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Brazilian Court Reverses Compulsory Submission Agreement Requirement

In this Guest Post, FELIPE SPERANDIO from Brazil updates us on a recent decision of the Court of Appeal that has done away with an otherwise troubling requirement of a compulsory submission agreement.

In a recent decision, a Court of Appeal in Brazil has corrected an arbitration-related decision, on the validity of arbitration clauses, which had raised a red flag among practitioners and scholars. The revised national court’s position places Brazil back on the pro-arbitration track.

Facts

Inepar S.A. Indústria e Construções (Inepar), the contractor, entered into an agreement with Itiquira Energética S.A. (Itiquira), the employer, for the construction of a hydroelectric power plant in the State of Mato Grosso, Brazil. The dispute resolution clause provided for ICC arbitration, with Brazil as the seat and Brazilian law as the governing law.

Disagreements between the parties started in 2001. Inepar sought to revise the amount owed to it under the contract given unexpected conditions that had results in extra costs and delays. Itiquira responded by terminating the agreement on account of Inepar’s delays.

Subsequently, Inepar filed a request for arbitration. There were no irregularities in the arbitral process: the parties properly undertook all required procedural steps, the arbitral proceedings were properly carried out, and the tribunal rendered an award in September 2005. The Tribunal awarded Itiquira damages amounting to approximately US$176 million (current figures). Inepar filed a request for correction in accordance with Art. 30 of the Brazilian arbitration law, although the Tribunal’s additional award in December 2005 did not alter the substance of the award. At no point during the arbitral process did either party object to the validity of the arbitration agreement or the tribunal’s jurisdiction.

Itiquera initiated proceedings to enforce the award (Lawsuit No 1,536/2006, 19th Civil Court of the City of Curitiba, Paraná, Brazil). Inepar objected to the enforcement proceedings and as well filed parallel lawsuit to vacate the award. In both actions Inepar challenged the validity of the award, inter alia, based on the non-existence of a submission agreement signed by the parties before initiating the arbitral proceedings, which, according to Inepar, is required under Brazilian arbitration law before parties may undertake arbitration.

Applicable Law

Brazilian arbitration law, enacted in 1996, was inspired in the French law, therefore, provides that an arbitration agreement may be concluded in an arbitration clause or a submission agreement:

Article 3. The interested parties may submit their disputes to arbitration by virtue of an arbitration agreement, which may be in the form of either an arbitration clause or a submission agreement.

Conclusion of an arbitration agreement in an arbitration clause takes place prior to the existence of a dispute (Art. 4 Brazilian arbitration law), whereas a submission agreement allows parties to a pre-existing dispute to submit that dispute to arbitration (Art. 9 Brazilian arbitration law).

A submission agreement can also serve a second purpose, which is to fill in gaps resulting from an incomplete arbitration clause. For example, an incomplete arbitration clause can prevent national court jurisdiction while failing to provide for the applicable arbitral rules or appointing authority. This second purpose is expressly stated in the law:

Article 6. If the parties fail to agree ahead of time on the form for instituting the arbitral proceedings, the interested party shall notify the other party, either by mail or through any other means of communication, with confirmation of receipt, of its intention to commence arbitral proceedings, fixing a date, time and place for the signature of the submission to arbitration.

The law distinguishes an arbitration clause from a submission agreement. The latter is required to complement the former if, and only if, the parties did not provide in the arbitration clause the means for instituting the arbitral proceedings, e.g., institutional rules.

Indeed, there is no logical rationale to require a submission agreement when an arbitration clause already establishes each of the elements necessary to proceed with the arbitration.

Decision

The first instance court rejected Inepar’s objection.  It held the arbitration clause to have the essential elements to commence arbitral proceedings, rendering unnecessary an additional submission agreement by the parties. The court relied on Art. 5 Brazilian arbitration law for guidance:

Article 5. If the parties, in the arbitration clause, select the rules of an arbitral institution or specialized entity, the arbitral proceedings shall be initiated and conducted according to such rules; the parties may also establish in the arbitration clause itself, or in a separate document, the agreed procedure for instituting the arbitral proceedings.

Inepar opposed the first instance decision (Interlocutory Appeal No 428067-1) and the matter was redirected to the Paraná Court of Appeal. On January 2008, the 18th Civil Chamber of that court, constituted by a panel of three judges, issued a majority decision overturning the first instance’s decision on the basis that a submission agreement is always mandatory, independent of the adequacy of terms in the underlying arbitration clause. The reasoning stated:

Only after signing a submission agreement the arbitral jurisdiction takes place, that is, the existence of an arbitration clause does not suffice the requisites to submit the dispute to arbitration. (…) The award is null and void if the arbitral proceedings were initiated without observing the essential requisite: signature of the submission to agreement.

The 18th Civil Chamber’s declaratory judgment vacated the arbitral award and dismissed the enforcement proceedings.

Contradictions in the Decision

The 18th Civil Chamber’s decision to overturn the first instance court was surprising for four reasons:

1. The arbitration clause signed by the parties referred to the ICC arbitration rules. These rules provide steps to constitute a tribunal and commence arbitral proceedings. Just weeks prior, the São Paulo Court of Appeal had determined, based on a very similar set of facts, that an arbitration clause itself comprises an arbitration agreement. (Ap. No 1,117830-0/7, CAOA Comércio Importação e Exportação Ltda v. Renault do Brasil Ltda [2008]).

2. Inepar was the party who filed the request for arbitration. This conduct expressly provides the requisite consent to arbitrate. Further, although Brazilian law system does not contemplate the principle of estoppel, the principle of good faith prevents a party from benefiting from his or her own irregular conduct. Put differently, if the submission agreement was needed, the party pursuing arbitration had the duty to fulfil the requirement before initiating the arbitration.

3. The parties signed the terms of reference in accordance with the ICC rules. The terms of reference fulfil the requirements of a valid submission agreement, in accordance with Art. 10 of Brazilian arbitration law, as they include a full description of the parties and arbitrators, subject matter, as well as the place to render the award. Therefore, even if the submission agreement was compulsory under Brazilian law, having a valid terms of reference would suffice, by the fact this would serve as a functional submission agreement.

4. Inepar did not challenge the arbitral tribunal’s jurisdiction at any stage of the process. Inepar argued the need for a submission agreement only after the enforcement proceedings had started. Brazilian arbitration law requires that a party allege points related to annulment, invalidity or inefficacy of the arbitration agreement at the first available opportunity after start of the proceedings (Art. 20 Brazilian arbitration law). By waiting to object to jurisdiction until after conclusion of the arbitration, Inepar waived its right to such an objection and should have been prevented from resisting enforcement on such grounds. Indeed, the Superior Court of Justice, in L’aiglon S/A v. Têxtil União S/A (2005), held that there is consent to arbitrate when the defendant, according to the evidence presented, participated in arbitral proceedings without challenging the existence of arbitration agreement”. Also, the Superior Court of Justice, in International Cotton Trading Limited Ict v. Odil Pereira Campos Filho (2007), reasoned When the institutional arbitration rules selected by the parties are followed accordingly, it is not possible to argue a flaw invalidating the proceedings”.

Battle in the National Courts

The 18th Civil Chamber’s decision also included a dissenting opinion, thereby permitting Itiquira to file a specialized form of appeal, applicable only to non-unanimous second instance decisions.  Fourteen appeals followed, a number that stunned even experienced Brazilian litigators.  The numerous procedural manoeuvres had the scope to verify the suitability of the appeal filed by Itiquira, according to civil procedural rules and, if positive, whether the 18th Civil Chamber or a different Chamber would have the competence to decide the matter.

Eventually, in December 2011, the Paraná Court of Appeal decided to review its previous decision. It held a new judgment session, constituted by five judges who did not participate in the previous decision, and unanimously decided to overturn the vacatur of the arbitral award on the basis that the arbitration clause provided terms sufficient to institute arbitration. It also reasoned:

The parties previously agreed on the rules to govern the arbitral proceedings [ICC], for this reason the arbitration clause is full. … The [Brazilian] arbitration law extinguished the old concept of equating the arbitration clause with the submission agreement, both are capable of instituting the arbitral proceedings. (Appeal No 428.067-1/10).

Inepar has indicated that it will seek to appeal the Paraná Court of Appeal’s decision. To do so, however, Inepar would need to obtain a leave to appeal. This prospect seems unlikely given the Superior Court of Justice case-law contradicts Inepar’s arguments. Further, even if a special appeal (the last procedural recourse available at this juncture) was successfully filed in the Superior Court of Justice, the appeal, while pending judgment, would have no power to adjourn the enforcement of the award. Therefore, the enforcement proceedings in the first instance court will resume after a three-year-long battle in the 18th Civil Chamber of Paraná Court of Appeal.

A Positive Outcome

Arbitration has been growing sharply in Brazil. According to the ICC Bulletin Vol. 22 No. 1 – 2011, Brazil was fifth-ranked country in terms of the number of its nationals, natural and juridical, that were involved in ICC arbitrations in 2010.  Contributing to this are relatively recent investments in Brazil intended to address the shortage in infrastructure, and the practice dictating arbitration as the dispute resolution clause in the respective agreements. However, this is also a consequence of consistent pro-arbitration interpretations rendered by Brazilian national courts, in particular the Superior Court of Justice.

Correcting the questionable decision was imperative to avoid scratching Brazil’s image as a desirable seat of arbitration. The Paraná Court of Appeal’s position has been welcomed by the international arbitration community and represents an important step forward for arbitration in Brazil.

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