The landscape of conflict resolution has undergone a global transformation with the rise of arbitration. Arbitration presents itself as a sophisticated alternative to the traditional judicial system, allowing parties to select an impartial third party to resolve disputes that may arise throughout their relationship. This mechanism enables the appointment of arbitrators who are highly specialized in the subject matter in dispute.
Among other advantages, arbitration is characterized by its confidentiality, ensuring that the content of arbitral proceedings remains undisclosed to third parties. It is also generally perceived as a faster alternative to litigation.
In looking at the M&A market, particularly during negotiations and contract drafting—whether for mergers, acquisitions, or incorporations—opting for arbitration may seem like the obvious choice.
However, there are specific issues to consider when dealing with transactions in the Brazilian market. First, the risk of having to enforce a contractual obligation in case of a dispute—such as an indemnification notice—is higher for the buyer in such a transaction than for the seller. Consequently, in most cases, the party initiating dispute resolution proceedings will be the buyer.
It is essential for such a party to weigh the relatively higher cost of arbitration against the transaction’s value and any identified or unidentified contingencies resulting from due diligence. Arbitration costs in Brazil tend to be significantly higher than judicial costs, which are typically 1% of the claim’s value, plus up to 20% in attorneys’ fees payable to the prevailing party. In some cases, arbitration expenses may exceed the compensation sought in the contract, whether the claim is for non-performance, realized contingencies, or financial losses suffered by a party.
Additionally, Brazil has been strengthening its judicial infrastructure by establishing more specialized business courts (Varas Empresariais). One example is the business court created in 2023 to serve the interior of São Paulo (Campinas region). These courts are established in some states, such as São Paulo, Rio de Janeiro, and Minas Gerais and they handle complex corporate and commercial disputes related to corporate law, bankruptcy, unfair competition, intellectual property and M&A.
A key question arises when one of the parties to a dispute is foreign: would litigation in Brazilian courts be a viable option? While parties often seek the efficiency and impartiality of arbitration, they must also consider the bureaucratic hurdles involved in enforcing a foreign arbitral award in Brazil.To enforce a foreign arbitral award in Brazil, the Superior Court of Justice (STJ) must review a properly translated and notarized copy of the award, along with additional required documentation. If the opposing party claims that enforcement would violate Brazilian public policy, the case undergoes further judicial scrutiny. Additionally, the party may file procedural objections, potentially delaying the enforcement process. More importantly, they should assess the complexities of serving notice and seizing assets to satisfy a debt. It tends to be easier in Brazil to serve notices in the judicial system than in an international arbitral proceeding. Similarly, the enforcement of a favorable ruling from a court through seizure of assets to compel payment is often more easily achieved than a similar enforcement effort undertaken pursuant to an international arbitral award.
In conclusion, for transactions involving a Brazilian company or where one of the parties is based in Brazil, a snap judgment that arbitration should be the dispute resolution mechanism is not recommended. It is crucial to analyze the particularities of the proposed transaction and to have the proper assessment by Brazilian attorneys when settling on the dispute resolution method.
Factors such as party representation (buyer or seller), total transaction value, and the need for confidentiality may influence the decision to opt for arbitration. The ultimate goal is to ensure that a party does not find itself unable to access an impartial dispute resolution mechanism due to excessive costs.
Author: Cindy Massesine Pimentel
E-mail: cindypimentel@felsberg.com.br