The Superior Court of Justice(1) recently upheld a decision rendered by the Sao Paulo State Appellate Court(2) which had set aside an arbitral award due to alleged irregularities during the formation of the arbitral tribunal in the context of a multi-party dispute.
The Superior Court of Justice's decision has confirmed the Sao Paulo State Appellate Court's opinion that the proceeding which had been adopted to form the arbitral tribunal before the Centre for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada (CAM-CCBC) contravened public policy, as it had violated the principle of equality of the parties.
The arbitral proceedings brought before the CAM-CCBC arose out of a dispute relating to financial operations materialised by a credit opening agreement and swap agreements entered between the parties.
The arbitration agreement included in the credit opening agreement provided that any disputes between the parties should be decided by a three-member arbitral tribunal before the CAM-CCBC. The arbitration agreement set out the following mechanism for establishing the arbitral tribunal:
The arbitral tribunal shall consist of three arbitrators. Each Party with a distinct interest shall have the right to elect one (1) arbitrator. The arbitrators shall jointly designate a third arbitrator to preside over the arbitration, within 15 (fifteen) days from the nomination of the second arbitrator. If any Party fails to elect an arbitrator or if the arbitrators no longer elect the presiding arbitrator, their appointment shall be made by the CCBC, in accordance with its rules.
In 2010 claimant Banco Santander Brasil S/A filed a request for arbitration against respondents Paranapanema S/A and Banco BTG Pactual S/A, claiming payment of a multi-million dollar debt relating to the financial operation between the parties.
When arbitration was proposed, the 1998 CAM-CCBC Arbitration Rules were in force. As a default mechanism, these rules provided that a three-member tribunal should be constituted and each party should appoint one co-arbitrator. The co-arbitrators would then choose the third arbitrator to act as chair of the arbitral tribunal in a similar manner as set out by the parties in the credit opening agreement.
When the respondents failed to agree on a co-arbitrator, the CAM-CCBC president made a nomination on their behalf. The claimant's co-arbitrator was appointed pursuant to the default provision in the CAM-CCBC Arbitration Rules.
Notably, the 1998 CAM-CCBC Arbitration Rules were silent on the procedure for appointing arbitrators in multi-party disputes, particularly when there was no consensus between the parties on one side of the dispute. The former Article 5.5 generically provided that if either of the parties failed to appoint an arbitrator, the president of the relevant arbitration centre would make this appointment.
After the arbitral award was rendered, Paranapanema S/A started a proceeding to challenge the decision before the judicial courts in Brazil, arguing (among other issues) that the proceeding adopted by the CAM-CCBC president to appoint the members of the arbitral tribunal was irregular.
Accordingly, it alleged that the damage caused by the lack of opportunity for one of the parties to appoint an arbitrator was as serious as harming the principle of natural justice.
It further argued that the subsequent amendment of the CAM-CCBC Arbitration Rules in 2012 proved how serious the violation of due process regarding the constitution of the arbitral tribunal was. In particular, the 2012 amendments included a specific provision in relation to the constitution of arbitral tribunals in multi-party arbitrations.
Indeed, both the Sao Paulo State Appellate Court and the Superior Court of Justice accepted the challenge, ruling that "unfortunately, there was a failure in the arbitrators' appointment, so the arbitration was tainted irremediably".
In short, the courts decided that the 1998 CAM-CCBC Arbitration Rules were "flawed by the total absence of forecast of choice of arbitrators for cases with multiple parties with distinct interests in one or another side of the dispute".
The courts also pointed out that the arbitration agreement inserted in the credit opening agreement clearly guaranteed the right of "each party with distinct interest" to appoint an arbitrator.
Therefore, even in the absence of a particular rule on multi-party appointments of arbitrators under the 1998 CAM-CCBC Arbitration Rules, the courts ruled that the CAM-CCBC president's decision was inappropriate.
2012 Arbitration Rules: arbitrators' appointment in multi-party disputes
The CAM-CCBC Arbitration Rules, in force since 2012, remedy the omission in the former rules. The new Article 4.16 provides as follows:
In arbitration cases with multiple parties as claimants and/or respondents, if there is no consensus regarding the appointment of an arbitrator by the parties, the President of the CAM-CCBC shall appoint all the members of the Arbitral Tribunal, designating one of them to act as President, with observance of the requirements of article 4.12 of these Rules.
The CAM-CCBC Arbitration Rules provide that the centre's president can appoint an arbitrator in the context of a multi-party arbitration on behalf of any group of parties which fails to appoint an arbitrator itself.
Clearly this is an attempt to avoid a situation whereby a group of claimants or respondents is said to have been prejudiced by an inability to appoint an arbitrator of their choice, which could lead to a challenge to an award, as in the case analysed.
The principle of equality between the parties in relation to nominating arbitrators has been described as a fundamental right of the parties involved in an arbitration.(3)
Both the Superior Court of Justice and the Sao Paulo State Appellate Court's decisions clarify that all parties involved in a multi-party dispute must have equal influence on the constitution of the arbitral tribunal in order to avoid any potential risk of annulment of the arbitral award.
This was exactly the same ground that lead to the annulment of an International Chamber of Commerce (ICC) award in the famous Siemens v Dutco case,(4) when the French Supreme Court underlined that each party in a dispute should have the same right to the appointment process and that "the principle of the equality of the parties in the appointment of arbitrators is a matter of public policy (ordre public) which can be waived only after a dispute has arisen".(5)
The omission in the former CAM-CCBC Arbitration Rules on proceedings to appoint arbitrators in the context of multi-party disputes was resolved when the 2012 rules came into force.
The new reading of Article 4.16 of the CMA-CCBC Arbitration Rules now seems to be in harmony with similar provisions in the rules of other major institutions, such as Article 8.1 of the London Court of International Arbitration Rules, Articles 12.6 and 12.8 of the ICC Arbitration Rules and Article 10.3 of the United Nations Commission on International Trade Law Arbitration Rules.
Finally, the Brazilian courts have shown staunch support for arbitration. This demonstrates that Brazil is an arbitration-friendly hub, one which not only has new and modern arbitral legislation, but also a judiciary that supports it – in particular, the Superior Court of Justice, the final-instance court in Brazil.
However, when manifest violations of public policy and principles relating to due process occur, the courts have been quick to act in order to preserve the fundamental notions of justice. In the case above, both the Sao Paulo State Appellate Court and the Superior Court of Justice found a clear deviation in the parties' right to influence the constitution of the arbitral tribunal, which led to the annulment of the award.
For further information please contact Renato Vieira Caovilla at Carvalho, Machado & Timm Advogados (+55 11 2872 4760) or email ([email protected]). The Carvalho, Machado & Timm Advogados website can be accessed at www.cmtlaw.com.br.
Endnotes
(1) Special Appeal 1.639.035-SP, 3rd Panel of the Superior Court of Justice, Judge Rapporteur Paulo de Tarso Sanseverino, decision rendered on 18 August 2018.
(2) Civil Appeal 0002163-90.2013.8.26.0100, 11 Civil Panel of the Sao Paulo State Court of Appeal, Judge Rapporteur Gilberto dos Santos.
(3) Nicklisch, F (1994). "Multi-party arbitration and dispute resolution in major industrial projects", Journal of International Arbitration, 4(11), pp 57-72.
(4) Siemens AG; BKMI Industrienlagen GmbH v Dutco Construction Company, French Supreme Court, decision rendered on 7 January 1992.
(5) Van Den Berg, A (1993). Yearbook commercial arbitration, (XVIII), pp140-142.
Marcelo de Souza Richter, LLM candidate, assisted in the preparation of this article.
Please note that this article was prepared in December 2018. Luciano Timm is currently on temporary leave, while he takes up a position at the Brazilian Ministry of Justice.
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