Highlights of Brazil

Authors:

Alan Kim Yokoyama / Marco Otavio Bottino Junior -

De Vivo, Whitaker, Castro e Gonçalves Advogados - PART I /

Adriano Boni de Souza -

Noronha Advogados - PART II

PART I

What should you know about judicial solution of conflicts when you intend to do business in Brazil?

Broadly speaking, there are four dispute resolution techniques. The first one is Mediation, which basically consists of an extrajudicial technique where one or more third parties act as facilitators of information exchange between the parties, aiming that the disputants themselves achieve a final settlement to their conflict.

The second is a Neutral Evaluation by a Third Party. It consists of the intervention of a third party, specialized in the object of the conflict, to prepare an opinion on the possible solutions in the judicial arena and even to propose possible settlement terms.

The third one is Arbitration by means of which one or more third parties, usually specialists, decide a conflict involving mainly equity rights. It is usually based on a convention and observes a procedure informed by the due legal proceeding, whose decision has the same effectiveness of a legal sentence.

The fourth dispute resolution method is the Judiciary. In sum, it is a judicial technique whereby a third party conducts a procedure informed by the due legal proceedings, and, at the end thereof, delivers a sentence, finally deciding the conflict.

Having regard to the four methods described above, the Judicial Power and Arbitration are the most used in Brazil, it being certain that, in spite of the growth of Arbitration during the last few years, especially after the issue of the Arbitration Law during 1996 (Law no. 9,307/96), the Judicial Power is still the mostly used. In this sense, it will be the method analyzed in our explanation below.

22.1. Judicial Power

Ruled by Article 92 of the Federal Constitution, the Judiciary is comprised of the following offices: i - Supreme Court (is the maximum tribunal of the Brazilian jurisdiction, is part of the so-called Special Jurisdiction and has the specific purpose of Safeguarding the Constitution), ii - National Board of Justice (Tribunal responsible for the administration of the Judicial Power), iii - Superior Court of Justice (Tribunal which is also part of the so-called Special Instance and is responsible for the control of the legality of the decisions), iv - Federal Regional Courts and Federal Judges (Tribunals competent to judge the cases of interest of the Federal Government), v - Labor Courts and Judges (Courts competent to judge cases related to the employment relations), vi - Election Courts and Judges (Courts competent to judge cases related to Elections) vii - Military Courts and Judges (Courts competent to judge cases related to the Armed Forces), viii - States, Federal District & Territories Courts and Judges (Courts competent to judge claims which are not under the competence of the other Courts).

The intervention of the Judiciary occurs basically under four conditions: (a) patrimonial defense, (b) enforcement of debts, (c) observance of agreements and (d) indemnities.

On patrimonial defense, the Brazilian legislation provides some specific mechanisms, similar to the common law injunctions, such as: the possession suits aiming at avoiding and/or reducing possible invasions to private or public property.

Regarding the enforcement of debts, Brazilian legislation adopts specific criteria depending on the quality of the evidence of debt. If the debt is represented by a security bond, the legislation offers easier collection means, otherwise, should the debt not be represented by a security, the search for the credit will demand a more complex process. In this sense we recommend the assistance of a legal counsel upon any transaction involving the grant and/or receipt of credit.

Regarding the performance of agreements, Brazilian law is very strict with the validity requirements, such as (i) capable agent, (ii) licit, possible, determined or determinable purpose, and (iii) form provided or not prohibited by law.

Generally speaking, suits involving the observance of agreements are more complex claims, it being certain that the experience with the judicial paths has shown that the better the agreement is prepared, the lower will be the claim period.

Thus, so as to avoid major litigation, the use of local legal assistance to prepare agreements is a measure which can avoid the occurrence or the undue extension of problems in the judicial area.
Another situation imposing the extensive use of the Judiciary includes indemnity claims. This type of suit also has well defined rules, imposing the Plaintiff some specific obligations to succeed.
It so happens that, exactly because it is the most used means to solve conflicts, accrued by the excessive bureaucracy and a still deficient technological logistics, the Judiciary has become an extremely slow mechanism.

In order to have an idea of how slow it may be, in the State of São Paulo, which is the State which receives more new suits per year and concentrates fifty-two percent (52%) of the two hundred (200) major corporate holdings of Brazil, a lawsuit takes as an average 701 days up to the issue of the first degree determination.

In such sense, considering that the Judicial Power is comprised of basically three levels of jurisdictions (First jurisdiction, Second Jurisdiction and Special Jurisdiction), the delay to achieve a final solution of a lawsuit is of approximately eighty (80) months.

This slow pace is aggravated due to the high Rate of Suit Congestion , which, during the last four years, achieved an average of 77.80% in first jurisdiction and 49.28% in second jurisdiction, as follows:

Congestion rate in first jurisdiction Congestion rate in 2nd jurisdiction
Average: Average:

[Caption: 1st/2nd Jurisdiction Congestion Rate. Average 2003/2006]
Source: CNJ, A Justiça em Números, 2003, 2004, 2005 and 2006.

1st Jurisdiction congestion disassociated by State - Reference Year: 2006

UF = State
Sent 1o Decisions closing the suit in 1st Jurisdiction
CN 1o  New suits in 1st jurisdiction
CPJ1o Suits awaiting 1st jurisdiction judgment
Г1 = 1o - Sent 1°/ CN 1° + CPJ1°

Source: CNJ, A Justiça em Números, 2006.

2nd Jurisdiction congestion disassociated by State - Reference Year: 2006

UF = State
Sent 2o - Decisions closing the suit in 1st jurisdiction
CN 2o  new suits in 1st jurisdiction
CPJ2o  Suits awaiting 1st jurisdiction judgment
Г2° = 1 - Sent 1°/ CN 1° + CPJ1°

Source: CNJ, A Justiça em Números, 2006.

However, in spite of the above scenario, the services of the Judiciary have been showing improvements, especially as a consequence of the investments in technology, celebration of agreements with other offices of the Public Administration and amendments to the Brazilian Procedural Law.

Among the investments in technology, we can quote as examples: (i) the creation and use of specific systems for the management of suits, (ii) the creation of Digital Forums, where the suits are entirely digital, thus eliminating a great portion of the bureaucracy present in the notaries and contributing to a faster processing and (iii) the use of informatics in great portion of the information of the lawsuits, allowing the follow up of the suit by internet, whether in first, second Jurisdiction or Special Jurisdiction, by means of the sites of the corresponding Superior Courts or State Courts of Justice.

Likewise, we must state that the Supreme Court, together with the National Board of Justice, estimates that within five years the Brazilian Justice will be fully computerized and interconnected, which no doubt will contribute to speed up the suits.

However, this projection must be carefully observed, since one of the major parties interested in the slow down of the Judiciary is the Public Power itself (Federal Government, States and Municipalities), which is currently responsible for around seventy percent (70%) of the suits in all levels.

Another great point deserving attention to improve the Judiciary are the agreements executed between the Courts and the other offices of the Public Administration.

Amongst such agreements we emphasize the one executed between the Judiciary and the Brazilian Central Bank, which, jointly, created a system called Bacenjud, which allows the Judge, through internet, (i) to issue judicial orders to blockade and release financial assets, (ii) to request information (balances, statements and addresses of individuals and legal entities client of the National Financial System - SFN) and (iii) to electronically transfer the amounts blocked to judicial accounts, among other things.

Finally, such agreement has proven to be a strong tool to create more effectiveness in the suit at the time of seeking the satisfaction of the corresponding credit, whether originated by a judgement note or a judgement debt.

However, the major innovations are under the responsibility of the legislator, which, during the last two years, passed a "package" of measures aiming at reducing the suit term and expanding the Judicial Security of the corresponding judicial decisions.

Among such innovations there are changes to the Enforcement Proceeding, such as, for instance, the obligation of the debtor of appointing assets to guarantee the execution under penalty of a fine of up to twenty percent (20%) on the debt amount, causing the slow pace of the Judiciary to no longer be an instrument of "defense".

Another measure adopted to promote a higher speed and judicial security was Law no. 11,417/2006, which ruled the issue of the so-called Binding Judicial Precedents by the Supreme Court.

The Binding Judicial Precedents are decisions approved by two/thirds of the eleven (11) Ministers of the Supreme Court who have a binding effect, that is, obliging all other offices of the Judicial Power and Public Administration to follow their guidelines.

As in the above examples, there are other innovations and changes which would demand a detailed analysis, fact which is not the object of the explanation, but may be studied in detail by means of the analysis of the procedural laws, the doctrine and especially the jurisprudence of the Superior Courts and of the State Courts of Justice.

Considering the peculiarities briefly exposed above, it is our recommendation that any investor intending to do business in Brazil must obtain information from the specialized consultants on the influences which the Judiciary may have on the operation and the implementation of the business, in order to avoid any surprises.

Bibliography

CNJ, A Justiça em Números, 2003.
CNJ, A Justiça em Números, 2004.
CNJ, A Justiça em Números, 2005.
CNJ, A Justiça em Números, 2006.
Ministério da Justiça, Fundação Getúlio Vargas e CEBEPEJ. Análise da Gestão e Funcionamento dos Cartórios Judiciais, 2007.

PART II

22.2. Arbitration

The Brazilian legal system has foreseen the possibility of resolving disputes through arbitration since the Constitution of 1824. However, since 1850, numerous changes and contradictions in Brazilian legislation have hindered the development of this form of dispute resolution. Due to legal fragilities, especially in the commencement of arbitration proceedings and in the enforcement of the awards, arbitration was traditionally not seen as an effective alternative to the Judiciary. Indeed, up until recent years, arbitration awards depended on a prior judicial ratification to become enforceable and, in addition, the right to access the judiciary was seen as a guarantee that could not be relinquished by citizens, even in the cases where the parties had previously signed a contract with an arbitration clause.

In recent years, however, given the increasing workload and the consequent slowness of the Brazilian Courts, alternative forms of dispute resolution (ADR), in particular arbitration, conciliation and mediation, regained importance, emerging as natural and convenient solutions for the problems related to the inefficacy of judicial decisions. At the same time, the growth of Brazilian international trade has increased the necessity for faster and more efficient and mechanisms for the resolution of disputes, so as to guarantee a healthy and predictable environment for businesses. As a result, in the past two decades, structural changes were made in the Brazilian Civil Procedure, including a reform in the enforcement procedure, a rise in the costs for filing appeals, incorporation of technologies by the Courts, and, most importantly, improvement of the mechanisms of ADR.

The Arbitration Act (n. 9.307), enacted on 23 September 1996, represented great progress in the Brazilian dispute resolution system. With this law, arbitration awards (either "ad hoc" and institutional) acquired the same status as a final judicial decision in terms of enforceability (article 475-N of the Code of Civil Procedure). As a general rule, arbitration awards are no longer subject to ratification or revision by the State Judges (article 18), who will be entitled only to perform a verification of whether the basic requirements of the arbitration process have been attended. Also, the arbitration clause itself became more binding and it is no longer necessary for the parties to sign another document (arbitration agreement) for the commencement of the arbitration proceedings, that is, provided the arbitration clause is perfectly drafted and fulfills the basic requirements.

The Brazilian Arbitration Act is guided by the principle that parties have complete autonomy to decide over rights in relation to their assets and, accordingly, parties are allowed to select the applicable law, the set of rules that will govern the arbitration process, language, place, the arbitrators and other relevant issues involved in the proceedings. These choices may be taken either by a clause enclosed in the contract or by an arbitration agreement, signed at the beginning of the proceedings.

This flexibility and dynamism of arbitration proceedings are not seen in the disputes submitted to the Judicial Body, where the procedure is thoroughly rigid and cannot be changed by the consent of the parties. Therefore, with the use of arbitration, disputes may be resolved in a more efficient manner, with the prevalence of oral arguments, consistent participation of experts in various areas, including on the panel of arbitrators, depending on what has been agreed between the parties.

The arbitration proceedings are expected to resolve disputes much faster than the Judiciary, where cases may take up to 10 years to their final judgment, depending on the Court and on the type of claim. In accordance with the Arbitration Act, the arbitral award should be issued within a deadline of 6 months (article 23), in case parties do not agree otherwise. Furthermore, as a rule, parties have no right to appeal against the award, which prevents the losing party from postponing the implementation of the arbitral decision, as is often seen in the Judiciary.

These characteristics of arbitration, together with the secrecy of the proceedings, explain why it has developed so rapidly in the recent years. Given the amplitude of the legal provisions, arbitration has proven to be very convenient and effective means for the resolution of disputes and hundreds of arbitration chambers are already in operation in Brazil, specializing in different areas.

The arbitration proceeding may be presided over by one, three or a higher odd number of arbitrators (1st paragraph of article 13), who have jurisdiction to render the final awards and decide on incidental matters, including with regards the validity and existence of the arbitration agreement. The intervention of the Judiciary in the proceedings is limited to a small number of situations, foreseen in article 32 of the Arbitration Act and in article 745-L of Brazilian Civil Procedure Code (e.g. if the arbitration clause or agreement is null and void; if the award was rendered by a person who could not be an arbitrator; if the arbitration exceeded the limits of the arbitration agreement; if it has been duly proved that the award was rendered through bad faith, extortion or corruption, etc.). In accordance with the current legislation, the merits of the arbitral decision cannot be reanalyzed by judicial Courts, which represents one of the greatest achievements of the arbitration legislation in Brazil.

In some cases, however, arbitrators and Courts will have to cooperate in order to make the arbitration fully effective, especially in cases where the arbitration clause or agreement is not clear or contains omissions on how the proceedings shall be carried out (applicable law, place, language, general rules, etc.). In case parties do not agree on how to supply the omissions and controversies a claim shall be submitted to the Judiciary, so as to permit the commencement of the arbitration proceedings (article 7).

Following the Arbitration Act, on 2002 Brazil ratified the New York Convention (Convention on the enforcement and recognition of foreign arbitration awards), which was signed by Brazil in 1958. This treaty was thereafter incorporated in Brazilian Legal System, reemphasizing that foreign arbitration awards can have validity in Brazil, as they do not offend the pubic order.

The New York Convention provides for an equal treatment for national and foreign awards and forbids the imposition of additional requirements to validate arbitral awards issued in other State Members. Notwithstanding, the Arbitration Act prescribes that foreign arbitral awards must be ratified by Brazilian Superior Court of Justice (STJ) to become valid and enforceable in Brazilian territory (article 35), in the same way as with validating foreign judicial decisions. This preliminary step usually takes some months and allows the subsequent commencement of enforcement proceedings in the first instance Courts.

The range of arbitration in Brazil

The "ratione personae" and the "ratione materiae" are limited by the Arbitration Act in its Article 1, which provides that: "persons capable of entering into contracts will be able to avail themselves of arbitration in order to resolve disputes relating to freely transferable property rights." The capability of entering into a contract (subjective arbitrability) is given by the Civil Code and is presumed for every citizen 18 years old and over and with sufficient mental capacity.

The Arbitration Act opens a wide field for the application of arbitration with regards to the matters discussed in the dispute (objective arbitrability). In accordance with Article 1, all disputes concerning rights that can be transacted may be decided by arbitration, since the parties have agreed to do so. This includes a wide range of matters in virtually all domains of law (except criminal law), covering disputes involving commercial affairs, corporate law, intellectual property, administrative law, consumers relations, family, labor, and others, as the public order is not offended. Depending on the case, however, one may have to deal with some disputes about the arbitrability of the matter in question. These discussions are more often seen in cases involving some aspects of corporate law, labor relationships, consumer transactions, administrative law and intellectual property, as will be referred to below.

Arbitration found a very important application in the corporate field, allowing a fast, effective and, most importantly, discrete settlement for disputes between a company and its shareholders, or the shareholders between themselves. This legal provision has proven to be extremely useful in avoiding that this kind of dispute from impacting on businesses and the image of the company, given that the proceedings are undertaken in secrecy and are not subject to the principle of being open to the public, which governs judicial claims.

Brazilian Corporate Law provides for the possibility of the insertion of an arbitration clause in the company's by-laws or in a shareholders agreement (article 109 §3 of Corporate Law n. 6404/76). It is important to mention, however, that some disputes remain in the doctrine and in the jurisprudence as to whether minority shareholders are also bound to this arbitration clause in some situations. This happens because the arbitration may become too expensive and eventually prevent the minority shareholders from contesting the acts of the majority, which may be considered as an infraction to their rights of action. There can be found, however, a dominant position in the Courts sustaining that the arbitration clause is duly valid to every shareholder in most cases.

A similar discussion may takes place in relation to the arbitrability of consumer and labor relationships, which are naturally marked by the disproportion of forces (in terms of bargaining power and information) between the parties (labor v. employer and consumer v. provider). Both consumer and labor laws are very protective in Brazil and do not allow for the rights of the weaker parties in the relationship to be damaged by abusive clauses, such as would happen in cases where arbitration proceedings hinder their rights of action. (It is in fact due to this presumed vulnerability of the consumers that the Arbitration Act provides that the efficacy of the arbitration clause will depend on an express consent by the consumer in adhesion contracts (article 4 of Arbitration Act and article 51, VII of the Consumer Code)). In these cases, the arbitration clause can be deemed abusive and, accordingly, ineffective, allowing the dispute to be submitted to Judicial Courts. In despite of that, arbitration has been used increasingly often to resolve labor disputes and the awards are being widely accepted in Courts, whose main concern is being to prevent frauds against labor rights.

There are also numerous legal provisions with regards to the possibility of using arbitration for resolving disputes arising from contracts with Public Entities and state owned companies. The possibility of inserting an arbitration clause into this kind of contract has been expressly confirmed by the Law n. 11.079/2004, the PPP Act (Public-Private Partnership) and by the Concession Law n. 11.196/2005. (Note, however, that Brazil has not signed the Washington Convention of 1965 on the Settlement of Investments Disputes between States and Nationals of Others States.) A reasonable number of cases have already been judged with regard to whether the use of arbitration in disputes involving the State offends the principle of publicity and the public interest. In most of them, the Courts recognized that the contractual provisions, including the arbitration clause, are binding and must be respected, so as to preserve legal stability and to stimulate investments.

Finally, it must be pointed out that arbitration also found an important application with regard to intellectual property. Not all disputes in the area may be resolved by arbitration, but there is a great range of applications in the domains of patents, permission for trademark use, edition contracts and franchising agreements. The use of arbitration for this kind of dispute allows that the parties meet a faster and more predictable resolution, given that specialized arbitrators may be selected to judge the disputes.

Conclusion

Although relatively recent, an important change in the Brazilian legal culture has been felt, whereby Arbitration and ADR are more and more establishing as new procedural parameters, with relevant repercussions for business practices. During the 14 years that the Arbitration Act has been in force, important judicial and legislative changes demonstrate that Brazilian authorities are interested in the development of arbitration and other kinds of alternative dispute resolution. The results of the efforts in this direction are visible, and an increasing number of disputes are no longer being submitted to the Judiciary.

In spite of the residual discussions about the constitutionality of the use of arbitration in some specific situations, in most cases the disagreements have already settled down among scholars and the Courts. As a result, arbitration is being used more often with diminishing risks. The success of the Arbitration Act is in great part due to the acceptance of the Arbitration Act by the Judiciary, who has been consistently refusing to intervene in the disputes that the parties have already agreed to submit to arbitration. This behavior of the Courts was certainly essential for the positive development of ADR in Brazil and provides a very important step towards legal stability, which is fundamental to the development of business, especially in the international area.