When negotiating a cross-border contract, e.g. a

Transcription

1 Resolution Of Transatlantic IP And Commercial Disputes Between Brazil And Europe By Carlos Aboim, Ulrich Lohmann and Eduardo Roncolatto 1 When negotiating a cross-border contract, e.g. a patent license agreement, the parties usually focus on the object of the contract. In the case of a patent license agreement, the object of the contract would be the rights that the licensor intends to grant to the licensee with respect to the patent and perhaps related know-how, and the royalty that the licensor expects the licensee to pay, plus perhaps some representations and warranties. When the members of the negotiation team are nearly finished, the topic of dispute resolution finally comes up. Dispute resolution, as used herein, means both the process, i.e. who decides a dispute and under which rules, and the substance, i.e. which law will govern the decision. At that time, usually late in the day, the party with the stronger negotiation position will normally propose that the courts of its home country shall have jurisdiction to decide any dispute arising out of the contract, based on the substantive law of its home country. After some half-hearted discussion, if at all, either the other side gives in or a quick compromise is cooked up. The resulting clauses are referred to as midnight clauses, both to denote the time at which they are devised and to reflect the fact that such clauses are often hardly suited to the needs of the parties. This paper will discuss what the negotiators should take into account to be prepared when discussing dispute-resolution clauses in a commercial contract, such as a patent license agreement, if one party is a resident of a highly industrialized country and the other of a newly industrialized country, notably a BRIC country. The first part provides the view from Continental Europe, and the second part the view from Brazil, in each case with an emphasis on contracts dealing with intellectual property. The paper is not concerned with disputes that may arise outside of contractual relationships, such as from patent or trademark infringements, challenges to patents or product liability cases. The paper is addressed to intellectual property professionals, such as patent agents, who may be involved in 1. This article is based on three presentations given by the authors in April of 2013 at the LESI 2013 Annual Conference Rio de Janeiro, Brazil. contract negotiations without necessarily being lawyers. Therefore, we will recur to patent licensing agreements to illustrate the points made below. I. The View From Continental Europe A negotiator acting for a European party, e.g. a German licensor, entering into a patent license agreement with a party resident in a BRIC country, e.g. a Brazilian licensee, should consider the following points: (1) Is a dispute-resolution clause required? Would one or both parties be better off without a dispute-resolution clause? (2) If a dispute-resolution clause is included in the contract, should it provide for the jurisdiction of the ordinary courts or should any dispute be referred to arbitration or some other process of dispute resolution? (3) If the parties agree to refer disputes to the ordinary courts, the courts of which country should have jurisdiction? (4) If the parties agree to refer disputes to arbitration, what points need to be considered? Is the place of arbitration significant? Should the arbitration be managed by a service provider or by the parties themselves, ad hoc? (5) If the parties want to refer disputes neither to the courts nor to arbitration, what other means are there? Is mediation an alternative? We will now explore these points one by one. (1) Is a Dispute-Resolution Clause Required? Before embarking on a discussion of dispute-resolution clauses, the negotiator should know how a dispute arising under the contract to be negotiated will be resolved if the parties could not agree on a dispute-resolution clause. As a first step, a German licensor entering into a patent license agreement with a Brazilian licensee would consider the matter of jurisdiction. If necessary, could the German licensor sue the Brazilian licensee in the courts of Brazil, of Germany or of a third country? Where might he be sued, in turn, by the Brazilian licensee, if the contract contained no choice-of-forum clause? A choice-of-forum clause states that a specific court shall have jurisdiction to decide disputes arising under a given contract. Normally, this analysis will be difficult, 48

2 because it will involve researching the law of at least two countries. However, even a superficial analysis will most likely show a lot of uncertainty, such that several different courts, both in Germany and Brazil, would likely assume jurisdiction, depending on whether the licensor or the licensee is the claimant. Such a situation could easily lead to a mud fight if the licensor tries to sue the licensee in a German court while the licensee sues the licensor in a Brazilian court and both hope that no other court will assume jurisdiction. Such a mud fight is not very efficient and can be very lengthy and costly. As a second step, the German licensor entering into the patent license agreement with the Brazilian licensee would consider which law would apply in a dispute. This is the law governing the rights and obligations of the parties to the contract, to the extent the contract itself does not spell these out unequivocally. He would have to conclude that, if the contract itself contains a choiceof-law clause stating which law has been chosen, most courts would accept and apply such choice. If however the contract itself does not specify the applicable law, any court that is asked to decide an issue relating to the contract would resort to the conflict-of-law rules 2 prevailing at its seat (lex fori) to determine the applicable law. Therefore, the determination of the law applicable to the contract in the absence of a choice-of-law clause depends on which court has jurisdiction: A Brazilian court would resort to Brazilian conflict-of-law rules while a German court would resort to German conflict-of-law rules. It is possible that the outcome differs because conflict-of-law rules around the world differ, even if they are similar in many respects. In other words, until the mud fight has ended, neither side will know who will finally decide the dispute and on the basis of which contract law, German or Brazilian. We conclude that those negotiators who want to avoid an expensive and unproductive mud fight will acquaint themselves with the next points discussed in this paper. (2) Courts or Arbitration? Arbitration is a means of settling disputes outside the courts, whereby the parties to a dispute refer the matter to one or more persons (the arbitrators or, collectively, the arbitral tribunal ), by whose decision (the award ) they agree to be bound. 3 There are many arguments in favor of and against arbitration and we will not endeavor to provide an exhaustive 2. Also referred to as private international law. 3. Most countries have legislation dealing with arbitration, such as the Book 10 of the German Code of Civil Procedure. Many of these laws, such as the German law, follow the UN- CITRAL Model Law on International Commercial Arbitration, Model_arbitration.html. discussion in this paper. From a practical point of view, however, arbitration has some compelling advantages in regard of the resolution of disputes that may arise under a cross-border contract, such as a patent license agreement between a German licensor and a Brazilian licensee. In the following, we will mention four of these arguments. First, it will be very difficult for the German party to convince the Brazilian party that it should agree to appear before a German court in case of a dispute. Not only is the language and the procedure of the German court unfamiliar to the Brazilian party, even if it had competent German counsel, but there would also always be a lingering suspicion that the German court would be disposed to exercise any discretion which it may have in favor of the German party. For the same reasons conversely, it would be difficult for the Brazilian party to convince the German party that it should agree to appear before a Brazilian court. Second, where as here the resolution of a dispute may require specialist knowledge, such as knowledge about patents and licensing, there is no assurance, with few exceptions, that the judge at the court selected has such knowledge. Indeed, Carlos Aboim, Licks Attorneys, Partner, Rio de Janeiro, Brazil carlos.aboim@ lickslegal.com Ulrich Lohmann, Pinsent Masons LLP, Head, Munich Office, Munich, Germany ulrich.lohmann@ pinsentmasons.com Eduardo Roncolatto, Merck Sharp Dohme, Latin America Managing Counsel Legal and Compliance, Sao Paulo, SP, Brazil eduardo_roncolatto@ merck.com there may be a question whether the judge can even read the contract, e.g. if the contract is in English and the judge is German or Brazilian. Third, choice-of-forum clauses might not be accepted by the court specified in the clause. 4 This is a matter of national civil procedure of the country where the court at issue is located. Before agreeing on a choiceof-forum clause, the parties therefore must make sure both that the court identified in the clause is prepared 4. In Germany, this would not be much of an issue: German courts would normally recognize and enforce a choice-of-forum clause, whether it provides for the jurisdiction of the German court (prorogation) or that of a non-german court (derogation), see Sec. 38 of the German Code of Civil Procedure (ZPO). March

3 to act when seized and that no other court assumes jurisdiction. If the court identified in the clause is not prepared to act when seized, the parties may not have any way of resolving disputes arising under the contract, because the other courts, i.e. the ones the parties have not chosen, may well recognize the choice-of-forum clause and therefore decline to act as well. Fourth, a particular court judgment is not necessarily enforceable in the jurisdiction where it is needed. This is a matter of the law of civil procedure of the country where enforcement is sought, which may provide that judgments from certain other countries cannot be enforced at all or only under certain conditions, such as reciprocity, which are difficult to establish. 5 All these issues would be taken care of if arbitration were selected as the dispute-resolution method the parties could select a place of arbitration of their choice, perhaps in a third country, and they could specify the requirements for arbitrators, such as language and technical skills, as they see fit. Arbitration clauses are generally recognized everywhere and the New York Convention 6 with 149 signatories 7 virtually guarantees that arbitration awards can be enforced around the world. Even disputes about the existence or the infringement of intellectual property rights could be resolved in arbitration in many countries. (3) If Courts, Which Courts? If the parties decide to refer disputes to a court, such court should be specified unequivocally and exclusively, making it clear that legal action before any court other than the one specified in the contract is not admissible. If the selection of the court is not unequivocal and exclusive, a mud fight could still ensue. The first impulse often is to resort to one s home country. Thus, the German licensor would, without much reflection, suggest the jurisdiction of the courts of its home country, Germany, and the application of German contract law. 8 However, as indicated above, this approach is likely to meet with resistance from 5. For instance, a foreign judgment could be enforced in Germany only if the foreign court had jurisdiction not only under the law of the foreign country, but also under German law, Sec. 328(1) No. 1 of the ZPO. 6. Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, 7. As of 15 August 2013, see en/uncitral_texts/arbitration/nyconvention_status.html. 8. We are concerned here only with substantive contract law, e.g. the rules dealing with the performance of contracts etc., but not with patent law, because under the conflict-of-law rules of most countries, patents are always governed by the law of the country having granted the patent (lex loci registrationis) and the parties are not at liberty to change this. the Brazilian licensee who would not want to appear in a foreign and far-away court and, if he followed the same impulse, would rather suggest jurisdiction of the Brazilian courts and application of Brazilian contract law. Also, the approach may be misguided because, if the licensor prevailed and the parties agreed on jurisdiction of the German courts, the Brazilian licensee failed to pay the agreed royalty, and the licensor obtained a German judgment, such judgment would still have to be enforced in Brazil. The enforcement of a foreign judgment is a separate legal process in almost all countries, which again will take time and cost money, even though the essence of the judgment of the first court is generally not questioned. As a result, it might have been easier and quicker to agree on the jurisdiction of the Brazilian courts, considering the whole process including the enforcement of the German judgment in Brazil. Another approach is the non-exclusive jurisdiction provision. This has the effect of ensuring that at least one national court has jurisdiction but allowing the chance of starting an arbitration in other courts if they are preferable. This gives the parties more flexibility. Parties often attempt to resolve the situation by agreeing on the courts of a neutral country, which begs the question whether such courts will accept jurisdiction, as discussed above. As an alternative, the parties propose a mix of jurisdiction and applicable law, e.g. by agreeing on German courts and Brazilian law. Mixing jurisdiction and applicable law is a bad idea, because courts are generally not equipped to decide cases under any law other then their own. The same is true for bifurcating the proceedings, e.g. by agreeing that the licensor can sue the licensee in Brazil under Brazilian law and the licensee can sue the licensor in Germany under German law. The outcome of the dispute would consequently depend on who sues first again unleashing a mud fight. To conclude, if the parties decide to refer disputes to a court, such court should be identified unequivocally and the law of the country of such court should also be selected as the applicable law of the contract. (4) Points to Consider if Agreeing on Arbitration If the parties agree to refer the dispute to arbitration, the following points should be considered: Every arbitration needs a home, which is called the place of arbitration. The place of arbitration determines, under most arbitration laws, the procedural law applicable to the arbitration. This is important because the arbitration laws differ from one country to another, even those that are based on the UNCITRAL Model Law. Here are a number of points to consider on the basis of the local arbitration law before making this choice: Are there any recognized arbitral institutions that will manage arbitration proceedings in the country 50

4 9. This is known also as Kompetenz-Kompetenz. 10. The IBA Rules on the Taking of Evidence in International Arbitration (2010), provides a set of rules governing the taking of evidence that should be acceptable both in civil law and common law jurisdictions. selected? At what cost? Is the likely object of the dispute arbitrable in the country at issue? Consider, in particular, disputes about the existence or the infringement of intellectual property rights, which may well come up in connection with a license agreement. Will an arbitral tribunal at the place selected recognize the choice of law made in the contract? Will the arbitration agreement be recognized and enforced? Independently of the main agreement, e.g. the license agreement? Will the arbitral tribunal itself be able to determine its powers on the basis of the arbitration agreement, or will that determination be left to the courts? 9 Will the arbitrators be bound to impartiality? Will they have to disclose any conflicts of interest? Is the arbitral tribunal obligated to give the parties a fair hearing and to treat the parties in a non-discriminatory fashion? What evidence is admissible and how is it taken by the arbitral tribunal? The answer depends on whether the legal practice at the place of arbitration follows the civil law or the common law tradition. Under the common law tradition, the arbitral tribunal is more likely to admit the cross-examination of witnesses, requests for documents (disclosure or discovery) and party-appointed experts. 10 Are there any formal requirements for the award that may constitute an issue? Will the award be enforceable where needed? Can the local courts set the award aside? On what grounds? Thus, the choice of the place of arbitration may have important procedural consequences and should be made explicitly in each arbitration clause. Generally, a country which is a signatory to the New York Convention should be selected as place of arbitration if it is likely that the award will be enforced in another of the many signatory states of the New York Convention. The parties should also agree whether the arbitration should be managed by a service provider or by the parties themselves. The latter method is referred to as ad hoc arbitration and is generally more risky, because the parties or, if the parties so agree, the arbitrators have to make up all the rules of procedure. This is a difficult task in and of itself, and any gap in the rules would give a party a way to delay or even derail the arbitration proceedings. It is also unnecessary to reinvent the wheel in this fashion, as there are many capable institutions around the world whose business it is to manage the arbitration process, including the selection of arbitrators. If ad-hoc arbitration is preferred nevertheless, the parties should consider referring to the UNCITRAL Arbitration Rules 11 which are known and practiced worldwide; these would confer some stability on the proceedings. Many arbitration institutions exist on a worldwide level, and the following should be mentioned: The International Court of Arbitration of the International Chamber of Commerce (ICC), the International Centre for Dispute Resolution (ICDR), the London Court of International Arbitration (LCIA), the China International Economic and Trade Arbitration Center (CIETAC), the Hong Kong International Arbitration Centre (HKIAC), the Singapore International Arbitration Centre (SIAC), and the German Institution of Arbitration (DIS). Of particular interest for patent professionals is the fact that the World Intellectual Property Organization (WIPO) 12 has an arbitration and mediation center and a panel of experts in intellectual property and technology related disputes. The arbitration institutions normally provide model clauses on their websites. These should be used. Again, the parties should resist the temptation to reinvent the wheel and refrain from attempting to regulate every detail of the arbitration themselves; the institution selected will have infinitely more experience with the matter. (5) Other Means of Dispute Resolution The parties may also want to consider means of dispute resolution other than litigation (before the courts) or arbitration. Such other means may be referred to as alternative dispute resolution (ADR). However, the parties should be aware that only litigation and arbitration provide for a framework in which the case can actually be decided. Clauses requiring the parties to negotiate or otherwise attempt to resolve disputes without the help of a professional third party, whether judge, arbitrator, mediator or expert, are usually useless. Mediation is a method of dispute resolution where a third party, the mediator, assists the parties in settling their dispute. Mediation is voluntary either party can stop the process at any time. The mediator has no power whatsoever to make any decision on the merits, and should not even make settlement proposals except if requested to do so by the parties. Mediation should 11. As revised in 2010, uncitral_texts/arbitration/2010arbitration_rules.html March

5 generally be considered, because it is much more efficient than litigation or arbitration and, more importantly, it is face-saving because the parties devise the settlement themselves and thus own it. On the other hand, there is no guarantee that mediation will lead to a resolution of the dispute if the parties want to try mediation, as they should, they should also provide for another, final dispute-resolution process if mediation fails. A clause providing first for mediation and then for another, final dispute-resolution process is called an escalation clause. Escalation clauses should be used only if they provide for a clear time table enabling the claimant to move the matter forward without too much delay if mediation is not successful. There are also other processes designed to resolve disputes, including those where an expert is requested to determine an isolated issue, such as the reasonableness of a price increase (expert determination). These are generally no substitute for litigation or arbitration either and will therefore not be considered here. If expert determination or a similar technique is used, it should also be agreed that the resulting report or opinion may be reviewed, at least as regards fundamental mistakes or bias, by a court or arbitration panel. Brazilian Chapter 1 Introduction to the Brazilian Civil Legal System Brazil is a Civil Law country mainly influenced by the French, Italian and German civil codes. Judicial decisions are not stare decisis, although they do exercise a role in supporting court s decisions. The Brazilian Federal Constitution of 1988 was promulgated after a military dictatorship had been in power from 1964 to 1985 and enacted a wide range of fundamental rights, including IP rights (Art. 5, XXIX) and access to courts (Art. 5, XXXV the law cannot exclude from the judiciary any violation or threat to a legal right ). Civil cases in Brazil are tried by single judges at the first instance of the judiciary, while appellate courts have panels of three judges (or more) to review cases submitted to them. There are no juries in civil proceedings, which typically have four phases (an initial phase, in which the pleadings and an answers are presented, a preparatory phase in which preliminary allegations are decided, a fact finding phase and the decision phase). It is important to note that in Brazil there is no discovery phase evidence is taken after the pleading phase; this is a short process following specific rules. Depending on the complexity of the case and the matter under analysis, a civil case can take from one year (for example, a case concerning a real estate residential lease agreement) up to ten years (a patent infringement case, for example), or more. In addition to that, interim measures are available during the whole proceeding, such as seizure of assets or preliminary orders; these can make the proceedings even longer. The parties do not have control over the procedure, except for limited opportunities to accelerate the procedure. Last but not least, civil proceedings are in their vast majority public in nature, except for some specific cases which are covered by confidentiality, like family law cases. As for the structure of the Brazilian Civil Judicial System, on top of it there is the Federal Supreme Court, whose main task is to interpret the constitution 13 by reviewing constitutional acts. The Superior Court of Justice has the final word on the interpretation of federal law, which may be superseded by the Supreme Court in case such interpretation violates a constitutional clause. The Superior Court of Justice is also in charge of confirming foreign arbitral awards ( homologação ) which will then be executed before a first instance federal judge. The Appellate Courts are based in each of the Brazilian States. Finally, the first instance judges form the base of the civil judicial system. 2 The Development and Cornerstones of the Brazilian Arbitration Law Before the enactment of the Brazilian Arbitration Law in 1996, the arbitration clause was a mere promise to agree. The dispute could be taken to court anyway. A state judge would never declare himself unable to hear a dispute simply because the parties had agreed on arbitration. The consequence of the breach of the promise to arbitrate would be damages, and that was it. At that time an arbitral award had to be approved by a state court in order to make it enforceable. Therefore arbitration was not regarded as an effective means for domestic or international dispute resolution. The enactment of the Brazilian Arbitration Law in did not solve all of these issues right away. The new federal law still had to pass the test of constitutionality as access to courts is a fundamental right under the Federal Constitution. Based on this, it was argued that state jurisdiction could not be waived. Nevertheless, in 2001 the constitutionality of the law was affirmed by the Brazilian Supreme Court, 15 and one of the arguments presented by the Justices during the hearing was the reliance of foreign investors in arbitration, especially in areas requiring specific knowledge. The national arbitration law is modern and substantially close to the UNCITRAL Model Law, where: (i) the 13. Federal Constitution, section Federal Law # of September 23 rd, Brazilian Supreme Court, SE 5206 AgR, Justice Sepulveda Pertence, , D.J , in M.B.V. Commercial and Export Management Establishment v Resil Industria e Comercial Ltda. 52

6 agreement to arbitrate is a waiver of state jurisdiction, 16 and courts can compel specific performance of an arbitration clause when one of the parties is not cooperating; 17 (ii) the arbitration clause is autonomous, i.e. it does not depend on the validity of the whole contract (separability), 18 (iii) there is freedom to choose the applicable law, 19 rules and procedure; 20 (iv) there is limited court intervention (Kompetenz-Kompetenz) 21 but courts are available to compel witnesses to appear and to enforce arbitral awards, among other modern cornerstones. 3 An Important Controversy Arbitration With States In a number of new Brazilian laws associated with public service concessions and building of infrastructure, arbitration is now recognized as the preferred dispute resolution method between private parties on one side and the state or public entities on the other. 22 According to this new legislation, it has been the prevailing interpretation that when a public legal entity is a party to an arbitration, the seat of the arbitration should be in Brazil, the applicable law should be Brazilian, and the arbitration should be conducted in Portuguese. Where express authorization is given by law, there can be no dispute about acceptance of arbitration among state and private parties. However, in the cases in which there is no such authorization, the doctrine developed three different theories: One stream states that the state cannot be a party in an arbitration due to the legality principle, 23 according to which the state can only perform acts that are authorized by the law; 16. Article 267, VII of the Brazilian Code of Civil Procedure, which provides that state court proceedings must be terminated where a valid arbitration agreement exists. 17. Art. 7 of the Brazilian Arbitration Law. 18. Art. 8 of the Brazilian Arbitration Law. 19. Art. 2 of the Brazilian Arbitration Law 20. Art. 21 of the Brazilian Arbitration Law. 21. Art. 8, sole paragraph, of the Brazilian Arbitration Law: The arbitrator has jurisdiction to decide ex officio or at the parties request, the issues concerning the existence, validity and effectiveness of the arbitration agreement, as well as the contract containing the arbitration clause. 22. Law 9.472/97, section 93, XV (Telecommunications Law), Law 9478, section 43, X (Petroleum and Gas), Law /2001, section 35, XVI (Transportation Law), Law /2002, section 4, paragraph 5, V (Electric Energy Law), Law /2004, section 4, paragraphs 5, 6 and 7 (Electric Energy Commercialization Chamber), Law /2004, section (Public Private Partnership), Law /2005, section 120, which amended the Public Services Concession Law (Law 8987/95, section 23-A), Law11.668/2008, section 4, XII (Postal Services Franchising) and the Law /2009, section 21, XI (Natural Gas Transportation). 23. Federal Constitution, Section 37. A second stream argues that arbitration should be agreed in administrative contracts since the Bid and Administrative Contracts law 24 establishes that general contracts principles should apply to public contracts as well. A variation of this stream says that the arbitration acceptance would indicate that it applies to all contracts in which the state is a party; The third stream defends the argument that arbitration would be applicable only to publicly owned companies and entities owned by private and public parties, which develop economic activities. 25 As for the court precedents, there is a tendency to accept arbitration in agreements with the state. The leading case was decided in 2005 AES Uruguaiana v. CEEE by the Superior Court of Justice, which reversed a court of appeals decision that ruled null and void an arbitration clause included in a power purchase agreement citing public interest. Said case was settled by the parties and the case dismissed in On the other hand, in TMC Terminal Multimodal de Coroa Grande SPE S/A v. Minister Science and Technology, decided in 2008, the court distinguished between primary interest of the state ( public interest ) and secondary interest of the state ( economic interest ) and concluded that only the latter could be submitted to arbitration. Brazilian investments abroad, as well as the need of foreign investments in infrastructure in Brazil, have enhanced the adoption of arbitration in agreements between private parties and the State in Brazil. 4 Choice of Law in Brazil In some countries, the parties to an agreement are free to choose the law applicable to the contract in which they are parties. The limits to such party autonomy are the local public policy (which can be understood as the mandatory rules which apply to the matter irrespective of the parties choice and, therefore, restrict the parties freedom to choose the applicable law), reasonable connection with the country (all mandatory rules stemming from legal systems that have a reasonable connection with the contract may be applicable and vice versa), and fraud (the choice of law should be declared null when the parties forge a connection with a legal system or choose a law to their contract aiming to avoid the incidence of an otherwise applicable rule). However, in Brazil the court precedents associated with the selection of law not necessarily associated with arbitration are controversial due to Section 9 of the Law Decree no. 4657/42 26, which states that 24. Law 8.666/93, section Federal Constitution, section 173, para. 10., II. 26. Brazilian Introduction Law. March

7 the law of the jurisdiction where the obligation was entered shall govern it. Where the obligation derives from a contract, the contract is deemed to have been made where the party having proposed the agreement has its residence. In other words, contracts entered between parties present at the same time, in the same place, should be ruled by the law prevailing at the place where the agreement was made. Where a contract is made between parties that are not present at the same place, the law of the party who proposed the agreement should apply to it. There is a controversy in Brazil as to whether it is possible to choose a law different from the law determined according to the criteria described above. The most conservative position is that choice of law in Brazil is not possible. There are a few cases in which choice of law is deemed possible, one of them being the choice of law for arbitration purposes, making the choice of arbitration to resolve disputes more attractive. 5 What Do You Get When You Choose Brazilian Law? The national law governing contracts has a number of mandatory provisions aiming at preventing both procedural and substantive unfairness in contractual relations. These apply even where the parties have equal bargaining power. The purpose of the statute is certainly well intended, but these provisions limit the autonomy of the parties and create some level of uncertainty. Among the legal provisions governing contract law: (i) social function of the contract 27 contractual freedom will be exercised according to and within the limits of the social function of the contract; (ii) objective good faith 28 both in entering into the contract as well as during its performance, the contracting parties shall respect the principles of probity and good faith; (iii) financial equilibrium 29 in long term contracts, if the obligation of one of the parties becomes excessively onerous, with extreme advantage for the other party, as a result of an unforeseeable event, the debtor may request the termination of the contract. The effects of the judgment that declares termination shall be retroactive to the date of the service of process. These provisions have actual implications on judicial decisions, as it can be seen in a ruling where the Brazilian Superior Court of Justice 30 decided that after the payment of thirty-one of thirty-six installments under a vehicle lease, it would be disproportionate to allow the termination of the contract and repossession of the 27. Article 421 of the Brazilian Civil Code. 28. Article 422 of the Brazilian Civil Code. 29. Article 478 of the Brazilian Civil Code. 30. Court responsible for reviewing as a matter of law the decisions of Courts of Appeals on Federal Law. vehicle as means for collecting the remaining debt, even in light of a specific contractual provision for termination and repossession. The court applied the theory of substantive due performance of the contract. The plaintiff in that case was allowed to seek only damages for the delayed payment Recent Developments on Arbitration in Brazil Most of the relevant Brazilian judicial decisions are pro-arbitration, but there are still challenges ahead. The current status can be illustrated with a few cases: (i) Itiquira Energética v. Inepar (2011) The parties entered into a contract for the construction of a hydroelectric power plant and things started to go sour when the parties disagreed on the costs, which increased exponentially. Inepar argued that it did sign an arbitration clause, but not an arbitration agreement (compromisso). The appellate court decided that no arbitration agreement (compromisso) needs to be signed where there is a full arbitration clause, and such clause was in place as the parties had agreed to submit any dispute to arbitration under the rules of the International Chamber of Commerce, the ICC. The court also highlighted that Inepar had fully participated in the proceedings and only sought to invalidate the arbitration after an unfavorable result; (ii) Consórcio Via Amarela v. Cia do Metropolitano de São Paulo (2010) Consorcio Via Amarela was building one of the lines of the subway in São Paulo and initiated arbitration seeking damages from Cia do Metropolitano (responsible for the subway in the City of São Paulo) for a delay that had occurred when residential homes, the demolition of which was necessary for the construction, were expropriated. Once the arbitral tribunal rejected Cia do Metropolitano s request for an expert examination by an engineer, it filed a writ of mandamus seeking an order for such expert examination. The trial court granted such request but it was overruled by the appellate court, which found that the rules and proceedings were followed and that such decision was up to the arbitrator. But (iii) in Chaval v Liebherr (2012) In a dispute about the cranes installed on a ship, after engineers found that the cranes were not working properly, Liebherr contended that the findings of the engineers with regard to the quantification of damages violated due process 32 as they had no accounting expertise. The 31. Abstract: Civil Law. Lease contract for the purchase of vehicle (leasing). Payment of thirty-one of thirty-six installments due. Termination of the contract. Action of repossession. Inappropriate. Disproportionate measures concerning the remaining debt. Application of the theory of substantive due performance. (Superior Court of Justice, Appeal # Resp /RS, Justice Luis Felipe Salomão, April 8 th, 2011). 32. Article 32, VIII, and Art. 21, 2, of the Brazilian Arbitration Law. 54

8 arbitral award was vacated and the court remanded the case to the arbitral tribunal for the issuance of a new award. This amounts to a revision au fond, which in our opinion was outside the scope of the court s review. These judicial decisions demonstrate that there are still some challenges lying ahead, but the increasing practice of Brazilian judges in the context of international commercial arbitration is creating a solid friendly environment for arbitration. (iv) The STJ recently recognized arbitral awards based on arbitration clauses contained in adhesion contracts, rejecting the argument that the agreement clause would be abusive because one of the parties would have all the bargaining power and the other side would have to adhere to the terms. The court ruled that the dispute over the nature of the contract was a matter before the arbitral tribunal, and that the award satisfied the formal requirements set forth in Articles 38 and 39 of the Brazilian arbitration law (Olam International Ltd v Sedeni Lucas Locks, Opposition for Enforcement of Foreign Arbitral Award n RJ). 7 Challenge to Arbitral Awards in Brazil (i) Brazilian Seat The arbitral award can be challenged based on its existence, validity and effectiveness of the arbitration agreement in annulment proceedings, enforcement proceedings, and, in case of foreign awards, recognition proceedings. 33 The main challenges before courts are related to the making of the arbitration agreement itself, and to the scope of the agreement to arbitrate. The Brazilian Arbitration Law provides for certain causes of nullity of the award (numerus clausus), 34 such as in case of nullity of the arbitration agreement or when the award exceeds the limits of the arbitration agreement. Nullity can be argued in a lawsuit before state court, or as a defense in the execution of the award. Nevertheless, courts are inclined to uphold arbitral awards. A good example was the decision on Doux v. W.M. Empreendimentos (2002), stating that a possible mistake on the part of the arbitrator is not a sufficient basis for annulment, as the parties accepted such risk when they decided to submit the dispute to an arbitral tribunal. ( In court, parties do not have the ability to select the judge who will hear their case. In arbitration, they can select the arbitrators, so they will select people in whom they have confidence. A mistake on the part of the arbitrators is an insufficient basis to annul an award. ) 33. Article 20 of the Brazilian Arbitration Law. 34. Art. 32 of the Brazilian Arbitration Law. (ii) Foreign Seat The Superior Court of Justice (STJ) 35 established the rules for homologation of foreign awards in general, most of them formal requirements, such as the issuance of the award by a competent court and proper notice, but also requires that the award does not offend national sovereignty or public order. The law requires the homologation before the STJ and states a numerus clausus of grounds for refusal to revalidate an arbitral award, such as when the arbitral award was rendered beyond the limits of the arbitration agreement and it was not possible to separate the exceeding part from what has been submitted to arbitration (partial revalidation is possible). The New York Convention has the status of a federal law in Brazil. 36 (Art. V 2. Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where the recognition and enforcement is sought finds that: (a) The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or (b) The recognition or enforcement of the award would be contrary to the public policy of that country. ) The Superior Court of Justice has consistently decided in favor of homologation of foreign awards. Examples of IP-related cases: (a) Viagra s patent case Eli Lilly sought the revalidation of an award that annulled a UK patent owned by Pfizer. The UK patent had been the basis for the grant of a pipeline patent in Brazil. Pfizer claimed that patents are independent and follow the territoriality principle, so the revalidation of the foreign award would be a violation of sovereignty and public order. The STJ found that Eli Lilly had an interest and standing to pursue the homologation of the UK award that annulled the counterpart of the pipeline patent, and that the revalidation of the foreign award per se would not harm the public order. The STJ granted Eli Lilly s request and stated that it would be up to the trial courts in Brazil decide the the legal consequences of such a foreign award with regard to the validity of the Brazilian pipeline patent (SEC # 911, STJ). (b) Stolichnaya s trademark case The Russian Federation filed an application seeking the homologation of a Russian award in a dispute with Plodovaya over the trademark Stolichnaya in Brazil. Plodovaya contended that the revalidation of the award would violate the public order as it would implicate misappropriation 35. Article 35 of the Brazilian Arbitration Law requires homologation by the Supreme Court, but since constitutional amendment # 45 of 2004, such jurisdiction has been transferred to the Superior Court of Justice. 36. Promulgated by Decree # of March

9 without compensation, in violation of the principles of objective good faith, legal certainty, and due process, and also for violation of basic principles of international law. The STJ concluded that the objections raised by Plodovaya were related to the merits of the award and stated that the revalidation depended solely on the examination of formal aspects. The court also stated that a claim for compensation (if any) should be filed in the proper venue, since the revalidation could not address questions that were not discussed in the award, and that the effects of the foreign award over registered rights in Brazil were outside the scope of the homologation process, and should be determined by trial courts. (iii) Challenges to Arbitral Awards Possible Pitfall The STJ has consistently ruled in favor of the autonomy of the parties to submit their dispute to arbitration, 37 even accepting tacit arbitration agreements. Nevertheless, lower courts decisions on the existence, validity and efficacy of the arbitration agreement are usually only reviewed as matter of law, as the STJ is bound to the facts found by the lower courts (questio facti). Therefore, the intent of the parties and scope of the arbitration are usually not reviewed by the STJ. Nevertheless, in a case pending before the STJ (# BA), Reporting Justice Galotti remanded the case to the lower court after investigating the intent of the parties on the making of the arbitration agreement, finding it invalid (contrary to the consistent jurisprudence of the court on reviewing arbitration clauses only as a matter of law). The votes of the remaining justices on the panel are still pending. Therefore, the intent to submit the dispute to arbitration and the scope of the arbitration must be very clear in the arbitration agreement. 8 Arbitrability of IP Disputes in Brazil The Brazilian Arbitration Law provides for a wide scope of arbitrability and Article 1 states that persons capable of entering into contracts may settle through arbitration disputes related to freely transferable patrimonial rights. Art. 89 of the Brazilian Procedure Law (CPC) states that the judiciary has exclusive authority on disputes over non-movable property located in Brazil, and according to the law in Brazil, IP rights are considered to be chattel (movable property). 38 Generally, all intellectual property disputes inter partes are arbitrable unless public order is implicated. Any controversy related to the law of obligations in a contract in general, a patent or trademark license agreement, a patent or trademark assignment, franchising, and others, may be arbitrated. Any matter that does not go beyond the merely private concerns of the parties can be subject of arbitration. The rule of thumb is to think about disputes that can be freely settled by the parties. Nevertheless, it is well settled in Brazil that you cannot impose to the BRPTO your agreement on a dispute over the validity ( erga omnes ) of an IP right. If you reach an agreement in an invalidity lawsuit before Federal Court, the judge will ask the BRPTO if it wants to stand as sole plaintiff in the lawsuit (remember that the BRPTO s intervention, either as plaintiff or defendant is required by statute). If you reach a coexistence agreement during the prosecution of a trademark before the BRPTO, the agency will accept the agreement as additional information, but may reject the application if it finds that, despite the agreement, it will cause confusion (in violation of art. 124, XIX and XVIII, of the IP Law). The coexistence agreement can still be valid between the parties, of course, but maybe it will not be possible to record it before the BRPTO to make it enforceable before third parties. A big step towards the arbitration of IP disputes was taken by the BRPTO very recently, acknowledging the importance of alternative dispute resolution, consisting in the inauguration of the BRPTO s mediation center on March 12, The rules are still pending, but the mediation center counts with the WIPO s support and will start the program in the oppositions to trademarks. The applications with submissions for mediation would be suspended and after mediation would be placed in a line that would be faster. The BRPTO announced that the advantage in that mediation would be the option to request a technical opinion (of the BRPTO) about the viability of the agreement between the parties. Nevertheless, such technical opinion would not be binding for the agency, and that may create some difficulties. The rules that are pending of publication may address all these questions. In any event, it is very good news to have the BRPTO promoting ADR mechanisms for IP disputes. 37. SEC 856/2005 Estoppel The agreement to arbitrate is not clear, but the party did not move against the installation of the arbitration and fully participated in the proceedings tacit arbitration agreement. 38. Art. 5 of Law # of 1996 BR IP Law. 56