Arbitration in Brazil: New Perspectives for Proceedings Involving Government Entities

On Sept. 23, 1996, the first modern arbitration law in Brazil came into force.1 Its inspiration was the United Nations Commission on International Trade Law (UNCITRAL)2 Model Law on International Commercial Arbitration, but the law had some "cultural" and "technical" features added by Brazilian legislators.

The new Arbitration Act faced an immediate hurdle-a challenge to its constitutionality-which stymied the use of domestic and international arbitration for many years. However, in 2001, the Brazilian Supreme Court (STF)3 confirmed the constitutionality of the Arbitration Act,4 leaving no doubt remaining that arbitration could be used by private persons, businesses and legal entities.

One of the cultural changes to the Arbitration Act concerns what can be arbitrated. The Act permits arbitration only of conflicts involving available assets rights (disposable patrimonial rights5).

Significantly, the Arbitration Act recognized that a domestic arbitration award (that is, an award issued in Brazil) is as enforceable as a court judgment and is not subject to judicial review. As for an international award (meaning one issued outside Brazil), it is recognized as an order and subject to limited simple judicial review in Brazil.6

As a result of the STF decision, Brazilian courts are no longer allowed to review the merits of an arbitral decision, whether it is domestic or international. The reason is that a tribunal with proper jurisdiction (whether by Brazilian or foreign arbitrators) has already decided the merits. The court's only role is to verify that proper arbitration procedures have been followed and the legal requirements for enforcement of an award have been fulfilled.7 Thus, if a dispute arising out of a contract containing an arbitration clause is brought before a Brazilian court, the court is required to dismiss the case without prejudice.8

Another important change brought about by the STF decision declaring that the Arbitration Act is constitutional is that the parties to an arbitration agreement are no longer required to submit their arbitration clause to a Brazilian court for a compromisse or arbitration commitment. The Arbitration Act allows a dispute governed by an arbitration clause to be taken directly to the specified Arbitration Court or elected arbitrators.

An additional innovation brought about by the Arbitration Act is that there is no longer any need for "letters rogatory" in order to serve process on a party in Brazil. Process via ordinary mail is perfectly valid and in accordance with Brazilian public policy as expressly stated in Article 39 of the Arbitration Act.

As a public relations matter, Brazil moved into the mainstream of international arbitration when it ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 2002. However, the ratification of this important convention generated very few changes in how foreign awards were recognized and enforced because the Arbitration Act was strongly influenced by the 1975 Panama Convention (officially known as the InterAmerican Convention on International Commercial Arbitration, signed Jan. 30, 1975). Therefore, those familiar with foreign law will not find many significant changes in this area.

Nevertheless, the benefits of ratification are obvious for Brazil. Because many signatories of the Convention have made use of the reciprocity reservation, ratification has made arbitration awards in Brazil enforceable in other countries. This has contributed to the increased volume of arbitrations in Brazil. Investors now feel confident that arbitral awards made in Brazil will be fully enforceable in all other signatory states, including those with the reciprocity reservation.

Furthermore, Article 32, VIII, of the Arbitration Act requires full compliance with the following principles: due process of law, equality of the parties, impartiality of arbitrators and an arbitrator's judicial discretion.9 If these principles, as well as constitutional principles-such as those ensuring a right to a full defense in Federal Constitution, article 5, LV; a right to a natural opinion in article 5, XXXVII and LIII; prohibition against illicit evidence in article 5, LVI); publication of the procedural acts in articles 5, LX, and 93, IX; and the obligation to justify decisions in article 93, IX10-and other Brazilian public policy issues are not complied with during the arbitration proceeding or the pronouncement of the award, it would signify a serious threat to the validity of the procedure and enforcement of the decision in Brazilian territory.

The Arbitration Act, Article 8, paragraph 1, established the kompetenz-kompetenz principle, which means that the arbitral tribunal has the authority to decide whether it has jurisdiction to hear the case. If the tribunal decides that there is no legal impediment to its jurisdiction, the arbitration may continue.

Acceptance of the kompectenz-kompetenz principle into the Brazilian legal system was so important that the drafters concluded that incidental questions related to the arbitration litigation should not be heard by a court unless necessary for the enforcement of a decision. However, an arbitral tribunal cannot abuse its power; otherwise, the Arbitration Act allows the tribunal's decision to be challenged in court.

The Arbitration Act also allows an award to be challenged in court on the ground that the arbitrator lacked authority to decide the case. The challenge must be filed no later than 90 days after the notification of the award." The nullification procedure was established to guarantee a fair trial to both parties.

Article 8 also established the "party autonomy" principle. This principle carries out the parties' intention to arbitrate as indicated by the contract they signed. Accordingly, the arbitration clause is enforceable even if the agreement containing it is void. This principle aims to prevent an injured party from being deprived of the contractual right to arbitrate.

The venue of arbitration is an important topic for parties to international arbitration. Brazil's Arbitration Act, like the New York and Panama Conventions,1- considers any arbitration award not rendered in Brazil to be a foreign award." Article 35 of the Arbitration Act provides that "in order to be acknowledged or enforced in Brazil, a foreign arbitration award is subject solely to confirmation by the Federal Supreme Court." Due to its enormous caseload, the FTS has taken three to four years to grant exequatur to requests for recognition of foreign judicial and arbitration awards.

The Constitutional Amendment No. 45 of 2004, known as the Judicial Reform, modified the Constitution by transferring the power of homologation of arbitration awards from the FTS to the Superior Court of Justice.14 This could speed up the process of recognition and enforcement considerably because the latter court has triple the number of judges that the FTS has. However, it is too soon to obtain concrete data to ascertain the effect of this legislative reform.

The use of arbitration is growing rapidly every year. According to information provided by the Conselho Nacional das Institui??es de Media??o e Arbitragem (CONIMA),15 the number of arbitrations in Brazil increased 45% in the five-year period from 1999 to 2004, and 12% from 2003 to 2004. Also, the Camara de Arbitragem Empresarial-Brasil (CAMARB) reported that the number of arbitration institutions in Brazil increased from 18 in 1997 to 77 in 2003 and is still growing. Arbitration is primarily used in labor disputes but is also increasingly favored for franchising, consumer and corporate disputes. The rise of non-labor arbitration cases is even more impressive with a 60% rise from 1999 to 2 004.

Arbitration and Government Parties

Despite the increasing acceptance of arbitration, uncertainties remain about its use by public entities. Article 1 authorizes the use of arbitration by capable people to resolve disputes involving disposable patrimonial rights. However, the Act provides neither specific authorization of, nor a formal prohibition against, public entities engaging in arbitration. The lack of an explicit provision is causing widespread debate. Other South American countries, Chile among them, also face this issue. The STF has not pronounced its final word on the matter, although lower courts have decided particular issues.

Some commentators and practitioners, including the three co-authors of the Arbitration Act, support the view that the Act authorizes the use of arbitration by government entities, including state-owned companies. They contend that Article 1 of the Arbitration Act gave a generic authorization through the term "persons capable of contracting."16 They argue that this term is comprehensive in that it includes private persons, legal entities, government entities, and state-owned companies. Furthermore, they add that since the Act does not expressly prohibit these entities from using arbitration, the Act should be interpreted to allow them to do so.

Others take the view that Article 54 of Law 8,666/93 (which governs public bids and agreements transacted by the government), authorizes the use of arbitration by the government and state-owned companies because it provides that general principles of contracts and provisions of Private Law shall be used in a supplementary way.

Meanwhile, a third group argues that Article 23 of Law 8,987/95 (which regulates the permission and concession of public services) provides generic authorization of arbitration not only in agreements related to the permission and concession of public services that are signed by government entities, but also to all agreements in which the government (directly or indirectly via its related entities) is a party.

The contrary view is that none of these laws provide authorization of arbitration with government entities. They say that a special law authorizing public companies to use arbitration is required. The authorization can be generic in that it need not specify the name of each government entity; rather, it could say that stateowned companies are allowed to use arbitration or any other method of alternative dispute resolution.17 Proponents of this view feel that the wording in the aforementioned laws is insufficient to authorize state-owned companies to use arbitration.

Brazil's legislative process can be long and complex. Government entities cannot afford to wait indefinitely to resolve disputes. Indeed, two of the primary advantages of arbitration are its speed and efficiency. If an explicit legislative mandate were necessary, arbitration would not be considered an efficient means of dispute resolution.

Attitude of Brazilian Courts

In the administrative and judicial ranks, the majority does not easily accept the validity of the arbitration commitment due to the legal principles that apply in the regime ot public law. These include legality, supremacy of the public interest, unavailability of the public interest, publicity, and finally, the binding nature of the "invitation to bid." Brazil's Federal Court of Accounts (Tribunal de Contas da Uni?o-TCU)18 has already decided that an arbitration clause in administrative contracts is invalid.19

The Rio de Janeiro State Court of Appeals has given more deference to arbitration in a government contract. The court implied that arbitration is admissible provided certain requirements are met. The case involved a contract between the Rio de Janeiro City Hall and the Guggenheim Foundation for the construction of a museum. The tribunal invalidated the contract for violating budgetary rules. Although it also declared the arbitration clause null and void, it did not do this tout court; it did so for two reasons: because (1) confidentiality was imposed on the contract, and this violated the public policy principle of publicity, and (2) the choice of a foreign law violated the principle of legality.20

The position of the Brazilian Legislature seems to concur with that of most commentators, including the authors of the Arbitration Act, on the issue of whether administrative contracts can be subject to arbitration. The reason is that there are references in certain national regulatory laws to the State's submission to arbitration. Recently, the Law of Private Public Partnerships (Federal Law No. 11.079 of Dec. 30, 2004) foresaw, in Article II,21 the insertion of an arbitration clause in partnership agreements it governed, provided that Brazilian Law applied and the arbitration took place in Brazil.

The Arbitration Act permits a choice of foreign law. There are still courts that find this contrary to principles of national sovereignty. The 2004 Judicial Reform ratified the use of arbitration proceedings by government entities since an item included in the bill of constitutional amendment prohibiting arbitration involving public administration was excluded from the approved Constitutional Amendment.

Also, certain industry legislation specifically calls for arbitration of disputes between the concessionaire and the governmental regulator.22 The same is true for oil and gas, water transportation, and land transportation.21 There are even electrical energy and oil and gas laws that mandate the use of arbitration, even in disputes with third parties, which calls into question whether those laws comport with Article 5, ? XXXV of the Federal Constitution, which provides that no one shall he deprived of access to the judicial branch.24

It is worth bearing in mind that when defending the possibility of arbitrations involving the government, only the acts in which the government's role is similar to the particular (jus gestionis) is being considered. The distinction between jus imperil-acts considered as an expression of the sovereignty of a nation-and jus gestionis is essential.

Conclusion

Brazil has made substantial progress over the last decade in facilitating the use of arbitration by its citizens and acceptance of arbitration by courts, by enacting the Arbitration Act and ratifying the New York and other international conventions.

It is hoped that the executive and judicial branches will accept the view that arbitration can be used by government entities because: (1) the Arbitration Act provides a generic authorization in Article 1; (2) the principle of party autonomy should be respected; (3) public companies and private and public joint stock companies are governed by the same legal system as private legal entities; and (4) legislation already exists accepting arbitration involving government entities.

Public entities do not need to be tied up in expensive, lengthy, time-consuming litigation. An amicable and quick resolution of disputes should be the goal whenever possible. In the meantime, the issue awaits indication of clearer and more defined trends by the Brazilian courts.