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".

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.

Should São Paulo be considered the Latin American Arbitration Center?

I have read an article (in Portuguese) the other day which stated that São Paulo will be the most important arbitration venue of Latin America.

I think São Paulo may not necessarily become the leading arbitration venue of Latin America, mainly because:

1. There is no strong arbitration institution in Brazil, and the existing Brazilian institutions have not signed cooperation agreements with the leading international organizations; and
2. The Brazilian Arbitration Act must be revised, and the specificity of international arbitration must be expressly recognized by Brazilian law.

Parties from abroad very rarely choose São Paulo (or Rio de Janeiro) as seat of their arbitrations. When either seat is selected, it is not because they offer advantages to the participants, but because the contract has a strong connection with either city or any other strong reason. For example, if the party likely to be the defendant is domiciled in São Paulo, and their assets are located in Brazil, it may make sense to set a Brazilian city as the arbitral seat. Although Brazil is a party to the New York Convention, enforcement proceedings are very slow and it usually takes at least one year until the successful party at the arbitration obtains the so-called exequatur at the STJ (and the party still need to enforce the award through the Federal Court system).

São Paulo is never an option as a purely neutral third-country venue. For São Paulo to become a venue of choice for international arbitration, many things need to change.

Petrobras Arbitration

Brazilian newspapers reported last week that Petrobras —Brazil’s state-owned oil company, the (then) major player in Bolivia’s energy market— will turn down the requests of Yacimientos Petrolíferos Fiscales Bolivianos - YPFB (Bolivian government’s oil company) to a review of prices in their gas purchase agreement. According to several sources, the gas purchase agreement contains an arbitration clause with seat of arbitration in New York City, New York.

The Bolivian government’s efforts to renegotiate its energy contracts, and this (eventual) big arbitration, are consequences of the “nationalization” of Bolivia’s oil and gas fields dated May 1, 2006.