Introduction
Taking a macro perspective, the increasing demand by individuals and legal entities for judicial solution of perceived violation of rights can be read as positive evidence of a broader and deeper understanding of one’s own rights and possible legal remedies.
However, the downside to this situation is the aggravation of the already notoriously fragile position of the Judiciary, which has been unable to fulfill its duty of providing justice in a timely fashion due to the State’s scarce resources. This is a worldwide problem which affects the vast majority of legal systems to varying degrees and Brazil is not an exception. This situation favors the development of alternative methods of dispute resolution.
Taking a more private view, the benefits of ADR methods, in particular arbitration, in relation to settling international commercial disputes and specifically disputes involving intellectual property matters are also evident.
Arbitration provides a neutral forum for a dispute, free of the psychological barrier of engaging in a different country court system. The arbitrators are normally experts in the area chosen by the parties, rather than randomly appointed by the courts among judges who are not specialized in the field.
The principle of autonomy underlies the whole idea of arbitration and this allows the parties to choose the rules of the game with greater flexibility, limiting the amount of discovery, keeping the process confidential and within a reasonable time frame, thereby obtaining faster resolution of a case which can reduce significantly the economical impact for both parties.
Further, arbitration is indicated for parties who have a continuing relationship, as is normally the case of parties involved in licensing of intellectual property rights.
In this context the adoption of a legal framework which advances alternative methods of dispute resolution plays a strategic role for the effective distribution of justice and this tool has historically been used by a number of different countries. .
Nevertheless, arbitration has never played an important role in Brazil, in view of the historical hurdles that the courts and legal doctrine have created to impede the effectiveness of this institute. In this context, the negative position of the Brazilian Patent and Trademark Office in the past towards arbitration clauses merely reflected this attitude.
The main purpose of this paper is to explain the positive change of the Brazilian legal system towards arbitration, which has occurred in recent years and was crowned by the recent adoption a modern arbitration law[1] and of the New York Convention on the Recognition and enforcement of Foreign Arbitral Awards of 1958, promulgated by Decree No. 4311 of July 23, 2002.
The Traditional View Towards Arbitration
The Brazilian traditional attitude towards arbitration is characterized by a dichotomy marked, on the one side, by the use of arbitration since the 19th century in a number of cases involving international disputes with the Brazilian Government, such as territorial disputes with other countries[2] and, on the other side, by the lack of relevance of the institute of arbitration in relation to private disputes.
The regulation of arbitration in Brazil can be traced to the colonial period, and was even considered mandatory for certain commercial disputes according to the Commercial Code of 1850, which was revoked in this aspect by Law 1350 of 1866. During the 20th century, arbitration became voluntary and based on the principle of autonomy of the parties as regulated by the Civil Code of 1916 and the Civil Procedure Codes of 1937 and 1973[3].
The resistance of a large part of the legal community to the possibility of using arbitration to settle private disputes was based on the conviction that the Judiciary should have a monopoly over jurisdictional power. The laws, and the great majority of court decisions of this period reflected this position and did not allow the development of arbitration in Brazil.
Following this trend, the Brazilian Patent and Trademark Office traditionally refused to accept licensing agreements which incorporated arbitration clauses, since they were viewed as restrictive of the rights of the local licensee to seek the jurisdiction of the courts.
It is important to note that the recordal of the agreement at the Brazilian Patent and Trademark Office is indispensable in the case of remittance of royalties. The purpose of the recordal is threefold, to:
(a) produce effect against third parties, thereby ensuring the licensee’s exclusive right in Brazil and enabling the licensee to defend the trade mark or patent or join the licensor in disputes involving the trade mark;
(b) permit the remittance of remuneration to the foreign party; and
(c) qualify the licensee for tax deductions.
Therefore, in view of the importance of recordal, and the restrictive view of the Brazilian Patent and Trademark Office and of the legal system in general, arbitration clauses were not included in licensing agreements.
The Positive Changes
This situation has radically improved in recent years as a result of the adoption of a series of regional agreements on the topic such as the following:
- Inter-American Convention on International Commercial Arbitration of 1975 promulgated by Decree No. 1902 of May 09, 1996,
- Inter-American Convention on the Extraterritorial Effects of Foreign Judgements and Awards of 1979 promulgated by the Decree No. 2411 of December 02, 1998
- Protocol of Buenos Aires on International Jurisdiction in disputes relating to contracts, incorporated into the domestic law of Brazil by means of Decree n. 2095 of December 17, 1996
and, more importantly, due to the introduction of a new law on Arbitration, Law n° 9307 of September 23, 1996, and the adoption of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 which was incorporated into the domestic law of Brazil by means of Decree No. 4311 of July 23, 2002.
The current Arbitration Law 9307/96 originated from a Bill proposed by the then Vice President Marco Maciel, and has solved the traditional obstacles which existed in the Brazilian legal system to the development of arbitration.
The first vital modification instituted by Law 9307/96 is that arbitration clauses, whereby parties agree to submit to arbitration of future disputes, are now enforceable. In the past, the courts and legal doctrine have considered such clauses (cláusula compromissória) to be a mere pact to do (pactum de compromittendo) and that, in the case of non-compliance, the party proposing the institution of arbitration would not be able to obtain specific performance but could only recover damages, which were very difficult to demonstrate and recover[4].
Needless to say that this situation provided an easy way out for the party desiring to avoid the arbitration previously agreed upon, and the arbitration would only proceed if the parties would agree to establish the specific arbitral submission “compromisso arbitral” after the conflict had arisen.
The current law has incorporated a mechanism to compel arbitration against a reluctant party, as set out in article 7, which specifies that a party may request judicial intervention to force the institution of arbitration in case an arbitration clause exists.
If such intervention is requested, the judge will set a hearing and try to conciliate the dispute and, if this attempt is unsuccessful, will try to induce the parties to enter into an arbitral submission by mutual accord. In case this attempt is also fruitless the judge will have power to decide as to the contents of the arbitral submission, even as to the names of the arbitrator or arbitrators, respecting the arbitration clause. The judgement will be regarded as the arbitral submission.
Recognizing that contacts with the Judiciary should be limited to the essential, since judicial intervention is always a bottleneck to be avoided, the law goes a step further in relation to arbitration clauses which already contain the elements and the form agreed upon for the institution of the arbitration, either because the parties referred to the rules of any institutional arbitral body, or have created their own rules.
In this case, as set forth in article 5, the arbitration shall be instituted and shall proceed in accordance with such rules, without the need to refer to the Judiciary to have the reluctant party execute the arbitral submission.
Therefore, lawyers in charge of drafting the arbitration clause should be careful not to insert an arbitration clause “en blanc” which does not refer to institutional rules or describe a minimum set of rules for the arbitration to proceed, under penalty of having to request judicial intervention.
The second major development established by Law 9307/96, is that a national arbitral award is now equivalent to a judgement rendered by a court and, if it condemns one of the parties, it shall constitute an executory instrument. Therefore, the law has abolished the necessity of homologation (exequatur is the name used in other civil law countries) of the arbitral award by the courts.
In relation to foreign arbitral awards, which the law defines as those which have been rendered outside of the national territory, the law has abolished the requirement of double exequatur. Now, to be recognized or executed in Brazil the arbitral award is only subject to homologation by the Brazilian Supreme Court, without the need of conversion into judgement in the country where the award was issued[5].
The requirement of double exequatur has always been appointed by experts as one of the great deficiencies of the Brazilian system, since many countries do not have the requirement of reducing awards to judgement and, therefore, awards originated in those countries would have their exequatur denied by the Supreme Court. In those countries which have the requirement of reducing awards to judgement this procedure should be taken before submitting the award for homologation before the Brazilian Supreme Court.
Another important innovation of the arbitration law 9307/96 is the ability to serve a party resident or domiciled in Brazil by mail with unequivocal proof of receipt, as long as the Brazilian party is assured ample time to exercise the right of defense.
Before the enactment of the current arbitration law, serving would have had to be conducted by letter rogatory, under penalty of being considered offensive to national public policy. This requirement was also a huge burden and a factor of disincentive to the adoption of arbitration in international disputes.
The reasons for denying homologation of a foreign arbitral award, set by articles 38 of the arbitral law, are substantially the same as provided by article V of the New York Convention as follows:
i. the parties lacked capacity in the arbitration agreement;
ii. the arbitration agreement was invalid according to the law to which the parties submitted themselves, or, in default of such showing, by virtue of the law of the country where the arbitral “judgement” was rendered;
iii. there was no notification of the designation of the arbitrator of the arbitration proceeding, or the principle of the adversary system was violated, making an ample defense impossible;
iv. the arbitral award exceeded the limits of the arbitration agreement, or it was not possible to separate the part that exceeded it from that which was submitted to arbitration;
v. the institution of the arbitration was not in accordance with the arbitral submission or the arbitration clause; or
vi. the arbitral judgment has not yet become obligatory for the parties, has been annulled, or, it has been suspended by a court of the country where the arbitral judgement was rendered.
Furthermore, homologation can also be denied if the Supreme Court decides that, according to Brazilian Law, the object of the dispute was not susceptible of being resolved by arbitration, or the decision offends national or public policy.
The rules of the New York convention and the other regional treaties shall be respected and the current arbitration law specifically refers to them in article 34, which determines that foreign arbitral awards shall be recognized and executed in Brazil with efficacy in the domestic law in conformity with international treaties.
We wish to highlight some other features of the current arbitration law which we consider important. The first one is that the parties have the discretion to opt for an arbitration by law or by equity. The parties have freedom to choose the rules of the law that will be applied, and may agree that arbitration take place on the basis of general principles of law, uses and customs, and international rules of commerce.
Second, the Law of arbitration has adopted the principle of “Kompetenz-Kompetenz”, whereby it is recognized that the arbitrator has the power to decide questions related to the existence, validity and efficacy of the agreement to arbitrate and the contract that contains the arbitration clause.
A relevant question, specifically regarding disputes involving intellectual property rights, is the possibility of the arbitrators to grant provisional measures. The Law has granted the arbitrators power to request coercitive or provisional measures from the court.
It is important to realize that the arbitrators are normally the right forum to decide matters related to interim relief in view of their familiarity with the parties and the dispute[6].
The arbitrators can decide on the appropriate provisional measure but, in the case where a party does not voluntarily comply with the order, the arbitrators will not have the power to compel the party to comply with the order
In this case the arbitrators will have the power to request enforcement to the Court. The Court should then exercise extreme care not to issue a decision on the merits of the case which is not under its jurisdiction, but only in respect to the provisional measure requested.
In circumstances where the party cannot await the regular constitution of the arbitral panel, as may be the case where a trade secret is involved, the party can request preliminary relief directly from the Court[7].
The last feature of the arbitration law which we want to highlight is the limited grounds under which an arbitral award can be annulled in Court. The whole system would be jeopardized if the law were to allow a broad scope of review of the arbitration award and, therefore, the circumstances where the arbitration award can be annulled were limited to the following as indicated by article 32:
i. the submission was null;
ii. it was issued by someone who could not be an arbitrator;
iii. it does not contain the requirements of article 26 of this law[8];
iv. it is rendered outside the limits of the arbitration agreement;
v. it does not decide the dispute submitted to arbitration;
vi. it is proven that it was rendered with prevarication, graft, or passive corruption;
vii. it is rendered outside of the period, respecting the provision of article 12 (III) of this Law or; or
viii. the principles dealt with in article 21, section 2 of this Law were disrespected[9].
The Current Arbitration Law and the Courts
Considering that the traditional view which disfavored arbitration was supported by a series of decisions from courts of different instances, it is important to analyze how the courts have received the new state of affairs in Brazil.
In this respect, it is with great satisfaction that the proponents of the new arbitration system in Brazil have witnessed the current law 9307/98 withstand a major test by the Supreme Court.
The dispute arose from the request of homologation of an arbitral award from Spain. The request was initially denied, based on the decisions and doctrine which demanded that the arbitral award had to be submitted to judgement in the country of origin (double exequatur rule). An interlocutory appeal was filed[10] and the Honorable Justice Sepúlveda Pertence decided to reverse the initial denial based on the new arbitration law which, as already mentioned, has abolished this requirement (note that Spanish law does not require that an arbitration award be reduced to judgment).
However, during judgement of the interlocutory appeal, the constitutionality of articles 6 and 7 of the arbitration law (which authorize a judicial proceeding aimed at producing the equivalent of an arbitral submission based on the existence of an arbitral clause) was raised and this called for all the members of the Supreme Court to issue a decision.
Justice Sepúlveda Pertence understood that these articles were unconstitutional, since they would conflict with the constitutional guarantee that no law may prevent a person from seeking access to the courts[11], in view of the fact that the parties in an arbitration agreement would withdraw from their right to be heard in court even before a conflict had arisen.
Fortunately, this position was only followed by a minority of the components of the Supreme Court, the majority, in a judgement which lasted five years, understanding that the constitution only guarantees access to the Courts but does not make access mandatory when the parties have chosen otherwise. Furthermore, the decision to withdraw from the Judiciary by means of an arbitration clause does not happen in abstract but in relation to a defined agreement and defined parties.
This decision by the Supreme Court, which at the time this article was written remained unpublished, plays a very important role in consolidating the system of arbitration in Brazil, since it drastically departs from the traditional view towards arbitration.
The constitutionality of the arbitration law was also confirmed by the Honorable Justice Maurício Correa of the Supreme Court in a case involving the homologation of an arbitral award issued in connection with a contract directing the parties to arbitration under the rules of the Liverpool Cotton Association Limited[12].
Justice Maurício Correa declared that the parties have the power to agree to submit a dispute to arbitration in advance, since an arbitration clause always has a determined or determinable object, and that when the judge follows the procedure established by the arbitration law, to compel specific performance of the agreement to arbitrate, it is merely carrying out the intentions of the parties[13].
Another decision now issued by the Court of Appeals of the State of São Paulo has declared that when the arbitration clause refers to the rules of an institution, such as the ICC (a complete arbitration clause as opposed to an arbitration clause en blanc ), the arbitration can take place without the need for a specific submission and that, therefore, the procedure defined by article 7 of the arbitration law does not apply to cases covered by article 5[14].
Finally, a Special Jurisdiction Appellate Court from the State of Minas Gerais has resolved another important issue, which is the application of the new arbitration law to arbitration clauses executed prior to the Law’s entry in force[15].
The Special Jurisdiction Appellate Court from the State of Minas Gerais in a case involving an appeal against a decision of a judge, who declined to apply the new arbitration law to an agreement signed before the entry into force of the law, decided that the arbitration law as a rule of procedure should follow the general principle of article 1211 of the Brazilian Code of Civil Procedure, which states that a rule of procedure applies immediately and therefore must be applied to litigation in progress after the entry into force of the new law.
This decision is very important as it guarantees that the new law will be applied in respect of all court actions filed after the entry into force of the new arbitration law, even if the arbitration clause was signed before September 23, 1996.
The Use of Arbitration in Specific Contexts Including Licensing Agreements
Another positive indication that the Brazilian legal system is finally embracing arbitration as a legitimate and efficient form of dispute resolution is the number of specific laws and regulations that have been issued in recent years, and which refer to arbitration as a channel to resolve conflicts.
In this context we should cite the regulations of Bovespa (São Paulo Stock Exchange) creating the “Novo Mercado”, which is a new segment of Bovespa requiring tougher corporate governance rules to boost transparency and accountability. In order to join this new segment at level 2, corporations have, among other obligations, to adhere to arbitration as a form of dispute resolution.
Also, arbitration has been incorporated in legislation regarding the real estate [16], petroleum[17], energy[18] and telecommunications[19] segments which clearly demonstrates the importance of this method of dispute resolution in the process of modernization of the Brazilian legal institutions.
Considering that intellectual property rights are proprietary rights, disputes involving licensing agreements are subject to the current arbitration law, and the parties to such agreements can freely choose to settle conflicts by arbitration.
In view of the positive change of the whole legal system towards arbitration the Brazilian Patent and Trademark Office now accepts arbitration clauses in licensing agreements which are submitted for recordal.
Conclusion
The recent changes in favor of arbitration will certainly have a profound impact on the Brazilian legal system, and will benefit those in search of a flexible and efficient form of resolving patrimonial conflicts with a great deal of complexity.
One of the objectives of this paper is to call the attention of the licensing community to these changes, since it is potentially one of the great beneficiaries of this new system, in view of the characteristics of a typical licensing deal involving intellectual property rights.
The parties involved in international licensing deals relating to Brazil should now be able to realize this new opportunity of inserting an arbitration clause, which reflects their idea of the best form of resolving a potential dispute and of obtaining a solution which will be enforceable and valid in Brazil.
[1] Law 9.307 of September 23, 1996
[2] See Pedro A Batista Martins, O Poder Judiciário e a arbitragem: quatro anos da lei 9307/96 (3ª parte), Revista Forense, v. 359, pages 165-177
[3] See Carmen Tiburcio, A Arbitragem no Direito Brasileiro: Histórico e Lei 9307/96, Revista de Proocesso, v. 74, pages. 79-99
[4] See Celso Barbi Filho, Execução Específica de Cláusula Arbitral, Revista dos Tribunais, Ano 85, v. 732, October 1996
[5] See Arnold Wald, Patrick Schellemberg and Keith S. Rosenn, Some Controversial Aspects of the New Brazilian Arbitration Law, Inter-American Law Review, Vol.31:2, pages 223-238 with an English version of the Brazilian arbitration law 9307/96
[6] See Dr. Julian D M Lew and Andrew Rich, Dispute Settlement for Biotechnology Transactions, Patent World, June/July 2001, pages 27/29
[7] See Paulo Cezar Pinheiro Carneiro, Aspectos Processuais da nova lei de Arbitragem, Revista Forense vol. 339
[8] Article 26 the mandatory requirements of an arbitral award are: I – the report, which shall contain the names of the parties and a summary of the dispute; II – the basis of the decision, which shall analyze the questions of fact and law, expressly mentioning if the arbitrators are judging in accordance with equity; III – the disposition in which the arbitrators resolve the questions submitted to them and establish a period for compliance with the decision, if this is the case; and the date and place where it was rendered.
[9] Article 21 – section 2 – the principles of the adversary system, equality of the parties, impartiality of the arbitrator and of his free conviction shall always be respected in the arbitral proceeding.
[10] Ag.Rg.SE 5.206.7
[11] Article 5, section XXXV of the Brazilian Constitution – No law may exclude from review by the Judiciary any injury or threat to a right.
[12] Se. No. 5847-1 between Aiglon Dublin Ltda and Teka Tecelagem Kuenrich S.A
[13] See Arnold Wald, Patrick Schellemberg and Keith S. Rosenn, Some Controversial Aspects of the New Brazilian Arbitration Law, Inter-American Law Review, Vol.31:2, pages 228-229
[14] Interlocutory Appeal (Agravo de Instrumento) n° 124.217/40 appellant Renault do Brasil S.A and Appellee Carlos Alberto de Andrade
[15] Decision of the Third Civil Chamber of the Tribunal de Alçada of State of Minas Gerais, in Civil Appeal n° 254.852.9 of June 3, 1998.
[16] Section 30F of the Provisional Measure 2.221/2001 which deals with real estate
[17] Section 43, item X of the Brazilian Energetic Policy Law 9.478/1997
[18] Section 2 of the Provisional Measure 29/2001 which regulate the energy wholesale market
[19] Section 93, item XV of the Brazilian Telecommunications Law 9472/1997
