Trend for ADRs, specially Arbitration in Latin America
For the last decade or so, development of arbitration as an effective method for out-of-court resolution of disputes in Latin America has been intense, with new local legislations being adopted in several countries of the region. In many of these countries, consolidation of and credibility on arbitration have been dependent on the support given by local courts. This is exactly what happened in Brazil.
Arbitration finally came to place in Brazil
The Brazilian Arbitration Law was enacted in 1996 (Law 9307, of September 23, 1996) and brought the long hoped-for binding power and compulsory enforcement of the arbitration clause. The new Law makes a clear distinction between the arbitration clause, on the one hand, and the arbitration agreement, on the other, both being different species of the genus “arbitration arrangement”. Thus, if the parties wish to refer their dispute to arbitration, they must enter into an arbitration arrangement, which initially will be an arbitration clause inserted in the contract, and then, if a dispute arises, an arbitration agreement.
The Brazilian Arbitration Law dispenses with the previously required recognition of the award by a competent state court. Consequently, as from 1996 the arbitration award has the same validity and effectiveness as a court ruling, and can be enforced directly against the defeated party without prior ratification by the Judiciary. This also applies to foreign awards, which no longer have to be recognized by the Judiciary of the country where they are rendered.
In addition, the Brazilian Arbitration Law permits the parties to agree, under an arbitration clause and/or in an arbitration agreement, to adopt the rules of an institutional arbitration body or specialized entity, whether Brazilian or foreign. The parties are further allowed to establish the place of arbitration, which can be in Brazil or abroad, as well as the language in which it will be conducted.
The great innovation in this new Law lies in its Article 7, which provides that: “If there is an arbitration clause but resistance as to the commencement of the arbitral proceedings, the interested party may request the Court to summon the other party to appear in Court so that the submission to arbitration may be signed; the Judge shall order a special hearing for this purpose.” This action has therefore been introduced in the Brazilian legal system for compulsory or specific performance of the arbitration clause.
The constitutional challenge has been overcome
Shortly after the Brazilian Arbitration Law was published, a great controversy arose as to the constitutionality of its Article 7. The constitutionality of arbitration itself did not come into question, but rather the judicial enforceability of the arbitration clause as provided for in Article 7 of the said law.
This is because Article 5, XXXV of the Brazilian Federal Constitution warrants the right of judicial access. Thus, some could contend that the obligation to submit to private arbitration would be violence to that constitutional precept.
This issue was taken to the Brazilian Federal Supreme Court, upon consideration of an incident of unconstitutionality raised in the judgment of recognition of an arbitral decision brought in Spain. This was the first — and decisive — test for the consolidation of arbitration in Brazil.
The Supreme Court took five years to render a decision, and the use of arbitration was practically put on hold in Brazil during such period. Judgment finally ended on November 12, 2001 and, by opinion of seven against four of the Federal Supreme Court Justices, the constitutionality of the Brazilian Arbitration Law provisions on specific performance of the arbitration clause was duly recognized.
The prevailing view was that Article 5, XXXV of the Constitution only prohibits the law from barring judicial access, but not the parties from establishing out-of-court means of settling their conflicts, either present or future (Opinion of Justice Nelson Jobim).
The Federal Supreme Court held that the act by which someone undertakes to refer certain disputes to arbitration does not constitute the (inadmissible) waiver of any and all rights of action, but rather a simple contractual clause by which the parties to a certain agreement involving a disposable economic right resolve at their own free will that any dispute over the said agreement will necessarily be settled by a trustworthy third party or parties whose decision they will be bound to accept (Opinion of Justice Ilmar Galvão).
Following this rationale, the Federal Supreme Court noted that denying the validity and specific performance of an arbitration clause would favour the defaulting party by allowing it to escape referral of a dispute to the expeditious settlement to which it had freely agreed (Opinion of Justice Ellen Gracie).
Important characteristics of the Brazilian Arbitration Law
Apart from the important Article 7, which provides that: “If there is an arbitration clause but resistance as to the commencement of the arbitral proceedings, the interested party may request the Court to summon the other party to appear in Court so that the submission to arbitration may be signed; the Judge shall order a special hearing for this purpose”, other points should also be noted:
a) The submission to arbitration is the judicial or extrajudicial agreement through which parties submit a dispute to arbitration by one or more persons;
b) At the parties’ discretion, arbitration may be conducted under the rules of law or in equity;
c) The interested parties may submit the settlement of their disputes to an arbitral tribunal by virtue of an arbitration agreement, which may be in the form of either an arbitration clause or a submission to arbitration (acte de compromis);
d) If the parties, in the arbitration clause, select the rules of an arbitral institution or specialized entity, the arbitral proceedings shall be commenced and conducted pursuant to such rules; it being also possible that the parties determine in the arbitration clause itself, or in a separate document, the agreed procedure for instituting the arbitral proceedings;
e) The arbitration clause is autonomous from the contract in which it is included, meaning that the nullity of the latter does not necessarily imply the nullity of the arbitration clause (Kompetenz- Kompetenz);
f) The parties may, by mutual agreement, define the rules for the appointment of arbitrators, or adopt the rules of an arbitral institution or specialized entity;
g) Any legally capable individual, trusted by the parties, may act as an arbitrator;
h) The arbitral procedure shall comply with the procedure agreed upon by the parties in the arbitration agreement, which may refer to the rules of an arbitral institution or specialized entity, it being possible for the parties to empower the sole arbitrator or the arbitral tribunal to regulate the procedure;
i) The arbitral award shall be made within the time limit stipulated by the parties. If no express stipulation is made thereon, the award shall be made within six months from the date of the commencement of the arbitral proceedings, or from the date of the substitution of an arbitrator;
j) A party wishing to raise issues as to the jurisdiction, suspicion or impediment of an arbitrator or arbitrators, or as to the nullity, invalidity or ineffectiveness of the arbitration agreement, must do so at the first possible opportunity after the commencement of the arbitral proceedings;
k) A foreign arbitral award shall be recognised or enforced in Brazil pursuant to international treaties effective in the national legal system, or, if non-existent, strictly in accordance with the present Law (a foreign arbitral award is an award made outside of the national territory);
l) In order to be recognised or enforced in Brazil, a foreign arbitral award is subject only to homologation by the Federal Supreme Court / Superior Court of Justice; and
m) An arbitral award is null and void if:
I – the submission to arbitration is null and void;
II – it is made by a person who could not be an arbitrator;
III – it does not comply with the requirements of Article 26 of this Law and the mandatory requirements of the awards;
IV – it has exceeded the limits of the arbitration agreement;
V – it does not decide the whole dispute submitted to the arbitration;
VI – it has been duly proved that it was made through unfaithfulness, extortion or corruption;
VII – it is made after the time limits established in the Terms of Reference; and
VIII – it disregards the principles dealt with in Article 21, that are the principles of adversary proceeding, equal treatment of the parties, impartiality of the arbitrator and freedom of decision.
Recent trends in Arbitration in Brazil
The growing support received from Brazilian courts has played a key role in the actual and efficient development of arbitration in Brazil, which has translated into a quicker alternative for settlement of disputes by means of expeditious decisions, many times even more specialized than those handed down by the Judiciary.
The Federal Supreme Court judgment – together with ratification of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention“) by the Brazilian Government in July 2002 – gave the green light to arbitration as a reliable mechanism in Brazil.
Since then, the reliability of arbitration as an effective means of settling conflicts – specially in the area of Construction – has found growing support in the Brazilian Judiciary. All these developments soon prompted Brazil to emerge as growing and important centre for arbitration in Latin America, for example having assumed the first position in Latin America in terms of parties involved in ICC arbitrations in recent years.