeal with the Court of Appeals of the State of Bahia. The controversy revolved around whether such a broad wording of the dispute resolution clause in the shareholders’ agreement was enough to bind the parties to arbitration.
The Court of Appeals ruled that, since the dispute resolution clause provided for “mediation or arbitration,” the trial judge should have summoned the parties to a hearing in an attempt to reach a consensus as to the appropriate way to resolve the dispute (mediation or arbitration). Absent agreement, the trial judge should decide between the two alternatives, supplementing, if required, the arbitration provision through a reference to arbitration (compromis) along the lines of Article 7 of the Brazilian Arbitration Act.
Kieppe filed another appeal with the Superior Court of Justice, contending that the stipulation that envisages “mediation or arbitration” should not be considered a valid agreement to arbitrate.
The case was heard by the Fourth Section of the Superior Court of Justice, and the decision was taken by a majority of 3 against 2. Whereas the minority opinion held that the provision envisaging “mediation or arbitration” could not be considered a binding agreement to arbitrate, the majority of the justices maintained that the wording signified a binding commitment to arbitrate.
The controlling opinion relied on a legal analysis drafted by Professor Kazuo Watanabe, off-counsel at Trench, Rossi & Watanabe Advogados in cooperation with Baker & McKenzie, and held that since mediation is a voluntary procedure, the reference to mediation did not invalidate the agreement to arbitrate. To wit:
“Since no one can be compelled to settle a case through mediation, the latter consists in nothing more than settlement attempts. If such attempts were to fail, the parties would still be able to rely on arbitration, which is binding, to resolve the dispute. Hence, the usage of the alternative ‘or’ seems even more appropriate and logical than would be that of the additive sentence connector ‘and.’ In practical terms, if the parties reached a settlement during the mediation or conciliation, this would render arbitration unnecessary. Arbitration would only be required in case the dispute endured.
Therefore, it is not reasonable to understand that the reference to mediation as an alternative—which remains a mere attempt to settle the dispute—would render the arbitration provision null and void. This line of thinking would entice the illogical conclusion that, in those cases where the parties have agreed to arbitration, they are prevented from reaching a settlement in conciliation or in mediation.”
This is a great example of how familiarized with alternative dispute resolution mechanisms, and how favorable to arbitration, the Brazilian superior courts have become.
(Brazilian Superior Court of Justice, 4th Section, Especial Appeal No. 1.331.100, Reporting Justice Isabel Galotti, judged on 16 December 2015 and published on 22 February 2016. Case Kieppe Participações e Administração Ltda. vs. Graal Participações Ltda.).
[1] Brazilian Arbitration Act, Article 7: “Where there is an arbitration agreement but one of the parties refuses to initiate the arbitration, the interested party may request the court to summon the other party to court in order to execute a submission agreement (compromisso), in a hearing specially convened for that purpose.”
