Originally from Arbitration Law of Brazil: Practice and Procedure - Second Edition

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SOME REMARKS ON ARBITRATION
IN CORPORATE LAW

Nelson Eizirik1

E.1 GENERAL VIEW

The Brazilian Corporate Law (Law 6,404/1976) was amended by Law
10.303/2001, which introduced a series of important changes to improve
the Brazilian securities market. One of these was the introduction of
paragraph three in Article 1092, permitting corporate bylaws to contain
arbitration clauses, applicable to disputes between the company and its
shareholders or between minority and controlling shareholders.

From an economic perspective, arbitration can be substantially
advantageous in comparison to the Judiciary, since the governance benefits
outweigh the enforcement costs. The reason is that arbitration is an
alternative venue that allows the parties to create rules and control costs3.

Certainly it is not implied here that arbitration is economically
favorable to all legal relations. Nevertheless, relations involving longterm
contracts or situations in which the parties know each other and
tend to repeat similar transactions are particularly suited to arbitration, in
light of its economic advantages.

Arbitration constitutes an extrajudicial mechanism to resolve
conflicts, which benefits from characteristics that are typical of the
jurisdiction exercised by the State4.

Brazil’s Constitution of 1824 allowed parties to appoint arbitrators5.
Under the aegis of that legal regime, articles 294 and 348 of the former
Commercial Code of 1850 and article 411, § 2, of Regulation 737 of
1850 provided for compulsory arbitration for some important
commercial issues6.

The solution to corporate controversies by means of compulsory
arbitration, as provided for in such norms, ignored the parties'
manifestation of will and thus contradicted the voluntary nature of the
arbitration institute7. This attitude, however, followed a trend verified in
other countries of similar legal tradition8.

Brazilian legislation subsequently swerved sharply from compulsory
arbitration into absolute inefficacy of arbitration clauses, thus impairing
their use in Brazil. This changed with enactment of Law 9307/96, and
particularly after the Brazilian Supreme Court declared the
constitutionality of relevant provisions, such as Art. 7, which provides
for specific performance of arbitration clauses9.

The development of the domestic legal system, allied with advances
in corporate governance, enabled the furtherance of initiatives regarding
the choice of arbitration to solve corporate disputes, among them the
inclusion of § 3 in Article 109 of the Corporate Law. Moreover,
securities market entities, both governmental and private, started to
encourage inclusion of arbitration clauses in corporate bylaws,
particularly of publicly held companies10. Arbitration is mentioned in the
rules of the Brazilian Securities Commission (Comissão de Valores
Mobiliários - CVM) regarding the constitution, operation, and
management of investment funds11. Pursuant to this regulatory provision,
corporations wishing to become eligible to receive investments from the
funds regulated by that instruction must undertake to resolve their
corporate conflicts through arbitration.

In the United States, the self-regulatory entities in the securities
market have long been offering arbitration service to solve conflicts. The
New York Stock Exchange (NYSE) was the first to introduce arbitration,
in 1872. The National Association of Securities Dealers (NASD) started
to use arbitration in 196812.

Along with the fact that economic theory recognizes the advantages
of using arbitration, as previously mentioned, legal scholars have always
mentioned its qualities, especially regarding commercial litigation, which
usually involves “freely disposable property rights”, one of the requisites
for the regular institution of arbitration in Brazilian Law13. Among such
advantages are the speed and informality in solving the controversy, the
expertise of the arbitrator14, and the confidentiality of the proceeding15.