Angela Di Franco heads the Levy & Salomão Advogados’ dispute resolution practice. She has tried hundreds of cases to final verdict in almost 30 years at the firm. She also has resolved many cases through arbitration and other methods of ADR. She served the São Paulo State Court System as a mediator and was a featured lecturer on ADR.
Rafael Zabaglia is a partner in the firm’s dispute resolution practice. He has been lead trial counsel and represented clients in appeals before federal and state courts. He also represents clients in arbitration and in business restructuring proceedings. He is experienced in transactional matters as he worked for almost two years at the firm’s M&A and corporate practice and for almost one and a half years at the M&A and corporate practice of Morrison & Foerster LLP, New York office.
Angela and Rafael have handled matters as diverse as M&A deals and other corporate arrangements, shareholder actions, commercial contract disputes, aviation products liability, enforcement of judgments, and reorganisation and liquidation of businesses. They also counsel clients on risk assessment related to potential and outstanding disputes.
GTDT: What are the most popular dispute resolution methods for clients in your jurisdiction? Is there a clear preference for a particular method in commercial disputes? What is the balance between litigation and arbitration?
Angela Di Franco and Rafael Zabaglia: Litigation is still by far the prevailing method of dispute resolution in Brazil; contracts for the trade of goods and services are usually governed by Brazilian law and disputes stemming therefrom are usually submitted to Brazilian courts. Arbitration is the preferred dispute resolution mechanism in domestic and cross-border M&A deals, project financing and other investment-related transactions. However, it is nowhere close to overtaking litigation. Although there are no reliable statistics, the number of pending arbitration proceedings in reputable domestic institutions is no greater than 2,000, while there are hundreds of thousands of commercial disputes unfolding before courts of law.
ADR such as mediation and expert determination are still unusual in the practice of commercial disputes as parties are usually afraid that consenting to ADR before litigation or arbitration may be perceived by the opposing party as a sign of low confidence in the merits of the claim (that is, some sort of ‘weakness’). Many contracts do contain the escalation clauses – language mandating the parties to negotiate a resolution of any dispute in good faith for a given period (usually 30 to 60 days) before engaging in litigation or arbitration – but the parties usually simply stall for time and do not meaningfully pursue a settlement during this period.
GTDT: Are there any recent trends in the formulation of applicable law clauses and dispute resolution clauses in your jurisdiction? What is contributing to those trends? How is the legal profession in your jurisdiction keeping up with these trends and clients’ preferences? Does Brexit continue to affect choice of law and jurisdiction?
ADF & RZ: It is not uncommon nowadays to see contracts governed by English or New York law and having international arbitration (usually under the International Chamber of Commerce rules) as the prevailing dispute resolution mechanism in the context of cross-border deals. As Brazilian companies seek to attract foreign investment and acquire goods and services in the international market, they have been more flexible in that respect than in the past. Pursuant to the Code of Civil Procedure, the parties are generally free to resolve disputes stemming from international contracts abroad. While the validity of governing law clauses might still be disputable in Brazilian courts, this tends not to be an issue any more as long as the matter is being litigated or arbitrated in a jurisdiction that favours the autonomy of will in the determination of applicable law.
On the flip side, domestic arbitration might no longer be such an obvious choice as far as cost-benefit analysis goes, as some clients have opted to submit their commercial disputes to the Judiciary. On the one hand, the quality and predictability of the decisions entered by courts specialised in commercial, corporate and reorganisation law have been increasing; on the other hand, some domestic arbitration chambers have greater workload that they can handle, with adverse effects on timing and quality of their services (on average, disputes have taken in excess of two years from the request for arbitration to be resolved in reputable domestic institutions).
Arbitration clauses are themselves becoming more complex. Some clients want to introduce tailor-made carve-outs to standard arbitration rules (preliminary injunctions, interim measures, choice of arbitrators, and so forth), others choose to have the arbitration seat in a venue that is neither the parties’ nor the arbitration chambers, or to have the arbitration conducted in two languages – these decisions increase cost and the interpretation of the applicable law may also become more problematic.
What we deem paramount for Brazilian practitioners in cross-border deals is to communicate efficiently with the client’s foreign co-counsel to make sure that arbitration clauses will work both in Brazil and in the jurisdiction chosen by the parties.
Keeping current (academic papers, industry news and so forth) is, of course, essential, but what we deem paramount for Brazilian practitioners in cross-border deals is to communicate efficiently with the client’s foreign co-counsel to make sure that arbitration clauses will work in both Brazil and in the jurisdiction chosen by the parties, as questions about the enforceability of the arbitral award could arise further down the road. Top-tier Brazilian firms have been encouraging not only M&A but also dispute resolution attorneys to study and work abroad as a way to facilitate communication and to make sure that legal concepts can be correctly adapted from UK and US common law systems to the Brazilian civil law system and the other way around.
Brexit has not directly affected the choice of law and jurisdiction.
GTDT: How competitive is the legal market in commercial contentious matters in your jurisdiction? Have there been recent changes affecting disputes lawyers in your jurisdiction? How is the trend towards ‘niche’ or specialist litigation firms reflected in your jurisdiction?
ADF & RZ: Brazil is already a saturated market with dozens of very qualified local law firms ranging from specialised boutiques to full-service powerhouses.
It would be hard to point to one or two specific recent changes in the market with immediate impact on commercially contentious matters. Non-legislative changes have been taking place gradually. For example:
- the increasing exchange with foreign practitioners not only in the context of arbitration but also in some high-profile court proceedings (such as civil liability claims stemming from mass torts in cases of environmental disasters, air crashes and product recalls, or global-scale antitrust and insurance disputes) has influenced Brazilian practitioners in many different ways, from legal interpretation to negotiation techniques to evidence production; and
- the growing complexity of commercial transactions requires from dispute resolution lawyers the mastering of accounting and business structures to better represent the clients.
On the legislative front, several statutes were enacted in 2015 that directly affect each of litigation, arbitration and ADR – respectively a new Code of Civil Procedure (Law No. 13,105), an update to the Arbitration Act (Law No. 13,129) and a Mediation Act (Law No. 13,140).
Given the relatively small number of proceedings, few firms are familiar with the nuts and bolts of arbitration, so it is itself a niche within the broader market for dispute resolution. As for litigation, some firms try to position themselves as boutiques in areas such as banking, intellectual property and competition law, but the larger disputes are usually handled by firms that have strong practices both in substantive law and dispute resolution, as these two skill sets are required.
GTDT: What have been the most significant recent court cases and litigation topics in your jurisdiction?
ADF & RZ: As the Brazilian economy continues to struggle, judicial reorganisations of high-profile businesses remain relevant, with large groups in the media, editorial and civil aviation sectors seeking shelter in court against creditors in 2018.
The Superior Court of Justice (STJ, the highest Brazilian court with jurisdiction over non-constitutional affairs) entered a very relevant opinion on the applicable statute of limitations in cases of damages stemming from contractual breach. It found that the claims can be brought within 10 years from the breach (tort claims are time-barred after three years). This means that, in many cases, a party may pursue damages several years after termination or expiration of the contract.
Investigations in connection with Operation Car Wash and other corruption and embezzlement schemes have also kept Brazilian firms and courts busy. Civil liability claims for malfeasance are expected to make news in the aftermath of the ongoing administrative proceedings and criminal charges.
Court precedents on domestic and international arbitration always draw a lot of attention from both arbitration attorneys and litigators. The Arbitration Act was enacted in 1996 and only in late 2001 did the Supreme Court affirm its constitutionality, so we have only 15 years’ worth of case law. Many controversial aspects have already been addressed by the STJ, but the view of courts of law on the Arbitration Act is still very relevant for practitioners to counsel their clients on whether to opt for arbitration and to design the most suitable strategy for the dispute itself.
While lawsuits of a collective nature such as civil enforcement actions filed either by the Public Prosecutor or civil associations are somewhat customary in connection with environmental matters and consumer protection, interest in them has been renewed lately in connection with antitrust and competition law (repression of cartels, dumping, market manipulation, among others) and corporate governance and shareholder activism (accountability of principals and controlling shareholders for wrongdoings or loss in share value). Collective suits have become significant tools for the protection of environment and victims’ families in the aftermath of two recent dam breaches in Brazil (city of Mariana in 2015 and city of Brumadinho in 2019).
GTDT: What are clients’ attitudes towards litigation in your national courts? How do clients perceive the cost, duration and the certainty of the legal process? How does this compare with attitudes to arbitral proceedings in your jurisdiction?
ADF & RZ: Clients seem to be realistic about the pros and cons of legal process and arbitration after having embraced domestic arbitration wholeheartedly following the Supreme Court’s affirmation of its constitutionality in 2001.
The costs of litigating claims are evidently lower than submitting them to arbitration. Litigating in some states such as São Paulo is not in itself cheap as court fees, expert fees and appeal fees could well exceed 100,000 reais and perhaps even 200,000 reais depending on the complexity of expert evidence to be produced (plus the costs with the party’s own legal counsel). That is hefty for small enterprises and one could argue that it is, at any rate, too expensive in light of the excessive duration of lawsuits and the perceived unpredictability of court decisions. But the fact that domestic arbitration expenditures tend to amount to 500,000 reais or more in many chambers (plus the costs with the party’s own legal counsel) certainly does no favours to the adoption of arbitration among small- and even mid-sized enterprises – and thereby prevents larger businesses from incorporating arbitration into all of their contracts with those smaller businesses.
Lawsuits in Brazil still take too much time despite the transition from paper to electronic filings: on average, it will take something between eight to 10 years for a commercial lawsuit to make it through the lower court, the court of appeals and the STJ or the Supreme Court. The 2015 Code of Civil Procedure purports to reduce the number and duration of lawsuits by simplifying the procedural rules, limiting the filing of appeals, extending the cases in which higher courts’ precedents will be binding to lower courts and increasing the economic risks of litigation (greater attorney’s fees and imposition of daily fines for failure to comply with court orders). However, whether the Code of Civil Procedure has accomplished such purposes is something to be appraised around five years from now. Arbitration takes much less than eight years to unfold, of course, thanks to the lack of an appeal phase, but the bad news is that their duration has, on average, increased to two and a half years as from the request for arbitration, which is somewhat disappointing to some parties who expect a swifter resolution of their dispute.
Certainty of the decisions may be the aspect in which arbitration has the upper hand over litigation in clients’ view. Clients strongly feel that arbitrators deliver more consistent and technical rulings on business law than judges, although they have at times felt frustrated with arbitrators who lack a more proactive conduct during hearings and examinations or whose awards do not contain in-depth assessment of the parties’ arguments. Clients are particularly worried that judges may not be familiar with market practices or knowledgeable to industry-specific regulation (especially in infrastructure and project finance disputes) or corporate and M&A law. However, there is a chance that this perception will change given the judiciary’s efforts to have courts specialise in business law.
GTDT: Discuss any notable recent or upcoming reforms or initiatives affecting court proceedings in your jurisdiction.
ADF & RZ: There has been a plethora of recent legislative initiatives and reforms affecting litigation practice in Brazil. As for reforms, the most significant one was obviously the enactment of a new Code of Civil Procedure in 2015 that has brought several significant changes such as:
- it is harder to file appeals in certain circumstances;
- parties are allowed to agree upon a calendar for and the conduct of court hearings, evidence production and other procedural acts, as if they were in an arbitration proceeding;
- the binding effect of certain court precedents upon lower courts has been strengthened; and
- ADR being incentivised as a mediation hearing is now a mandatory step prior to the filing of defence.
With the enactment of a new Code of Civil Procedure less than five years ago, there are no meaningful initiatives regarding procedural law. But there are two legislative initiatives in the field of business law:
- two bills for creation of a Commercial Code, which has been the source of a very heated debate among scholars as many of them believe that the Civil Code suffices for commercial affairs and immense transaction costs will kick in with a new Commercial Code; and
- a bill for amendment and restatement of the 2005 Business Insolvency Act, reflecting evolutions in case law and containing provisions about cross-border insolvency and treatment of foreign creditors in domestic proceedings.
We do not expect the new administration that took office in January 2019 to prioritise either procedural law or business law initiatives in the short run, because its main initiative will be a very challenging and complex overhaul of the pension system – which will require extensive negotiation with Congress.
ADR being incentivised as a mediation hearing is now a mandatory step prior to the filing of defence.
Litigators’ work has been affected also by four non-legislative initiatives of the judiciary. The first is the shift from paper to electronic filings over the course of this decade. The second initiative is the improvement of the courts’ online databases so access to case law is now easier, which in turn impacts the way lawyers bring forth their arguments and the way courts enter their decisions. The third is the growth in the number and attendance of seminars where judges and attorneys interact with foreign practitioners – for instance, model legislation issued by UNCITRAL on cross-border insolvency, which is not binding in Brazil, is now the topic of more studies and debates than ever before and has at times been invoked by courts in their reasoning. Finally, the fourth initiative is the specialisation of judges and justices on business law in São Paulo and Rio de Janeiro, which are the two main business hubs of the country. These changes require more sophistication from lawyers: the fact that whole case files on similar disputes and also specific precedents are readily available online to all attorneys levels the playing field, and the fact that courts are more knowledgeable to the specificities of the market and of business law reduces the leeway for superficial or inaccurate arguments.
GTDT: What have been the most significant recent trends in arbitral proceedings in your jurisdiction?
ADF & RZ: The use of third-party funding has been on the rise, given the steady growth in the number of arbitration disputes in Brazil and the fact that many local companies are currently in financial distress and have been looking for ways to limit their budget for commercial disputes. Disclosure is an issue, and the Arbitration and Mediation Centre of the Chamber of Commerce Brazil-Canada, which is currently the largest arbitration chamber in Brazil, issued specific regulation on TPF to mitigate the risk of conflicts of interest between funders and arbitrators.
The use of arbitration to resolve disputes between high-profile executives and their companies tends to increase in the near future, as legislation passed in late 2017 at long last enabled workers whose earnings exceed a certain threshold to submit disputes to arbitration. As labour and employment courts tend to be very protective of workers, it is expected that companies will seek to include arbitration clauses in their new employment agreements. Depending on how this new trend unfolds, it could be a catalyst for the popularisation of arbitration among local practitioners.
Brazil is, these days, seen as one of the most arbitration-friendly jurisdictions in Latin America mostly due to the judiciary’s supportive interpretation of the Arbitration Act.
The interaction between arbitration and ADR has also been in the spotlight. First, the 2015 Mediation Act may have effects on arbitration as it prohibits mediators from acting as arbitrators or witnesses in an ensuing dispute and parties from disclosing documents and information produced during mediation. Second, dispute boards and adjudications, which are two ADR methods that have not been regulated in federal statute, have become more common in the context of construction and infrastructure agreements that also contain arbitration clauses, to the point where:
- the city of São Paulo passed a law providing for the use of ADR in certain public contracts; and
- the Court of Appeals of the State of São Paulo awarded 10 million reais to a contractor against the state-owned company that runs the local subway system with grounds on a dispute board finding.
GTDT: What are the most significant recent developments in arbitration in your jurisdiction?
ADF & RZ: The most relevant recent development in arbitration was the enactment of Law No. 13,129/2015 to amend and update the 1996 Arbitration Act. Its content is not really innovative but rather a codification of existing case law on the Arbitration Act. This is not surprising. Brazil is, these days, seen as one of the most arbitration-friendly jurisdictions in Latin America mostly due to the judiciary’s supportive interpretation of the Arbitration Act. Instead of affirming their jurisdiction over disputes submitted to arbitration and then challenged in court as they might otherwise have done, courts have consistently safeguarded the validity and lawfulness of arbitration, arbitrators’ rights and jurisdiction, and the binding nature of arbitration agreements and the existence of implied consent to arbitrate.
Notably, the government and the entities it owns or controls are now expressly allowed to choose to arbitrate certain disputes. We point to two recent developments in that connection.
- The governor of Rio de Janeiro passed a ground-breaking decree in 2018 allowing state-controlled entities to agree to arbitration in contracts where the value exceeds 20 million reais (and in some specific types of contracts regardless of value), and regulating public transparency vis-à-vis the confidentiality of the proceedings.
- The federal government agreed to move a dispute in the seaport sector that had been pending in court for around 10 years against a cargo terminal operator called Libra to arbitration and the tribunal entered an award in early 2019 in favour of the government for 2.8 billion reais.
GTDT: How popular is ADR as an alternative to litigation and arbitration in your jurisdiction? What are the current ADR trends? Do particular commercial sectors prefer or avoid ADR? Why?
ADF & RZ: ADR has not gained much traction in Brazil yet but we expect this to change in light of efforts on both the judicial and the legislative fronts. Brazilian courts are overwhelmed and widespread adoption of ADR would come in handy, as per the most recent official data available, there were around 80 million lawsuits pending before Brazilian courts as of December 2017.
The judiciary has been promoting ADR through campaigns and seminars, capacitating mediators and expert negotiators and implementing specific programmes to submit certain disputes (for example, family affairs, consumer rights) to those specialists. On top of this, Law No. 13,140/2015 was enacted to regulate mediation systematically for the first time, and the 2015 Code of Civil Procedure also contains several rules to incentivise it.
Banks and telephone companies have been partnering with the judiciary to implement some innovative ADR programmes to prevent litigation. Banks, for instance, are part of a government-sponsored online mediation system and also operate an ADR facility in the city of São Paulo to review and settle lawsuits immediately after they have been filed by clients. It is still unclear whether other sectors with a very large number of standardised consumer-related claims such as airlines will follow suit.
Larger players in the civil construction sector tend to employ FIDIC contracts and other standard form agreements and to appoint dispute boards to prevent or solve disputes that arise during the performance of the contract, so as to avoid disruption in construction work and schedule delays.
The Inside Track
What is the most interesting dispute you have worked on recently and why?
We have been handling many disputes stemming from aviation accidents, which require deep knowledge of international law vis-à-vis treaties and conventions that Brazil is a signatory to, foreign law vis-à-vis the connection with related litigation unfolding outside Brazil, insurance and reinsurance and obviously civil liability itself. The cases are complex and challenging. Not only do they require constant interaction with foreign counsel but also familiarity with aspects of aircraft design, to defend the client’s interests in the most effective manner.
Describe the approach adopted by the courts in your jurisdiction towards contractual interpretation: are the courts faithful to the actual words used, or do they seek to attribute a meaning that they believe the parties actually intended?
Courts usually stick to the actual wording when sophisticated parties are involved, but they have freedom to interpret the contract otherwise. Statute on the interpretation of private contracts is expressly designed to give courts the necessary wiggle room to favour substance over form when they find that this is appropriate: pursuant to articles 112 and 113 of the Civil Code, contracts must be interpreted in accordance with good faith and intent prevails over literal meaning; also, article 423 sets forth that contracts of adhesion (standard form) must be interpreted in favour of the adhering party.
What piece of practical advice would you give to a potential claimant or defendant when a dispute is pending?
Avoid being emotional about winning the dispute; an ingrained dispute-oriented mentality may harm your interests in the long run. If you are a claimant, you may have invested many years and tons of money and end up with a pyrrhic victory (which is particularly true in litigation). If you are a defendant, keeping the dispute going may backfire: not only are costs high in Brazil but applicable interest rates while the dispute is pending may be greater than the return on low-risk investments. Disputes are tools to solve problems and should be used efficiently – acting to gain leverage to settle in favourable terms rather than hoping for an uncertain outcome (much) later may be the most efficient approach.
Angela Di Franco and Rafael Zabaglia
Levy & Salomão Advogados