Brazil has recently witnessed two major legal reforms that brought important changes to the law governing arbitration.
The first and most significant reform is the recent amendment to the Brazilian Arbitration Law, Law No. 9,307/96 (BAL). The new Law (No. 13,129/15) deals with several arbitration issues, including disputes involving state entities, shareholders’ disputes and interim measures. (BMA’s senior partner Francisco Müssnich was a member of the drafting commission of the bill that resulted in the new BAL.)
The second major reform is the enactment of a New Code of Civil Procedure, Law No. 13,105/15 (NCCP), in force as of March 2016. The NCCP establishes new procedural rules aimed at enhancing the interaction between the Brazilian courts and arbitrators.
The purpose of this article is to look at the main changes those two legal reforms have made to the legal framework for arbitration in Brazil. The idea here is not to provide an exhaustive analysis of all rules provided for in the two new laws that might have an impact on the Brazilian arbitration regime, but rather to present a summary of the key changes.
The first section of this article analyses the more important amendments to the BAL contained in Law No. 13,129/15. The second examines the main new rules in the NCCP related to arbitration.
The New Brazilian Arbitration Law (Law No. 13,129/15)
The enactment of the original BAL back in 1996 was paramount for the consolidation of arbitration in Brazil. Together with Brazil’s adherence to the 1958 New York Convention in 2002 (Decree-law No. 4,311/02), the BAL laid down the legal foundation that allowed Brazil to conquer its place among the major arbitration-friendly jurisdictions in the world.
Law No. 13,129/15 represents the first direct reform to the Brazilian arbitration regime in 19 years. The new law did not bring about a complete change in the BAL, but rather focused on specific issues. Apart from formal revisions to align the BAL with legislative changes that took place after 1996 and some corrections to the original wording of the BAL, the major purposes of the reform were to turn consolidated case law into black-letter law and to fill in some gaps left unanswered by the original version of the BAL.
In the following paragraphs, we present a brief analysis of the most significant changes contained in the new law.
Arbitrability of disputes involving state entities
The Brazilian Superior Court of Justice’s case law had long confirmed the possibility of arbitrating disputes involving indirect state entities. However, some controversy remained in relation to the arbitrability of disputes involving direct state entities. The new Law ended that controversy by expressly allowing Brazilian direct and indirect state entities to arbitrate disputes, as long as the disputes involve disposable property rights.
The new Law also provides that disputes involving state entities will be governed by law (and not be decided ex aequo et bono) and will remain public throughout the process (ie, the proceeding cannot be confidential). Moreover, the amendment expressly states that the same authority or body responsible for executing settlement agreements has the power to execute arbitration agreements, whose validity will thus become easier to ascertain.
The new Law ends a long-lasting controversy in Brazil by confirming that arbitration agreements included in companies’ by-laws are binding on all shareholders, including those absent or dissented from inclusion of the arbitration clause. Dissenting shareholders can exercise appraisal rights and withdraw from the company.
This issue has been the subject of a long debate among Brazilian practitioners since a new provision was added in the Brazilian Corporations Law (Law No. 6,404/76) to allow companies to include arbitration clauses in their by-laws. Whereas some argued that the majority principle should also apply to arbitration agreements, and thus obligate all shareholders to submit disputes to arbitration (even those who voted against the inclusion of the arbitration agreement in the company’s by-laws), others contended that arbitration could not be imposed on a shareholder without its consent to arbitrate. The new Law puts an end to this debate.
Appointment of arbitrators
The new Law made an important change regarding the appointment of arbitrators.
The Law allows the parties to derogate from any institutional rules that restrict their choice of arbitrators to the names contained in the institution’s roster of arbitrators. Some Brazilian institutions adopt the practice of limiting the parties’ choice to a specific pool of arbitrators. Those institutions were against the amendment, arguing that the change would lead to a drop in the quality of the arbitral awards rendered under their auspices. Nevertheless, the amendment prevailed.
If the parties or the co-arbitrators do not reach an agreement on the appointment of the jointly named arbitrator (as can occur in multiparty arbitrations), the arbitration rules chosen by the parties will govern the constitution of the tribunal.
Limitation of claims
The new Law expressly establishes that the institution of the arbitration interrupts the limitation period applicable to the claim, even if the arbitral tribunal later terminates the proceedings based on lack of jurisdiction.
According to the BAL, the arbitration commences only when all arbitrators accept their appointment (article 19). Nevertheless, the new provision clarifies that the limitation period is deemed to have ceased running as of the date of filing of the request for arbitration (and not from the date when all arbitrators accept their appointment). The amendment ends a long-standing controversy in Brazil as to the rules governing the limitation of claims submitted to arbitration.
Interim and urgent measures
The new Law added a chapter to the BAL on the subject of interim and urgent measures. While the original BAL already allowed arbitral tribunals to request support from the courts to enforce interim measures (article 22, paragraph 4), the new Law expressly authorises the parties to seek precautionary measures before the courts prior to the constitution of the arbitral tribunal.
Those new provisions essentially consolidate the Brazilian Superior Court of Justice’s case law on the powers of arbitrators to order interim measures and to review measures granted by the judiciary before the arbitration commences.
Under the new regime, the party requesting the judicial interim measure must initiate arbitral proceedings within 30 days from the date of enforcement of the measure. If the party fails to do so, the interim measure automatically loses its effects. Once the arbitral tribunal is formed, the arbitrators have the authority to uphold, modify or revoke any urgent measure previously granted by the courts. Moreover, according to the new Law, after the arbitral tribunal is constituted, the parties must request any interim measure directly from the arbitrators.
The new Law introduces a rule governing communication between the arbitrators and the courts, which will happen by means of arbitral letter. The arbitral letter is similar to a rogatory letter exchanged by judges of different jurisdictions, enabling arbitrators to request and obtain the aid of the courts, and vice versa. This opportunity is welcome: the creation of a specific means of communication between arbitrators and the courts will remove uncertainties about the interaction between those institutions, and make it more efficient.
The new provision states that the arbitral tribunal may issue an arbitral letter to the judiciary asking the courts to enforce or order certain procedural acts (such as to compel a non-cooperative witness to testify before the arbitral tribunal). In addition, the new Law provides that the judicial proceedings initiated by the arbitral letter will be confidential, if the interested party proves that a confidentiality provision applies to the arbitral proceedings. As seen below, the NCCP provides for the procedure to be followed by the courts to enforce the request contained in the arbitral letter.
The new Law adds a provision recognising the arbitral tribunal’s power to render partial awards. That change essentially consolidated the existing practice in Brazil. In line with the international trend, most Brazilian arbitral institutions have added provisions to their arbitration rules establishing the arbitrators’ authority to render partial awards. Accordingly, a majority of Brazilian courts have also recognised the validity of partial awards. Nonetheless, the amendment was important because it ends any lingering controversy over the validity of partial awards rendered in Brazil.
The new Law also puts an end to a more controversial issue regarding the time frame for seeking the annulment of partial awards. The amendment expressly states that the 90-day period for asking the courts to vacate a partial award starts from the parties’ notice of that award (and not from the notification of the final award). This amendment ends the dispute over whether the parties had the right to seek annulment of a partial award before the tribunal renders its final award.
Request for clarification
The new Law entitles the parties to agree on a deadline different from the five-day period set forth in the BAL for requesting the arbitral tribunal to clarify any doubt or correct any non-substantive errors] contained in the award. Furthermore, the new Law confirmed the prevailing view among Brazilian practitioners that the 90-day term for vacating the award starts from the decision on the request for clarification (whenever the parties present such a request) and not from the rendering of the arbitral award.
That change is most welcome. The original version of the BAL did not allow the parties to modify the five-day legal period to present a request for clarification, even though the time period established in most Brazilian and international institutional rules is longer. Also, there was some controversy as to whether the time period for filing an annulment claim was interrupted by the request for clarification. Before the changes to the BAL, parties that filed a request for clarification in accordance with the arbitration rules (but later than the five-day legal term) ran the risk of having a future annulment claim time-barred.
Deadline for rendering the final award
In line with the well-established practice in Brazil, the new Law confirms that the parties and the arbitrators may jointly agree on extending the deadline for the arbitrators to render the final award.
The 1996 version of the BAL stated that the award should be rendered within the time period established by the parties. In the absence of such a time period, the Law required the arbitrators to render an award within six months from the constitution of the arbitral tribunal (article 23).
As the BAL provides that an award rendered after the applicable deadline is null, the new rule allowing the arbitral tribunal to extend the deadline by agreement with the parties is important to avoid the undesirable risk of having the award vacated or having to render a premature award to dodge an annulment claim.
Annulment of the arbitral award
The new Law makes two major changes to the provisions applicable to the annulment of arbitral awards.
First, the amendments corrects an error in the original version of the BAL, stating that the nullity of the arbitration agreement, and not of the submission agreement, is grounds for vacating the award. That change was important to clarify that an award based on a void arbitration clause (and not only on a void submission agreement) is null.
Second, the new Law excludes the possibility of vacating an award that fails to decide all claims submitted to arbitration. Now, the parties will be able to apply to the courts for an order requiring the arbitral tribunal to render a complementary award to resolve undecided issues. The new provision, however, does not state if
the same tribunal that rendered the original award should render the complementary award or if a new tribunal should be constituted.
Recognition of foreign arbitral awards
The new Law recognises that the Superior Court of Justice (and not the Federal Supreme Court, as provided for in the original version of the BAL) has jurisdiction to decide requests for recognition of foreign arbitral awards. This change simply aligns the BAL with the Constitutional Amendment No. 45/2004, which transferred the authority over foreign judgments and arbitral awards from the Federal Supreme Court to the Superior Court of Justice.
Not all changes under the new Law were approved. The President vetoed two amendments to the BAL related to the arbitrability of disputes involving consumers and senior management employees. At the time of this article the President’s vetoes were still under scrutiny before the Brazilian Congress.
Consumer adhesion contracts are those agreements where the consumer may only adhere to the terms of the contract but does not have the opportunity to negotiate them. The vetoed amendment established that arbitration clauses included in those agreements should prevail if that the consumer took the initiative to initiate the arbitral proceedings or expressly agreed to instituting arbitration proceedings. According to the reasons for veto, the amendment would have inadvertently expanded the use of arbitration to resolve consumer disputes without clearly requiring the consumer’s consent at the outset of the arbitral proceedings and not just at the time the adhesion contract was signed. According to the Brazilian Ministry of Justice, the vetoed amendment could endanger the well-established principle of protection of consumers.
Senior management employees
The arbitrability of labour disputes is an open question in Brazil. The vetoed amendment attempted to resolve the controversy in part by establishing that arbitration clauses contained in managers’ or directors’ individual employment agreements would prevail, as long as the manager or director initiated the arbitral proceedings or expressly agreed to instituting arbitration proceedings. The Brazilian Ministry of Labour and Employment took a stand against the amendment, pointing out that the change would bring about an undesirable distinction between employees and would do so by resorting to terms (manager and director) not technically defined in Brazilian labour legislation.
New Code of Civil Procedure (Law No. 13,105/15)
The main goal underlying the NCCP is to enhance the effectiveness of resolution of disputes in Brazil. The NCCP therefore encourages the use of alternative dispute resolution mechanisms and sets forth specific rules to foster the interplay between arbitrators and the Brazilian courts.
In the following paragraphs, we present a brief analysis of the most significant rules established in the NCCP from the arbitration standpoint. As will be seen, some of the amendments to the BAL reflect the new rules established in the NCCP.
The NCCP provides for new rules governing the procedure applicable to the arbitral letter. According to the NCCP, in issuing an arbitral letter, the tribunal must also send a copy of the arbitration agreement as well as evidence of the arbitrators’ appointment and acceptance (article 260).
The arbitrators issue arbitral letters to request support from the courts in undertaking or ordering certain procedural acts, including those deriving from interim measures (article 237, IV). According to the new Code, the procedural acts that the courts may perform in response to arbitral letter include: serving and notifying parties and witnesses; collecting documentary and oral evidence; undertaking measures to freeze assets; and enforcement of procedural orders (article 69).
The current Brazilian Code of Civil Procedure does not expressly establish that court proceedings initiated in connection with confidential arbitrations should remain confidential before the courts. The NCCP changes that regime. Under the new Code, all
proceedings ancillary to confidential arbitrations, including those related to arbitral letters, will remain confidential, as along as the party proves the confidentiality of the arbitration (article 189, IV).
Objection to the courts’ jurisdiction
Under the NCCP, if the defendant fails to raise an objection to the courts’ jurisdiction based on an arbitration agreement in its answer to the plaintiff’s initial complaint, the defendant has implicitly waived its right to arbitrate and accepted the courts as the proper forum to resolve the parties’ dispute (article 337). The current Code does not have an express rule on the question. That gap led to doubts as to whether the failure to raise an objection to the courts’ jurisdiction could amount to an implied waiver. The NCCP puts an end to those doubts.
Enforcement of arbitral awards
The NCCP establishes new rules on the enforcement of arbitral awards. The new Code provides that the debtor will be served with notice by the competent civil court to comply with the award within 15 days (article 515, 1st paragraph). The NCCP also clarifies that the creditor may seek enforcement of arbitral awards before the courts where the debtor has its place of business, the debtor’s assets are located, or the obligations set forth in the award being enforced are to be performed (article 516, sole paragraph).
Recognition of foreign arbitral awards
The NCCP makes it clear that the recognition of foreign arbitral awards is governed by the applicable treaty and the BAL, and that the Code’s rules apply only in a subsidiary fashion (article 960, third paragraph). That represents an important development in relation to the current regime, which does not clearly state that the 1958 New York Convention and the BAL prevail with regard to the recognition of foreign awards.
Appeal against judgment compelling arbitration
The NCCP reinforced the current Code’s rules regarding the effects of an appeal from a judgment compelling the commencement of arbitration. The NCCP states that the appeal does not suspend the effects of the judgment, and consequently the interested party can initiate arbitral proceedings immediately, without having to wait for a decision from the court of appeals. The court of appeals may only suspend the lower court judgment in favour of arbitration if the appellant proves that its appeal is based on relevant grounds (there is good reason for the appeal/the appeal is not frivolous or designed to delay arbitration) and the appellant may suffer irreparable harm if the court of appeals does not suspend the judgment (article 1012).
Both the amendments to the BAL and the NCCP have made significant changes to the legal framework for arbitration in Brazil. The reforms ratify the support that the Brazilian courts have been giving to arbitration over the past two decades. (A member of the Superior Court of Justice led the drafting commission of the bill that resulted in the new Arbitration Law.) Apart from the downside inherent to any legal reform (such as ‘switching costs’), the general expectation among Brazilian practitioners is that the two new sets of rules will strengthen the already consolidated use of arbitration in Brazil.