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

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LAW APPLICABLE TO THE MERITS

4.1 CHOICE OF SUBSTANTIVE LAW

Pursuant to the Arbitration Law of 1996, the parties may freely
choose the rules of law applicable to arbitration, provided that there is no
violation of public policy or good morals.1 The parties can even grant the
arbitrators powers to decide ex aequo et bono, that is to say, to decide in
equity, rather than based on a specific legal system. 2

In light of these provisions, the great majority of Brazilian doctrine3
maintains that, with respect to arbitration, the Brazilian legal system has
acknowledged the principle of autonomy of will (lex voluntatis),
according to which the parties have the power to choose the law
applicable to their agreement. There is a leading case in this sense (Total
Energie, SNC, et al. v. Thorey Invest Negócios Ltda.),4 in which a second
level court of São Paulo upheld the choice of French law, provided in an
arbitration clause of an agreement executed in Brazil.

This decision is in harmony with the voluntary nature of arbitration,5
and is aligned with many other jurisdictions that grant freedom to parties
to choose the applicable law in international contracts.6

The Brazilian legal system is traditionally not flexible on the choice
of law applicable to contracts. The Introductory Law to the Brazilian
Legal Rules, which sets forth the conflict of law rules and that was
applied to arbitral proceedings prior to the Arbitration Law of 1996,
provides that contracts must be governed by the laws of the country in
which they were signed (lex loci celebrationis)78; in the case each party
signs in a different country, the law of the domicile of the offeror shall
apply. The majority of the scholars hold that the parties may not select
another applicable law.9 If the parties are in different countries when they
execute the agreement, the law of the country where the proponent
resides shall apply.10

Accordingly, the majority of the scholars and current case law hold
that, after the Arbitration Law of 1996, the Brazilian legal system has a
dual regime for choice of law. On the one hand, if the contract is not
subject to arbitration, the governing law will be the law of the country
where the parties executed it. On the other hand, in contracts with
arbitration clauses or subject to other types of arbitration agreements, the
parties may choose the applicable law, provided that there is no violation
of public policy.

For this reason, arbitration clauses have become increasingly common
in international agreements in Brazil following the Arbitration Law of
1996, because they are deemed to be a safe harbor for parties that wish to
have their contract subject to a given legislation, without having to comply
with the criteria of the Introductory Law to the Brazilian Legal Rules.

It is worth clarifying that under the Brazilian legal system, the choice
of foreign law refers solely to substantive law, and does not include that
country’s conflict-of-law rules.11 This position of Brazilian law is aligned
with modern international treaties, such as the Inter-American
Convention on the Law Applicable to International Contracts of 1994
and the Hague Convention on the Law Applicable to Contracts for the
International Sale of Goods of 1986.

4.1.1 Choice of Foreign Law in Domestic Arbitration

Art. 2, §1 of the Arbitration Law of 1996 allows parties to freely
choose the applicable legislation, without drawing any distinction