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Brazilian court issues anti-arbitration injunction
Practical Law UK Legal Update 5-519-6966 (Approx. 4 pages)
Brazilian court issues anti-arbitration injunction
by Practical Law
| Published on 31 May 2012 • Brazil |
Eduardo Damião Gonçalves (Partner), Flávio Spaccaquerche Barbosa (Associate) and Marcel Alberge Ribas (Associate), Mattos Filho Advogados
An international legal battle of anti-suit and anti-arbitration injunctions arose from diverging interpretations of the applicable law and scope of an arbitration clause in an insurance policy. The express provision indicating Brazilian law raised the debate over specific rules applicable to adhesion contracts in Brazil, as well as the law governing the arbitration agreement where the parties had chosen London as the seat of arbitration.
Background
Article 4 of Federal Law No. 9,307, of 23 September 1996 (Brazilian Arbitration Act) provides that:
"The arbitration clause is the agreement whereby contracting parties oblige themselves to submit to arbitration all disputes that may arise relating to the contract.
First Paragraph: The arbitration clause shall be in writing contained in the contract itself or in a separate document referring thereto.
Second Paragraph: In adhesion contracts, the arbitration clause will only be valid if the adhering party initiates arbitral proceedings or if it expressly agrees to arbitration by means of an attached written document, or if it signs or initials the corresponding contractual clause, inserted in boldface type."
Article 44 of the SUSEP Circular No. 256/2004 (Brazilian Superintendency of Private Insurance) provides that:
"The Arbitration Clause, when inserted in an insurance contract, shall comply with the following provisions:
I – To be written in boldface type and contain the insured's signature, in the clause itself or in a specific document, with an express consent to its application;
II –To contain the following information:
a) that is optionally adhered by the insured;
b) that by consenting to the application of the clause, the insured is agreeing to resolve all disputes with the insurance company by means of arbitration, whose awards have the same effect as judgments rendered by the Judiciary; and
c) that it is governed by the Law No. 9,307, of 23 September 1996."
Condition 7 of the Insurance Policy:
"It is agreed that this Policy will be governed exclusively by the laws of Brazil. Any disputes arising under, out of or in connection with this Policy shall be subject to the exclusive jurisdiction of the courts of Brazil."
Condition 12 of the Insurance Policy:
"In case the Insured and the Insurer(s) shall fail to agree as to the amount to be paid under this Policy through mediation as above, such dispute shall then be referred to arbitration under ARIAS Arbitration Rules. (…) The seat of the arbitration shall be London, England."
Facts
A dispute arose in relation to an insurance policy under which the insurers refused to cover damages and consequential losses in excess of 1 billion Reais, resulting from revolts that halted the construction works of the Jirau hydropower plant in May 2011. The insurers commenced an arbitration against the insureds in London on 29 November 2011, in accordance with the arbitration clause in the policy, which provided that "the seat of the arbitration shall be London, England" (Condition 12).
On 16 December 2011, the insureds initiated a lawsuit before the 9th Civil Court of the Capital of the State of São Paulo contesting the efficacy of the arbitration agreement under Brazilian Law, on the grounds that the insurance policy was an adhesion contract under Brazilian Law. They argued there was no express consent of the insured parties on the arbitration clause, which is a legal condition established in Article 4 of Brazilian Arbitration Act.
The conflicting proceedings led to a series of decisions of the Brazilian and English courts respectively:
- On 12 December 2011, in an ex parte decision, the first instance Brazilian judge dismissed the interim anti-arbitration request made by the insureds.
- On 13 December 2011, the insurers obtained an ex parte anti-suit injunction from the Commercial Court in London.
- On 19 December 2011 a second decision by the Brazilian judge reviewed the insureds' request and granted an anti-arbitration injunction against the insurers.
- On 19 January 2012, the Commercial Court in London granted the continuance of the English anti-suit injunction (see Legal update, Identifying proper law of hybrid arbitration law (Commercial Court)).
The insurers tried to overturn the anti-arbitration injunction before the Appellate Court of the State of São Paulo.
Decision
In a majority decision of 19 April 2012, the Court of Appeals of the State of São Paulo upheld the anti-arbitration injunction ordering the insurers to refrain from continuing the arbitration proceedings in London. The decision was based on the possible ineffectiveness of the arbitration agreement under Brazilian law, in light of arguments brought pursuant to the adhesion contract rules (such as Article 4 of the Brazilian Arbitration Act).
The court considered the two different dispute resolution clauses in the insurance contract, one of which provided for the exclusive application of Brazilian law and conferred jurisdiction on the Brazilian courts for disputes arising out the insurance policy, and the other providing for arbitration in London in cases where the parties failed to agree on the amount to be paid. According to the majority of the Justices, the arbitration clause did not contain the express consent of the adhering party as required by Article 4 of the Brazilian Arbitration Law and 44 of the SUSEP Circular No. 256/2004.
Comment
The court adopted the reasoning that the less "traumatic" path to resolve the dispute would be to suspend the arbitration proceedings pending a decision of the Brazilian courts on the issue of whether the arbitration clause was effective. However, such a controversial approach will certainly attract heavy criticism by Brazilian arbitration practitioners. It could be said that the Brazilian courts assessed the validity of the arbitration clause in light of the express choice of Brazilian law to govern the terms of the policy. However, the English courts reached a different conclusion and concluded that the law governing the arbitration agreement was English law, the English Court of Appeal having upheld the Commercial Court's decision (see Legal update, Sulamerica: full update on Court of Appeal decision on determining law of arbitration agreement). The conflicting interpretations, and the large amounts at stake, make for interesting reading.
Case
TJSP AI No. 0304979-49.2011.26.0000, Energia Sustentável do Brasil S/A e outros vs. Sul America Companhia Nacional de Seguros S/A e outros, Reporting Appellate Judge Paulo Alcides Amaral Salles (judgment 19 April 2012, published 26 April 2012).