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The provisions on legislative application and choice of forum and possible violations of the Arbitration Law
The provisions on legislative application and choice of forum and possible violations of the Arbitration Law
Following the analysis of the House Bill No. 29/2017 (PLC), we will address the sector’s concern regarding the controversial points involving the definition of the legislation applied in contracts, the choice of forum and the impacts and possible violations of such provisions.
Initially, it should be noted that Law No. 9,307/1996 (Arbitration Law) guarantees the parties an extrajudicial alternative for conflict resolution, as well as freedom to decide the place, and mode based on which criteria they wish to settle. These are the so-called ‘alternative means’ for resolving disputes. Articles 2 and 5 of the Arbitration Law clearly establish that it is up to the parties to decide whether the arbitration will be governed by law or equity, and whether general principles, usages and customs and international trade rules will be applied, always respecting good practice and the public order.
However in our view, article 9 paragraph 1 of the PLC ignores the provisions of the Arbitration Law by stating that Brazilian law is exclusively applied in the following cases: (I) in insurance contracts entered into by insurers authorized to operate in Brazil (II) when the insured or applicant resides or is domiciled in the country (III) when the assets on which the guaranteed interests incur are located in Brazil or (IV) whenever the guaranteed interests are related to assets considered relevant for the development of the Brazilian infrastructure. This is a very open and subjective concept, which in our opinion could even violate the principle of legal certainty.
Despite the application being able to generate a different interpretation, we understand that the exclusive jurisdiction could not be applied to cases involving reinsurance, since its caput specifically and expressly mentions the ‘insurance contract’. If applied to reinsurance, the potential for a negative impact on the market is even greater as we are dealing with a complex relationship that demands a highly technical solution, which is why the insurer and reinsurer often opt for an arbitration clause.
We also understand that the provision of the PLC interferes with the provisions of Decree-Law No. 4.657/42, the Law of Introduction to the Norms of Brazilian Law (LINDB), which has the power to deal with the competence to apply Brazilian legislation. Considering that the LINDB is a Complementary Law and that, consequently, it could not be amended by Ordinary Law, there is also room for a discussion about a possible invasion of the PLC’s competence in the provisions of the LINDB.
In addition, another concern is related to item IV of the article, which does not present a clear definition of what ‘goods considered relevant for the development of Brazilian infrastructure’ are. The regulation does not conceptualize this expression, which can lead to interpretation difficulties when it comes to large-risk insurance contracts, i.e., those that cover large and complex risks and that, in many cases, are directly related to infrastructure projects of the country, as any damage or interruption in certain sectors can significantly impact the economy and society.
Furthermore, article 63 of the PLC establishes that the resolution of disputes by alternative means will be carried out in Brazil, under the procedure and rules of Brazilian law, which, in our opinion, constitutes an excessive and unnecessary restriction to the principle of autonomy of the will of the parties. In addition, this is as an obvious affront to several provisions and the guiding principle of Law no. 13,874/2019 (Economic Freedom Law).
As already mentioned, when dealing with insurance relationships and especially in relation to large risks, we are often talking about highly complex litigation over which the parties do not always have the option of applying Brazilian legislation, even if it involves an asset or Brazilian insured.
In this sense, if the provision of the PLC passes the way it is currently written, the impact on the insurance market could be negative, especially due to the possibility of a decrease in the appetite of foreign insurers to issue policies involving Brazilian risks, making it even more difficult to contract risks abroad in cases of lack of capacity in the local market. We also point out that in some cases and in relation to some risks, taking out national insurance can be difficult and the only alternative is taking out foreign insurance.
The paragraph of the same article mentions that ‘whoever is responsible for resolving the dispute’ is obliged to disclose – in a repository easily accessible to any interested party – the summaries of the conflicts and the respective decisions without revealing personal identities. In addition, there is the fact that the PLC does not mention who would be responsible for this obligation. That is, the definition of ‘responsible for resolving the dispute’, the application goes against one of the main reasons (besides the technical) why the parties choose the resolution by arbitration behind closed doors.
Finally, and in the same sense as the previous criticisms, articles 126 and 127 of the PLC insist on violating the freedom of choice of the parties, providing for the competence of the Brazilian courts to deal with disputes involving insurance contracts, determining the application of the jurisdiction of domicile of the insured. This provision may also have an impact on the contracting of insurance for large risks, and for complex products and/or contracted abroad in accordance with the uses and customs of foreign law and international trade.
We will await the review of the points listed above by the Federal Senate and will deal with other controversial points in the next articles.
Lefosse’s Insurance, Reinsurance and Private Pensions practice will continue to follow the progress of the PLC and comment on controversial points before eventual approval. For further clarification on the subject, or others that may be of interest to you, please contact our
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