Brazil: 10 Traps To Avoid In Drafting Arbitration Agreements*

Last Updated: 3 January 2013
Article by Walter Stuber

Introduction

Arbitration in Brazil is regulated by Law No. 8,307, of September 23, 1996 (the Brazilian Arbitration Act), which applies to all arbitral proceedings with their seat in the Brazilian territory, and it is based on the UNCITRAL Model Law and on the Spanish Arbitration Law of 1988. Furthermore, Brazil ratified and introduced, without reservations or declarations, the New York Convention into its legal system through Legislative Decree No. 52, of April 25, 2002, and it is party to several multilateral treaties on international commercial arbitration, such as (i) the Geneva Protocol on Arbitration Clauses of 1923; (ii) the Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards of 1979 (the Montevideo Convention); (iii) the Inter-American Convention on International Commercial Arbitration of 1975 (the Panama Convention); (iv) the Protocol of Las Leñas of 1992; and (v) the MERCOSUR Agreement on International Commercial Arbitration of 1998.

A significant number of arbitration institutions or centers have been created or have gained reputable prestige in Brazil and abroad, such as the Arbitration and Mediation Center of the Chamber of Commerce Brazil-Canada (CCCB), the São Paulo Chamber for Mediation and Arbitration (FIESP/CIESP), the Conciliation and Arbitration Chamber of the Fundação Getúlio Vargas (FGV), the Corporate Chamber of Commerce in Brazil (CAMARB), the Arbitration and Mediation Center of the American Chamber of Commerce in São Paulo (AMCHAM), the Mediation and Arbitration Center of the Portuguese Chamber of Commerce in Brazil and the Market Arbitration Center (Câmara de Arbitragem do Mercado – CAM) instituted by the Brazilian Exchange (BM&FBOVESPA).

Use of institutional international arbitration is more common in Brazil than ad hoc international arbitration. If and when the parties choose ad hoc arbitration in Brazil, they will usually follow the UNCITRAL rules.

An arbitration agreement must fulfill certain requirements to be valid and enforceable under Brazilian law. We will now discuss ten traps that should be avoided in drafting arbitration agreements which might adversely affect their validity and enforceability in Brazil.

Trap No 1 – Is the Issue Arbitrable?

The first trap is to avoid the inclusion of a matter that cannot be arbitrated in the arbitration agreement. Some types of disputes are deemed to be non-arbitrable in Brazil.

The Brazilian Arbitration Act expressly provides that parties must have full legal capacity in order to arbitrate a dispute and the subject matter must be pecuniary patrimonial and negotiable rights (direitos disponíveis), i.e. rights over which the parties may negotiate.

Most commercial matters may be arbitrated, including many when the government or government-controlled entity is one of the parties.

Certain matters, however, may not be arbitrated even if the parties with full legal capacity were agree to arbitrate them, such as family matters, certain public law matters, and possibly individual employment-related matters, according to a recent precedent of the Brazilian Superior Labor Court.

Furthermore, an arbitration clause is only valid and effective in a consumer contract or an adhesion contract, in the following cases: (i) when the consumer of the adhering party initiates the arbitration; (ii) if the provision is in boldface; or (iii) when the arbitration clause is established in a separate signed document. In essence, in all these cases, the arbitration agreement is only deemed valid and enforceable if the weakest party (the consumer of the adhering party) wishes to resolve the dispute through arbitration.

If, during the course of the arbitral proceedings, a dispute arises concerning rights over which a party may not dispose, and once convinced that the final decision may depend thereon, the arbitrator(s) may refer the parties to the State Court having jurisdiction, ordering a stay of the arbitral proceedings. Then, the arbitral proceedings shall recommence after the preliminary question is settled and evidence has been entered in the file of the final non-appealable judgment thereon.

Trap No. 2 – Inadequate Choice of the Applicable Rules.

The second trap is to choose inadequately the applicable rules that will govern the arbitration agreement or not do it clearly.

The parties may freely choose the rules of law applicable to the arbitration provided that their choice does not violate good morals and public policy. This choice is permitted due to the principle of autonomy of the parties and the voluntary nature of the arbitration.

In this regard, it is important to make clear in the agreement the substantive law applicable to arbitration. Whenever the substantive applicable law is not clear, the conflict of law of the Brazilian Introductory Law to the Civil Code will prevail. If this situation happens, the applicable law would be the law of the country where the agreement was signed, unless the parties have signed the agreement in different venues. In this latter case, the applicable law would be the one of residence of the claimant.

Parties may even determine the use of equity by the arbitrator(s) if they so desire or may also agree that the arbitration shall be conducted under the general principles of law, customs, usages and international rules of trade.

Trap No. 3 – Non-fulfillment of the Mandatory Requirements.

The third trap to be avoided in an arbitration agreement is the lack of certain requirements that must be fulfilled under Brazilian law.

The arbitration agreement must mandatorily indicate:

  1. the qualification (name, profession, marital status and domicile) of the parties;
  2. the qualification of the arbitrator(s), or, if applicable, the identity of the arbitration institution or center to which the parties have delegated the appointment of the arbitrator(s);
  3. the subject matter to be arbitrated; and
  4. the place where the arbitral award will be rendered.

In addition, there are other requirements that are not mandatory but may be included in the arbitration agreement, namely:

  1. the place or places where the arbitral proceedings shall be held;
  2. if so agreed by the parties, the authorization for the arbitrator(s) to decide in equity;
  3. the time limit for the making of the arbitral award;
  4. the choice of the national law or institutional rules applicable to the arbitral proceedings, if the parties so agree;
  5. provisions as to the responsibility for the fees and costs involved in the arbitral proceedings; and
  6. provisions as of the fees of the arbitrator(s).

A complete (full) arbitration clause should cover all the above-mentioned requirements (mandatory and non-mandatory).

Brazilian law does not prevent the arbitrator(s) from choosing the most convenient place to carry out the hearings and procedural meetings. If Brazil is selected as the seat of arbitration, hearings and procedural meetings can also be conducted abroad.

Trap No. 4 – The Arbitration Clause is Distinct from the Main Agreement.

The four trap is the drafting of the arbitration clause to be inserted in the main agreement.

Under Brazilian law an arbitration clause is autonomous and separable from the main agreement.

Therefore, the validity and enforceability of the agreement to arbitrate must be analyzed separately from the validity and enforceability of the main agreement. The invalidity of the arbitration clause will not automatically entail the invalidity of the main agreement. Consequently, even if the main agreement is deemed to be invalid, the parties will remain bound by the arbitration clause for the purposes of submitting their issues to means of dispute resolution. For this reason, it is very important to draft properly the arbitration clause.

The principle of competence-competence is recognized by the Brazilian Arbitration Act. This means that the arbitrator(s) is(are) competent to decide, by virtue of his/her(their) office(s) or at the parties´ request, the issues concerning the existence, validity and effectiveness of the arbitration agreement, as well as of the contract containing the arbitration clause. The autonomy of the arbitration clause is the basis of the principle of competence-competence.

The arbitration clause inserted into an agreement, ie, a provision stating that any and all disputes arising/related to the agreement shall be resolved by arbitration, is legally binding on the parties. Pre-dispute arbitration clauses (cláusulas compromissórias) are legally binding on the parties as long they are in writing. An arbitration clause may be inserted in the underlying agreement itself or in a separate document which makes reference to it.

The Brazilian Arbitration Act provides for a special legal proceeding, which entitles a party to judicially demand the institution of arbitration if the other party fails to comply with the arbitration clause.

Trap No. 5 – Choice of Arbitrators.

The fifth trap may happen with the wrong choice of the arbitrator(s).

An arbitrator should be an individual (natural person) with full legal capacity, impartial and independent and, last but not least, entrusted by the parties. Foreign arbitrators who attend these requirements can act as arbitrators when the seat is in Brazil or hearings are held within the Brazilian territory. Brazilian law does not require arbitrators to be Brazilian nationals.

It should be mentioned that Brazilian law does not expressly forbid legal entities from acting as arbitrators. However, in practical terms this is absolutely impossible. The position of an arbitrator under Brazilian law is equivalent to a judge´s function and may entail personal civil and criminal liability, which is only applicable against natural persons.

Depending on the arbitration institution or center which the parties have chosen to submit the arbitration and the institutional rules of that entity, they will not be able to nominate arbitrators that are not inserted in the list of the arbitration institution or center.

When the parties have failed to nominate the arbitrator(s), they may still do so jointly, resort to the pertinent rules of the arbitration institution or center, if any, or indicate an appointing authority to nominate the arbitrators. The parties may also be assisted to nominate the arbitrator(s). In case of an "empty" arbitration agreement, a judge may nominate the arbitrator(s). This possibility is admitted by the Brazilian Arbitration Act. An arbitration agreement is deemed to be "empty" when it fails to deal with this requirement and does not mention the rules to nominate the arbitrator(s).

The grounds for challenging an arbitrator under the Brazilian Arbitration Act are the same for the disqualification of a judge under the Brazilian Code of Civil Procedure, namely: (i) impediments; and (ii) suspicions. This may happen when there are justifiable doubts as to the arbitrator´s independence and/or impartiality. The International Bar Association (IBA) Guidelines on Conflicts of Interest in International Arbitration will generally be taken into account.

An impediment is a clear sign that the arbitrator is biased and may not act in the arbitral proceedings under an objective interpretation of the circumstances. Nevertheless, based on the principle of autonomy of the parties, the parties are entitled to waive their right to challenge an arbitrator even in the most severe case, whereas a judge under the same circumstances would be required to withdraw from deciding the matter.

A suspicion offers a subjective and tentative analysis of the decision-maker´s state of mind. Grounds for suspicion may result from non-disclosure of previous business relationships or financial interests between the arbitrator and the parties in connection with the dispute at hand. However, it does not necessarily lead to the conclusion that an arbitrator is biased in favor of one of the parties or has an interest in the subject-matter in dispute.

Trap No. 6 – Multi-party Agreements.

The sixth trap is the drafting of an arbitration clause in a multi-party agreement.

The Brazilian Arbitration Act is silent about the effects of arbitration agreements on third parties. Depending on the circumstances of the case at hand, the arbitral tribunal may exceptionally accept third parties in the arbitration. This only occurs in very specific situations, involving groups of companies, for example.

Since the issue of third-party agreements remains unsettled in Brazil, it is paramount to be precise when drafting the arbitration clause for multi-party agreements.

Drafting a complete arbitration clause providing for all the relevant issues can potentially avoid the disruption of the dispute resolution mechanism originally envisioned. Issues to the right of each incoming party to challenge the arbitral tribunal´s composition will constitute a relevant factor in the arbitration clause. It is advisable to include provisions for a potential appointment of arbitrators by third parties, particularly as this may encompass issues involving due process of law in Brazil, such as full defense and proper response, equal treatment of the parties, arbitrator´s impartiality and free convincement.

Trap No. 7 – Payment of Fees to the Arbitrator(s).

The seventh trap is not to secure payment of fees to the arbitrator(s).

In Brazil arbitrators may only secure payment of their fees if the arbitration agreement expressly establishes this possibility. As a rule, payment of arbitrator(s) is usually contingent upon the rendering of a decision. Consequently, the arbitrator(s) may only receive the payment of his/her (their) fees after he/she (they) issue(s) the arbitral award.

From a practical standpoint, payment of a part of the arbitrator´s fee is used as a guarantee. If there is no specific amount previously determined, the parties and the arbitrator(s) can jointly establish it, based on the number of hours that the arbitrator(s) is (are) expected to work.

Regarding arbitration´s costs, Brazilian law expressly provides that arbitrators can require the advanced payment of part of the costs of the arbitration. Often the arbitration institutions and centers require the payment of part of the costs as a guarantee and some of them provide rules to suspend the arbitration process, in order to compel the parties to pay in advance part of such costs. The opposing party can even pay the total amount owed and later collect if from the defaulting party, in order to prevent the suspension of the arbitration process.

Trap No. 8 – Confidentiality.

The eight trap is not to include a confidentiality provision in the arbitration agreement.

The Brazilian Arbitration Act does not impose the duty of confidentiality on the parties. However, the parties may establish it in the arbitration agreement. Furthermore, the arbitration institutions and centers can also require the duty of confidentiality in their rules.

The purpose of the confidentiality clause is to keep the dispute and sensitive information secret and to ensure that information disclosed in the arbitration process cannot be relied on in other legal proceedings.

Extent to confidentiality may depend on the grounds relied on when asking for disclosure. Recognized exceptions to the rule include where disclosure is: (i) made by express or implied consent of a party; (ii) made mandatory by law or a court order; (iii) in the public interest / interest of justice to disclose documents; (iv) necessary for the establishment or protection of an arbitrating party´s legal rights vis-à-vis a third party.

Trap No. 9 – Definition of the Limits of the Arbitration.

The ninth trap is the lack of the definition of the limits of the dispute in the arbitration agreement.

The arbitration agreement must define the limits of the dispute because the arbitration award will be deemed null and void if it has exceeded the limits of the arbitration agreement or it does not decide the whole dispute submitted to arbitration.

Furthermore, pursuant to the Brazilian Arbitration Act, the arbitral award shall be made within the time limit stipulated by the parties in the arbitration agreement. If no express stipulation is made thereon, however, the award shall be made within six months from the date of the commencement of the arbitral proceedings, or from the date of the substitution of the arbitrator (s). The stipulated period may be extended by the parties and the arbitrator(s) by mutual consent.

Trap No. 10 – State Immunity.

The tenth trap is to insist in the waiver to the state immunity when the Brazilian government is one of the parties of the arbitration agreement and is acting in its sovereign capacity.

State immunity is usually deemed to have been waived and may not be invoked whenever the Brazilian government (the Union, the States or the Municipalities) is acting in its commercial or private capacity (ius gestonis).

Whenever the Brazilian government is acting in its sovereign capacity in the public field, it may successfully raise a defense of state or sovereign immunity at the enforcement stage, particularly when the arbitration award is against national public policy or the subject matter is non-arbitrable.

Footnotes

*This article contains the notes prepared for the elaboration of the PowerPoint presentation related to the webinar organized by the GOAL - Global Outsourcing Association of Lawyers on "Arbitration Agreements: Pitfalls to Avoid While Drafting Them" on November 29, 2012 at 12:00 pm ET, in which the author was one of the speakers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Walter Stuber
 
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