On August, 2019, the Government of the State of São Paulo, by means of the Decree nº 64.356, regulated the usage of arbitration by the direct and indirect Government Administration. This Decree provided that the proceedings could be ad hoc, according to the United Nations Commission on International Trade Law (“Uncitral”) Rules, or could follow the rules provided by the Arbitral institutions to be accredited by the Office of the General Counsel for the State of São Paulo.

The highly anticipated regulation for this accreditation process was published on 16 December 2019, in the Resolution No. 45 of the Office of the General Counsel for the State of São Paulo.

The Resolution assures that both national and foreign institutions can register before the State of São Paulo, as long as certain requirements are fulfilled.

Practically, the institutions must be lawfully constituted for more than 5 (five) years, possess the necessary physical structure — including the offices of its secretariat and facilities amenable of hosting hearings without additional costs to the parties in the City of São —, and be capable of receiving payments from the Public Administration.

Besides, the Resolution requires the institutions to demonstrate recognized good-standing reputation, competence and expertise in the administration of arbitral proceedings. For this requirement, a list of three objective elements was established:

i. To demonstrate that, in the year preceding the register request, at least 15 (fifteen) arbitral proceedings were commenced before the institution;

ii. The existence, within the institution, of at least one arbitration involving any entity from the Public Administration, either State or Federal, ongoing or finalized; and

iii. To demonstrate that, in the year preceding the register request, at least one arbitration whose total claim value is superior to R$ 50,000,000.00 (fifty million Brazilian reais).

Considering the requirements above, the registry to be elaborated by the General Attorney’s Office of the State of São Paulo would cover the most renowned arbitral institutions in Brazil. All said institutions have tested expertise and more than adequate physical structures to receive any future arbitrations by the Public Administration.

The full text of the Resolution No. 45/2019 can be read (in Portuguese) here.

Enacted on December 26^th, 2019, the Law No. 13,966 comes to modernize the old franchising system that was in effect since 1994.

Amon the most relevant updates is the express recognition of the arbitrability of disputes arising out of franchising contracts, as established in art. 7^th, paragraph 2^nd of the New Franchising Act.

Although the application of arbitration to franchising contracts was already consolidated in the Brazilian case law, the new franchising system dispel any doubts still lingering over the matter, consolidating the Courts’ position in Law.

On the other hand, the New Franchising Act does not eliminate the need to observe the formal requirements established in art. 4^th, paragraph 2^nd of the Brazilian Arbitration Act. In case, whenever the franchising contract is entered into by “adhesion”, the arbitration clause must be drafted in a separate minute or highlighted in bold type face in the main contract’s body. Moreover, the franchisee must place his initials or place a signature specially for the arbitration agreement.

The New Franchising Act can be read (in Portuguese) here.

On 19 November 2019, the Superior Court of Justice (“STJ”), through the judgment of Special Appeal No. 1.717.677 PR, clarified the operation of a motion to stay in enforcement proceedings related to disputes subject to arbitration and the extent of the control that State Courts can exercise in such cases.

In this case, the plaintiff and the defendant entered into a contract that contained an arbitration clause stating that all disputes arising from it would be resolved through arbitration. The plaintiff alleged a breach of contract and filed an enforcement action before the State Court. The defendant filed a motion to stay the enforcement, alleging the State Court’s lack of jurisdiction due to the presence of an arbitration clause.

In the first instance court, the motion to stay the execution was dismissed in accordance with art. 267, VII, Code of Civil Proceeding (“CPC”) of 1973 (equivalent to article 485, VII, of the 2015 CPC), which determines the dismissal without prejudice of the cases that are subject to an arbitration agreement. The court of appeals held that the motion should not be dismissed but rather suspended until the arbitral tribunal was constituted and decided on its jurisdiction.

Thus, both parties filed appeals to the STJ. Based on the aforementioned procedural provisions, they discussed, on the one hand, that the case had to be dismissed (instead of suspended, as dictated by the court of appeals) and, on the other, that the State Courts should not even hear the motion to stay as it was incompetent to do so.

The STJ held that it was necessary to dismiss the enforcement proceeding instead of merely suspending it, but stressed that this does not prevent it from hearing the motion to stay. This is because the motion to stay the enforcement was the only appropriate means of defense allowing the defendant to allege the existence of an arbitration agreement. The existence of an arbitration agreement prevents the State Courts to rule on the merits of the dispute, but still allows them to hear a motion to stay if only to recognize their lack of jurisdiction and to refer the dispute to an arbitral proceeding.

The full opinion of the court is available (in Portuguese) at the STJ’s website: click here.

The clamant filed a motion to set aside an arbitral award positing that the chairman of the arbitral tribunal had committed two alleged ethical flaws: (i) he was appointed by the respondent to sit as arbitrator in a similar demand filed by the respondent against a third party and (ii) failed to reveal in the first arbitration proceeding that he had been appointed to sit in a second arbitration involving the same respondent.

Claimant requested the court to render an interim measure suspending the enforceability of the arbitral award pending the analysis of the motion to set aside, which is being heard by the 1^st Business Law and Arbitration Conflicts Division of the São Paulo Courts. The trial judge denied the interim measure and the claimant filed an interim appeal against this denial. On 9 October 2019, the 1^st Business Law Chamber of the São Paulo Court of Appeals unanimously overturned the decision of the trial judge and suspended the enforceability of the arbitration award pending the judgment of the motion to set aside.

The decision was handed down in response to a request for an interim measure. It is not a final decision and follows the standards required to render an interim measure: a prima facie case and the likelihood of harm in the absence of the interim measure. The decision does not close the issue, which may be discussed in the motion to set aside. Still, the reasoning of the court remains relevant.

The opinion of the reporting appellate judge Fortes Barbosa emphasizes that the adoption of the arbitration inhibits the State Courts from reanalyzing the merits of the dispute; still, in the motion to set aside arbitration awards, State Courts are required to exercise control from a formal standpoint. He holds that the cases where the parties raise suspicions with regards to arbitrators lead to a delicate issue: the respect of the parties’ trust in the arbitrators. In order to protect this trust, one important aspect is the arbitrator’s duty to disclose. This obligation “prevents the arbitrator from omitting or withholding, at the commencement of the arbitration, any piece of information that is materially relevant for the choice of arbitrators (Article 14, § 1 of the Brazilian Arbitration Act), but it also imposes total transparency during the course of the arbitration.” Holding that the arbitrator’s failure to inform the parties about the second appointment amounts to a breach of his duty to disclose, the reporting appellate judge recognized that claimant had a prima facie case in his motion to set aside and decided to overturn the trial judge’s decision, thereby granting the interim measure that suspends the enforceability of the arbitration award.

The concurring opinion of appellate judge Cesar Ciampolini posits that the State Courts must be must be severe once faced with claims of lack of independence or impartiality of arbitrators and makes reference to the decision handed down by the Superior Court of Justice in the Abengoa case (SEC 9.412), in which the court recognized the importance of the arbitrator’s duty to disclose during arbitration proceedings.

In addition, the concurring opinion quotes international analyses regarding situations in which arbitrators performed simultaneous roles in investor-State arbitration. Investment arbitrations are those in which a State (subject to public international law), accepts — usually through a treaty —to refer to an arbitral tribunal the potential claims brought forth by foreign investors hosted by said State (subjects of municipal law). Brazil is not involved with investment arbitration, which is a type of arbitration that requires a very advanced specialization. Therefore, investment arbitration is practiced by a number of professionals that is much more restricted than commercial arbitrations, modality of arbitration that has become widespread in Brazil, and supplied by a wide contingent of qualified professionals.

This decision illustrates the importance of court supervision in order to guarantee the independence and impartiality of arbitrators, a remedy that is indispensable for the proper functioning of arbitration.

The court’s opinion on the Interim Appeal No. 2166470-26.2019.8.26.0000 is available (in Portuguese) at the São Paulo Court of Appeals website: click here.

On 5 November 2019, the Third Chamber of the Superior Court of Justice (“STJ”) judged the Special Appeal (“Resp”) No. 1,785,783-GO, which rekindles the discussion over the arbitrability of consumer disputes. Over the past few years, from time to time, the STJ has been discussing this issue. The STJ’s decisions vary according to the factual circumstances of the cases and from these it is possible to draw the following conclusions:

– Possibility of an arbitral proceeding if initiated by the consumer (art. 4, § 1, of the Arbitration Law): Party autonomy (the cornerstone of arbitration) still prevails, even if art. 51, VII, of the Consumer’s Defense Code (“CDC”) establishes that the standard term clauses that mandatorily determine the use of arbitration as the method of conflict resolution are null and void. This because, once the conflict has emerged, there can be an evident choice of arbitration by the consumer. The STJ understands, therefore, that Brazilian law voids the prior and compulsory adoption of arbitration at the time of the contract’s conclusion, but allows the consumer to later opt for arbitration by initiating an arbitral proceeding (Resp 1,169,841‑RJ; Resp 1,189,050‑SP). Likewise, if the consumer files a lawsuit, despite the existence of an arbitration clause, the latter becomes void, since there is a clear disagreement by the consumer as to the dispute resolution method (internal recourse on the bill to review REsp 1,192,648‑GO; REsp 1,628,819‑MG);

– Possibility of subsequent consensus by the parties to opt for arbitration: Bearing in mind that the prohibition refers only to the prior adhesion to arbitration, the STJ has also understood as valid an submission agreement concluded later by the parties, even when dealing with a consumer matter (Resp 1,742,547‑MG; Internal recourse on the bill to review REsp 1,152,469‑GO); and

– Requirement of form for arbitration agreements (art. 4, § 2, of the Arbitration Act): In any of the cases mentioned above, it is necessary that the arbitral clause or submission agreement abides by the formal requirements dictated by the statutes, namely: (i) be executed in writing; (ii) in an attached document or in bold type face within the main contract; and (iii) with a signature specially directed towards the arbitral clause. In a recent decision, the STJ understood that the existence of an arbitration clause in an contract entered into by adhesion that was placed on the signature page was not sufficient to guarantee the validity and effectiveness of the reference to arbitration without another signature specially directed towards the arbitration clause (Resp 1.785.783‑GO).

Through Public Notice 01/2020 (available only in Portuguese), the National Consumer Secretariat, an office attached to the Ministry of Justice and Public Security, is hiring a natural person as consultant in order to evaluate the feasibility of using mediation and arbitration in the framework of consumer law.

Among other services, the consultant to be hired shall submit a final report evaluating the legal and operational feasibility of relying on arbitration on the framework of consumer law. The analysis may yield proposals for regulatory makeover, as well as proposals for an increased integration with the consumidor.gov.br web platform, a website provided by the Brazilian government that aims at resolving consumer claims. The report should be delivered within 150 days of the executing of the contract.

The procurement emphasizes the efforts being made by the National Consumer Secretariat for the promotion of the alternative dispute resolution methods in the framework of consumer law. This resolve already translates into the support being offered to the web platform consumidor.gov.br, which allows the online resolution of disputes between consumers and providers of goods or services.

The previous commitment to arbitrate disputes in consumer contracts is barred by Article 51, VII, of the Consumer Protection Code, which holds as unconscionable the contract provisions that entail a mandatory submission to arbitration. This does not mean that it is impossible to arbitrate consumers’ disputes in Brazil, as discussed in another item of this newsletter.

The procurement of this analysis indicates that the Brazilian government is assessing the possibility of enabling the usage of mediation and arbitration in consumer disputes through regulatory modifications.

The use of alternative dispute resolution mechanisms renders the offer of products and services and do not undermine the rights conferred to consumers. This analysis therefore seems relevant and useful in order to render the Brazilian economy more competitive.

On 10 January 2020, the New York International Arbitration Center – NYIAC — promoted another event of the series “NYIAC Talks” in order to discuss “China’s Belt and Road Initiative: Challenges and Opportunities for Arbitration”.

The Chinese Belt and Road Initiative (一带一路) began in 2013, when China unleashed a plan to invest between US$ 1 and US$ 8 trillion in infrastructure and other means to connect 65 countries representing 60% of the world’s population and 60% of the global GDP.

The event was moderated by Michael Bond Michael Bond (Schedler Bond, Seattle) and showcased lectures by Eliza Jiang (Fangda Partners, Hong Kong), Aaron Wolfson (King and Wood Mallesons, New York) and Guilherme Rizzo Amaral, partner at Souto Correa Advogados and member of the Belt and Road Commission of the International Chamber of Commerce.

The speakers discussed the different methods of dispute resolution that are appropriate for disputes involving belt and road jurisdictions, the recommended dispute resolution institutions, the applicable law to the merits and the recent trend of international commercial courts, such as the China International Commercial Court launched in 2018.

In his presentation, Guilherme Amaral posited that the belt and road initiative is not limited to the terrestrial belt linking China to Central and South Asia and onward to Europe, and the maritime road linking China to the nations of South East Asia, the Gulf Countries, North Africa and on to Europe. In fact, Latin America has been receiving 10% of all the Chinese foreign direct investment since 2009. Despite the political instability that predicates the region, China invested approximately US$ 140 billion in Latin America, 90% of which were destined to four countries – Argentina, Brazil, Ecuador and Venezuela.

The dispute resolution mechanisms that are available for Chinese parties involved in Latin America vary from country to country. At least 11 Latin-American countries did bilateral investment treaties with China, and such treaties refer to arbitration the disputes between Chinese investors and the host countries for such investments. The countries that did BITs are the following: Argentina, Bolivia, Chile, Colombia, Cuba, Ecuador, Guyana, Honduras, Jamaica, Mexico and Peru. The exceptions are Brazil and Venezuela. Yet, the situation is markedly different in each of those two countries, after all Brazil hosts a solid arbitration market that ensures more foreseeable results in what regards the enforcement of contracts to the Chinese investor, whereas Venezuela does not offer tools the same level of dependability with this toll and occupy the last position in the World Justice Project Ranking.

Considering the complexity of Chinese investments in Latin America, there is no room for a “one size fits all” solution. Such investments are structured in such a way that there are several parties involved, such as Chinese banks and insurers, contractors and operation and maintenance companies, alongside the governmental agencies of the host country. Hence, time will tell how the different economic and political factors will shape the market for dispute resolution with Chinese parties in Latin America.

Souto Correa Advogados, in an action to encourage the advanced study of arbitration, contracts and international trade, provides for the sixth time a preparatory competition for Willem C. Vis International Commercial Arbitration Moot.

The competition, which is promoted by the Association for the Organization and Promotion of the Willem C. Vis International Commercial Arbitration Moot, revolves around a mock case involving a conflict arising from an international contract for the purchase and sale of goods and which provides for arbitration as the method for dispute resolution. This year, the procedural and merit discussions are:

i. a possible conflict of interest of the technical assistant of one of the parties and the jurisdiction of the arbitral tribunal; and

ii. the existence and consequence of an alleged non-conformity of imported hydropower turbines, according to the United Nations Convention on Contracts for the Purchase and Sale of International Goods – CISG.

In this edition, 10 Brazilian universities will participate in the Pre-Moot and will have the possibility to orally present their arguments to a select group of arbitrators that will evaluate the development and quality of the teams. In the end, the winning team will be awarded R$ 5,000.00, which helps with travel costs for the competition itself in Vienna, Austria or Hong Kong, Special Administrative Region of China.

The sixth edition of Souto Correa Pre-Moot will take place on February 8^th and 9^th, 2020, in Souto Correa’s offices in São Paulo and Rio de Janeiro.