Arbitration in Brazil: A look at recent developments

Dispute Resolution Journal, Feb-Apr 2003 by Martins, Pedro A Batista

Less than a year after Brazil's Supreme Court upheld the constitutionality of the nation's arbitration law, Brazil has signed on to the New York Convention.

In the following article, Pedro Batista Martins discusses these important developments, which, despite Brazil's previous reputation for hostility to arbitration, are consistent with a rich arbitral tradition dating back to the 19th century.

Brazil evokes images of Rio de Janeiro's colorful carnival and sunny beaches. For international businesses, however, it also evokes hostility to arbitration. From the perspective of world trade, this tourist mecca has had its eyes closed to the method of dispute resolution most favored by international business. Fortunately, this may be changing due to two significant events. The first is the decision of Brazil's Supreme Federal Tribunal (Brazil's Supreme Court) affirming the constitutionality of the nation's 1996 arbitration law. The second is the accession of the Federal Republic of Brazil in 2002 to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. These events signal to the international business community that Brazil, at last, has awakened to the benefits of arbitration and is ready to welcome international trade.

Background

Arbitration has had a place in Brazil's legal history at least since 1824. The Brazilian Empire's first constitution, the Constitution of 1824, contained provisions that called for disputes between Brazilian nationals and foreigners to be settled by arbitration. Under these provisions, the arbitrator's decision was final and could not be appealed if the parties had included a "non-recourse clause" in their agreement. In 1831 and 1837, respectively, Brazil enacted laws making arbitration the mandatory process for resolving disputes arising from insurance contracts and services contracts. Arbitration gained a broader base in 1850 when it was recognized in the Commercial Code. It was also recognized legally in the 1916 Civil Code and the Civil Procedure Codes of 1939 and 1973.

Despite Brazil's inexplicable aversion to the ratification of international treaties and conventions, it signed on to a few treaties that call for arbitration to resolve commercial disputes. In 1927, it ratified the 1923 Geneva Protocol on Arbitration Clauses.1 In 1983 it signed the Interamerican Convention on International Commercial Arbitration (the 1975 Panama Convention) and in 1991 it signed a treaty with several South American neighbors (the Mercosur Treaty), which encourages the use of arbitration of disputes that are not settled by negotiation= However, its absence from some important treaties was also notable, specifically, the New York Convention and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States.

Brazil's historical experience with arbitration has primarily involved state-to-state disputes. In the early 1900s, border and other territorial disputes with Argentina, Bolivia, British Guyana and Peru were resolved by arbitration. In the 1870s Brazil arbitrated with the United States to bring an end to indemnification claims resulting from the shipwreck of the vessel Canada on Brazilian shores. In the same period, Brazil arbitrated disputes with Sweden and Norway that resulted from nautical collisions.

Brazil's experience with arbitration includes participation by prominent Brazilian citizens on international arbitration tribunals, often on cases of major import.

Despite this rich history, the use of arbitration in Brazil to resolve private commercial disputes remained dormant for many years. The reason for this dates back to 1867, specifically to Decree No. 3900, which expressly conditioned the effectiveness of an arbitration clause on the execution by the parties of a special agreement called the compromisso. This is best translated as a "submission" agreement, that is, an agreement entered into after a controversy arises in which the parties agree to submit the matter to arbitration. Decree No. 3900 made agreements to resolve future disputes unenforceable. Only after a dispute arose could the parties specify in a separate document (the compromisso) the scope of their dispute and that it would be settled by arbitration. The arbitration clause in a contract was considered by most jurists and legal scholars to be a mere pactum de compromittendo, or promise to agree, dependent on a later, post-dispute agreement to give it validity and enforceability. Although there was a theoretical possibility of demanding damages from a party who defaulted on its obligation to enter into a compromisso, the fact was that the predispute arbitration clause was a true caput mortuum-a dead letter. The compromisso thus became the only legal means to avoid the court's jurisdiction over a dispute.

Later law made the arbitration situation even worse. Legislation was enacted requiring the state court with jurisdiction to "homologate," or approve, the arbitral award. In the case of foreign awards, this required double approval (double exequatur or double recognition), since the award had to be approved by the court in the jurisdiction where the award was issued for the award to be enforced by the court in Brazil.