Generally speaking, parties that enter into an arbitration agreement expect the arbitral award to be spontaneously complied with at the outcome of the arbitration (or during its course, in case of a partial award).
Practice in Brazil has shown, however, that a significant part of defeated parties refuses to comply with awards, which – in light of the lack of coertio and executio of the arbitral tribunal – results in the filing of enforcement proceedings before State Courts[3].
The Brazilian Arbitration Act (“BAA”) provides that an arbitral award ordering a party to comply with an obligation (e.g., to pay, act or abstain from acting, or to deliver a certain asset) "has the same effects as the award rendered by State Courts and shall constitute an enforcement instrument” (article 31 of the BAA).
Enforcement proceedings are governed by the Brazilian Civil Procedural Code (“CPC”), from article 513 onwards. The lawsuit is to be filed before the court which would have jurisdiction over the claim had it not been settled in arbitration (sole paragraph of article 516, III CPC), and the debtor is to be personally served (service via counsel to the party in the arbitration is deemed insufficient) (paragraph 1 of article 515 of the CPC).
In case of a payment obligation, service of the debtor triggers a 15-day period for compliance with the terms of the award (article 523 CPC). If the debtor fails to pay within that period, a fine of 10% of the debt accrues[4], and the debtor shall also be ordered to pay 10% of the debt as attorneys’ fees (due directly to counsel for the opposing party) (article 523, § 1 of CPC). Thus, not complying with the arbitration award in the context of the enforcement proceedings increases the debt by a considerable percentage.
The BAA foresees the possibility of the arbitral tribunal setting a date by which the debtor must comply with the payment order (article 26, III), which we repute to be advisable – for doing so eliminates any doubt as to the deadline for compliance with the award. There is debate over whether arbitrators could set a penalty for noncompliance with the established deadline, which would be due in addition to the penalty of article 523 in case the debtor also fails to pay in the 15-day deadline of the enforcement proceedings[5]. From our experience, arbitral tribunals in general establish penalties to reinforce a party’s obligation to act or abstain from acting (the so-called “astreinte”, as allowed by art. 461 of the CPC), but do not determine penalties in case a party fails to make payment.
Naturally, the arbitral award can only be subject to enforcement proceedings after the deadline for compliance set by the arbitral tribunal has elapsed. If no deadline is established, we understand the creditor should notify the debtor requesting payment within a reasonable timeframe, which, if not observed, would allow for the enforcement proceedings to be brought. A possibility would be for the creditor to await the 90-day deadline established by article 33, § 1 of BAA for the annulment of arbitral awards, after which the debtor can no longer contest the validity of the arbitral award before State Courts.
If the debtor does not pay within the 15-day deadline of the CPC, its assets are subject to attachment (article 525, § 3 of CPC), including any amounts deposited in bank accounts.
Within the enforcement proceedings, the scope of the defense of the party against which the award is enforced is limited to the grounds of article 525, § 1 of CPC (i.e., nullity of service, unenforceability of award, invalid attachment of assets, among others). The Code does not give room for the State Court to review the merits of the award. Article 33, § 3 of the BAA also allows the debtor to request a declaration of nullity of the arbitral award in the defense to the enforcement proceedings (if, e.g., rendered outside the scope of the arbitration agreement, in breach of due process or by a person who could not sit as an arbitrator) – but this is only possible if the 90-day deadline has not elapsed[6].
It is safe to say that State Courts in Brazil are arbitration-friendly and will seldom enter into a merits discussion in the context of an enforcement proceeding or an annulment lawsuit, respecting the decision reached by the arbitrators[7].
It is important to note that under article 525, § 6 of the CPC the submission of a defense by the debtor will not enjoin the creditor from attaching assets and even taking measures to receive payment (such as, for example, request an auction of the debtor’s real estate property). This is also true if the debtor has filed an annulment lawsuit[8], which the State Court may choose to process together with the enforcement proceeding[9]. This is an important rule, which we understand has an impact on a party’s decision to pay.
The same provision cited to in the preceding paragraph allows the Court to stay the enforcement proceeding only if the debtor (i) proves that the grounds are substantial; (iii) proves that in the absence of a stay it will most likely be gravely harmed, in a way in which reparation would be difficult or uncertain; and, finally, posts security in the amount being enforced. State Courts require all requisites to be present[10], and the bar is thus very high.
In conclusion, Brazilian procedural law sets forth conditions that encourage debtors to voluntarily comply with arbitral awards. Such conditions have not, however, enjoined parties from avoiding payment and bringing the matter that was to be finally settled in arbitration before State Courts – the upside for creditors being that they will eventually receive more than what was defined in the arbitral award.
[1] Partner at Mannheimer, Perez & Lyra Advogados in São Paulo. LL.B. from PUC-Rio. LL.M. from Columbia Law School. Visiting Attorney at Wachtell, Lipton, Rosen & Katz. Licensed to practice law in São Paulo, Rio de Janeiro and New York. [2] Member of Mannheimer, Perez & Lyra Advogados in São Paulo. LL.B. from PUC-SP. [3] See, e.g., the survey conducted by Dr. Andréa Galhardo Pama, which concluded that between 2016 and 2020 requests for enforcement of arbitration awards represented 32% of the arbitration-related claims that were distributed to the Specialized Courts of the São Paulo State Court. [4] See, e.g., Superior Court of Justice, Special Appeal 1,102,460, Special Court, Reporting Justice Marco Buzzi, ruling on June 17, 2015, confirming that the 10% penalty is due in case of noncompliance within the 15-day deadline. [5] See, in the sense that arbitrators can only apply a penalty for noncompliance if the arbitration agreement provides for such: CAHALI, Francisco José. Curso de Arbitragem – Mediação e Conciliação. 6. ed. São Paulo: Revista dos Tribunais, 2017, p. 365-367; and TEIXEIRA, Tarcisio; LIGMANOVSKI, Patricia Ayub da Costa. Arbitragem em evolução: aspectos relevantes após a reforma da Lei Arbitral. Barueri: Manole, 2018, p. 128. [6] In this sense, see SCAVONE JUNIOR, Luiz Antonio. Arbitragem - Mediação, Conciliação e Negociação. Rio de Janeiro: Forense, 2020,. p. 249; and case law: Superior Court of Justice, Special Appeal 1.609.649, Reporting Judge Raul Araújo, ruling on February 19, 2020; São Paulo Court of Appeals, Interlocutory Appeal 2001836-13.2019.8.26.0000, Reporting Judge Hamid Bdine, 1st Chamber of Corporate Law, ruling on April 3, 2019. [7] That said, a research conducted recently concluded that not only are more annulment lawsuits being filed, but a larger percentage is being ruled in favor of annulment of the arbitral award: https://www.conjur.com.br/2021-mar-26/cresce-numero-sentencas-arbitrais-anuladas-justica?utm_source=dlvr.it&utm_medium=facebook [8] In this sense, see, e.g., São Paulo State Court, Interlocutory Appeal 0014165-38.2012.8.26.0000, Reporting Judge Theodureto Camargo, 8th Chamber of Private Law, ruling on March 21, 2012. [9] In this sense, see, e.g., São Paulo State Court, Interlocutory Appeal 2034187-05.2020.8.26.0000, Reporting Judge Pereira Calças, 1st Chamber of Corporate Law, ruling on March 19, 2020. [10] See, e.g., São Paulo State Court, Interlocutory Appeal 2065005-37.2020.8.26.0000, Reporting Judge Gilberto dos Santos, 11th Chamber of Private Law, ruling on June 29, 2020.