New horizons for arbitration involving public entities in Brazil

It is not a secret that Brazil needs to attract foreign investments to implement large infrastructure projects, and to increase state revenue through the sale or concession of public assets. However, as in any other country disagreements between private investors and the government may occur over time; there may be issues with technical aspects of construction, or changes to the regulatory environment that flatten the return on invested capital, and so forth.

That poses a challenge in Brazil since litigating against the government is a long and difficult process, which constitutes a large share of the so called Custo Brasil. In a search for a better process, attention has turned to arbitration as a way to provide investors with more efficiency. Lately, it has been applied with success to high profile cases such as one involving Petrobras and the Brazilian National Agency of Petroleum, Natural Gas and Biofuels (ANP) and another involving one of the largest legal disputes in the Brazilian seaport sector.

In a litigation case, the judicial process moves slowly in Brazil and cannot keep up with the speed of business – lawsuits can take more than a decade (or two, at worst) to unfold. Specialized courts have the jurisdiction over disputes involving the government and could become biased – or at best more inclined to take political rather than legal arguments into consideration upon adjudicating the claims. That is bad for investors, but it is even worse for the country in the long run, since investors may pursue opportunities elsewhere if the Judiciary is not business-friendly.

The use of arbitration started in private commercial disputes boosted by a law enacted in 1996 (the ‘BAA’) in the context of the opening of local economy to foreign investment. In 2001, the Brazilian Supreme Court affirmed the constitutionality of the BAA, and since then local courts have consistently acknowledged the validity of arbitral clauses inserted in contracts and allowed the enforcement of arbitral awards.

However, that evolution did not include disputes against public entities, and therefore arbitration still faced a lot of resistance in the context of public contracts. The BAA was then amended in 2015, and one of the key innovations was the express and broad permission for public law entities to submit disputes relating to certain economic rights to arbitration.

The amendment left no doubts as to the validity and enforceability of arbitration involving public law entities, and Brazilian states and cities have since started adopting arbitration in administrative contracts. This has required training of personnel (such as public attorneys and technical staff) and the passing of local regulations with specific guidelines on the implementation and resolution of disputes by arbitration.

The State of Rio de Janeiro recently issued a decree with specific rules for arbitration. This new scenario enables arbitrators to focus on material issues of the dispute and there have been cases of prominence regarding public law entities, as the two following examples show.

The criteria for distribution of royalties was at the core of the dispute involving the concession agreement between Petrobras and ANP. The agreement contained an arbitral clause stating that proceedings would be administered under the rules of the International Chamber of Commerce. Based on the express legal provision of the BAA for the use of arbitration by public entities, the Brazilian Superior Court of Justice found that the arbitral tribunal – and not the federal court – had jurisdiction to review all procedural objections raised by ANP.

The second case is known as Libra and is one of the largest legal disputes in the Brazilian seaport sector. It was initially brought before Brazilian courts by Libra Group, a concessionaire of cargo terminals at the Port of Santos, that was seeking the review of the lease fees and damages. On the other hand, the Federal Government and Companhia Docas do Estado de São Paulo (‘Codesp’, a state-controlled company that manages the Port of Santos) were seeking unpaid fees. After almost ten years of discussion the parties set up arbitration in 2015 and the award was entered last month, ordering Libra Group to pay approximately BRL 2.8 billion to the Federal Government and Codesp.

High-profile cases such as these two, plus the Brazilian states’ and cities’ growing number of guidelines and rules for the implementation and use of arbitration, reveal that the Brazilian public sector is willing and preparing to expand the use of arbitration as a preferred venue to resolve disputes against private investors and contractors. Furthermore, they make it clear that it is fully possible to enter into and enforce arbitration agreements with public entities – a dispute resolution mechanism that tends to be faster and more effective than the Judiciary.

However, investors should keep in mind that arbitration may not work as well as in an ordinary commercial dispute. Confidentiality is inevitably compromised as public entities are subject to transparency requirements. Also, there are still few renowned arbitrators with proven expertise in public and administrative law; the choice of arbitrators who are not used to dealing with the government could affect the quality of the proceedings and the award – leading to further challenges before that same Judiciary that investors would rather avoid.