Brazil: Will COVID-19 mean more arbitrations against public entities?

Sorce: Lexology 
Authors:  Vinicius Pereira and Felipe Hermanny

Brazilian parties are among the most frequent users of international arbitration. They are, for example, among the top five nationalities in arbitrations administered by the International Chamber of Commerce (ICC).

As for disputes involving public entities, the Brazilian Arbitration Act was amended in 2015 to allow Brazilian public entities, including the national government, to use arbitration as a dispute resolution method. In 2018 and 2019, the states of Rio de Janeiro and São Paulo each issued rules establishing a framework for their participation in arbitrations. Also in 2019, the national government issued a decree regulating arbitration in connection with claims related to its exercise of eminent domain (expropriation or taking of private property for public use) and public infrastructure-related disputes. Just this year, the city of São Paulo issued a law allowing its instrumentalities to include arbitration clauses in their agreements.

These legislative initiatives are significant and have instilled greater confidence and certainty for potential and existing parties looking to do business with Brazilian states or their instrumentalities.

The Superior Court of Justice precludes arbitration against a semi-public enterprise

Notwithstanding these notable pro-arbitration developments, in February of this year the Superior Court of Justice (the highest court in Brazil for non-constitutional matters) held that arbitral tribunals have no jurisdiction to rule on disputes with the federal government resulting from Operation Car Wash, a far-reaching corruption scandal involving, among others, the semi-public Brazilian oil and gas company, Petrobras. In that case, which involved underlying claims by some Petrobras’ shareholders against Petrobras and the federal government, the Court declined to compel arbitration even though Petrobras’ bylaws clearly provide that shareholders’ disputes should be resolved through arbitration, and the Brazilian federal government is the company’s controlling shareholder. Despite these facts, the Court held that explicit statutory authorization was required (and was somehow found lacking under the facts of the case) for the federal government to be required to arbitrate disputes arising in this context.

In any event, and despite this seemingly outlier decision, there is a clear trend in Brazil in favor of the use of arbitration in disputes involving the state. According to the ICC’s Brazilian office, for example, arbitrations involving public entities represent approximately 30% of ICC Brazil’s ongoing proceedings, and this percentage has continued to increase year on year.

Arbitration against public entities in the wake of the COVID-19 pandemic

In light of the COVID-19 pandemic, many companies that have entered into agreements with public entities have been preparing for disputes. In addition to disputes related to the consequences of force majeure events, public agreements ̶ such as those involving concessions, construction, public-private partnerships, and infrastructure ̶ may need to be renegotiated, which may result in additional disputes.

It is important to note that, even if a dispute arises in the context of a public agreement that entered into before the referenced laws permitting government entities to participate in arbitration, parties may still be able to arbitrate. In such cases, parties will need to consent to arbitration and determine what rules, if any, will apply to the dispute.

Due to the overwhelming number of disputes currently in Brazilian courts and the pressure the public entities to employ alternative methods of disputes resolution, it is likely that public entities will, in many cases, ultimately agree to arbitration, particularly in cases involving complex agreements.

With this in mind, the number of arbitration proceedings involving public entities is expected to increase exponentially in the coming years. Private companies consequently should carefully consider whether arbitration clauses involving the government do in fact authorize the relevant public entity to arbitrate to avoid the risk of a time-consuming and costly arbitration which ultimately ends with an award that could be rendered null and void, as in the Petrobras arbitration mentioned above.