A recent decision rendered by an arbitral tribunal constituted under the Centre for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada (CAM-CCBC) has ended a 20-year dispute over the largest container port in South America.(1)(2)
The 7 January 2019 partial award dismissed all of the claims brought by Libra Terminais S/A and Libra Terminais Santos S/A against respondent Companhia Docas do Estado de Sao Paulo with regard to the rebalancing of the parties' contracts.
The proceeding was bifurcated, with the quantum issues being postponed until the second phase of the arbitration. The respondent estimated that the claimants' debts totalled approximately Rs2.7 billion ($700 million).
The parties' relationship began in 1998, when the claimants won a public bid for a 20-year concession for the management and operation of Terminals 35 and 37 of the Santos port in Brazil. The respondent was a state-owned company and the port authority in charge of the administration of the Santos port – the largest container port in South America.
Following the public bid, the parties entered into two lease agreements for the management and operation of the relevant terminals. Under the lease agreements, the claimants were required to pay port tariffs.
However, from the outset of the performance of the agreements, the claimants refused to pay the agreed port tariffs, arguing that the infrastructure delivered by the respondent differed to what had been promised under the tender and lease agreements.
The lease agreements did not include an arbitration agreement. As such, starting in 2000, the parties brought various disputes before the Brazilian state courts and entered into new agreements to resolve the disputes. However, these efforts were unsuccessful.
Aiming to definitively resolve the legal disputes over the disputed tariffs, in September 2015 the parties entered into a submission agreement to arbitrate.(3) According to that agreement, all earlier court proceedings between the parties were to be transferred to an arbitral tribunal constituted under the CAM-CCBC.
In its partial award, the arbitral tribunal unanimously found that there was no basis to grant the claimants' request for a financial rebalancing of the lease agreements.
The tribunal held that the claimants were liable for the tariffs which had been agreed in the contract, as well as any applicable interest and penalties resulting from their default. The exact quantum will be determined in the second phase of the arbitral proceeding.
The claimants' claims were as follows.
Reimbursement of expenses
With regard to Terminal 37, the claimants argued that the expenses associated with their improvement of Terminal 37 should be reimbursed by the respondent.(4)
The arbitral tribunal dismissed this claim, ruling that under the tender, the public bid and the lease agreements:
Works of adaptation of the dock would be promoted and borne by the lessee. Libra formulated its proposal based on such premise, won the bid and entered into the lease agreement according to such conditions.(5)
Financial and economic rebalance
In relation to Terminal 35, the claimants submitted five claims,(6) all of which were dismissed by the arbitral tribunal. The most controversial centred on rebalancing the lease agreements.
The claimants argued that the world economic crisis, followed by Brazil's economic depression and changes to the tax regime, entitled them to an economic and financial rebalancing of the Terminal 35 lease agreement.
Pursuant to Article 65 of Federal Act 8.666/93,(7) which establishes the framework for economic and financial rebalancing of administrative contracts in Brazil, the arbitral tribunal rejected the claimants' arguments, as follows:
In relation to the rebalance request based on the supervenience of crises and the increase in taxes, nor does the Requesters see any reason. The Arbitral Tribunal states that the request was formulated in a generic manner, not lending itself to demonstrate, as it was Libra's burden of proof, neither the occurrence of events considered as causes of imbalance nor the occurrence of contractual imbalance.(8)
In summary, the arbitral tribunal ruled that there was no cause for economic and financial rebalancing of the lease agreement and that the final amounts to be paid by the claimants would be stipulated in the final award.
Following the enactment of Federal Act 13,129/15, which altered some of the provisions in the Arbitration Act (9,307/96), the arbitrability of claims involving public entities in Brazil is undisputed.
The case at hand involved a high-end multi-million real dispute relating to the Brazilian port sector, which is mainly regulated by Federal Act 12,815/13. This statute not only regulates substantial issues relating to the exploitation, management and operation of Brazilian ports, but also provides that certain types of contractual dispute may be referred to arbitration, including divergences over port tariffs.
Therefore, in addition to the general provisions of the Arbitration Act applicable to administrative arbitration,(8) any arbitral proceeding involving Brazilian public entities in the port sector must observe a long list of requirements set out in Federal Decree 8,465/15,(9) which sets out the framework for arbitration within the port sector.
Led by a prominent and experienced arbitral tribunal constituted under the CAM-CCBC, the outcome of this arbitration is positive, as it demonstrates that Brazil's arbitral framework is well established and well functioning – even in disputes involving public administration.
For further information please contact Tiago Faganello 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) Since the 2015 amendment of the Arbitration Act (9,307/96), public entities in Brazil are expressly allowed to celebrate arbitration agreements. Pursuant to Article 2(3) of the act, arbitrations that involve public administration will always be subject to the principle of publicity.
(2) The award can be accessed at: https://globalarbitrationreview.com/digital_assets/8766b480-927b-47ed-bb5e-afb4580205ec/sentenca-arbitral-parcial-codesp-grupo.pdf.
(3) Federal Act 12,815/13 established a legal framework over the exploitation of ports in Brazil, both by the public administration and private companies. It further sets out the other types of dispute that can be submitted to arbitration. Further, Federal Decree 8,465/15 regulates arbitral proceedings under the Federal Act 12,815/13 involving the public administration and private companies under lease and concession agreements.
(4) Partial award, Paragraph 170.
(5) Partial award, Paragraph 220.
(6) Partial award, Paragraph 223.
(7) Federal Act 8,666/93 regulates government procurement law and policy in Brazil.
(8) Partial award, Paragraph 553.
(9) Mainly Articles 1(1) and 2(3), which respectively provide that direct and indirect public administration entities may use arbitration to resolve conflicts regarding transferrable public property rights, and that arbitration that involves public administration will always be at law and will be subject to the principle of publicity.
Marcelo Richter, LLM student, assisted in the preparation of this article.
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