Thursday, October 04, 2007

Domestic Arbitration

Arbitration is the preferred method of dispute resolution for foreign investors doing business in Brazil. Most foreign investors, however, prefer to select a foreign city —generally in the U.S. or Europe, as the case may be— as the seat of arbitration. They rarely select a Brazilian city as the seat (please read Seat in Brazil?). Foreign investors also prefer international institutions for administration of their arbitrations against Brazilian parties, such as the ICC, LCIA and the Triple A/ICDR. This is obvious as Brazilian arbitral institutions still lack the necessary ability to administering international disputes.

Some foreign investors doing business in Brazil through Brazilian subsidiaries (therefore, purely domestic transactions for purposes of Brazilian law) insist in inserting arbitral clauses providing for ICC arbitration. This is possible under ICC Rules of Arbitration. But while some believe that the party autonomy provided for Section 2 of the Brazilian Arbitration Act allows a party to a purely domestic transaction to elect any given law or lex mercatoria as the contract's governing law, the majority of scholars and arbitration practitioners believe otherwise.

Purely domestic disputes submitted to arbitration must (i) have Brazilian law as the governing law and (ii) establish a Brazilian city as the seat of arbitration. Foreign investors must avoid anything different than that in their arbitration clauses, unless the contract is —in fact— an international contract.

Tuesday, October 02, 2007

Publicly traded companies participating in arbitrations... Do they have to disclose such participation to their investors?

Early this week Brazilian newspaper Valor Econômico published an article about disclosure of arbitration to investors by publicly traded companies.

According to the article, just a few companies traded at Bovespa have been disclosing information about arbitrations they are parties to. The article mentions three of such companies: Grupo Pão de Açúcar; Embratel; and Brasil Telecom.

Two things to keep in mind:

  1. The Brazilian Arbitration Act does not have any provision regarding the confidentiality of arbitration (arbitration in Brazil is private, but not necessarily confidential);
  2. The Brazilian Securities and Exchange Commission - CVM does not have any specific rule regarding disclosure of arbitrations, therefore, parties should look for general disclosure rules when in doubt whether or not to disclose any arbitrations t their investors.

To date, neither a Brazilian court has ruled on this subject nor any fines have been imposed by CVM for lack of disclosure of participation in arbitration proceedings.

Seat in Brazil?

Attractiveness of a particular location as a potential seat of arbitration lies ―to a great extent― to the issue of whether there are, in such seat, a modern and arbitration-friendly legislation, supportive (pro-arbitration) courts, and a good general infrastructure.

Brazilian cities are hardly chosen as neutral seats of arbitration. I believe there are two main (and obvious) reasons for that:

(i) arbitral clauses are inserted in international contracts mainly because arbitration is seen as a "neutral forum" of dispute resolution. And, from a practical and financial standpoint, it may not necessarily make sense to establish the seat of an international arbitration in Brazil (if the parties are, for instance, from Europe, the US or Asia, the logistics involved may make it very expensive to arbitrate in Brazil).

(ii) not only the arbitrators may be trusted by the parties; the court system of the arbitral seat must be trusted by the parties as well. The parties cannot "appoint" the court system. Although Brazilian courts have been very supportive to arbitration and there are plenty of pro-arbitration decisions in Brazilian case law, arbitration is still in its infancy in Brazil.

I believe that Brazil has achieved a very good level of receptivity towards international arbitration in the last 11 years, since the passing into law of the Brazilian Arbitration Act. Brazil is, undoubtedly, an arbitration-friendly jurisdiction. But it will take some time until Brazil is becomes accepted, both legally and commercially, as a favored forum for resolving international commercial disputes. In the words of a practitioner in the field of international commercial arbitration, "arbitration is about trust, and establishing trust takes time".