Arbitration in BRAZIL: Foreign Investment and the New Brazilian Approach to Arbitration

Dispute Resolution Journal, Feb-Apr 2005 by Pucci, Adriana Noemi

Since 1996, arbitration and ADR generally seem to have attained a high level of acceptance in Brazil. Brazil has a modern Arbitration Act (Law No. 9.307) and has ratified (in July 2002) the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). More recently, it enacted the International Commercial Arbitration Agreement of Mercosur (MERCOSUR Treaty), which provides for arbitration to resolve commercial disputes.1 In addition, mediation is being used more often in Brazil. A bill is now pending in the National Congress that would require parties to submit a conflict to mediation before initiating a lawsuit. These are significant developments indeed.

Many in the international community believe that allowing foreign investors to arbitrate disputes is essential to attract foreign investment. Whether Brazil subscribes to this view is a provocative issue-one that requires analysis of the status of arbitration in Brazil. This analysis must start with the acknowledgement that Brazil has not ratified the Washington Convention of 1965 (the ICSID Convention), which provides procedures for conducting arbitration of investment disputes, and it has not ratified any bilateral investment treaties (BITs).

One should not conclude from this that Brazil does not protect foreign investments within its borders, since that conclusion would be superficial. We must look more closely at the status of arbitration since Brazil's Supreme Court (the Supremo Tribunal Federal or STF) upheld the constitutionality of Brazil's modern Arbitration Act in December 2001, as well as the case law that is being developed. These decisions show that Brazil recognizes that having an enforceable arbitration system is relevant to attracting foreign investment within its borders.

Background of the Arbitration Act

Brazil's enactment of Arbitration Act No. 9.307 in 1996(2) should have given a great boost to national and international arbitration. But the Arbitration Law did not immediately produce the intended effect. Arbitration faced an enormous obstacle when Justice Sepúlveda Pertence, then president of the STF, questioned the constitutionality of Articles 6 and 7 (and as a consequence, Articles 41 and 42) of the new Arbitration Act. In so doing, Justice Pertence put the enforceability of the arbitration clause in doubt.

Justice Pertence found Article 7 of the Arbitration Act problematic because it called for national courts to compel specific performance of an arbitration clause to resolve future disputes.1 Essentially, Article 7 required a judicial hearing in which the parties had to agree on the terms of a commitment to arbitrate (called a compromisse). If the parties did not reach a compromisse, the judge could appoint a sole arbitrator. In the view of Justice Pertence, the parties could refer to arbitration only existing disputes, not ones that had not yet arisen. Thus, Justice Pertence concluded that Article 7 was an unconstitutional violation of Article 5, Item XXXV, of the Brazilian Federal Constitution, which guarantees the right of access to the state courts.

Justice Pertence's view did not receive universal support. Brazil's Attorney General disagreed with it. He supported the Arbitration Act and considered it to be in accord with Brazil's Federal Constitution. Yet doubts about the constitutionality of the Arbitration Act lingered until December 2001, when a majority of the justices on the STF issued a decision upholding the constitutionality of the Act in its entirety.

Prior to that decision, an arbitration clause was considered to be a simple contractual promise (a pactum in contrahendo). Thus, a party to an agreement containing an arbitration clause could refuse to submit a conflict to arbitration. Only if the parties agreed to sign a compromisse would the case be arbitrated. Indeed, that was the only way to remove the court's jurisdiction.

The STF decision holding that the 1996 Arbitration Act complied with Brazil's Constitution ended the period in which pre-dispute arbitration clauses were unenforceable in Brazil. Since this decision there has been a noticeable increase in the number of arbitration clauses incorporated into contracts with Brazilian parties. There also has been a meaningful growth of national and international arbitration proceedings involving Brazilian parties.

Enforcement of Arbitration Clauses and Awards

Brazil's Arbitration Act provides that if there is an arbitration clause in a contract, in the event one party refuses to arbitrate, the other party, in accordance with Article 7 of the Act,4 can request the intervention of a judge, who has the authority to rule that the court has no jurisdiction and appoint a sole arbitrator to resolve the dispute.

The 1996 Arbitration Act also provides that an arbitration award has the same effect as a court decision. This means that an award constitutes an "execution instrument."' Thus, it can be enforced by a court.

Court Decisions between 1996 and 2001