Apr 4

The Brazilian Court of Justice Declines to Enforce a Vacated Arbitration Award

While the U.S. Court of Appeals for the Second Circuit considers the circumstances in which a lower court may confirm a nullified foreign arbitration award, the Brazilian Court of Justice (“STJ”) has declined to recognize an award that was vacated in Argentina, where the tribunal was seated. The case, EDF International S/A v. Endesa LatinoAmérica S/A and YPF S/A (SEC No. 5.782/AR), presented an issue of first impression for the STJ and led to a landmark decision on the enforcement of foreign arbitral awards in Brazil.

The lawsuit concerned an arbitration award issued in Buenos Aires, Argentina, under the rules of the International Chamber of Commerce (“ICC”), which granted US$40 million to claimant EDF International S/A (“EDFI”) and approximately US$11 million to respondent YPF S/A (“YPF”). The arbitration arose out of a dispute involving a stock purchase agreement (the “Agreement”) entered into on March 30, 2001, between EDFI, Endesa Internacional S.A., and Astra Compañia Argentina de Petróleo S/A (which later merged with respondent YPF, with YPF as the surviving entity). Under the Agreement, EDFI sought to purchase controlling shares in two Argentine companies: Empresa Distribuidora y Comercializadora Norte S.A. and Electricidad Argentina S.A. The Agreement granted EDFI the right to request that the share price be reviewed if the Central Bank of Argentina terminated the parity exchange rate between the U.S. dollar and the Argentinian peso (the “Trigger Event”). In July 2002, EDFI commenced arbitration to request the readjustment of the share price.

After the award was issued, EDFI filed a petition before the Buenos Aires Commercial Court of Appeals, seeking to have the award partially vacated. On December 9, 2010, the Buenos Aires Court vacated the award, finding that the arbitrators’ decision incorrectly applied Argentine law. The Court found that EDFI was not entitled to a share price review under the contract because the Trigger Event did not occur, as the parity exchange rate between the American and Argentine currencies had remained fixed under Argentine law during the period in question. Accordingly, the arbitrators were mistaken in concluding that the Trigger Event occurred when the Argentine Central Bank decided to close doors for approximately 7 business days.

Notwithstanding this annulment decision, EDFI later sought to enforce the award in Brazil and commenced proceedings on June 7, 2011 before the STJ – the only court with jurisdiction to rule on the recognition of foreign arbitral awards in Brazil. Endesa and YPF argued that the STJ could not enforce the award because an Argentine court was in the process of issuing an order to vacate it. They also argued that the Argentine court’s annulment decision had become res judicata, and that recognition of the award would violate the New York Convention and the Brazilian Arbitration Act (“BAA”).

Before issuing an opinion, the STJ consulted with the Brazilian Federal Public Attorney’s Office (the “MPF”), which is an independent federal body of prosecutors and attorneys that operates separately from the three other branches of the Brazilian government, and which may be consulted by the courts on complex matters of law. On November 28, 2015, the MPF opined that enforcement should be denied because the award had been annulled by a competent court at its country of origin. The MPF cited the French version of the Convention – which it claimed was the official version – as unambiguously requiring that an award be enforced “unless” it had been vacated (or fell under another enumerated category).

After the MPF issued its opinion, the case was presented before the STJ’s Special Chamber, which is composed of fifteen senior judges. On December 16, 2015, the STJ unanimously held that a foreign arbitral award cannot be recognized in Brazil unless it has become res judicata at its country of origin. During the hearing, the STJ agreed with the MPF’s finding that the purpose of recognizing a foreign arbitration award is to internalize the effects of such award and thus an award that has been nullified at its seat must be null in Brazil, because it has no effect in its country of origin. The STJ also found that the New York Convention, the Panama Convention and the BAA forbade the recognition or enforcement of duly nullified awards.

In its remarks, the STJ referred to the ICCA Guide to the Interpretation of the New York Convention, and Article 216 D of its internal rules, which requires arbitral awards to be final and binding before they can be recognized in Brazil. Further, the Court cited Brazilian legal scholars who agreed that nullified awards cannot be enforced, and discussed Article 20(e) of the Las Leñas Protocol on Cooperation and Judicial Assistance on Civil, Commercial, Labor and Administrative Matters, which has been ratified by Argentina, Brazil, Paraguay and Uruguay, and applies to the recognition and enforcement of court and arbitration rulings. The STJ noted that the Las Leñas Protocol explicitly requires arbitration awards to be considered res judicata before they can be enforced at the arbitration seat. Because the parties did not dispute that the award had been vacated in 2010, the STJ found that the set-aside decision had become res judicata. The Court refrained from discussing whether there were any circumstances under which an annulled award could be enforced in Brazil.

EDF International S/A v. Endesa LatinoAmérica S/A and YPF S/A is a landmark decision because it marks the first time that Brazil’s highest commercial court has applied the New York Convention. For many years, Brazil was slow to embrace international arbitration.1  Although it is now a party to several international conventions governing the enforcement of foreign arbitral awards, Brazilian courts provigil online typically base their enforcement decisions on the BAA, without citing to Brazil’s international treaties.

By Walsy Sáez

1. Brazil only acceded to the Panama Convention in 1995 and to the New York Convention in 2002.