The importance of arbitration continues to grow in Brazil
Adriana Maria Gödel Stuber
Walter Stuber Consultoria Jurídica, São Paulo
Nobody can question that arbitration is now a reality in Brazil, and its importance in the solution of conflicts has been confirmed by our local courts during 2008, as we will demonstrate in this article.
Recently, Brazilian courts arranged to uphold arbitration agreements during insolvency proceedings, recognising the competence of the arbitrators designated by the parties to decide about the controversy submitted to arbitration. Although these court precedents are only binding on the two cases at hand, we can conclude that this is a trend that would be followed by the Brazilian Judiciary Branch with regard to similar situations.
The first precedent is evidenced by Provisional Measure (Medida Cautelar) No 14,295 – SP (2008/0122928-4), having Interclínicas Planos de Saúde S.A. as Petitioner (Requerente) and Saúde ABC Serviços Médico-Hospitalares Ltda. as Respondent (Requerida), and as Reporting (Relatora) Judge Nancy Andrighi, of the Brazilian Superior Court of Justice (Superior Tribunal de Justiça –STJ). The decision was issued on 9 June 2008 and involves two Brazilian entities operating healthcare plans, Interclínicas Planos de Saúde S.A. (Interclínicas), a company which is currently under extrajudicial liquidation proceedings (liquidação extrajudicial), and Saúde ABC Serviços Médico-Hospitalares Ltda. (Saúde ABC), that had acquired from Interclínicas its entire client portfolio, pursuant to the terms and conditions of a certain portfolio purchase agreement entered into between Interclínicas, as seller, and Saúde ABC, as buyer. In this contract, which was signed before Interclínicas became insolvent, the parties included an arbitration clause to settle eventual controversies.
The Brazilian Company Recovery and Bankruptcy Law (Law No. 11,101, of 9 February 2005) does not apply to: (i) government-owned and mixed-capital companies; and (ii) financial institutions, credit cooperatives, pension funds, entities operating healthcare plans, insurance companies, saving companies, and entities subject to the same treatment as these entities. When the entities operating healthcare plans become insolvent, they are subject to administrative winding-up proceedings known as extrajudicial liquidation (governed by Law No. 6,024, of 13 March 1974, as amended).
Interclínicas tried to avoid the arbitration by questioning the validity and enforceability of the arbitration clause. This issue was submitted to the consideration of the Brazilian Superior Court of Justice (Superior Tribunal de Justiça, STJ). The STJ is the highest Brazilian court in federal law issues and it is responsible for the recognition of foreign arbitral awards.
In this case, the STJ held that the arbitration clause included in the contract was valid and enforceable because it had been agreed between the parties prior to the beginning of the extrajudicial liquidation proceedings of Interclínicas. Furthermore, as part of its the STJ concluded that Interclínicas’ participation in the arbitration did not represent any risk whatsoever to anyone involved in the extrajudicial liquidation proceedings and that the rights of the Liquidated Estate and, therefore, the interests of creditors and third parties in general, could be adequately protected during the arbitration.
In addition, the STJ recognised that any decision as to the validity and scope of an arbitral award is ultimately within the jurisdiction of the arbitrators and not of the judicial courts, based on the competence principle (Kompetenz-Kompetenz principle) contained in Article 8 of the Brazilian Arbitration Law (Law No. 9,307, of 23 September 1996), which reads as follows:
‘Article 8: the arbitration clause is autonomous from the contract in which it is included, meaning that the nullity of the latter does not necessarily imply the nullity of the arbitration clause.
Sole Paragraph: the arbitrator is competent to decide, ex officio 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.’
Jackson v Diagrama
The second precedent is represented by Interlocutory Appeal (Agravo de Instrumento) No. 531.020-4/3-00, having Jackson Empreendimentos Ltda. as Appellant (Agravante) and Diagrama Construtora Ltda. as Respondent (Agravada), and as President and Reporting (Presidente e Relator) Judge Pereira Calças, of the São Paulo Court of Appeals (Tribunal de Justiça de São Paulo, TJSP). The decision was issued on 25 June 2008 and involves the Brazilian real estate company Jackson Empreendimentos Ltda. (‘Jackson’) and the Brazilian construction company Diagrama Construtora Ltda. (‘Diagrama’). Diagrama and Jackson entered into a construction contract whereby Diagrama was responsible for the construction of a building on behalf of Jackson and an arbitration clause was included to settle any disputes between the parties arising out of the contract in accordance with the International Chamber of Commerce (ICC) rules to be administrated by the Arbitration Chamber of Engineering Institute of São Paulo (Câmara de Arbitragem do Instituto de Engenharia de São Paulo).
The building delivered by Diagrama was not satisfactory to Jackson, and thus Jackson filed a request for arbitration against Diagrama for failure to duly execute the construction contract. Two months after the beginning of the arbitration proceedings, Diagrama was declared bankrupt. Then, the Trustee of the Bankruptcy Estate (Administrador Judicial da Massa Falida) of Diagrama submitted an opposition to the arbitration. However, the opposition of the Trustee was denied and the arbitration proceedings continued. The Arbitral Tribunal issued an award favourable to Jackson, condemning Diagrama to pay damages to the amount of over R$1.6 million.
Subsequently, Jackson filed a claim to participate in the bankruptcy proceedings of Diagrama. At the first instance, the Bankruptcy Court (1ª Vara de Falências e Recuperações Judiciais da Comarca de São Paulo) rejected such claim, arguing that the arbitration proceedings should have been suspended when Diagrama was officially declared bankrupt.
Jackson filed an Interlocutory Appeal (Agravo de Instrumento) at the São Paulo Court of Appeals (Tribunal de Justiça do Estado de São Paulo, TJSP) against such decision and succeeded in reversing it. The Special Chamber of Bankruptcies and Judicial Recoveries (Câmara Especial de Falências e Recuperações Judiciais) of the TJSP examined the matter and decided to allow Jackson to seek the damages awarded by the Arbitral Tribunal before the Bankruptcy Court, because the parties were fully capable of executing the arbitration agreement at the time that the underlying construction contract was signed and supervening facts, such as the company’s bankruptcy, cannot annul an arbitration clause, which has been validly executed and is legally enforceable.
Both court precedents are undeniably important and indicate the interplay of arbitration and insolvency proceedings in Brazil.
RS UK v RS Brazil
We would also like to comment herein another case, the result of which would be completely different if the parties had included an arbitration clause in the contract. It refers to Special Appeal (Recurso Especial) No. 804.306 – SP (2005/0207126-3), having RS Components Limited as Plaintiff in Error (Recorrente) and RS do Brasil Comércio Importação Exportação Consultoria e Representações Ltda as Respondent (Recorrido), and as Reporting Judge (Relatora) Nancy Andrighi, of the Brazilian Superior Court of Justice. The Third Panel of STJ decided unanimously to deny the appeal according to the vote of the Reporting Justice that was followed by Justices Massami Uyeda, Sidnei Beneti and Ari Pargendler.
On 19 August 2008, the STJ decided that even when the contract expressly establishes that the controversies will be submitted to the jurisdiction of a foreign court, agreements exclusively performed in Brazil cannot exclude the jurisdiction of the Brazilian courts. The STJ denied the special appeal filed by the English company RS Components Limited (RS UK) against the Brazilian company RS do Brasil Comércio Importação Exportação Consultoria e Representações Ltda (RS Brazil). The appellant RS UK argued that the jurisdiction of the Brazilian were excluded by the terms of the distribution agreement made in 1996 between RS UK (as principal) and RS Brazil (as distributor) for the purpose of distributing the products of RS UK in the Brazilian territory.
The distribution agreement contained a choice of venue clause, providing for the exclusive jurisdiction of the English courts to settle any disputes between the parties. In the case at hand, RS Brazil initiated a lawsuit against RS UK in the city of São Paulo, where RS Brazil is headquartered, to keep the contract on foot and seeking an indemnity for the expenses incurred in setting up the distribution channels in Brazil. The judgment of the São Paulo court was favourable to RS Brazil.
RS UK argued in its answer that the clauses of the distribution agreement were freely negotiated between the parties and RS Brazil, in reply, pleaded that the agreement was in fact an adhesion contract and that the clauses have been imposed to RS Brazil by RS UK without any negotiation.
There was also argument raised by RS UK regarding whether Summarised Precedent (Súmula) 335 of the Brazilian Federal Supreme Court (Supremo Tribunal Federal, STF) was applicable to the case. According to Summary Precedent 335, the choice of venue clause is valid for proceedings originated from the contract.
In addition, arguments were put forth by RS Brazil in relation to Article 9 of the Law of Introduction to the Civil Code (Lei de Introdução ao Código Civil, LICC),1 which provides that obligations are governed by the law of the country where they are incurred (lex loci domicilii).
The STJ decided that the choice of venue clause is valid even in adhesion contracts, provided there is no abuse and damage to the defense, and that in this case the abuse and damage to the defense of RS Brazil is evident.
In its appeal to the STJ, RS UK repeated the same reasons mentioned above (that the clauses of the distribution agreement were freely negotiated by the parties and that
Summary Precedent 335 should apply), concluded that the judgment of the São Paulo Court of Appeals offended certain rules of the Brazilian Civil Procedure Code2 and that the contract was signed by each of the parties and the respective country of domicile and that the payments were made abroad (outside Brazil).
However, the STJ, in denying the appeal, held that the fact that payments were made abroad were irrelevant because the obligations assumed by RS Brazil had been effectively performed in Brazil. Furthermore, the STJ found that there was no evidence that the payments were really made outside Brazil. With respect to the STF Precedent, the STJ held that the choice of venue is valid to the extent that there is no abuse or damage for the adhering party as – but found that in this case there was. The STJ finally held that Article 9 of the LICC should apply because the contract was performed in Brazil.
Despite the STJ’s decision in Special Appeal (Recurso Especial) No. 804.306 – SP (2005/0207126-3), it is important to stress that Brazilian law contemplates another solution that may permit ousting the jurisdiction of the Brazilian courts in this type of situation, allowing the parties to choose a different dispute resolution mechanism. This solution is arbitration, which now can be considered a reliable method of dispute resolution and as an alternative to court litigation. Under Article 2 of the Brazilian Arbitration Law, the parties may validly insert an arbitration clause in the contract, establishing that the arbitration proceedings will be governed by foreign law and also indicating the place where the arbitration will be carried out. This choice is only limited by the public policy of the forum.
Adriana Maria Gödel Stuber is a partner of Walter Stuber Consultoria Jurídica and her practice areas are international and business law. Her doctorate thesis is on arbitration.
The basic principles of private international law are set out in the LICC (Decree-law No. 4657, of 4 September 1949). The rules relating to choice of venue (forum) in Brazilian private international law are found in the LICC and in the Civil Procedure Code (Código de Processo Civil, Law No. 5869, of 11 January 1973). Article 12 of the LICC provides that ‘the Brazilian judicial authorities have subject-matter jurisdiction, when the defendant is domiciled in Brazil or when the obligation has to be performed here’. Article 88 of the CPC establishes that ‘the Brazilian courts have subject-matter jurisdiction when: (i) the defendant, whatever his nationality, is domiciled in Brazil; (ii) the obligation has to be performed in Brazil; and (iii) the action arises from an event or action that took place in Brazil’. Therefore, in all three cases, the jurisdiction of the Brazilian courts is not exclusive, with the parties being free to choose their venue, subject to the conditions as to public policy, morality and national sovereignty.
2 These rules are contained in items (ii) and (iii) of Article 88 of the Civil Procedure Code.