June 28 2012
The Sao Paulo appellate court recently suspended the effects of an agreement to arbitrate disputes arising from an insurance policy covering the construction of one of the world's largest hydroelectric facilities located in Brazil.
By a majority opinion(1) the court held that insurance companies are precluded from commencing arbitral proceedings abroad until Brazilian courts have decided the merits of a challenge brought by the insureds against the validity of the underlying arbitration clause contained in the agreement.
This decision comes against the backdrop of an interim anti-suit injunction obtained by the same insurers at the Queen's Bench Division (Commercial Court) in the High Court of England and Wales.(2) The English decision had previously upheld the agreement to arbitrate disputes in London pursuant to the Insurance and Reinsurance Arbitration Society (ARIAS UK) arbitration rules and, as a result, restrained the insureds from pursuing legal action in Brazil under penalty of imprisonment.
The case was widely reported in Brazil because the insureds – a consortium of leading contractors – claimed coverage in excess of R1.4 billion stemming from a delay in construction caused by riots at a work site, which prompted the Brazilian federal government to send additional police forces to the area.
The main issue in both jurisdictions referred to the alleged inconsistency between the insurance policy's arbitration clause (ARIAS, London) and a clause providing that disputes under the policy are "subject to the exclusive jurisdiction of the Brazilian courts".
The Sao Paulo appellate court held that the contradiction between the arbitration clause and the choice of forum provision was "perplexing" and caused an "undesired uncertainty" as to the proper mechanism of dispute resolution. The court alluded to Article 4(2) of the Brazilian Arbitration Act and a regulation of the Brazilian Insurance Authority, which require that arbitral clauses related to contracts of adhesion must be in bold face type and specifically signed (initialled) by the adhering party (ie, the insureds).
The Brazilian court further held that the arbitration clause was limited to disputes about the amount to be paid under the policy (quantum), whereas the choice of forum provision contained a broader scope of disputes to be resolved by the Brazilian judiciary.
The majority held that the existence of easily identifiable (prima facie) vices in the arbitration clause required immediate court intervention. According to the opinion, exceptional circumstances enable courts to set aside the principle of competence-competence laid out in Article 8 of the Arbitration Act, under which arbitrators retain the authority to decide on their own jurisdiction. As a result, the court enjoined the insurers from pursing arbitration under the ARIAS rules in London and imposed a fine of R400,000 per day of non-compliance.
The dissenting opinion, however, held that the specific requirements of Article 4(2) of the Arbitration Act concerning adhesion contracts were not applicable in this case, where the parties had equal bargaining power and were accustomed to insurance transactions for large-scale construction projects. The appellate judge held that the insureds could not claim lack of consent regarding the agreement to arbitrate, particularly in this type of transaction. Citing the importance of competence-competence for arbitration ("to ensure that parties do not evade the obligation to arbitrate" by bringing frivolous judicial challenges against arbitration clauses), the minority vote saw nothing impeding the continuation of proceedings in London.
The dissenting opinion is consistent with the English decision, which reconciled the insurance policy's arbitration clause with the choice of forum provision by holding that all disputes or differences must be referred to arbitration, while the exclusive jurisdiction of the Brazilian courts should be left to actions to compel arbitration, or to enforce the respective arbitral award.
The Sao Paulo appellate court decision is likely to be subject to yet another appeal that will take the matter to the Superior Court of Justice – the highest court for federal law issues. The Superior Court is known for its pro-arbitration track record and recently ruled that arbitration clauses can certainly coexist with choice of judicial forum provisions, stating that:
"[A] choice of forum provision is not incompatible with arbitration. Among the several arguments [in favour of the compatibility] indicated by the doctrine, one can mention the need to have the judiciary acting in situations when urgent measures are necessary; to enforce the arbitration clause; or to compel arbitration when one of the parties does not accept it voluntarily...Thus, both clauses can coexist harmonically because the respective scopes are distinct and there is no conflict between them."(3)
The strong public policy in favour of arbitration that has emerged from the most recent decisions of the Superior Court may weigh in favour of the arbitration clause inserted into the insurance policy in question.
For further information on this topic please contact Fernando Eduardo Serec or Antonio M Barbuto Neto at Tozzini Freire Advogados by telephone (+55 11 50 86 50 00) or by fax (+55 11 50 86 55 55) or by email (firstname.lastname@example.org or email@example.com).
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