International Arbitration in the Oil and Gas Industries
© Springer International Publishing Switzerland 2015
Yanko Marcius de Alencar Xavier (ed.)Energy Law in Brazil10.1007/978-3-319-14268-5_1111. International Arbitration in the Oil and Gas Industries
(1)
Department of Private Law, Federal University of Rio Grande do Norte, Natal, Brazil
Abstract
The present chapter aims at discussing the most adequate international format to deal with controversies involving private entities, especially involving contractually guaranteed interests and rights. International arbitration is the accepted means of resolving controversies through a third party with judicial powers over the issue that is highly adapted to the transnational reality of current private international juridical relations, given the autonomy of the parties in areas such as specialty, speed and confidentiality sought. Thus, this chapter will initially focus on arbitration in Brazilian legal policy as a way of resolving controversies, in order to explain how international arbitration functions in Brazil and its format, which must, to some extent, be executed and recognized by Brazilian law, as well as analyzing how it is incorporated into the Brazilian legal system. Finally, we discuss the specific arbitration clauses contained in Brazilian oil and natural gas exploration contracts, their international implications and classification in Brazilian law. We also assess how arbitration is included in international commercial contracts that maintain a connection with Brazil for any reason, once again in accordance with private international law in force in the country.
11.1 Arbitration in Brazilian Legal Order as a Way to Resolve Controversies
Arbitration emerges as a form of “ad hoc” jurisdiction, or a mere jurisdictional equivalent, in which the State itself provides an option for parties to resolve their controversies under the dominion of individuals of their choice.
This choice made by the interested parties is independent of the dispute itself and considers a number of specific factors in each case, but which are almost always related to one or more of the following: technicality of decisions that the case requires in analysis, impartiality of the court selected, speed of legal proceedings, duration of the process, nonexistence of appeals related to decision issues, possibility of choosing the arbitrators, the law and procedural guidelines to use, secrecy and confidentiality required in most commercial contracts, whereas in the state judiciary the general rule of making all acts public prevails.
This being said, it is important to understand that in all sovereign States arbitration can take on different meanings, depending on the framework that each internal law provides for this form of conflict resolution without state participation, despite the existence of initiatives to standardize national laws, in order to create the most balanced arbitration rules possible among states, thereby ensuring greater judicial security for international transactions, irrespective of where negotiations are held.
The best example of this, though nonbinding in that it is not an international treaty per se, is UNCITRAL’s Model Law on International Commercial Arbitration. UNCITRAL, the United Nations Commission on International Trade Law, is a subsidiary department of the United Nations General Assembly that plays a key role in the development of the legal framework of international law through legislative texts. These are employed by the States to modernize international commercial law and nonlegislative texts for the parties to use them when negotiating commercial transactions.
With respect to uniform legal instruments and the force of law that links the Brazilian State, specifically in relation to arbitration, the “MERCOSUL Accord on International Commercial Arbitration,” instituted by Decision no. 03, of July 23, 1998, of the Common Market Council, regulates arbitration as a private alternative means of resolving disputes arising from international commercial contracts between natural or legal persons.
In another spectrum, the current Brazilian law that regulates this third-party method for resolving conflicts is Federal Law No. 9.307, of September 23, 1996 (“Arbitration Law”), which recognizes the importance of this mechanism in pacifying disputes between private entities, especially in commercial matters. However, an evolution in thinking was needed with regard to arbitration to achieve its current internal legal treatment and consider it an efficient and beneficial instrument for society.
Under the Civil Process Code of 1973, the arbitration sentence was still subject to judicial approval by the state entity that would originally have authority to judge the case had it not been the object of the arbitration convention between the parties. This issue was only modified in Brazil by Arbitration Law, in 1997, when it was verified that there was a pressing national and international need to grant the parties the power not only to resolve their litigation outside state control but also, notably, to guarantee speed in the execution of these decisions and further legitimize this choice by excluding the State from authorizing the arbitration. Its activities are restricted to very exceptional situations, but limited to protecting the free and independent choice of the parties and the legal provisions agreed upon.
In this sense, the Arbitration Law establishes that three requirements must coexist to enable a legitimate arbitration process. The first is the ability of the parties to contract, irrespective of their being natural or legal persons, given that Brazilian law states that for arbitration to occur, the parties must provide a declaration of complete exemption, free of any flaws or defects. This is manifested by adherence to the solution that differentiated shape of state, which is necessarily formal and written. It is an instrument for expressing wishes that is considered legally valid and autonomous and can therefore only be issued by one who enjoys full legal capacity.
Admittedly, legal capacity, for both natural and legal persons, can be treated differently from country to country, that is, each State has the sovereign power to rule on the start, completion and conditions that legal capacity falls under. In terms of internal issues, this is not a serious problem since without binding elements that interconnect a judicial relationship to at least two legal orders, the matter is not treated differently and will be totally regulated by internal law. However, the problem arises with some specific aspects when the private relationship under analysis is considered, for whatever reason, international and subject to receiving the assessment of two or more internal laws.
Judicial capacity of a natural person in Brazil initiates at the age of 18 years, when the person is authorized to engage in all civil acts, in accordance with article 5 of the Brazilian Civil Code; it also states that in some instances age of majority can be reached beforehand.1 The capacity of a legal person in Brazil, according to article 45 of the Brazilian Civil Code, is deemed to exist at the point of its legal foundation, especially in regard to private law, with the establishment of its acts of incorporation, in the appropriate registry, which can be the business registry, in the case of a company, the civil registry, if it is a legal person with such scope, and thus a nonprofit entity, or even professional societies registered in their respective professional councils.
In the case of private international legal relationships, the capacity of the parties required by the Arbitration Law should be viewed in accordance with not only the Brazilian Civil Code, since Brazilian law may not be directly applicable in terms of establishing legality, but also the LINDB and other guidelines of private international law valid in Brazil. In relation to natural persons, article 7 of the LINDB states that the law in a person’s country of residence will determine the rules regarding the start and end of the legal personality and its capacity, while the substantive law applicable to companies, as discussed earlier in Chapter 13, will be the law of the country in which the legal person was instituted (art. 11 da LINDB).
In this respect, article 2 of Federal Decree No. 2.427, of December 17, 1997, states that “the existence, authority to have rights and obligations, functioning, dissolution and merger of private legal persons will be regulated by the law of the country in which it was instituted.” The Inter-American Convention on the Legal Personality and Authority of Legal Persons in Private International Law, enacted in Brazil and therefore internalized under juridical order by the aforementioned Federal Decree, asserts that “law of the country in which it was instituted” is understood to be the State where the requirements to create such legal entities were fulfilled. The Convention officializes the recognition by one State of private juridical persons duly constituted in another State.
Once the first requirement is fulfilled, the second requirement adduced by the Arbitration Act to conceive that its happening in Brazil involves the availability of the right involved in the dispute to be settled, while the third and last requirement is the endowment of a patrimonial characteristic to this same right, which must therefore be available and patrimonial. Through the characterization between available and unavailable laws achieved by elimination, the unavailable laws are in the public domain, prohibiting waiver, cessation, transfer or any type of transaction, whereas the available laws can be objects of bilateral negotiations or even unilateral acts. As a complement to the third requirement, the law in discussion pertaining to arbitration must be endowed with a perception of value in the economic-financial sense, usually linked to contractual judicial relationships.
When these elements of the fundamental assumptions contained in Brazilian law in terms of the country’s arbitration are entirely fulfilled, interested parties can submit the solution of their litigation to the arbitrator through the arbitration convention, as understood by the arbitration clause and arbitral commitment. The arbitration clause is a contract signed by the parties foreseeing the existence of any argument or dispute, whereas the arbitral commitment applies when the parties perceive the need for third-party decisions, in the event of divergence regarding contractual issues or otherwise.
The parties can freely choose the rules of law that will be applied in arbitration conducted in Brazil, provided they do not violate good standards and public order, as contained in paragraph 2 of article 2 of the Arbitration Law. This equally recognizes the independence of the parties’ decision and the best solution to litigation. It will be up to the parties to decide on the most adequate substantive law applicable to the case, providing a more balanced solution.
In relation to the effectiveness and execution of the arbitration sentence, article 31 of the Arbitration Law contained, at that time, a relevant and indispensable modification that became a real change of paradigm for the development of arbitration in Brazil. The said disposition dictates that the arbitral decision produces the same effects between the parties and their successors as the sentence imposed by the Judiciary. If condemnatory, the sentence constitutes an executive title linking the parties that opted for arbitration to resolve a given dispute, as well as serving as a legal document for interested parties to judicially enforce the fulfillment of any sentence. This is because the coercive power to oblige individuals to comply with any legal decision remains with the State, there being no arbitration court with the said inalienable authority of the democratic rule of law.
11.2 International Arbitration in Brazilian Law
Based on this premise of established concepts, which are constantly varying in national laws but need to be consistent internationally, it is important to understand when arbitration is considered “international” to be able to apply specific arbitration rules to internal and international arbitration in Brazil, given that depending on characterization being one or another, there are different procedural means to consider it feasible.
This being so, when there are connecting elements with more than one legal system, similar criteria to those that differentiate between national and international contracts are used to distinguish between internal and international arbitration; after all, arbitration originates solely from a bilateral act of commitment, whether instituted in a contract or not, but greatly resembles this juridical figure, despite its independence and autonomy, due to the joint commitments of both parties to establish bilateral obligations.
According to the UNCITRAL Model Law on International Commercial Law, whose relevance in being adopted internally by countries was established by UN General Assembly Resolution Nos. 40/1972, of 1985,2 and 61/33, of 2006,3 arbitration can be considered international when (art. 1, §3) (a) the parties in an arbitration agreement have, at its conclusion, their commercial headquarters in different States or (b) one of the locations to follow is situated outside the State in which the parties have their headquarters: (b.1) the site of arbitration, if determined in, or in accordance with, the arbitration agreement; (b.2) any location where a substantial part of obligations resulting from the commercial relationship must be fulfilled or the location where the object of dispute has closer ties; or (b.3) the parties have expressed that the object of the arbitration agreement involves more than one country.
The assumption of internationality in an arbitration would therefore occur in any situation where the private juridical relationship in question could be considered international because it directly involves two or more legal system, as well as in situations in which the parties themselves, the substantive law that applies and even the site of arbitration are different from that of the parties involved.
The format contained in the UNCITRAL Model Law involves a broad conception of internationality, which internal laws must handle case by case. This means they can rule adequately when any of these international arbitration aspects are present, providing security for all parties that choose this law to resolve their litigations, irrespective of the nationality of the arbitrators and/or the substantive law selected, the differences in their residences/headquarters and even the geographic location of the arbitration court itself.
However, this thinking is not the basis for the establishment of the Brazilian Arbitration Law, which adopted the so-called monist system for international arbitration, given that it regulates only domestic arbitration. In the international arena, Arbitration Law deals only with the manner of internalizing the foreign arbitral sentence. It differentiates solely in terms of territorial and geographic aspects, given that they rule over internal arbitration, headquartered and occurring in Brazil, regardless of other factors that could classify it as international. These include the residence or headquarters/administration of persons that will litigate in said arbitration, substantive or procedural law to be applied being foreign, the language selected not being Portuguese, arbitrators not being national, part of the probatory instruction not being conducted in Brazil, as well as the legal effects of the future arbitral sentence not being executed exclusively in Brazil.
Thus, only differentiation between national and foreign arbitral sentences was established in the sole paragraph of article 34, which states that an arbitral sentence is considered foreign if it was pronounced outside national borders. It is understandable to conclude that under Brazilian law there is not exactly international arbitration but rather foreign arbitral sentencing. This is in line with articles 34 to 40, which deal only with the approval of foreign arbitral sentences for purposes of execution in the Brazilian justice system.
This is because Brazilian law uses only the geographic criterion to characterize arbitration as internal or international. In other words, if the Arbitration Court is in the country, the arbitral sentence will be national, even if parties involved are headquartered abroad, foreign laws apply or the object is connected to a different country, as described above.
Therefore, Brazilian law does not precisely define international arbitration but rather is limited to treating it as a foreign arbitral sentence, derived from arbitration conducted abroad. This is the meaning of Brazilian law for international arbitration, regardless of the other circumstances that may involve a certain case, making differentiation simpler, at least in relation to the legal treatment given to internal and international arbitration.
Thus, the nationality of the arbitrators or the court is irrelevant, as are the procedural rules that the arbitration judge used or the substantive rules applied, only the fact that they had been pronounced outside Brazil.
It is important to underscore that treatment of the issue by Brazilian law in no way diminishes the importance of international arbitration in Brazil. It merely means a legal choice by which, instead of ruling on all possible international arbitration cases to provide each case the due judicial consequence to have valid and legitimate arbitration, Brazilian law preferred not to broaden the possibilities and make a clear distinction between arbitration that takes place here in the country and that which occurs abroad.
For the first, the requirements of validity, which must be fulfilled, are found in the aforementioned law, albeit doctrinarily if such arbitration is considered international. These requirements cover everything from the convention that establishes it to its conclusion, with pronouncement of the arbitral sentence/report. In the second situation, the law rules on the adequate measure by which the arbitral sentence/report concluded abroad may generate judicial effects as if it had been pronounced in Brazil. This is achieved through a judicial procedure petitioning its recognition by the competent national authority, which will ratify and approve the foreign arbitral sentence/report.