Arbitration world has shaken in Brazil in the last few weeks with the recent decision of the Superior Court of Justice voiding an arbitration clause included in a franchising agreement. The leading case will guide how to write arbitration clauses in this type of contract.
The decision made a lot of noise in the arbitral world for different reasons:
1 – it applied a non-standard view of the kompetenz-kompetenz principle,
2 – it included franchising agreement among adhesion contracts,
3 – once found it was an adhesion contract, the clause has extra requirements to be valid.
Based on these three major issues, the Superior Court of Justice voided the arbitration agreement in the case.
The kompetenz-kompetenz is a principle recognized in article 8 of the Brazilian Law of Arbitration. It says that the arbitral tribunal has power to decide about his own jurisdiction over the case. Traditionally, the Superior Court of Justice explained that kompetenz-kompetenz means that the arbitrator decide first and the judicial court could only assess later whether the arbitral panel or the court have jurisdiction over the case.
In this case, however, the Court followed another rule. The Judges followed the rule of law by which the Court can act first when the clause is valid prima facie. The Superior Court stated that where the clause clearly did not follow the formalities of the law, then a Judicial Tribunal may decide regardless of the stage of the arbitral proceeding. Judges need not to wait for the arbitrators´ decision on the matter in order to void the arbitration clause.
Then, the court needed to assess whether the clause at hand was prima facie void. In order to evaluate the matter, the court found that franchising agreements are qualified as adhesion contracts. The franchisee has no power to change nor negotiate the agreement and he can only accept or deny all the terms of the contract. Nevertheless, not all adhesion contracts are consumer contract and consumer law does not regulate franchising.
It is important to distinguish from consumer contract, because under consumer protection statute, mandatory arbitration is void per se. In the other hand, other adhesion contracts may have arbitration clauses, provided that either of three situation is respected:
1. the party starting the proceedings is the one who adhered to the contract or
2. that the arbitration agreement is written in bold letters, signed separately from the signature of the contract or
3. the arbitration agreement is signed in a separate document.
Some arbitralists criticized the decision. They understand that it disregarded the important principle of kompetenz-kompetenz as it is applied worldwide. In the other hand, even though the application is not the general application, the Superior Court followed its own precedent on the issue. Moreover, we may find examples where the kompetenz-kompetenz is not applied to prevent the Judicial Court to decide over the jurisdiction before the arbitral tribunal (for example, the United States). Moreover, there are other situations provided by Brazilian law where the principle is not applied, especially where the parties need to file a lawsuit to enforce the arbitration agreement that does not have all the requirements to start the arbitral proceedings. Therefore, the principle has some caveats within the arbitration law itself.
Lawyers of franchisors also criticized the description of the contract as adhesion contracts. They say that franchising agreement are negotiated, even though they follow some standardized forms in the beginning. Nevertheless, the court was consistent once again with its precedents.
In conclusion, arbitration clauses in franchising contracts must follow additional rules given in article 4 of the Arbitration Statute, in order to be valid in Brazil. Finally, there is no reason to believe that the precedent weakens arbitration in Brazilian law, because the courts consistently enforce valid arbitration agreements. This precedent apply to limited situations as described above.
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