Engineering projects in Brazil: the requirements for arbitration agreements

On Wednesday of last week the English Court of Appeal (“CA”) dismissed an appeal on the continuation of an anti-suit injunction restraining proceedings in the Brazilian courts. The decision is one more round in a battle fought on two different fronts, i.e. the English and Brazilian courts. The cases are significant in highlighting the special requirements of Brazilian law for arbitration agreements.

Facts

A consortium of Brazilian construction companies (“Insured”), working as the contractor for the construction of one of the world’s largest hydro-electric facilities, in Jirau – Brazil, entered into two all risk insurance policies (“Policy”) with a group of Brazilian insurance companies (“Insurers”). Incidents at the worksite motivated the Insured to claim under the Policy. The Insurers, in turn, gave notice of arbitration before ARIAS – the Insurance and Reinsurance Arbitration Society, seeking declaration of non-liability.

The Policy’s controversial terms (in translation from Portuguese) provided:

Condition 7 – Law and Jurisdiction:

It is agreed that this Policy shall be governed exclusively by the laws of Brazil.

Any dispute arising under, out or in connection with this Policy shall be subject to the exclusive jurisdiction of the courts of Brazil.

Condition 12 – Arbitration:

In case the Insured and the Insurer(s) fail to agree as to the amount to be paid under this Policy through mediation as above [condition 11], such dispute shall then be referred to arbitration under ARIAS Arbitration Rules. (…) The seat of the arbitration shall be London, England.

Parallel Court Battles

The Insured (relying on condition 7) started proceedings in Brazil, on 12th December 2011, seeking to establish that Insurers were not entitled to refer the dispute to arbitration. In the same motion, the Insured requested an ex parte interim order to restrain Insurers from proceeding with the nascent arbitration until the issue was finally decided by Brazilian courts. The latter request was denied by the first instance court, however, after an interlocutory appeal, the São Paulo Court of Appeal (“TJ-SP”), granted an interim order preventing Insurers from continuing with the arbitration in London.

In response, Insurers made an application without notice to the Commercial Court in London and obtained an interim anti-suit injunction to restrain the Insured from pursuing the proceedings in Brazil. Subsequently, on 19th January 2012, the High Court ordered the continuation of the anti-suit injunction against the Insured and decided, inter alia, that (i) English law is applicable to the arbitration agreement; (ii) the Insured is restrained from pursing proceedings initiated in Brazil; (iii) Insurers are entitled to continue with the arbitration. (SulAmerica CIA Nacional De Seguros S.A v Enesa Engenharia S.A [2012] EWHC 42 (Comm)).

However, on 19th April 2012, the TJ-SP confirmed the interim order against Insurers and determined that (i) Insurers are prevented from continuing with the arbitration in London until the issue is finally decided by Brazilian courts; (ii) a fee of around US$200,000 per day would be imposed on the Insurers if and for as long they continued with the arbitration. (TJ-SP, AI no. 0304979-49.2011.8.26.0000 Energia Sustentável do Brasil S/A e outros v Sul América Companhia Nacional de seguros S/A).

The most recent step in this battle was then for the CA to uphold the Commercial Court’s decision to allow the arbitration to continue and restrain the Insured from continuing with the Brazilian proceedings.

As a result, Brazilian and English decisions clash against each other to the extent the former refrains and the latter allows the continuation of the arbitration proceedings in London.

The Central Issue – the Arbitration Agreement

Brazilian arbitration law determines that in “adhesion contracts” (being, in essence, contracts on another party’s standard terms), the arbitration clause is only valid if the adhering party (ie, the party who did not draft the contract) initiates arbitral proceedings or if it expressly agrees to arbitration by means of an attached written document, or if it signs or initials the corresponding contractual clause, inserted in boldface type (art. 4°, §2° Law 9,307/96). It was argued in this case before the Brazilian courts that the insurance policy is an “adhesion contract”, and that the arbitration agreement in the policy should not be upheld on the basis of non-compliances with the formalities for adhesion contracts. The Brazilian courts have not finally decided this issue, but in the meantime Insurers are still subject to a Brazilian anti-arbitration injunction which attaches signficant financial penalties for the prosecution of the London arbitration.

However, on the analysis of the English CA, the arbitration agreement was not governed by Brazilian law. This was because the seat of the arbitration was stipulated to be London, which indicated that the parties intended English law to govern the arbitration agreement.

Commercial Implications

The case has particular significance for the drafting of international contracts involving Brazil:

• Firstly, international parties willing to arbitrate under Brazilian law must be aware of the additional requisites in adhesion contracts and/or in insurance agreements. This may necessitate modifying or supplementing the wording in standard forms of contract and standard arbitration clauses.
• Secondly, Brazilian parties must be aware that by selecting London as the arbitration seat and by not expressly agreeing on the law applicable to the arbitration agreement, English courts shall apply the recognised principle of the arbitration agreement being most closely connected with the law of the place in which parties have chosen to arbitrate and, in this case, English law being applicable to the arbitration agreement.

Reference: Sulamerica CIA Nacional De Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638