Petrobras case and new Brazilian jurisprudence on corporate arbitration

The end of 2016 and the beginning of 2017 brought some news in Brazilian arbitration law. Two Courts, a state court from Sao Paulo and a federal court, decided two cases involving arbitration clauses in corporations’ bylaws and the decisions had opposing results. The Court of Appeals of Sao Paulo held against an arbitration clause in a private company case, while the Federal Court of Appeals of the 4th Region enforced the arbitration clause in the major Petrobras case.

Court of Sao Paulo held arbitration clause invalid when imposed by a majority if there is an ongoing dispute between shareholders

The State Court of Appeals of the state of Sao Paulo provided a surprising solution in the case of a family held corporation. The decision is surprising because it did not applied the article 136-A from the Federal Law of Corporations. It is one of the first precedents interpreting this article.

Article 136-A provides that the majority can impose an arbitration clause in the bylaws of a corporations and it binds all shareholders. In the other hand, this law creates appraisal right the minority shareholders who disagreed with the inclusion of the arbitration agreement.

In the case at hand, however, the Court of Appeals of Sao Paulo found it was contradictory that the majority shareholder decided to include the arbitration agreement in the bylaws exactly when the corporation was facing major economic setbacks. The court said that arbitration is more expensive method of dispute resolution than the judiciary and it would be strange for the company to prefer this kind of dispute resolution. Moreover, it is also strange that the company would prefer the appraisal remedy to the minority in this scenario of economic crisis. Finally, the court annulled the arbitration agreement based on the existence of many disputes between the shareholders, and the change in the bylaws were an act of abuse of power, which is impermissible by the Law of corporations’ regime.

Federal Court of appeals says that Petrobras corporate disputes involving devaluation of shares shall go to arbitration

This is the second important decision regarding arbitration and the Petrobras Case. First, as we commented in previous posts, a New York Court held that Brazilian shareholders could not litigate their case in New York because of the arbitration agreement. Now, a Brazilian Federal Court applied the same reasoning in the lawsuit initiated by a minority shareholder.

Many minority shareholders of Petrobras were trying to avoid the arbitration agreement based on the old argument of unconstitutionality. This precedent is important, because it made stronger the law in favor of arbitration in corporate disputes even in publicly traded companies. Furthermore, the court accepts the possibility of corporate arbitration against the Government as a controlling shareholder.

In sum, the Petrobras Case indicates that arbitration law is getting stronger, even though there are some peculiar situations where the court intervenes and annul arbitration agreement, as the precedent from the Sao Paulo Court.

Conclusion

Recent developments of Brazilian law showed the maturity of Brazilian judiciary regarding arbitration. The Petrobras’s decision is a good example of that maturity. However, the reasoning of the State Court of Sao Paulo deserves attention. The factual scenario must be considered before we create an abstract interpretation of article 136-A of Law of Corporations. For instance, it is not reasonable to make a rule stating that the fact of bigger costs imposed by arbitration would determine if the arbitration agreement is void when the company faces an economic crisis. If so, this would generate apprehension in many deals in distressed companies, who adopted arbitration agreements to encourage suppliers to get into new contracts. Therefore, the context is very important, and this case must have limited application to abuse of shareholder power situations.