On February 26, 2008, in CAOA Comércio de Veículos Importados et al v Renault do Brasil S/A et al, the São Paulo Court of Appeals1, following the country’s prevailing case law, rejected a party’s attempt to attack the enforceability of an arbitration clause. In Renault the court addressed an issue that has recently been thrown into confusion: whether the submission agreement, under Brazilian law, is required to lead to a valid arbitration and an enforceable award. The court enforced an arbitration clause without the submission agreement and clarified the scope, effect and differences between the so-called “full” arbitration clause and “empty” arbitration clause within the Brazilian arbitral regime.
Although Renault is not a novelty2 in Brazilian arbitration law, it deserves attention and praise because its ruling came just a few days after the much-criticized decision in Inepar v. Itiquira3. Inepar had astonished the local and international arbitral community with an ill-advised understanding regarding the submission agreement. In Renault, as in the overall majority of Brazilian case law, the submission agreement was not necessary because the parties agreed on an arbitration clause that contained all the elements for the appointment of the arbitral tribunal. Renault shows that judicial action for specific performance4 does not apply when dealing with a “full” clause. In the full-clause scenario, the arbitration shall commence and be conducted in accordance with the contractual mechanism chosen by the parties. Furthermore, Renault represents a string of judicial decisions that comport with the Brazilian statutory arbitral regime5, as well as with international principles and standards. Identifying the most recent judgment in Renault v CAOA as “Renault IV,” this article will give the entire picture where Renault has been decided by first summarizing the facts of the case, followed by previous judicial rulings6; then I will briefly comment on Renault IV and make some comparisons with Inepar v. Itiquira case.
The Facts
In 1992, the French car manufacturer Renault S/A (“Renault”) entered into a distribution agreement with C.A. de Oliveira Andrade Comércio, Importação e Exportação Ltda. (“CAOA”) aimed at distributing the French cars within Brazilian territory. In 1995, Renault sent a notice to CAOA advising of its intent to initiate its own activities7 in Brazil. In reply, CAOA asked for five hundred million dollars, based on alleged losses and damages. In 1996, the parties signed a Protocol Agreement, which turned out to be insufficient to solve the differences and mutual expectations. Several lawsuits were filed before the courts of São Paulo, in Brazil, and, in 1998, the parties signed a new agreement, which contained a clause calling for arbitration in New York to be administered by International Chamber of Commerce (“ICC”) Rules. New conflicts emerged, and in 1999 Renault filed a request for arbitration before ICC.
The 1st Decision – Renault I
CAOA initially challenged the jurisdiction of the arbitral tribunal, alleging the non-execution of a submission agreement (“compromisso”). CAOA, based on articles six and seven of Brazilian Arbitration Law (“BAL”)8, concurrently filed an action before the courts of São Paulo for specific performance9, arguing that the arbitration could only be initiated by way of a compromisso. The district court ruled in favor of CAOA. The court recognized the existence of the arbitral clause, but held that it did not have a binding effect because the parties had not signed the compromisso10.
In 1999, the São Paulo court of appeals, in a landmark decision, reversed on the grounds that the arbitration clause contained all necessary elements to initiate the arbitration without the need of a compromisso, nor for judicial intervention. The appellate court11 held that when the arbitration clause makes reference to the rules of an arbitration institution or contains the mechanism to the constitution of the arbitral tribunal, (“full arbitration clause”), the compromisso is unnecessary. It also held that Brazilian Courts lacked jurisdiction to examine preliminary questions about the effects of arbitration clauses. Such matters could only be initially heard by the arbitral tribunal pursuant to Article 8 of the BAL12, which recognizes the principle of Kompetenz/Kompetenz. Eventually, in 2002, the Brazilian Superior Tribunal of Justice, the highest appellate court in federal law matters13, confirmed the ruling of the Sao Paulo court of appeals14.
The 2nd Decision – Renault II
Despite the existence of the article-seven action for specific performance, and its successive appeal before São Paulo’s highest state court against the decision in Renault I, the arbitral tribunal was constituted and issued a partial award asserting its jurisdiction to rule on the issues arising out of the agreement. CAOA sought to set aside the award before the courts of São Paulo by alleging, inter alia, that Brazilian law does not recognize partial awards. The São Paulo court of appeals15 denied the motion and held that it lacked jurisdiction to hear the case because the competent authority had to be a U.S. court. The court then dismissed the case. In the meantime, the arbitral panel ruled on the merits in favor of Renault, although it awarded CAOA approximately three million dollars.
The 3rd Decision – Renault III
CAOA sought to set aside the final award before Brazilian courts, but the São Paulo district court dismissed the case16 based on article 267, VII17 of Brazilian Code of Civil Procedure, which has been expressly amended by article 41 of the BAL. The court held that a valid arbitration clause prevents the state court from adjudicating the case, and any attempt to seek nullification of the award should be brought before the courts of the seat of arbitration, without prejudice of further formal review by the time of recognition and enforcement proceedings. In June 2006, the 25th Civil Chamber of Sao Paulo Court of Appeals affirmed the trial court ruling.
The 4th Decision – Renault IV
CAOA, once more, filed a lawsuit against Renault; this time, seeking material and moral damages, as well as loss of profits. CAOA grounded its case on the fact that the arbitral award, rendered in New York, “despite its irreparable defects”, had not yet been recognized in Brazil. CAOA anchored its action on a premise of the inexistence of the arbitral award in Brazil, before being recognized by Brazilian competent court. The district court rejected CAOA’s thesis and dismissed the case; again due to the presence of a valid arbitration clause in the contract. Finally, on February 26, 2008 the Sao Paulo court of appeals affirmed the lower court ruling. As one commentator pointed out, “[it] appears to be the final chapter in CAOA’s attempt to circumvent an unfavorable award rendered in New York by an arbitration proceeding conducted under the International Chamber of Commerce (ICC) Rules.”18
Comments
Renault further strengthens the well established judicial acceptance of the doctrine of Kompetenz-Kompetenz and the effects of the so-called full arbitration clause. The opinion shows a solid, mature and unequivocal pro-arbitral approach regarding the role of the state courts when asked to rule on challenges on arbitration agreements and/or arbitral awards for absence of a compromisso.
J. Antonio Ribeiro Pinto, who wrote the opinion of the court in Renault IV, noted that “… an arbitration agreement encompasses two avenues; both of them with binding effect upon the parties, prohibiting state judges from adjudicating the matter. The two avenues are a) the arbitration clause, and b) the compromisso.” This means that a compromisso is confined to a very specific and limited situation of the “empty” (blank) arbitration clauses.19 Making reference to previous rulings on the Renault arbitral saga, J. Ribeiro Pinto recognized that in Renault the arbitration clause signed by the parties clearly falls within the category of a full arbitration clause: “The clause indicates the rules or entity for the development of the arbitral process, its limits and scope. Nothing else is needed.” The opinion also emphasizes the concept of the full arbitration clause, using, as a common example, arbitral institutional clauses provided for by article 520 of the BAL. “If the parties draft a full-type clause, one has to conclude that judicial intervention envisaging the commencement of arbitration is not appropriate.”
Is Inepar a Threat to the Current State of Arbitration in Brazil?
Because Renault v. CAOA and Inepar v. Itiquira were decided almost simultaneously, a comparison between them seems inevitable.
In Renault, the state court intervened to support arbitration; in Inepar the court acted to repeal arbitration. According to Renault, a full arbitration clause is able de per se to initiate the arbitration. In Inepar21, despite the string of Renault decisions and the weight of case law, the court concluded that a compromisso is always required in all types of arbitration clauses.
Perhaps, the most surprising aspect of Inepar, apart from its outdated reasons and bold outcome, comes from the fact that other chambers of the state of Paraná court of appeals recently offered much-celebrated decisions in cases involving a more controversial issue: whether a state-owned entity could agree to solve future disputes through arbitration. In Copel v. Energetica Rio Pedrinho, a “Popular Action”22 was filed before the 2nd Lower Treasury Court of Curitiba, state of Paraná, seeking an injunction to stay arbitral proceedings that were in progress before the Getulio Vargas Foundation Conciliation and Arbitration Chamber. The arbitral tribunal had unanimously denied Copel’s request to this end. The district court granted the order, but the court of appeals of Paraná reversed. It held that “… [t]here is no obstacle for a government-controlled legal entity, governed by private law, to enter into agreements or to resolve disputes via arbitration, since the matter referred to arbitration is merely of an economic nature and does not involve any public interest.”
In another State of Parana case involving Companhia Paranaense de Gas (“Compagas”) v. Carioca Passarelli Consortium, the same court again had the opportunity to rule on the issue of arbitrability where a state-owned company is involved. The court held that “Compagas is a business corporation governed by private law of which the government is a shareholder and … [i]t is therefore obvious that contracts entered by and between the appellant and appellee are governed by private law and that there is absolutely nothing against conflicts arising out of those agreements be decided by arbitration as provided by Brazilian law.” In another part, the court affirmed that “[t]he use of arbitration is even more adequate when it concerns the acts of governmental companies involved in the exploration of economic activities which are governed by the same legal system applicable to private companies, according to article 173, paragraph one of the Brazilian Constitution”.
Renault and Inepar drew the attention of Brazilian arbitral community. “The latest Renault v CAOA decision is in line with numerous judicial precedents issued by the Brazilian courts since the enactment of the country’s arbitration law in 1996 and shows that the decision of the appeal court in the state of Paraná was an isolated anomaly.”23 The Paraná ruling [in Inepar] should not represent any major concern about the future of arbitration in Brazil, which continues to be very promising. With all due respect to the judges of the Paraná appeal court, their position is completely contrary to the position taken by the Superior Court of Justice, where the Inepar v Itiquira case will ultimately be heard.”24
The Paraná court of appeal however still has the opportunity to put Inepar back on track because an appeal en banc, based on the minority opinion, seems to be possible, and it is likely to be filed soon.
Conclusion
Renault represents not only a landmark case regarding the supportive role of state courts vis à vis arbitration, but it falls within the prevailing case law on the matter. Inepar, on the other hand, represents an isolated pathology, even inside its own backyard. Renault certainly swims with the tide, while Inepar stubbornly swims against it, but the good news is that Inepar swims alone, and probably not for long time.
________________
1 Civil Appeal # 1.117.830-0/7, 36 Civil Chamber of Sao Paulo Court of Appeals. The decision was published at the Official Gazette on March 07, 2008.
2 Other Brazilian courts, including the Supreme Court had already addressed this issue in M.B.V Commercial and Export Management Establishment v. Resil Industria e Comercio Ltda. Ag Rg in SE 5.206-7, Reino da Espanha. Revista de Direito Bancário, do Mercado de Capitais e da Arbitragem, Ano 4, n. II, São Paulo, Ed Revista dos Tribunais, Jan-Março 2001, p. 361.
3 Interlocutory Appeal # 428.067-1, 18 Civil Chamber of Paraná Court of Appeals. The decision is not yet final. For more comments, see Gomm-Santos, Mauricio, Brazil – Swimming Against the Tide, Mealey’s International Arbitration Report, Volume 23 # 2, February 2008.
4 For executing a submission agreement (compromisso)
5 Law # 9307 of September 23rd, 1996
6 See also Cristian Conejero Roos & Renato Stephan Grion, Arbitration in Brazil: The ICC Experience, Revista de Arbitragem e Mediação, ano 3-10, Julho-Setembro de 2006, Ed Revista dos Tribunais, p. 93, 108. Philip Dunham & Simon Greenberg, After 10 Years of Positive Developments, Does Confusion Remain in Brazil’s Arbitration Law? Revista de Arbitragem e Mediação, ano 3-11, Outubro- Dezembro de 2006, Ed Revista dos Tribunais, p. 118, 127
7 The Brazilian manufactory plant was inaugurated in 1996 in Sao José dos Pinhais, state of Paraná.
8 Article 6 – In the event of absence of provision as to the method of initiating the arbitration, the interested party shall serve the other party, either by mail or through any other means of communication, with confirmation ofreceipt, of its intention to commence arbitral proceedings, setting up a date, time and place for the signature of the compromisso. (emphasis added)
Sole Paragraph: Where the party to whom notice is served fails to appear or refuses to sign the compromisso, the other party may, pursuant to article 7 of this law, seek assistance from the Judicial Court which originally would have had jurisdiction to hear the case.
Article 7 - Where there is an [article six] arbitration clause, but one of the parties shows resistance as to the initiation of arbitration, the interested party may request the judge to summon the other party to appear in court so that a compromisso can be signed; the judge shall order a special hearing for this purpose.
§ 1 - The plaintiff shall specify, in detail, the subject matter of arbitration, attaching to its claim the document containing the arbitration clause.
§ 2 - The judge, previously to the signature of the compromisso, shall try to bring the parties into a settlement. Failing such agreement, the judge shall lead the parties to approve, by mutual agreement, the compromisso.
§ 3 - When the parties fail to agree as to the terms of the compromisso, the judge, after hearing the defendant at the same hearing or within ten days, and pursuant to articles 10 and 21 § 2º of this law, subject to the provisions of the arbitration clause, shall decide the issue.
§ 4 - If the arbitration clause has no provision as to the appointment of arbitrators, it will be the judge’s task, after having heard the parties, to rule on the issue, having the option of appointing a sole arbitrator to decide the dispute.
§ 5 - If the plaintiff, without good cause, fails to appear at the hearing designating for the drafting of the compromisso, the case will be dismissed without prejudice.
§ 6 – If the defendant fails to appear, the judge, having heard the plaintiff, shall have the authority to rule with respect to the content of the compromisso, and to appoint a sole arbitrator.
§ 7 - The judgment granting the motion shall have the force of a compromisso.
9 Lawsuit # 45.649/99 before 36 District Court of Sao Paulo.
10 It should be noted that this decision came just three years after the coming into force of the Brazilian Arbitration Act, which at that time had its constitutionality being challenged before the Supreme Court. In other words, the infancy of the matter, and the pending discussion before the Supreme Court, could justify some unfriendly judicial approach towards arbitration at that moment.
11 Interlocutory Appeal # 124.217-4/0, 5th Chamber of Private Law
12 “The arbitrator has jurisdiction to decide ex officio or at eh parties’ request, the issues concerning the existence, validity and effectiveness of the arbitration agreement, as well as of the contract containing the arbitration clause.”