Brazil Enacts Decree Regulating Arbitrations Involving the Federal Union

On September 23, 2019, Federal Decree 10,025/2019 was published, to regulate arbitration between the Federal Union or other Federal Public Administration entities and concessionaires of federal public services.

Matters subject to arbitration
The decree clarifies that the arbitration can resolve controversies on any “patrimonial disposable right“, including (but not exclusively), in relation to the concession agreements (i) economic-financial rebalancing; (ii) indemnification due to termination or transfer of the agreements; and (iii) breach of contractual provisions, including application of penalties and calculation of amounts.

Concession Agreements without arbitration clause
The Decree determines the possibility of arbitration even in relation to concession agreements that currently do not include such clause. In this case, the parties are to enter into arbitration covenants (compromisso) even for agreements without arbitration clause, if it is more advantageous given the circumstances of the specific case. The choice of arbitration is recommended whenever (i) the dispute is based mainly on technical issues; and (ii) the usual length of a judicial lawsuit could trigger damages to the quality of public services or infrastructure, or could curb priority public investments.

Also, current concession agreements without an arbitration clause can be amended, by agreement between the parties, to include such provision.

Procedural rules
The Decree determines a series of rules on the arbitration procedures regulated by it, in special:

• In arbitrations involving Brazilian federal entities, only Brazilian material law shall apply;
   
• The seat shall be in Brazil and the arbitration shall be carried out before an arbitral institution from a list of pre-approved entities by the Federal Attorneys’ Office (Advocacia-Geral da União – AGU), being ad hoc arbitration admitted only in exceptional cases, upon previous justification. To be included in such list, the arbitral institution shall (i) have been working for more than 3 years; (ii) be widely known for its ethics, competence and experience; and (iii) have its own rules translated into Portuguese;

• If the arbitration clause does not set forth the applicable rules, the private party may choose among the ones of listed arbitral institution, subject to approval of the federal entity;

• The respondent shall have at least 60 (sixty days) for the answer to the request for arbitration. The arbitrators shall have 24 months counted from the terms of reference to issue the final award, deadline which can be extended only once;

• The private party shall advance the arbitration court fees, the arbitrators’ fees and the fees of the court-expert, if any, provided that the final award shall allocate the responsibility for those amounts according to the outcome. The costs of expert witnesses and other party-appointed experts shall be borne by each party. The costs with attorneys are not reimbursable, but the attorneys of the winning party shall be entitled to sucumbência, ie, a separate award of fees over and above any award granted to the wining party. The federal entities shall be represented in the arbitrations by the Federal Attorneys’ Office (AGU), which can request that federal public officers to be engaged in arbitrations to issue expert opinions;

• The parties are free to appoint arbitrators, subject to the requirements of the Brazilian Arbitration Act (which does not prohibit foreigners), provided that such individuals are knowledgeable of the subject-matter of the dispute. It is interesting that the Decree mentions the possibility to apply “international standards of conflict of interest”, which is clear reference to the International Bar Association Guidelines on Conflicts of Interest in International Arbitration.

Our comments
The Decree was the latest step in a trend in favor of arbitrations involving state entities, which started in 2015 with the express legal authorization for such type of procedure, followed by the regulation enacted by the States of Rio de Janeiro and São Paulo (the largest ones in Brazil) and recently by the regulation to arbitrate indemnification due in eminent domain cases.

The Federal Union has not only launched an aggressive privatization plan, but also wishes to renegotiate older concessions to bring more private investments in infrastructure. In this context, the existence of an efficient and neutral method for dispute resolution such as arbitration is key for the success of such plans. Although the Decree has some protectionist features, such as the mandatory application of Brazilian Law and the choice of seat within the country, not to mention the obligation to advance the costs, in general its rules bring about a functional legal framework that could foster arbitration with state-owned entities.