Is Brazil still an arbitration-friendly country?

Amid initial skepticism and distrust, commercial arbitration in Brazil has become widely used following the Supreme Court confirmation of the constitutionality of the Brazilian Arbitration Act (BAA) in 2001. Since then, the number of arbitrations in Brazil has increased, transforming the country into an arbitration hub within Latin America. However, over the past months, judicial courts have set aside some arbitration awards. While some may see this as a sign that Brazil is about to lose its place as an arbitration-friendly country, we believe there is no cause for concern.

Ultimately, as an alternative dispute resolution method, arbitration needs the support from the judicial courts in several ways to exist and be effective. Without that support, it is doomed to fail. A fundamental way in which arbitration depends and relies on courts is to enforce valid awards. A necessary consequence is the possibility that an arbitration award might be set aside.

Under the Brazilian Arbitration Act, an arbitration award may only be set aside for a very narrow set of reasons, which includes non-compliance with required formalities, non-compliance with constitutional guarantees and the principles of due process of law (such as rights to a fair hearing and to an independent and impartial arbitrator), arbitral tribunals that cross a line and adjudicate claims beyond their jurisdiction, and arbitral awards that are not sufficiently reasoned. At the same time, the BAA prohibits judicial courts from adjudicating a case covered by an arbitration agreement and from reviewing the merits of an arbitration award.

Courts’ ability to assess the validity of arbitral awards strengthens the arbitration practice: if courts were not allowed to make this assessment, arbitrations would provide fertile ground for misconduct by parties and arbitrators alike, iniquity and lower-quality awards. At the end of the day, the interplay between the Judiciary and the arbitral system is essential so that arbitration can operate as it should and be trustworthy.

One particular dispute regarding damages which arose out of a share purchase agreement has been recently under the spotlight. In a nutshell, the Court of Appeals of the State of São Paulo partially set aside an award on the grounds that it was not sufficiently reasoned and that parties had not had the same opportunities to be heard during the proceedings. The award was deemed defective on its own right and also due to the flaws in the proceedings from which it resulted.

At first glance, these recent decisions may be seen as an intentional reaction of courts against arbitration, thereby endangering its enforceability and utility. However, we believe that courts are not blackballing arbitration and, in fact, that their message is quite the opposite.

Judicial courts seem aware of their place within the dispute resolution system. If they were crossing the red line by reanalyzing the merits of arbitration awards, then we all should be deeply worried. This is not the case. The perceived increase in the number of arbitral awards that are set aside means only that courts are complying with their duties as the ultimate guardians of the integrity of the arbitration process and that the system is operating as expected.

This outlook confirms that the legal initiative designed and implemented through the enactment of the BAA 25 years ago succeeded and, through courts’ support, commercial arbitration has increasingly become an attractive alternative for dispute resolution in Brazil. By reviewing arbitral awards and ensuring their conformity with the BAA, courts demonstrate that Brazil continues to be a safe harbor for arbitration. Well, what is this attention to the integrity of the arbitration systems but a true proof of friendship?