May 15 2003
In the early 1990s Brazil signed a number of bilateral investment treaties with the aim of attracting increased foreign investment. The treaties were drawn up in response to the concerns of capital exporter countries over the security of their investments, to protect such investments against the risks that exist in developing countries. The treaties, although criticized as biased to a degree, have been very successful - over 2,000 exist today, involving more than 175 countries.
So far, Brazil has signed 14 bilateral investment treaties.(1) Of these, eight were forwarded to the National Congress for ratification and implementation, but none has been ratified to date.
In spite of the apparent resistance to approving these treaties - including a request from the Executive Branch that they be withdrawn from the ratification agenda of the National Congress - there is increasing international pressure for the ratification procedure to be resumed. The European Union has insisted that Brazil must ratify the treaties, a call which has been echoed by investment and insurance guarantee institutions. The European countries argue that while the treaties may not significantly influence the investment policies of large companies, smaller companies rely on them in choosing where to allocate their investments.
The dispute settlement mechanism provided for under the treaties is one of the questions that has been subject to debate in Brazil. In general, the treaties specify arbitration as a means of resolving conflicts relating to investments of individuals in the recipient countries.
In addition to providing a mechanism for the settlement of disputes between signatory states through arbitration, the treaties introduce a new feature into Brazilian law: the possibility of resolving disputes between the investor and the recipient state through arbitration without the existence of a separate arbitration convention - that is, exclusively by force of the arbitration mechanism set forth in the bilateral investment treaty. The investor is thus given the opportunity to enter into arbitration with the recipient state or its agencies.
The compatibility of these provisions with the Brazilian legal system has been subject to heated debate, in relation to the state's capacity to submit itself to arbitration, issues of sovereignty and the principle of access to the courts.
As a rule, the treaties provide a period of six months within which to resolve a dispute by amicable means. If no agreement is reached by the end of this period, the investor may choose to submit to litigation before the competent courts of the recipient state, or to enter into arbitration proceedings. If it chooses to commence arbitration, the investor may opt either for ad hoc arbitration, through application of the United Nations Commission on International Trade Law Arbitration Rules, or for resolution through the International Centre for Settlement of Investment Disputes (ICSID). In order to submit the dispute to the ICSID, both contracting states must be parties to the 1965 Washington Convention. Otherwise, the dispute may be resolved by the alternative mechanism of the ICSID. However, Brazil has not signed the Washington Convention.
Finally, there is some doubt as to whether the application of the ICSID mechanism is possible at all, either directly in the case of Brazil's ratification of the Washington Convention, or through the alternative mechanism. The mechanism is potentially in conflict with Brazil's legal and constitutional provisions, in the sense that it impedes access to the courts by the contracting parties. A further issue is the possible conflict of this mechanism with any forum selection clause included in the contract between the state and the foreign investor. However, these issues may well be overcome by Brazil's growing prominence in the international economic order.
For further information on this topic please contact Ricardo Barretto, Eduardo Damião Gonçalves, Paulo Marcos Rodrigues Brancher or Samia Borella Hougaz at Barretto Ferreira, Kujawski, Brancher e Gonçalves – Sociedade de Advogados by telephone (+55 11 3066 5999) or by fax (+55 11 3167 4735) or by email (email@example.com or firstname.lastname@example.org or email@example.com or firstname.lastname@example.org).
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Ricardo Barretto Ferreira Da Silva
Eduardo Damião Gonçalves
Paulo Marcos Rodrigues Brancher