Brazil: Arbitration And Execution Proceedings Based On Extrajudicial Title

With the development and consolidation of arbitration as an effective means of dispute resolution in Brazil, new issues have arisen that demand the attention of the courts and commentators. One of these issues is the controversy over the possibility of bringing execution proceedings in the judicial courts based on a contract that contains an arbitration provision.

Under the Brazilian Code of Civil Procedure (Código de Processo Civil – CPC), a creditor who claims a certain, liquid and enforceable debt based on "extrajudicial title for execution" may proceed directly to collection of the debt through an execution proceeding, without first bringing cognitive proceedings (i.e. an ordinary action) to have his right to the debt recognized by the court. One of the documents that constitutes "extrajudicial title for execution" is a "private document signed by the debtor and by two witnesses". Thus, any written contract stipulating a certain and liquid debt which is signed by the debtor and two witnesses would, in theory, give the creditor the right to commence an execution proceeding. In such proceedings, the debtor has the right to reply by initiating a cognitive proceeding ("embargos à execução"), connected to the collection action.

When a contract which constitutes extrajudicial title for execution also provides for arbitration of disputes, the relation between the coercive aspect of the collection of the debt and the cognitive aspect of the embargos à execução poses some questions, notably by reason of the novelty of the subject for both case law and legal doctrine.

It can be said that an arbitration proceeding is equivalent to a cognitive proceeding in the judicial courts, and that consequently the execution of certain, liquid and enforceable debts falls outside the scope of arbitration. Thus, a party who claims performance of an obligation established in an extrajudicial title for execution may enforce the claim through an execution proceeding before the judicial courts, even if the contract contains an arbitration provision.

In this case, the judge in execution proceeding will have jurisdiction to appreciate and grant all measures related to the execution, while the arbitrator will have jurisdiction to decide questions going to the creditor's right to the debt, which would typically be argued in a cognitive procedure, such as an action for a declaration of the unenforceability of the debt (ação declaratória de inexigibilidade), or in an objection to execution (embargos do devedor).

In effect, the appeal courts of São Paulo and Rio de Janeiro have found that the judge's and the arbitrator's respective jurisdictions do not overlap or cancel each other out; instead, they complement each other.

In this context, arbitration can be understood as an alternative to objections to execution and declaratory actions (which are typically cognitive in nature) incidental to execution proceedings, and accordingly the existence of a contractual arbitration agreement would not constitute grounds to dismiss the execution proceeding, within the strict terms of articles 267 (VI), 580 and 585 §1 of the CPC.

There is also some question as to whether the commencement of arbitration will suspend a judicial execution proceeding. Law 11.382/06 amended the provisions of the CPC governing execution of extrajudicial titles. One of the most significant changes, introduced in a new article, 739-A, was to create conditions for speedier and more effective enforcement. Article 739-A provides that, as a rule, objections by the execution debtor do not have the effect of staying the execution. Exceptionally, the execution debtor may request that the execution be stayed, but the debtor must prove that (i) there are good grounds for defence; (ii) the execution will cause serious damage that would be difficult to repair; and (iii) the debt under execution has been secured by attachment of property, deposit into court or a bond.

In other words, as the law now stands, we believe that the simple fact that there is a cognitive proceeding related to the liquidity, certainty or enforceability of a debt under execution, regardless of whether the cognitive proceeding is before the judicial courts or before an arbitrator, should not necessarily result in a suspension of the execution proceeding. Instead, the judge in the execution proceeding must assess the requirements set out in article 739-A of the CPC and determine whether the execution should be stayed pending the outcome of the cognitive proceeding.

The Superior Tribunal of Justice (Brazil's highest court in nonconstitutional matters) recently decided in an action for provisional relief (Medida Cautelar no. 13.274-SP {2007/0225507- 1}) that a judicial execution action is not incompatible with arbitration proceedings, and that the existence of arbitration is not cause to dismiss the execution action. However, Minister Nancy Andrighi held that existence of arbitration meant that the execution must be stayed after attachment of the debtor's property, citing various precedents of the Superior Tribunal of Justice to support her interpretation. All the precedents cited by the Minister, however, predate the changes made by Law 11.382/06 and were therefore based on the now revoked art. 739§1 of the CPC.

Debate on the issue continues, and the question now is whether Minister Nancy Andrighi's decision in Action for Provision Relief no. 13.274-SP is consistent with the new rules introduced in article 739-A of the CPC, under which the mere existence of an arbitration proceeding or cognitive action (objection to execution or declaratory action) does not automatically result in a stay of pending judicial execution proceedings.

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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