By: Maria Eduarda Vita Passo
1. Introduction
Infrastructure is a key sector in the socioeconomic development of a nation. Due to its prominent role, it calls for heavy investments and funding, as well as the active participation of public agents and officials with the power to dispose of state assets and resources. [1]Notably in relation to Brazil, the major corruption scandals encountered by Car Wash Investigation led to an institutional crisis, that has critically affected the infrastructure sector.
In view of the lack of public funds to promote the advance of infrastructure projects, the Public Administration reemphasized the importance of the private sector’s input. However, the universally known corruption scandals shattered the countries’ attractiveness and discouraged private investors to take on Brazil’s opportunities.
In this sense, this article will analyze the recently enacted Arbitration Decree (10,025/2019), which constitutes one of the main initiatives of Brazil’s Federal Government in an effort to overcome the downturn of the infrastructure sector.
Before entering the core issue, a brief overview will be conducted through important antecedents as to contextualize the subject herein introduced. It will further examine the specificities of the mentioned Decree which, as it will be seen, enables a more effective decision-making process and provides predictability to potential investors.
This article has an informational purpose and will be divided into two main parts: Section 2 has a sector related scope and will deal with aspects as to the pre-promulgation of the Decree. Section 3 will provide a walk through the most important provisions that may generate repercussions to investors.
2. Sector
Brazil’s economic scenario has faced severe turbulences mostly due to political uncertainties and waves of corruption, kickback scandals, bid rigging and money laundering, dissected through the so-called “Car Wash Investigation” (Operação Lava-Jato). A facet of this scheme was typically engaged between public officials, on one side, and, on the other, executives that would disburse millions in bribes in exchange for securement of overpriced contracts and other unlawful advantages. It is sometimes said that, in a context of large values at stake and in the relationship between public and private agents with great economic power and influence, there is found to be an environment conducive to corruption.[2]
In the deep-seated crisis installed in roughly all ambits nationwide, the infrastructure sector did not get away unharmed as the most significant construction companies were in the very center of the abovementioned scandal. These factors, among others, naturally repelled investors to bet on Brazil’s infrastructure sector.
According to the Brazilian Association of Infrastructure and Basic Industries – ABDIB, in 2019 nearly 1,86% of Brazil’s Gross Domestic Product (“GDP”) came from the infrastructure sector.[3] In the same year, the Global Competitiveness Report of the World Economic Forum placed Brazil in the 78th position in its infrastructure rank.[4] This position, far behind other emerging nations, indicates a disparity in relation to the actual size of the country’s economy, whose total GDP places it among the 9 largest world economies.[5]
As one of the reactions to combat the downsizing of infrastructure projects, and in order to relaunch the economy growth, a group of leaders from the Lemann Foundation initiated a Project called “Infra2038” with the purpose of placing Brazil among the top-20 countries in the infrastructure category of the Global Competitiveness Index (GCI) of the World Economic Forum by the year of 2038.[6] In other words, the expectation is that in 18 years Brazil will advance 58 positions in the infrastructure category.
In order to achieve these important long-term expectations and given the lack of financial resources of the public sector, private national and foreign investments assume an important role. As a matter of fact, the Ministry of Infrastructure in more than one opportunity announced its clear objective to transfer as many assets as possible to the private sector.[7] To do so, it has structured one of the world’s largest and most sophisticated concession program where more than 200 billion Brazilian reais are projected in investments in ports, railways, highways and airports by the year of 2022.[8]
To recover the investors’ confidence, the government and regulatory agencies began a movement to strengthen and advance towards a more transparent and secure regulatory framework. In 2016 the Brazilian Government promulgated Law No. 13,334/2016 and instituted the Investment Partnerships Program (Programa de Parcerias de Investimentos – “PPI”).[9]
The PPI, as provided for by its implementing act, has the primary scope of expansion and enhancement of the private capital input in infrastructure projects, such as public-private partnerships, permissions and concessions of airports, railways, ports, waterways and highways. As of May 2019, the infrastructure projects that emerged from PPIs, amounted to over BRL 1.4 trillion in investments throughout the whole concession period.[10]
Despite the established acceptance of commercial arbitration in Brazil, whenever a controversy would arise from the relationship between investor and State, it would typically be settled by local courts in view of its exclusive jurisdiction over the mere participation of the Public Administration, as well as Brazil’s reluctance in entering into the ICSID Convention.[11]
After years of immersion in grey areas, and the long-standing resistance as to the possibility of the Public Administration being a party in arbitration proceedings, in 2015 the Legislative branch took an important step in amending Brazil’s Federal Arbitration Act (Law No. 9,307/96) to expressly enable the Administration to arbitrate its disputes.[12]
Following that significant amendment, as well as the world trend to arbitrate infrastructure disputes, in September 2019 the Brazilian President, Jair Messias Bolsonaro, issued the Decree No. 10,025/2019 (“ Arbitration Decree”) which finally consolidated the possibility of infrastructure arbitration in Brazil.[13] The Government has bestowed the market with an instrument that brings more predictability, to contractors and its funding institutions by essentially facilitating the management of risk allocation.
The Arbitration Decree was also well received since it provides the desired promptness required by infrastructure relations –g. attempting to prevent indefinite shutdowns of structural projects – as opposed to Brazilian judicial proceedings that are historically time-consuming (especially, given the prerogatives of the Public Administration) and unstable as its jurisprudence has shown.[14]
3. Discussion
a. Contracts and Parties Subject to the Arbitration Decree
Despite de 2015 amendment to the Brazilian Arbitration Act which expressly allowed the Public Administration to arbitrate its disputes, the issue still was not unanimously settled, as the new couple inclusions were very broad and generalist. Also, considering that arbitration involving the Administration has always been subject to a great tension due to the conservatism of the involved players, the initiative in promulgating a more specific decree (as is the Arbitration Decree) constitutes a significant advance towards effectively consolidating infrastructure arbitration in Brazil.
Before the Decree, only disputes in the port sector could expressly be resolved through arbitration.[15] Now, divergences arising out of sectors such as ports, road, railways, waterways, and airports can also be arbitrated.
The parties subject to the Arbitration Decree are both federal entities and private investors. On one side, there can be an entity of the Federal Public Administration, which, for purposes of this article, can be understood as the Federal Government itself (União Federal), federal state-owned companies, federal mixed-capital companies, federal regulatory agencies – such as the National Land Transportation Agency (ANTT), National Civil Aviation Agency (ANAC) and the National Agency for Water Transportation (ANTAQ), among others.[16]
On the other side, there are the private investors or contractors, notably, concessionaires, sub-concessionaires, permit holders, lessees, authorized entities and operators, that won their respective bidding process and entered into administrative contracts with the entity that called for procurement.
Although the Decree establishes general provisions, regulatory agencies are not precluded from editing rules on the topic. On this note, the National Agency for Land Transportation – ANTT has enacted Resolution No. 5,845/2019 to govern mediation and arbitration disputes in its internal ambit.[17]
b. Arbitrable Issues and Conditions
Not all infrastructure matters may be subject to arbitration, but only those that comprehend “disposable pecuniary rights”. Considering its indefinite concept and the difficulty in precising which rights of the Public Administration are encompassed therein, the Arbitration Decree outlined some issues that fall into that category and therefore may be arbitrable, such as (i) issues related to the economic and financial equilibrium of contracts; (ii) calculation of indemnities arising from the termination or assignment of administrative contracts; and (iii) alleged breaches of contractual obligations by any of the parties, including penalties.
Even though there might be other situations that accommodate in the expression of “disposable pecuniary rights”, it shall be born in mind that Brazil is not yet a 100% pro-arbitration jurisdiction, which might possibly leave decisions to the ultimate discretion and subjectivism of judges.
In addition, before resorting to arbitration, the party must exhaust all administrative appeal bodies, that is, only final administrative decisions may be challenged in arbitration. Likewise, prior to arbitrating, the parties may agree to another alternative method of dispute resolution, including direct negotiation, or even the submission of the dispute to the Chamber of Prevention and Administrative Resolution of Disputes of the Attorney General.
c. Language, Seat of Arbitration, Transparency and Governing Law
The language of the arbitration shall be Portuguese and Brazil must be the exclusive seat of the proceeding. Another important provision refers to the required applicability of Brazilian law, in a manner that arbitration in equity is expressly forbidden.
Also, considering the principles of publicity and supremacy of the public interest, the proceeding shall be available for public scrutiny, except as to safeguard information related to industrial or trade secrecy or other issues considered confidential by Brazilian law. In the absence of an express agreement between the parties as to how the information will effectively be disclosed, the arbitral institution is the one who shall grant access to the information on the proceeding.
d. Arbitral Institution
The proceeding shall be preferably conducted with an arbitral institution chosen among a list of pre-accredited entities drafted by the Federal Attorney General (Advocacia Geral da União – AGU). The option for an ad hoc arbitration is conditioned to prior justification.
In order to gain the status of an accredited chamber and therefore be inserted in the list, the arbitral institution must (i) be in operation for at least 3 years; (ii) be widely known for its ethics, good standing, competence and experience; and (iii) have its own set of rules available in Portuguese. The Federal Attorney General will discipline the means for the proof of those requirements and may also establish others.
The arbitration agreement may give the contractor the right to choose the arbitral chamber from the list of accredited institutions. The indication of the arbitral chamber shall be made by correspondence addressed to the other party. The federal public entity, however, retains the right to object to the contractor’s choice within 15 days, also by correspondence, occasion in which the party who brought the proceeding shall indicate another certified institution in 15 days, counted from the date of the objection. Therefore, an appropriate option to avoid undue delays is to choose the competent arbitral institution at the time of entering into the submission agreement or arbitration clause.
Even if the arbitration clause already provides for a certain arbitral institution, the parties may still afterwards replace the referred institution, if done so by mutual consent and before the commencement of the arbitration, regardless of an amendment to the infrastructure contract.
e. Choice of Arbitrators
The parties to the infrastructure contract are free to appoint arbitrators of their trust – including foreign arbitrators who speak Portuguese, provided that the proceeding needs to be conducted in that language – but shall necessarily observe the general requirements in the Brazilian legislation, such as the arbitrator’s civil capacity and their specific knowledge of the issue that underlies the controversy.
The appointed arbitrators shall have no relationship with any of the parties or with the dispute submitted to it, under penalty of incurring in the hypothesis of impediment or suspicion of judges, as per the Brazilian Code of Civil Procedure, or other situations of conflict of interest recognized by domestic law, internationally accepted guidelines (such as the IBA Guidelines on Conflict of Interest), or in the rules of the chosen arbitral institution.
f. Arbitration Clauses
Arbitration clauses are generally entered into between contractual parties in an abstract manner, that is, before the effective installation of a certain dispute and without the parties having knowledge about its specific nuances.
The Arbitration Decree is applicable to arbitration clauses that were signed after September 23, 2019. However, knowing that most of the infrastructure contracts involve long-term relations that were entered into beforehand, the Arbitration Decree allows the amendment of existing contracts that do not originally contain an arbitration clause, if done so by mutual agreement of the parties.
In this case, if an administrative contract has a forum clause electing a Brazilian local court to resolve eventual disputes, then the referred contract may be amended to further include an arbitration clause, thus opting out of the judiciary system.
g. Submission Agreements
Differently from the arbitration clauses that are executed prior to a conflict, a submission agreement relates to an already existing dispute. In this event, and in the absence of an arbitration clause, the parties may still choose to be bound to arbitration by entering into a submission agreement. Nevertheless, the submission agreement must be preceded of an evaluation conducted by the Public Administration as to the advantages and disadvantages of resorting to arbitration in the specific case.
Arbitration will be a preferred method whenever the divergence relates to “eminently technical aspects”, or whenever a delay in the resolution of the case has a damaging potential to important infrastructure operations, or to inhibit investments that are considered priorities in the agendas. However, in this regard, it is important to emphasize that the Federal Administration is not compelled to undertake to submit the controversy to arbitration.
h. Arbitration of Ongoing Lawsuits
If a lawsuit has already been filed in a Brazilian court prior to the conclusion of an a submission agreement, the dispute may still be submitted to arbitration after the fulfillment of some conditions. In addition to the assessment of the pros and cons of resorting to arbitration in the specific ongoing case, the Attorney General responsible for monitoring the lawsuit shall, to the extent possible, issue an opinion expressing (i) the chances of a favorable decision to the public entity in the ongoing lawsuit, as well as (ii) an estimated time prospect for the conclusion of the litigation suit, when possible of being measured.
If arbitration is recommended, the parties shall enter into a judicial or extrajudicial submission agreement, which, in addition to the requirements of the Brazilian Arbitration Act, shall also establish the precise scope of the dispute, as the place where the arbitration will take place and the necessary observance to the provisions of the Arbitration Decree.[18]
i. Costs of Arbitration
The infrastructure contractor shall advance the costs of the institution and the arbitrators’ fees and, depending on the outcome of the arbitration, the costs may be reimbursed in accordance with the final award. If the parties mutually lose, both will bear proportionally the costs of the arbitration.
Except where the parties have agreed otherwise, the costs related to the production of expert evidence, including expert fees, shall also be advanced by the contractor. The costs arising from the hiring of technical assistants, however, shall be borne by each party.
Even though the proceeding will at first prove to be more costly for the contractor due to its obligation to advance costs, this initial burden most likely pays off. After all, infrastructure disputes are naturally complex, and resorting to high-skilled specialized decision-makers is a more efficient alternative than turning to standard court litigation that lasts an indefinite time and is questionable from the technical perspective.
j. Time Limit Provisions
The Arbitration Decree stipulates that the Respondent in the proceeding shall respect a minimum of 60 days to file its initial response. The final award, in its turn, shall be rendered in no more than 2 years from the date of the terms of reference. However, experience has shown that since infrastructure arbitrations are inherently cumbersome, its disputes are rarely resolved within 2 years. If the parties reach a mutual agreement, the 2-year deadline may be extended once, reaching up to no more than 4 years. Nonetheless, it is questionable whether this provision will have practical success since the requisite for mutual consent might not be feasible.[19]
For comparative purposes, note that the Arbitration Rules of the International Chamber of Commerce (ICC) provide that an arbitral tribunal must render its final award within 6 months, which may also be extended pursuant to a reasoned request from the tribunal or on its own initiative if it decides it is necessary to do so.[20] Unlike the Arbitration Decree, the ICC Arbitration Rules does not stipulate an ultimate deadline for the issuance of the final award.
An additional requirement provided for in the Arbitration Decree is that arbitration awards that establish a pecuniary obligation shall provide the means of monetary adjustment of the debt, including default interest rates, in compliance with the governing legislation. In the event of condemnation in attorney’s fees, the Brazilian Code of Civil Procedure shall apply, excluding, in any case, reimbursement of private attorney’s contractual fees.
k. Enforcement of the Award
In the event an arbitration award imposes a pecuniary obligation on an entity of the Federal Public Administration, the prevailing party shall initiate an enforcement proceeding before the competent court. As a general rule, the payment will be carried out by means of a payment order (“Precatório”) that follows a chronological order and observes a pre-established public budget for that means, as provided for by the Brazilian Constitution and ratified by the Arbitration Decree.[21] This means that it is legally impossible to seize the entity’s assets.
However, the Arbitration Decree brought an important innovation to overcome the inherent delay of the Precatório The parties may agree that payment shall occur by means of (i) instruments provided for in the contract that replace monetary indemnity, including mechanisms of economic and financial rebalance; (ii) compensation and set-off of assets and duties of a non-tax nature, including penalties, or (iii) attribution of payment to a third party, in cases permitted by Brazilian law.
In addition to the new possibilities brought by the Arbitration Decree, there are also other alternative methods of satisfying the award that distances from the usual Precatório method. For example, influential Brazilian jurists argue that if an arbitral award is rendered in favor of the private investor there would be no impediment for the public authorities to honor its condemnation provided that there is contractual balance and a specific allocation provision in the Annual Budget Law for the said payment.[22] After all, the mere existence of a dispute does not prevent the Administration from recognizing investors’ claims and even of entering into a transaction, provided that it is duly authorized to do so.[23]
Likewise, the Brazilian Public-Private Partnership Act allows the creation of a partnership guarantee fund, with the purpose of providing guarantee for payments of pecuniary obligations assumed by the public partners.[24] In this case, and after an arbitral award has been rendered to the detriment of the public entity under the partnership contract, it is not reasonable to oblige the prevailing investor to initiate a judicial proceeding to obtain the issuance of a Precatório, when it can just be reimbursed by the fund created precisely to ensure the payment of Public-Private Partnership obligations.[25]
It is also important to highlight that whenever the non-prevailing federal entity is constituted as a state-owned or mixed-capital company (the entities that are usually used to carry out the larger projects), the Precatório payment method does not apply , since those companies bear the status of private entities and therefore are not subject to the Precatório regime, which means that they may suffer asset attachment.
In sum, the Precatório payment method shall be observed as it represents the general constitutional rule. However, that does not preclude the recognition of other legal exceptions which ultimately authorize the adoption of a different procedure by the Public Administration.
4. Implications
As stated, Brazil’s plans to invest heavily in the infrastructure sector depends on the strong performance and endeavor of the private sector. To this end, it is unequivocal that the advent of the Arbitration Decree came in line with the Government’s intention to expand Brazil’s infrastructure, after all, putting the future of major contracts in the hands of sophisticated and reliable arbitrators is one way of capturing investors.
The main reason for the successful first impressions and well reception of the Arbitration Decree is that investors are attracted by efficiency, predictability, and less bureaucracy, which are all present in arbitration proceedings as opposed to judiciary lawsuits. In fact, it has always been a common practice among investors to embed the pricing of judicial risk within the scope of their bid offers.
Although Brazil is not yet a fully pro-arbitration country, especially when it comes to resolving disputes that involve the Public Administration, it can be said that the provisions of the Arbitration Decree appear to be more friendly than harmful for potential investors. It is fair to say that the private sector was presented with a great instrument.
[1] André Luiz dos Santos Nakamura, A infraestrutura e a corrupção no Brasil, 97, 101-102, Revista Brasileira de Estudos Políticos (2018), https://pos.direito.ufmg.br/rbep/index.php/rbep/article/view/588/493
[2] Id., at 102.
[3] Annual Report 2020, ABDIB – Associação Brasileira da Infraestrutura e Indústrias de Base, 4 (2020), https://www.abdib.org.br/wp-content/uploads/2020/02/Relatório-Anual-2020.pdf.
[4] Klaus Schwab, The Global Competitiveness Report 2019, World Economic Forum, p. 110-113 (2019), http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf
[5] World Development Indicators, The World Bank (2019), https://databank.worldbank.org/data/download/GDP.pdf
[6] Relatório Infra 19 Report Acompanhamento do avanço da infraestrutura no Brasil, Projeto Infra 2038 (2019), https://www.infra2038.org/relatorio-infra-19. See also Quem Somos, Projeto Infra 2038 (2017), https://www.infra2038.org/quem-somos
[7] Ministério da Infraestrutura cumpre meta de realizar 23 concessões nos 100 primeiros dias de governo, ministerio a infraestrutura (2019), http://transportes.gov.br/ultimas-noticias/8463-ministério-da-infraestrutura-cumpre-meta-de-realizar-23-concessões-nos-100-primeiros-dias-de-governo
[8] Ministro da Infraestrutura apresenta programa de concessões do governo federal em Nova York (2019), Ministério da Infraestrutura http://transportes.gov.br/ultimas-noticias/9081-ministro-da-infraestrutura-apresenta-programa-de-concessões-do-governo-federal-em-nova-york.html
[9] Lei No. 13.334 de 13 de setembro de 2016, Diário Oficial da União [D.O.U.] de 13.09.2016 (Braz.), http://www.planalto.gov.br/ccivil_03/_Ato2015-2018/2016/Lei/L13334.htm
[10] Conselho do PPI qualifica projetos de infraestrutura que somam R$ 1,4 trilhão em investimentos, Programa de Parcerias de Investimentos (2019), https://www.ppi.gov.br/conselho-do-ppi-qualifica-projetos-de-infraestrutura-que-somam-r-14-trilhao-em-investimentos
[11] Arnoldo Wald et. al., Investment Arbitration in Brazil: revisiting Brazil’s traditional reluctance towards ICSID, BITs, and investor-state arbitration, Journal of Arbitration and Mediation, Revista de Arbitragem e Mediação (2007), https://www.arnoldporter.com/-/media/files/perspectives/publications/2008/07/investment-arbitration-in-brazilrevisiting-brazi__/files/publication/fileattachment/investmentarbitrationinbrazil_2007.pdf
[12] Lei No. 9.307 de 23 de setembro de 1996, Diário Oficial da União [D.O.U.] de 24.09.1996 (Braz.). http://www.planalto.gov.br/ccivil_03/Leis/L9307.htm
[13] Decreto No. 10.025 de 20 de setembro de 2019, Diário Oficial da União [D.O.U.] de 23.09.2019 (Braz.), http://www.planalto.gov.br/ccivil_03/_ato2019-2022/2019/decreto/D10025.htm
[14] However, arbitration will not always be the best subterfuge, since the poor wording of an arbitration clause and the rules provided for therein can perfectly transform the route into an exhausting tour, similarly to the ones found in court proceedings. Therefore, only a specific analysis of an arbitration clause will allow a more accurate conclusion as to the advantages of arbitration in the particular case. And here is where resides the great importance of a specialized and up-to-date legal assistance. (Gustavo Schmidt, A arbitragem nos conflitos envolvendo a administração pública: uma proposta de regulamentação, Biblioteca Digital FGV, 86 (2016), https://bibliotecadigital.fgv.br/dspace/bitstream/handle/10438/16218/Dissertação%20-%20Gustavo%20da%20Rocha%20Schmidt%20-%20Aprovado.pdf?sequence=1&isAllowed=y).
[15] Decreto No. 8.465 de 8 de junho de 2015, Diário Oficial da União [D.O.U.] de 08.06.2015 (Braz.), (revoked by Decree 10,025/2019), http://www.planalto.gov.br/ccivil_03/_Ato2015-2018/2015/Decreto/D8465.htm.
[16] Since the Decree 10,025 only addresses disputes involving the Federal Public Administration, the states and its entities shall observe their respective state decrees, if any.
[17] Resolução No. 5.845 de 14 de maio de 2019, National Agency for Land Transportation – ANTT LEGIS (2019), https://anttlegis.antt.gov.br/action/UrlPublicasAction.php?acao=abrirAtoPublico&cod_modulo=161&cod_menu=6616&num_ato=00005845&sgl_tipo=RES&sgl_orgao=DG/ANTT/MI&vlr_ano=2019&seq_ato=000
[18] Lei No. 9.307/1996: Art. 10. The submission agreement must contain: I – The name, profession, marital status and domicile of the parties; II – The name, profession and domicile of the arbitrator or arbitrators, or, if applicable, the identification of the institution to which the parties have entrusted the appointment of the arbitrators; III – The subject matter of the arbitration; and IV – The place where the award shall be rendered (free translation), http://www.planalto.gov.br/ccivil_03/Leis/L9307.htm
[19] Leonardo Toledo et. al., O novo decreto da arbitragem de infraestrutura, JOTA (2019), https://www.jota.info/opiniao-e-analise/artigos/o-novo-decreto-da-arbitragem-de-infraestrutura-19102019
[20] International Chamber of Commerce 2017 Arbitration Rules, International Chamber of Commerce, art. 31 and 39 (2017), https://iccwbo.org/dispute-resolution-services/arbitration/rules-of-arbitration/.
[21] Constituição da República Federativa do Brasil de 1988 [CONSTITUTION], art. 100 (Braz.). http://www.planalto.gov.br/ccivil_03/Constituicao/Constituicao.htm
[22] Gustavo Justino de Oliveira et. al, Arbitragem público-privada no Brasil: a especialidade do litígio administrativo e as especificidades do procedimento arbitral, Revista de Arbitragem e Mediação, 150-171 (2015), Gustavo Fernandes de Andrade, Arbitragem e Administração Pública: Da hostilidade à gradual aceitação in Leonardo de Campos Melo et. al, A Reforma da Lei de Arbitragem, p. 437-440 Mayer Brown (2016), Forense, https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2016/08/gustavo-fernandes-de-andrade-arbitragem-e-administrao-pblica-da-hostilidade–gradual-aceitao-1006805051.pdf.
[23] Carlos Ary Sundfeld et al., Acordos na execução contra a Fazenda Pública, Revista Brasileira de Direito Público, 43-58 (2010).
[24] Lei No. 11.079 de 30 de dezembro de 2004, Diário Oficial da União [D.O.U] de 31.12.04 (Braz.), http://www.planalto.gov.br/ccivil_03/_Ato2004-2006/2004/Lei/L11079.htm
[25] See Gustavo Justino de Oliveira et. al., Id.
