Arbitration Yearbook Brazil

By: Joaquim de Paiva Muniz,1 Luis Alberto Salton Peretti,2 João Marçal Martins da Silva3 and Bruna Alcino Marcondes da Silveira4

A. Legislation, Trends and Tendencies

A.1 New Civil Procedure Code Due to Enter into Force This Year

A new Code of Civil Procedure (NCPC) was published as Law 13.105/2015 on 16 March 2015 and in principle will enter into force on 16 March 2016. However, there is a bill proposing to postpone its entry into force to March 2018, as it substantially modifies Brazil’s procedural system.5

The NCPC does not regulate arbitral proceedings, which will continue to be subject to the Brazilian Arbitration Act, which has been recently reformed (please see Section A.2). Nonetheless, there are some provisions regarding cooperation between the arbitration and judicial processes, namely:

Arbitral Letter

The New Code adopted the suggestions of a working group, convened by the Rio de Janeiro Section of the Brazilian Bar, chaired by Trench, Rossi e Watanabe partner Joaquim de Paiva Muniz, and by the Pontifical University of São Paulo, headed by Professor Francisco Cahali, to regulate cooperation between arbitration panels and state courts through the “arbitral letter” (carta arbitral). This instrument would be similar to rogatory letters exchanged between judges from different jurisdictions, to be issued by arbitrators to enable them to request and obtain court support in favor of arbitration.

Confidentiality

The current Brazilian Code of Civil Procedure does not specifically provide that court proceedings deriving from confidential arbitrations shall remain confidential. The NCPC provides that lawsuits ancillary to confidential arbitrations should also remain confidential, respecting the private character of the arbitral proceedings.

Recognition and Enforcement of Foreign Arbitral Awards

Treaties such as the New York Convention shall prevail over local procedural law. Some favorable provisions were inserted, such as the one allowing the Superior Court of Justice (Superior Tribunal de Justiça –STJ) to grant injunctions in procedures for recognition of foreign awards.

A.2 Reform of the Brazilian Arbitration Act

A bill reforming the Brazilian Arbitration Act was sanctioned on 26 May 2015 (Law 13.129/2015), and the changes entered into force on 26 July 2015. The amendments confirm the pro-arbitration environment in the Brazilian legal system with specific changes seeking only to clarify controversial issues and deal with matters not previously regulated.

The bill confirms that governmental entities may submit to arbitration any issue that can be subject to settlement. Although there were many specific laws authorizing the government to go to arbitration, such as the Petroleum Law, the Telecommunications Law and the Electric Power Law, this is the first broad legal authorization.

It also clarifies that an arbitration clause included in the bylaws of a corporation is binding upon all shareholders, including the ones that did not expressly approve it. The main change in this regard is that a shareholder will be entitled to withdraw from the corporation in the event that an arbitration clause is inserted into its bylaws, unless the corporation has shares that have liquidity and dispersion in the stock market, or if the inclusion of the arbitration clause is required for listing in a stock exchange or OTC market requiring at least 25 percent of free float (e.g., the “New Market” from the São Paulo Stock Exchange – BOVESPA).

The bill states that the limitation period will be interrupted by the filing of the request for arbitration, as already occurs with judicial lawsuits. The bill also allows the parties to avoid the application of arbitral rules on the selection of arbitrators where such rules limit the choice of arbitrators to names on a previously agreed list of prospective individuals.

The bill authorizes arbitrators to render partial awards. Moreover, respondents are permitted to request the setting aside of an arbitral award as a defense in a lawsuit to judicially enforce such an arbitral award. Provisions regulating interim and urgent measures in arbitration are inserted. Last but not least, the bill provides for the “arbitration letter,” whereby an arbitral tribunal can request and obtain court support in favor of arbitration.

Three provisions were vetoed. Two would have allowed arbitration in consumer protection issues, provided that the consumer brought the arbitration and agreed to it. The third one would have allowed arbitration between a company and an employee where the employee was an administrator of the company, provided once again that he or she brought the arbitration or consented to it.

A.3 Mediation Act Entered into Force in Brazil

The “Mediation Act” (Law 13.140/2015) was sanctioned on 26 June 2015 and will be in force as from 26 December 2015. The purpose of the Mediation Act is to regulate and foster ADR in Brazil.

The Mediation Act has three chapters: (i) procedural aspects of mediation; (ii) mediation involving state entities; and (iii) final and transition provisions.

On the interaction of the Mediation Act with other pieces of legislation, it is possible to foresee two potential controversies. The first arises out of Article 23, which deals with the suspension of the arbitration or judicial proceedings in cases where the parties undertook to perform mediation.

Another potential controversy is the omission from the Mediation Act of the legal impediment provided in Article 167, paragraph 5 of the New NCPC: professionals cannot act as lawyers in the same judicial courts where they serve as judicial mediators. This impediment does not apply to out-of-court mediators.

Another innovation of the Mediation Act is the regulation of disputes between “public law bodies and entities from the federal public administration” under Article 36.

B. Cases

B.1 Deadline for Requesting Annulment of Partial Arbitration Award6

This case relates to an arbitration conducted in Rio de Janeiro before the Brazilian Center of Mediation and Arbitration regarding a contract for the purchase and sale of natural gas between the gas distribution company of the State of Pernambuco (Companhia Pernambucana de Gás – Copergás) and a gas-fired power plant (Termopernambuco SA). There was a controversy as to whether or not Petrobras (the national oil company) should have been a party to the arbitration, given that it sold gas to Copergás and received funds from Termopernambuco without being a formal party to the contract. The losing party requested the annulment of a partial award that excluded Petrobras from the arbitration. The main issue was whether the 90-day term for requesting the annulment of the partial award should have started to run from the date of the partial award excluding Petrobras, or rather from the date of the final award deciding the merits. If the first interpretation prevailed, the losing party would have missed the deadline for annulment.

The Brazilian Arbitration Act was unclear on this issue until the recent reform, which changed Article 33, paragraph 1, to provide that the deadline to annul a partial award runs from the date of that partial award, even if the arbitration continues to a final award.
The decision of the STJ followed the same line as the reform, counting the 90-day deadline from the date of the partial award. As a result, the lawsuit to annul the arbitral award was deemed untimely.

B.2 Foreign Award on Employment Law Recognized by STJ7

The decision arose from a dispute between a soccer player and an Arab soccer team, which resulted in a foreign arbitral award whose recognition in Brazil was challenged, based on Article V.1.e of the New York Convention. The dispute referred to an employment relationship, which in principle cannot be resolved through arbitration in Brazil, according to the majority of Brazilian case law.8 However, the STJ granted the recognition of this foreign arbitral award because it only discussed the penalty due by the player for early termination of the labor relationship. The STJ concluded that the core of the discussion was purely contractual and involved monetary matters and, therefore, that there was no arbitrability issue.

B.3 Closure of Arbitral Entity Does Not Invalidate Arbitration Clause9

This was a lawsuit regarding a lease agreement with an arbitration clause, in which the tenant filed a lawsuit in the judicial court. The defendant raised an objection to the jurisdiction of the courts based on an arbitration provision contained in the lease agreement. Based on the fact that the arbitration institution selected by the parties (the Núcleo de Mediação e Arbitragem de Ribeirão Preto) had ceased to exist, the first level court (4th Civil Court Division in the city of Ribeirão Preto) denied the objection to its jurisdiction and ordered the judicial proceedings to continue.10 The plaintiff filed an interim appeal before the 29th Chamber of the Court of Appeals of the State of São Paulo, which dismissed the judicial lawsuit.

The rationale of the Court of Appeals’ decision was that the parties had clearly chosen arbitration and that the fact that the selected arbitral institution no longer existed was not able of itself to invalidate the agreement to arbitrate. The solution would be to choose another arbitral institution, rather than go to the judicial courts. The reporting judge made an interesting analogy with the situation where the parties jointly choose an arbitrator. If the individual is not available, the choice of arbitration will still be enforceable and the parties will have to appoint another person. Hence, the Court of Appeals upheld the arbitration agreement and overturned the decision of the first level court, referring the parties to arbitration.

B.4 Enforceability of Arbitration Clause11

This was a dispute involving the holding companies of the Odebrecht and Gradin families, which are the main shareholders of one of the largest Brazilian economic groups, Odebrecht, the former being the majority shareholder (circa 62%) and the latter a relevant minority shareholder (circa 20%). The parties have a shareholder agreement providing for “mediation or arbitration” to resolve disputes, and in 2010, the Odebrecht family tried to acquire the participation of the Gradin family, filing a judicial lawsuit, against which the Gradin family raised the existence of an arbitration clause. The controversy was whether such a broad wording of the dispute resolution clause in the shareholders’ agreement really forced the parties to resolve disputes though arbitration. The discussion went all the way to the STJ, which concluded, by a majority of votes, that the parties should resolve the controversy by arbitration, rather than in judicial courts. This is a good example of how favorable to arbitration the Brazilian higher courts are.

B.5 Enforcement of Awards Annulled in Country of Issuance12

In this case, EDF was seeking to enforce in Brazil an arbitral award against Endesa and YPF that had been set aside by the National Commercial Court of Appeals of Buenos Aires. Given that the decision issued by the Argentinian judiciary power had become res iudicata, the Brazilian STJ ruled that the enforcement of the arbitral award should be refused due to the fact that the award had been set aside by judicial courts of the country where the award was made, pursuant to Article V.1.e of the New York Convention, Article 5.1.e of the Panama Convention and Article 38.VI of the Brazilian Arbitration Act. Therefore, the Brazilian STJ decided that arbitral awards declared null and void by the foreign competent authority could not produce effects in Brazil. Brazil therefore did not follow international precedents such as Hilmarton and Putrabali, whereby arbitral awards set aside in the country of issuance had been recognized elsewhere.

C. Costs in International Arbitration

The issue of costs in arbitrations with their seat in Brazil is subject to the parties’ autonomy. In the absence of agreement in this regard, arbitrators will apply the Brazilian Arbitration Act.

C.1 Allocation of Costs

Under Brazilian law, a distinction should be drawn between attorneys’ fees and other costs of litigation. On one hand, costs are generally recoverable, except for attorneys’ fees. On the other hand, in judicial lawsuits, the counsel of the winning party is entitled to collect from the losing party, as his or her own separate right, mandatory success fees (sucumbência), equivalent to an amount from 10 percent to 20 percent of the award. This amount is granted on top of the award itself. For this reason, it is usual in Brazil for counsel in judicial lawsuits to only charge their clients a retainer, being mostly compensated by the sucumbência if the party that he or she is representing wins.

The right of sucumbência derives from the Code of Civil Procedure, which in principle does not apply to arbitral proceedings. As to costs, Article 27 of the Brazilian Arbitration Act provides that “the arbitral award shall decide on the parties’ responsibilities regarding costs and expenses for the arbitration, as well as on any amount resulting from bad-faith conduct, as the case may be, following the provisions of the arbitration agreement, if any.”13 The consequences of this provision are twofold.

First, if the agreement to arbitrate is silent, arbitrators have broad discretion to determine the allocation of costs. Arbitrators usually require the losing party to compensate the prevailing party for costs and expenses, according to the principle “costs follow the event.” If many reliefs are sought and have different outcomes (some won by the claimant and others by the respondent), the arbitrators usually allocate the costs on an equitable basis, adopting quite subjective criteria, so that it is difficult to describe a simple “rule of thumb.”

The reimbursement of attorneys’ fees is treated a little differently. A general rule is that the losing party must indemnify the winning party for “reasonable” legal fees. Since the concept of “reasonableness” involves quite subjective criteria, in Brazilian practice, sometimes the arbitrators allow the reimbursement of a percentage of the fees actually charged by counsel; in other instances, the arbitrators determine a fixed amount that they deem “reasonable” to be reimbursed.

Unless the parties otherwise agree, there is no sucumbência in arbitrations (i.e., no right for counsel to additionally collect 10 percent to 20 percent of the award from the losing party). A very controversial issue, however, is whether counsel may be entitled in arbitration to “contractual success fees.” That is to say, it is debatable, if counsel charges a low retainer fee but contracts for a percentage of the final award from a successful client as a “success fee,” whether the successful client may collect from the losing counterparty full reimbursement of that success fee paid to counsel.

Second, Article 27 of the Brazilian Arbitration Act allows the arbitrators to adapt the allocation of costs to sanction bad-faith conduct during litigation. For instance, if the respondent wins, but in the course of the arbitral procedure it adopted dilatory tactics, such as asking for unnecessary technical evidence to gain time, the arbitrators can require the respondent to bear the costs of the unnecessary evidence, notwithstanding its overall success.

In institutional arbitrations, the amount at issue is usually fixed by the administrative institution. Nonetheless, it is not unusual for Brazilian arbitrators to “raise a red flag” to the institution if they believe that the parties are understating the amount at stake to lower the fees that they need to pay.

C.2 Security for Costs

Security for costs is foreseen by the Code of Civil Procedure for judicial lawsuits where the plaintiff does not reside in Brazil or leaves the country during the lawsuit.14 This provision, however, does not automatically apply to arbitration.

Nonetheless, most Brazilian arbitration institutes require the parties to pay the court’s and arbitrators’ fees prior to the execution of the terms of reference, or make the delivery of the award conditional on the full payment of fees and costs. Moreover, most institutions request an advance of funds to cover costs to be incurred during the arbitration.

C.3 Recovery of Costs

Without detailing the types of costs to be compensated, Article 27 of the Brazilian Arbitration Act only mentions the recoverability of “costs and expenses for the arbitration.” Since Brazilian law requires indemnifications to provide full restitution, corresponding to the reestablishment of the status quo ante,15 this might be construed to require compensation for all heads of costs and expenses actually incurred throughout the arbitration.

The arbitrators are free to interpret the definition of “costs and expenses,”16 but such terms are generally construed to encompass: (i) arbitrators’ fees; (ii) attorney’s fees; (iii) fees of the administering institution; (iv) fees of experts appointed by the arbitration panel and of expert witnesses selected by the parties;17 as well as (v) general disbursements on travel, accommodation, communication and other costs incurred in the arbitration.

As we have addressed in C.1, in practice, attorneys’ fees sometimes are not fully reimbursed, being subject to the arbitrators’ assessment of whether it was “reasonable” in view of the circumstances of the case. In principle, there is no sucumbência in arbitral proceedings.

It is rare for arbitrators in domestic arbitrations to allow reimbursement of costs of in-house counsel and other members of a party’s staff, such as contract managers and engineers. Nevertheless, we see no legal impediment to this, in light of the principle of full restitution, as long as those costs are duly evidenced.

  1. Joaquim de Paiva Muniz is a principal in Trench, Rossi e Watanabe Advogados, Rio de Janeiro, registered both at the Rio de Janeiro Bar and at the New York Bar. He has an LLM from the University of Chicago and is the Chairman of the Arbitration Commission of the Rio de Janeiro Bar (OAB/RJ) and coordinator of the arbitration courses of the Rio de Janeiro Bar, including a lato sensu graduate course. He is an officer of the Brazilian Arbitration and Mediation Center, which is the largest of its kind in Rio de Janeiro, as well as an author of many books, including Arbitration Law of Brazil: Practice and Procedure (Juris Publishing, 2nd edition 2015) and Curso Básico de Direito Arbitral (Juruá, 3rd edition 2015), which he coauthored.
  2. Luis Alberto Salton Peretti is a senior associate in the arbitration practice of Trench, Rossi e Watanabe Advogados, São Paulo. He is a graduate of the Paris Institute of Political Studies (SciencesPo), with a Master of Laws in Economic Law, as well as a Masters in Law and Economic Globalization from the University Paris I Panthéon Sorbonne and a Masters in Comparative Law by the University of Paris II Panthéon Assas.
  3. João Marçal Martins da Silva is an associate in the arbitration practice group of Trench, Rossi e Watanabe Advogados, Rio de Janeiro. He has a Master in Public Law from the Fundação Getúlio Vargas (FGV). He is a lecturer on Arbitration Law at the Superior School of Law of the Brazilian Bar Association (Rio de Janeiro Section), as well as a founder and director of the Brazilian Association of Students of Arbitration.
  4. Bruna Alcino Marcondes da Silveira is an associate in the arbitration practice of Trench, Rossi e Watanabe Advogados, São Paulo. She is a Law graduate from the Mackenzie Presbyterian University.
  5. Draft Bill of the House of Representatives PL 2913/2015, proposed by Congressman Victor Mendes.
  6. STJ, Special Formation. Special Appeal No. 1519041/RJ, Reporting Justice Marco Aurélio Bellizze, judged on 1 September 2015.
  7. STJ, Special Formation. Challenge of a Request for Foreign Arbitral Award Recognition No. 11529/EX, Reporting Justice Og Fernandes, judged on 17 December 2014.
  8. See, for instance: Brazilian Superior Labor Court, First Formation, Interlocutory Appeal (AgIn) in the Revision Appeal RR 122940-23.2004.5.05.0014, Reporting Justice Vieira de Melo Filho, judged on 18 November 2009.
  9. TJSP, São Paulo State Court of Justice. Interlocutory Appeal 2204194-40.2014.8.26.0000, Reporting Justice Carlos Henrique Miguel Trevisan, judged on 11 March 2015.
  10. Fourth Civil Court Division in the city of Ribeirão Preto. Decision rendered on 6 August 2014 in lawsuit 0003234-10.2012.8.26.0506.
  11. Superior Court of Justice, 4th Turma, Especial Appeal 1.331.100, Reporting Justice Isabel Galotti, judged on 16 December 2015.
  12. Superior Court of Justice, SEC 5.782 – EX (2011/0129084-7), Reporting Justice Jorge Mussi, judged on 2 December 2015.
  13. An English translation of the Brazilian Arbitration Act is available at the website of the Brazilian Arbitration Committee – CBAr (www.cbar.org.br).
  14. Brazilian Code of Civil Procedure, Article 835: “The plaintiff, whether Brazilian national or foreign, that resides outside Brazil or is absent from the Brazilian territory pending the lawsuit, must post, in the lawsuits that it initiates, a guarantee that is sufficient to cover the costs and attorney’s fees of the opposing party, unless it has real estate property in Brazil that ensures the payment.”
  15. Brazilian Civil Code, Article 944: “The indemnification must correspond to the extent of the losses.”
  16. Carmona, Carlos Alberto. Arbitragem e Processo: Um Comentário à Lei 9.307 de 1996. São Paulo: Atlas, 2009, p. 374.
  17. Beraldo, Leonardo de Faria. Curso de Arbitragem: nos termos da Lei nº 9.307/96. São Paulo: Atlas, 2014, p. 343.