Episode 29 - Brazilian Arbitration Trends
Read the transcript below:
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My name is Annie Lespérance and I’m your host for today’s podcast, “Brazilian Arbitration Trends”. I’m the Head of Omni Bridgeway’s Latin America Group and based in Montreal.
I’m delighted to be joined today by Fernando Merino, Managing Director, Investigations and White-Collar Defense at Steptoe & Johnson in Washington, DC.
Fernando has more than 30 years of experience as a practitioner and legal executive, having worked as a chief legal officer and independent board member for large Latin American conglomerates and as in-house compliance and legal officer for leading investment banks in the region. Fernando is both a US and Brazil qualified lawyer. His legal career allowed him to develop substantial corporate, transaction and disputes experience, including acting in dozens of multi-million dollar arbitration proceedings in the US, the UK, Switzerland, Argentina, Uruguay, Brazil and Spain.
In this podcast, Fernando will share with us his insights into relevant developments in cross-border and domestic commercial arbitrations in Brazil.
Fernando, welcome to the Beyond Hourly podcast.
Thank you, Annie, and Omni Bridgeway for this invitation. It is a pleasure to be here and have the opportunity to discuss developments in commercial arbitration relating to Brazil.
Let me clarify that I am sharing my personal views and thoughts here, not those of my firm – Steptoe & Johnson – or those of my colleagues.
I am a long-standing professional that initiated my career as a financial and transactional lawyer and over time gradually included disputes as part of my practice. It is comforting to see how arbitration in the region has evolved as an effective alternative dispute resolution mechanism.
It has been a long way since Brazil’s Arbitration Law was initially enacted in 1996. As you may know Brazil has a large number of legal claims – approximately 90 million cases based on certain accounts. There are a variety of reasons for this that I don’t think fit within the scope of our discussion today. But clearly the Judiciary was overloaded and not in a position to satisfy one of the key elements for the proper administration of Justice – celerity. For example, at the time I was the chief legal officer for the largest retail and e-commerce group in Brazil. My team and I oversaw approximately 170,000 legal claims through the country that were managed by more than 200 law firms. You can imagine how complex and time consuming that was.
Early in the discussion around the adoption of the new law in 1996, in addition to a swift process, arbitration proceedings were identified as providing confidentiality and the opportunity to have your case decided by an arbitrator with superior technical knowledge and expertise.
Having arbitration as an option for dispute resolution was a fantastic opportunity from a legal management perspective. However, the reality is that the law was received with a fair level of skepticism. The market waited to see whether the law would indeed “work”.
I believe the first opportunity I effectively found myself discussing the adoption of an arbitration provision was during my years at JP Morgan and the development of the so-called Brazilian ISDA contract, a standard-form to be used in local over-the-counter derivative transactions market based on the widely-known and used ISDA international derivative contract. These were complex multi-million dollar transactions; financial institutions realized, early on that, in case a dispute arose, it would be far better to have a discussion managed by experts in the field and seek a swift and confidential resolution.
The financial services community eventually converged to the idea of recommending the adoption of an arbitration provision for the standard form. Not without a level of worry by market participants, given that it had not yet been tested in courts. I happily found out later that the contract and the provision was put to test in the 2008 crisis, which, much like in the international markets, generated disputes around some of these derivative contract arrangements. I am glad to share that the Judiciary in Brazil, in general, enforced the provision and recognized that if the parties voluntarily agreed to include an arbitration provision, that arrangement should be upheld and respected.
I think in Brazil alone I have been involved in more than a dozen proceedings in a variety of subjects and counterparties – EPC contracts, construction arrangements, a failed M&A transaction, a joint venture disputes, enforcement of a bank “comfort letter” and insurance claim disputes (including a mediation). Hopefully his helps illustrate the breadth of matters that are the object of arbitration disputes in Brazil.
Fernando, before we dive into today’s topic, could you please give our listeners a broad picture of the Brazilian Arbitration Market? Who are the key players in terms of law firms and arbitral institutions and who are the usual users?
We have seen substantial development in the arbitration practice and market in Brazil. I think it would be fair to say that arbitration originally concentrated on construction-related disputes. The local market evolved and now encompasses a wide variety of subject matters, including disputes involving mergers and acquisitions, securities matters and general contractual issues. Court decisions have, for the most part, upheld the applicability and enforceability of arbitration provisions. This generated stability and predictability for the market.
Ever since the 2000’s Brazil has been an important originator of cross-border and international arbitrations. We have activity both in the local markets and the cross border space from an arbitration perspective.
Brazil is well served of law firms and lawyers that have substantial experience in arbitration. This universe includes both large and boutique law firms with expertise on different types of matters. It has become a truly sophisticated market. In terms of end-users, there is now a large cross-section of industries and businesses that use arbitration. Certain subject matters –civil status, taxes or criminal law - may contain limitations for arbitration. But the market and law continue to evolve and even in areas where traditionally arbitration was a “no-no” – employment law – are now embracing to the possibility of using arbitration in certain instances.
The increase in local and international cases led to the development of a number of institutions that provide support and arbitration services. These include (i) the International Chamber of Commerce (ICC), that established a case management team and office in Sao Paulo in 2017, (ii) the Centre of Arbitration and Mediation of the Brazil-Canadá Chamber of Commerce (CAM-CCBC), probably the largest in terms of number of cases managed, (iii) the Market Arbitration Chamber (CAM B3) established by B3, the Brazilian stock and futures exchange, focused on securities and corporate matters that certain listing requirements from B3 required be used for dispute resolution between companies, shareholders and management, (iv) Mediation and Arbitration Chamber of São Paulo (CIESP), (v) FGV Chamber of Conciliation and Arbitration (FGV) and (vi) the Brazilian Center of Mediation and Arbitration (CBMA).
End-users include companies and financial institutions. It is not uncommon to see international companies as parties in local arbitrations. Proceedings can be conducted in Portuguese or English, based on Brazilian law or any other governing law chosen by the parties.
We have seen a significant growth in recent years in the number of arbitrations originating from Brazil. As a matter of fact, the ICC reported, in respect of its dispute resolution figures for 2020, that – and I quote - “Brazil remained the most represented nationality within the region with 150 parties, rising from third to second place in the worldwide nationality ranking for the first time.” What are, in your view, the reasons behind this significant growth?
This is an interesting topic and practitioners in the region often discuss for how long Brazil will be able to keep this “title”. So far all reduction predictions have proved incorrect…
There are a number of reasons behind this. There is the sheer size of the Brazilian economy and its relevance for certain industrial sectors such as oil and gas, mining and retail. Certain international consumer market companies cannot afford not to have a foothold in Brazil.
One also needs to consider the internationalization of Brazilian companies and, related to the prior topic, of certain industries in Brazil. Over the recent years there’s been substantial investment, to name a few, in the pharmaceutical, technology and infrastructure sectors. In the process of becoming more international, Brazilian companies are also increasingly having to adapt and accept the fact that they may need to litigate or arbitrate in a foreign jurisdiction.
Some companies and investors have not yet gotten comfortable in including local arbitration provisions in disputes in their contracts. Others such (such as shipping and insurance) have established dispute resolution venues outside Brazil. This is the typical situation in which one will see the ICC or LCIA as the arbitration body.
Finally I think that certain counterparties may prefer to have an award in USD (or another international currency) that can be enforced in an international jurisdiction. Although I appreciate this concern, I think deciding to go down this path requires consideration at the time of the contract’s negotiation, particularly since Brazil has ratified the New York Convention. Sometimes it may be better to have more options and the enforcement of a foreign award – although perfectly legal and feasible – entails additional procedural steps.
What types of trends are you seeing in the Brazilian arbitration market? Is there a growing appetite for dispute funding?
The Brazilian market is only starting to experiment and familiarize itself with the opportunities and benefits that litigation funding may provide. There are a few active players in the local markets - hedge funds, family offices and alternative investment asset managers that acquire claims or provide funding. Some of these players are sophisticated and can provide funding in international arbitration matters; but I think there are natural challenges (e.g., different legal and cultural issues, costs associated with arbitration, currency fluctuation, return benchmarks) that are still being addressed.
And now you also have very relevant and sophisticated international players –Omni Bridgeway being a prime example - that are open to discussing investments in claims in Brazil. I have no doubts that the interest in dispute funding will only grow as companies and the market familiarize themselves with the opportunities available. More can and should be done by companies to discuss and evaluate with their outside counsel whether funding should be considered.
Let me explore a different angle now Annie, which is the liability management side. I think that litigation funding provides companies in particular with a great opportunity for liability management and given the right circumstances they may also prove a very important capital allocation tool, so CFOs and legal departments have an opportunity to better manage the company’s capital position. For instance, in my experience only a very limited number of my clients understand the breadth of opportunities that funding may generate. For instance, risk sharing, improving of capital allocation and candidly sometimes case management. And of course we haven’t even explored yet in this conversation, the whole law firm industry in terms of portfolio financing, so I think there is a very fertile ground for that matter and those opportunities in Brazil.
I think arbitrations will continue to increase in Brazil and for Brazilian counterparties – and with that the interest in dispute funding.
Any insights you would like to share as to cross-border disputes?
Brazil is a civil law country. Although arbitration proceedings, like in other jurisdictions, have been influenced by common law practices and ideas, important differences remain. The increased use of a “soft” version of cross-examination is, for instance, a good example of situations that straddle both these worlds. That being said, there remains substantial legal and cultural differences between both systems, as between in US and Brazil litigation practice. A few examples include the fact that civil law countries lawyers are, in general, less adversarial, there is no concept of discovery as known in the US and there is a smaller bar and group of practitioners then in other international venues.
One should also consider from the outset what assets will provide for a most efficient enforcement of a favorable award – both the nature of the asset to determine if its market value may be subject to currency fluctuation and where the assets are located. A party that engages in an arbitration proceeding involving operations in Brazil or a Brazilian counterparty should be mindful about these peculiarities and try to identify and work with a team that is familiar with these differences. I have faced innumerous situations where cultural differences played a fundamental role in the outcome of a matter. For instance, civil law countries tend to be more formalistic when it comes to evidencing a corporate; officer’s authority to execute documents. In the US a simple affidavit may suffice for these purposes while in Brazil you may need to provide the underlying corporate documentation that supports that affidavit.
How do you see the Brazilian arbitration market evolving over the next 5-10 years?
There is so much happening that is difficult two summarize all potential avenues for development in a short conversation. Let me share three main areas to where I think the market will be go.
First, I do think that we will continue to see an increased use of arbitration in general. I don’t think the main forces driving the growth of arbitration in Brazil are going to change. In terms of local arbitration I see an increase in the use of arbitration proceedings for certain matters involving the government or government-owned entities and an increased diversification in the underlying subject of the cases. Let me discuss one concrete area where I believe we will see change. As it is now widely known, in the wake of the Car Wash scandal there were several US class actions and opt-out cases initiated against Brazilian companies involved in allegations of improper behavior. Perhaps most notably we had the Petrobras US$3 billion US class-action settlement. However, based on a decision on the case, only ADR holders were entitled to bring or participate in US claims. The company’s by-laws – as it is the case for many companies that seek a listing in the premium listing segment of the B3, the Brazilian stock exchange – provided for arbitration to resolve disputes between the company and its investors. As a result, investors that acquired shares in Brazil were required to resort to private commercial arbitration in Brazil to seek indemnification comparable to those paid in the US settlement. The Brazilian institutional investor community was initially reticent with these types of securities claims. It has, however, become increasingly comfortable with these types of claims. Although it remains to be seen whether investors will ultimately be successful in these claims, I would not be surprised if, in addition to Brazilian institutional investors, we see an increased number of international investors – that commonly participate in similar cases in the US – start becoming more active.
The other area where I see the market going is what I’ve been referring to as liability management. I don’t think we have seen liability management really being explored as an alternative funding investment strategy for disputes by companies and financial institutions. Let me take a moment to clarify why I am bringing up financial institutions here. It is fairly common for banks to be defendants, but also to be plaintiffs, either on corporate matters or tax matters. Even though banks have the financial capability to finance or cover the costs of their own litigation, sometimes they are involved in litigation that is not part of their business – it’s something that comes along with the nature of their business – and there for instance is an opportunity for which if I was in-house in a bank, I would certainly be thinking about how we could use litigation funding in a more effective manner. And I think that the complexity of the disputes and costs in conducting arbitrations will see companies and banks looking to partner up with financial and strategic investors such as funders. I believe this is going to happen both in local and in cross border arbitrations.
Finally, there is the world’s macro-economic scenario and the investment opportunities being generated in Brazil. The country is now experiencing a new wave of M&A, IPOs and infrastructure investment. I would anticipate that when this new cycle is completed, there will be inevitable increase in disputes between the government and private parties or between shareholders and/or co-investors. And we haven’t even started to talk about the impacts from the COVID and disputes that are likely to arise in that context…
Thank you very much Fernando for being our guest on Omni Bridgeway’s Beyond Hourly podcast and sharing your knowledge with our listeners.
Thank you very much again Annie, it’s really been a pleasure and I hope that your client base finds this interesting.
I am sure they will.
As I mentioned at the outset, episodes of the Beyond Hourly podcast can be found on our website, www.omnibridgeway.com, iTunes, Spotify and other podcast networks and I invite you to subscribe and leave us reviews. You can also access a transcript of this podcast on our website blog page. Please feel free to follow up with me, Annie Lespérance, at [email protected] for any feedback, ideas or insights you have on topics we should cover on the podcast. We’ll be back soon with another episode. Until then, thank for listening and goodbye.