ARBITRATION IN BRAZIL AND THE 1958 NEW YORK CONVENTION — RELEVANT ISSUES

• Jurisdiction: Derecho Internacional

MINING LAW & INVESTMENT IN LATIN AMERICA
(April 2003)
CHAPTER 4A
ARBITRATION IN BRAZIL AND THE 1958 NEW YORK CONVENTION — RELEVANT ISSUES¹
José Emilio Nunes Pinto
Tozzini, Freire, Teixeira e Silva Advogados
Sço Paulo, Brazil

jenp@tozzini.com.br

While over the last five decades arbitration has developed and solidified as an efficient means to settle commercial disputes in various jurisdictions, in Brazil, however, during such same period, arbitration has experienced a period of stagnation. Development and solidification implied a move from a legal framework crafted in the 19th century to a modern one and consistent with the intent of the parties as well as the replacement of Conventions executed in the 1920's by a well received New York Convention in 1958.

Stagnation in Brazil was due basically to two factors, i.e. the existence of old fashioned codified rules governing arbitration which had not incorporated and, therefore, lacked the most modern mechanisms to force the parties to institute arbitration, as previously agreed upon, and, further, the reluctance of Brazil in adhering to and ratifying the 1958 New York Convention.

Nevertheless, upon having adhered to and ratified the 1958 New York Convention without opposing any reserves, Brazil joined the developed nations and this has certainly been the step forward that was missing to definitely consolidate the framework of arbitration in Brazil, favoring the dissemination of the procedure.

Although arbitration has always been provided by Brazilian laws, namely the Civil Code and the Civil Procedure Code, the then existing framework did not give enough assurance to the parties that, even if they had agreed to submit their contractual disputes to arbitration, the arbitral proceedings would be actually instituted upon the surge of a concrete dispute. Should one of the parties fail to abide by the arbitration clause and actually fail to perform the obligations thereunder, the other party would be entitled, at most, to claim damages. The rules governing arbitration failed to create a resort to specific performance, and the absence of an appropriate legal remedy ended up hindering the intended use of the dispute resolution system.

Despite the imposition of huge pre liquidated damages in case of breach by a party to accept the institution of arbitration, such alternative has not been helpful. There are cases where the interest of a party is far beyond the payment of damages, even if the amount is huge. There are interests into play that are invaluable...

Nevertheless, by the end of the third quarter of 1997, precisely on September 23, 1997, the Brazilian Congressional Houses passed Federal Law No. 9,307, and introduced into the Brazilian legal system the Arbitration Act. This new law properly addressed the solution for

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the main impediment for the development of arbitration in Brazil upon granting specific performance to the arbitration clause. Although this is not the main focus of this article, but for purposes of recording the historical events surrounding the Arbitration Act, the constitutionality of certain sections thereof has been challenged on grounds of the same breaching the individual rights provided by the Brazilian Federal Constitution. The Arbitration Act was finally declared constitutional by the Federal Supreme Court, and undoubtedly such decision paved the road for the development and dissemination of arbitration in Brazil.

The importance for Brazil to have a strong framework for arbitration may be measured by the voluminous amount of corporate transactions completed since the beginning of the second half of the last decade that represented an increase of foreign equity investment in the Country, the expansion of investments by local groups and the actual number of privatizations and greenfield projects in the infrastructure industry. The increasing presence of foreign investors in those areas was per se a strong claim for the introduction of a modern and effective legal statute to allow the parties to resort, whenever necessary, to institute arbitration to settle their disputes.

In any event and although the Arbitration Act contained a set of rules governing the recognition and enforcement of foreign arbitral awards (substantially similar to the principles and language of the New York Convention), an important piece was still missing in mat framework. Earlier, Brazil had adhered to and ratified the Panama Convention but owing to the limited scope of participants, the enhancement and upgrading of the arbitration framework still depended on the adhesion to and ratification of the 1958 New York Convention, and such adhesion was materialized in 2002 only. More than 40 years had elapsed since the New York Convention was established when Brazil finally adhered to the text without opposing any reserves. Reasons for such delay? Whichever those may be, they are, at this point, of minor importance, and shall have no more than historical contents.

Therefore, all circumstances are now favorable, and may lead arbitration to a phase that shall be characterized by its development and solidification as an effective means for settlement of disputes. There is, further, a perfect synchronicity between the momentum of adhesion by Brazil to the Convention and the present stage of implementation of large infrastructure and industrial projects in Brazil, and the dissemination in the marketplace of complex and sophisticated transaction structures. In all such cases...