Introduction
The existence of different legal structures and cultures has always been a strong barrier for foreign investments. The lack of knowledge in a specific legal system brings several challenges when a decision has to be made on whether a specific jurisdiction should be the target of a new business.
Regardless of the nature of the foreign investment, that is, whether it is a Bank giving a loan or a company about to set up a subsidiary in a new jurisdiction, the legal system of the target country plays an important role in the decision-making process.
As a result, countries try to enter into conventions, treaties and, in a few cases, go beyond that. A good example is the European Union, whose association of countries expressly enhanced the flow of investment amongst them.
In other words, regardless of the mechanism by which countries try to have similar or compatible legal systems, the purpose underlying such a behavior is common: countries want to become more attractive to foreign investors and are pretty aware that having a well known and reliable legal system is a very good port of entry.
Latin America countries in general are seen as countries foreign investors should pay attention to. In most of those countries, the legal systems are complex, not well aligned with international standards, and scandals involving possible corruption are not that unusual.
Particularly with regard to litigation, having a reliable Judiciary is a key element for business attraction. Nevertheless, the question in the mind of any investor willing to invest in an unfamiliar country is "What if it does not work as we planned? Does this country have a reliable and efficient system, providing adequate remedies?"
The purpose of this QuickCounsel is to highlight tendencies related to litigation and arbitration in Latin America, precisely in Brazil and Mexico, with more emphasis in the former. We intend to highlight issues related to Court litigation and domestic and international arbitration, giving tips foreign investor should follow based upon our past experience.
Court Litigation in Brazil
As the only BRIC country in Latin America, investors have been coming to Brazil and getting used to the litigation process there, which may cause some concern for people not used to it.
Although Brazil is a large country, most of its business is located in the southeast and south regions, consisting of the State of São Paulo and Rio de Janeiro, among others. Most of the litigation, both in terms of quantity and importance, is concentrated in the State Courts of the aforementioned States. Federal Courts in Brazil are only used whenever the Federal Government or any of its bodies are involved in the lawsuit. If they are not, the case goes to a State Court. Therefore, most of the commercial and civil disputes go to the State Court System.
The Brazilian Procedural system is well known for having a wide range of appeals and Courts with tremendous case load. For instance, the Brazilian Supreme Court made in 2012 12,089 decisions, which is a pretty significant figure for the highest Court in the country with only 11 Justices.
As a consequence, lawsuits take very long to be ultimately decided. As an average, an ordinary lawsuit discussing a breach of contract is likely to last from 6 to 10 years. There are cases in Court for more than 20 years, and often examples of cases lasting for almost 40 years.
It should be said, though, that there has been significant improvements in the length of litigation. There is a Commission appointed by the Brazilian Senate to propose a brand new Civil Procedure Statute, in order to speed up the proceedings.
Likewise, in a few States specialized Courts have been created only to deal with commercial matters, the so- called Varas or Câmaras Empresariais, in a worthwhile effort to improve the quality of the judgments and their timing.
Hence, when investors come to Brazil, they should carefully consider the location of the business and where litigation is likely to take place. Such previous assessment is a precaution any foreign investor should take, since avoiding litigation in underdeveloped regions of the country is extremely recommendable. Despite the evolution of the Brazilian legal system, concerns with regionalism, lack of knowledge about complex businesses, and corruption should still cross the mind of any foreign investor.
It is worth noting that the choice of venue is allowed in Brazil in contractual relationships. Thus, foreign investors do have the option to migrate to Courts where the aforementioned concerns will be quite diminished, remaining only those related to the timing and lack of efficiency.
Arbitration in Brazil
The Brazilian Arbitration Act was passed in 1996 and is now the Federal Law n. 9.307/96. Such law is pretty much aligned with the most important principles of international arbitration, since it was inspired on the UNCITRAL Model Law . Despite that, a Commission was recently set up by the Brazilian Senate to assess the extent to which amendments to the Arbitration Act should be implemented. Such Commission should be seen as an effort to keep the Brazilian arbitration as an important and reliable tool, rather than created to fix an institute that has not been used.
Actually, since a Supreme Court case was decided in 2001, holding the constitutionality of the Brazilian Arbitration Act, the use of arbitration has increased very significantly. From that point on the number of arbitrations in Brazil had an impressive growth, both in terms of domestic and international disputes.
In addition to international chambers such as the ICDR and ICC, there are in Brazil very reliable chambers such as the Câmara de Conciliação, Mediação e Arbitragem Ciesp-Fiesp, Centro de Mediação e Arbitragem da Câmara de Comércio Brasil-Canadá and Centro de Arbitragem da AMCHAM (American Chamber of Commerce). These are the 3 chambers which concentrate the vast majority of arbitrations with a seat in Brazil, both domestic and international. For a better reference please check their webpages and internal rules, which are pretty much aligned with the most modern rules in the world.
It should be highlighted that arbitrations have been mostly used for contracts involving large sums of money in Brazil, particularly due to the costs involved thereof. The majority is related to contracts dealing with infrastructure, corporate discussions amongst shareholders, and insurance.
In accordance with the Arbitration Act, the award is not subject to any appeal and has the same status of a Court verdict covered by res judicata. The only way to reverse an arbitration award is by means of an annulment action in the very restrictive hypothesis set forth by section 32 of the Brazilian Arbitration Act, all of them related to due process violations.
Finally, it should be noted that Brazil is a party to the New York Convention. Foreign awards are enforceable in Brazil, but depend on a validation process before the Brazilian Superior Court of Justice. The requirements set forth by the Internal Rule n. 9 (Resolução n. 9, de 4.05.05) of the Superior Court of Justice and the Brazilian Arbitration Act mentioned above have to be met. Once the process is concluded, which usually takes from 2 months to 2 years if validation is challenged, the foreign award gains the status of a domestic award and can be enforced in Brazil.
We have been advising colleagues willing to include arbitration clauses in their contracts to establish Brazil as the seat of the arbitration so that the arbitration will be considered domestic and there would be no need to pass through the aforementioned validation procedure to be enforceable in Brazil.
We have been arguing that international reliable chambers do have a seat in Brazil, in addition to the Brazilian chambers, which do not owe anything to the international ones.
Arbitration in Mexico
Arbitration in Mexico, like in other Latin American countries, has been established to bring to disputes the reliability and certainty that in most of the times are not found in national courts.
Unlike Brazil, arbitration in Mexico has been mostly used since the early 90s, when a reform in 1993 was introduced to the Mexican Commercial Code, in this specific part dealing with arbitration. Such amendment was pretty much based on the UNCITRAL Model Law and in the New York Convention.
Mexican arbitration had another tremendous push in 2008, when its constitutionality was recognized. It is worth noting that Mexico adhered to the New York Convention in 1971, to the Panama Convention in 1978, and to the Montevideu Convention in 1986. Because Mexico is a party to such international treaties, it does recognize and enforce international awards, based upon the requisites set forth in the New York Convention, which has been adopted by Mexican internal law.
In addition to the international chambers which hold arbitral Tribunals there, 2 domestic chambers are also well recognized as reliable ones to be included in arbitration clauses, namely: Centro de Arbitraje de Mexico and CANACO - Centro de Mediación y Arbitraje. Both webpages of the two aforementioned centers of arbitration in Mexico do provide more important information on the topic and are important sources for additional information.
Conclusion
This QuickCounsel is not intended to go deeply on any issue related to litigation and arbitration in Brazil and Mexico. The idea was to transmit the following pieces of advice, which we believe foreign investors should pay attention to:
- Latin American countries, in most of the cases, are either undeveloped or developing nations. As such, any foreign investor should investigate how the Court systems are in terms of reliability, existence of adequate remedies, timing, etc.
- Foreign investors should be aware that, even within a certain country, the aforementioned patterns may vary significantly depending on the region litigation takes place. Hence, choice of venue and location of the business may be important factors to be considered. Most of the countries do have arbitration as a valid option, provided that the country is a party to the main treaties dealing with that. It is expected to the more costly, but may set aside undesirable risks and represent an efficiency gain.
- The choice of an arbitration taking place where the award will be enforced makes sense, since it saves time regarding the validation process most countries will have before the enforcement to an international award is actually granted.
