In a recent decision,(1) the Superior Court of Justice stated that an arbitration clause providing that disputes between the contracting parties must be settled by "arbitration or mediation" was valid.
In addition, the court ruled that the arbitration clause would be valid even if inserted into an agreement that, despite the presence of the arbitration clause, also allowed certain situations to be resolved by the courts.
This case is especially relevant since it involves the holding company Odbinv S/A (controller of one of the biggest Brazilian construction companies), which is being investigated under the purview of Operation Car Wash, Brazil's largest corruption investigation.
Kieppe and Graal were shareholders of Odbinv S/A. Kieppe was the controlling shareholder, owning 62.3% of the company's shares. Grall was the minority shareholder, owning 20.6% of the shares. The parties entered into a shareholders' agreement, adjusting the purchase, sale and preference for the acquisition of shares.
Graal received a notice from Kieppe concerning a stock purchase option that hypothetically diverged from the agreement's stipulations, as it did not specify the grounds, conditions and quantities for the purchase of shares.
The shareholders' agreement contained an arbitration clause, which provided that "doubts and disputes arising from this shareholders' agreement shall be settled by mediation or arbitration, in accordance with the law; except for that provided in clause eight".
To determine whether the arbitration clause was considered a pathological clause under the Arbitration Act, Graal brought a suit before the Salvador District Court in order to:
- plead for its enforcement;
- seek a submission to arbitration; and
- request the commencement of arbitral proceedings to discuss the merits of the stock purchase option.
Pathological arbitration clause According to Article 7(4) of the Arbitration Act, if an arbitration clause contains a defect that may disrupt the arbitration (pathological clause),(2) the parties can seek the assistance of the courts by means of specific performance of the arbitration clause. If this is sought, the court will refer the parties to arbitration, amending the clause to correct its deficiencies and fill in the gaps.
The purpose of this procedure is to correct the shortcomings of the arbitration clause, supplying the necessary elements of the procedure which are missing, such as the arbitration centre rules.
In the case at hand, the judge referred the parties to arbitration, correcting the pathology of the arbitration clause.
Validity of arbitration clause Kieppe appealed to the Bahia Court of Appeal. The case eventually reached the Superior Court of Justice, the highest court within the Brazilian court system.
Kieppe argued that the arbitration clause was null, since it stated that:
- disputes must be settled by "mediation or arbitration"; and
- certain disputes would be decided by the judiciary.
For these reasons, Kieppe claimed that the clause was not binding on the parties.
Clause 11.8 of the shareholders' agreement provided that "doubts and disputes arising from this shareholders' agreement shall be settled by mediation or arbitration, in accordance with the law; except for that provided in clause eight".
Clause 8 of the shareholders' agreement stipulated that, among other things, the shareholders could turn to the judiciary in order to suspend or cancel registration of the transfer of shares (if applicable) in the event that the terms and conditions of the shareholders' agreement were breached.
Provision for mediation or arbitration With regards to the dispute's merits, the Superior Court of Justice stated that arbitration, as the sole method of dispute resolution chosen by the parties for all disputes and matters connected thereto, could not be a condition precedent for the arbitration clause's existence.
As for express reference to mediation as an alternative to arbitration, this provision did not render the arbitration clause null. Consequently, when the parties executed the arbitration clause, they were not prevented from reaching a court or out-of-court settlement, even by means of mediation. Only matters regarding disposable rights were arbitrable, which is why only disputes arising from or relating to issues which the parties could freely settle could be submitted to arbitration. If something can be settled, conflicts related thereto can always be resolved with mediation or arbitration, which are compatible dispute resolution methods.
As Justice Raul Araujo rightly pointed out:
"Since no one can be forced to accept mediation, of course this is always just an attempt to find the solution. Once the attempt is frustrated, arbitration becomes a binding force. Thus, it is more correct and logical to use the alternative 'or', rather than the additive 'and' because, in practice, arbitration becomes unnecessary if mediation or court settlements are achieved with the parties' consent."
Clause 8 of shareholders' agreement Pursuant to the decision, an arbitration clause inserted into an agreement which provides that, in special circumstances, certain issues may be exceptionally submitted to the courts will be considered valid and must therefore be duly enforced.
The Superior Court of Justice ruled that the absence of a detailed provision for mediation or arbitration does not render such clause null and void. Instead, the court reasoned that this is merely a pathological clause, which is valid under Article 7 of the Arbitration Act.
The Superior Court of Justice decided that harmonious coexistence between arbitral tribunals and the judiciary bodies is a fundamental point of arbitration.
Finally, the court brought attention to the fact that the judicial enforcement of arbitration clauses which would otherwise be rendered ineffective is an essential aspect of the judiciary's support for arbitration.
This decision has important implications as it is a great example of how arbitration friendly the Brazilian superior courts have become. Evidence can be found in a series of recent decisions in Brazil, which ultimately contribute to the development of arbitration in the country.
For further information please contact Luciano Timm, Marcelo Richter or Isabela Popolizio Morales at Carvalho, Machado & Timm Advogados (+55 11 2872 4760) or email ([email protected], [email protected] or [email protected]). The Carvalho, Machado & Timm Advogados website can be accessed at www.cmtlaw.com.br.
Endnotes
(1) Kieppe Participações e Administração Ltda v Graal Participações Ltda, Superior Court of Justice, Special Appeal 1.331.100-BA, Reporting Judge Maria Isabel Gallotti, delivered on August 10 2016.
(2) Some Brazilian scholars have identified a variety of possible defects, including:
- reference to an arbitration institution that does not exist or is incorrectly defined;
- lack of choice regarding the appointment of arbitrators (eg, rules of an arbitration chamber or ad hoc);
- wording that makes it unclear as to whether the arbitration venue is mandatory or optional; and
- selection of an arbitrator-appointing authority that refuses to carry out this duty.
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