Li Hu  Márcio Souza Guimarães (org.
)
EVANDRO MENEZES DE CARVALHO
Doctor in International Law from the Uni-
versity of São Paulo (USP). Master in Latin
American Integration from the Federal
University of Santa Maria (UFSM). Bache-
lor in Law from the Federal University of
Pernambuco (UFPE).
Senior Foreign Expert at the Cen-
ter for BRICS Studies at Fudan University
and Senior Scholar at Shanghai Universi-
ty of Finance and Economics. Founding
member of the Brazilian Network of Chi-
nese Studies (RBChina). Former president
of the Brazilian Association of Law Tea-
ching (ABEDi).
LI HU
Vice chairman of China Maritime Arbitra-
tion Commission (CMAC). Former deputy
secretary general of China International
Economic and Trade Arbitration Com-
mission (CIETAC). Board member of Arbi-
tration Institute of Stockholm Chamber of
Commerce (SCC).
Council member of Asian Institute
of Alternative Dispute Resolution (AIADR).
Member of ICC Commission on Arbitra-
tion and ADR. Vice chairman of ICC China
Commission on Arbitration and ADR. Mem-
ber of International Council for Commer-
cial Arbitration (ICCA).
MÁRCIO SOUZA GUIMARÃES
Doctor in Law from the Université Toulouse
1 Capitole (Center for Business Law), reva-
lidated by the State University of Rio de Ja-
neiro (UERJ). Master in Business Law from the
Universidade Cândido Mendes (UCAM/RJ).
Bachelor in Law from Pontifical Catholic Uni-
versity of Rio de Janeiro (PUC/RJ).
Founding academic of the Bra-
zilian Academy of Civil Law. Member of
the Public Prosecutor's Office of the State
of Rio de Janeiro from 1998 to 2017. For-
mer professor at the Law School Rio of the
Getulio Vargas Foundation (FGV). Visiting
professor at Harvard Law School. Visiting
professor at the University of Toulouse. Max
Schmidheiny professor at the University of
Saint Gallen (Switzerland). Guest professor
at the University of Saint Gallen.
Capa_Arbitartion.indd 1
Current Issues in Shareholder Arbitration un-
der Brazilian Law
Evandro Menezes de Carvalho 
Fabiano Robalinho Cavalcanti
Legal Aspects of Arbitration Involving Brazilian
Regulatory Agencies
Sérgio Guerra
General Overview of Arbitration in Brazil
Evandro Menezes de Carvalho  Marcelo Roberto Ferro
Brazil-China Law Series
Li Hu  Márcio Souza Guimarães (org.) Arbitration and Brazilian Antitrust System
Carlos Ragazzo
Amanda Barelli
As two of the world’s most dynamic economies, Brazil and Arbitration and Brazilian Infrastructure
China have forged a strategic partnership that spans 30 Flávio Amaral Garcia
years, with 2024 marking the 50th anniversary of the re-
Arbitration and
International Commercial Arbitration and
Arbitration and Mediation in Brazil and China
establishment of diplomatic relations between the two Compliance Disputes in Brazil
countries. With China being Brazil’s biggest trading partner Alice Moreira Franco
Mediation in Brazil
and a major investor, there is an urgent need to deepen the
Recognition and Enforcement of Foreign
dialogue between the legal systems and legal professionals Arbitral Swards in Brazil
Peter Christian Sester
and China
of both nations.
Arbitration and mediation in Brazil and China is Brazilian Contracts and Arbitration
a product of a long-standing partnership between FGV Fabiane Verçosa
Direito Rio and the Chinese International Economic and
Chinese Institutional Practice on Challenges
Trade Arbitration Commission (CIETAC). This book brings to Arbitrators
together leading specialists to explore the crucial issues Li Hu
related to arbitration and mediation, which have become
Beyond Litigation: ADR and Dispute Resolu-
increasingly relevant in both countries. This is a must-read
for arbitrators, mediators, lawyers, and experts in dispute Brazil-China Law Series tion between Air Carrier and Passenger – A
China’s Perspective
resolution who wish to learn from the legal cultures of these Huaping Qin
two vibrant nations. Financial Dispute Resolution in China
Xiuming Tao
Rethinking Some Issues of Arbitration in China
Xuehua Wang
Settlement of E-commerce Disputes in China
Hong Xue
Navigation for Third-party Funding in Arbitra-
tion of Mainland China
Yao Yu
Research on the Combination of Mediation
with Arbitration and its Latest Development
Zhan Ling
30/05/2023 09:45:39
Edition produced by FGV Direito Rio

Praia de Botafogo, 190 | 13th floor

Rio de Janeiro | RJ | Brazil | Zip code: 22.250-900
55 (21) 3799-5445
www.fgv.br/direitorio
 Evandro Menezes de Carvalho 
Li Hu  Márcio Souza Guimarães (org.)

Arbitration and
Mediation in Brazil
and China

Brazil-China Law Series

FGV Direito Rio Edition
Printed in Brazil.
First edition finalized in 2023, June.
This book is in the Legal Deposit Division of the National Library.

This material, its results and conclusions are the responsibility of the
authors and do not represent, in any way, the institutional position
of the Getulio Vargas Foundation / FGV Direito Rio.

Coordination: Ludmilla Totinick, Christian Danniel and Victor Almeida

Book cover and layout: Bruno Santos | Studio Oorka
1st review: Márcia Glenadel
2nd review: May Mortari and Gabriela Carioca

Dados Internacionais de Catalogação na Publicação (CIP)

Ficha catalográ�ica elaborada pela Biblioteca Mario Henrique Simonsen/FGV

Arbitration and mediation in Brazil and China [recurso eletrônico] / Evandro Mene-
zes de Carvalho, Li Hu e Márcio Souza Guimarães (orgs.). - Rio de Janeiro: FGV Direito
Rio, 2023.

452 p. (Brazil-China law series)

Dados eletrônicos.

Inclui bibliogra�ia.

ISBN 978-65-86060-42-3

1. Arbitragem – Brasil. 2. Arbitragem - China. 3. Mediação – Brasil. 4. Mediação - Chi-

na. 5. Arbitragem comercial internacional. I. Carvalho, Evandro Menezes de. II. Hu,
Li. III. Guimarães, Márcio Souza. IV. Escola de Direito do Rio de Janeiro da Fundação
Getulio Vargas.

CDD – 341.163
 Introduction

In this year of 2023, Brazil and China complete 30 years of strategic part-
nership. In 2024, the two countries will celebrate the re-establishment
of diplomatic relations 50th anniversary. For the last 14 years, China has
been Brazil’s biggest trading partner and has also become one of its biggest
investors. The volume of Chinese companies’ investments and operations
in Brazil justifies the need to intensify the bilateral dialogue between the
legal systems and legal professionals of the two countries. Increasingly,
Brazilian and Chinese law firms are looking for professionals who under-
stand the legal culture of both countries. However, the exchange of infor-
mation between legal professionals and researchers in Brazil and China
is still very incipient.
Considering the importance of Sino-Brazilian relations, FGV Direito
Rio was a pioneer by establishing the Center of Brazil-China Studies in
2017, it was the first ever in a Brazilian Law School. In the same year,
FGV Direito Rio promoted the 1st Brazil-China Seminar on “Regula-
tory and Legal Challenges for Chinese Companies and Investments in
Brazil”, in partnership with the Brazilian Association of Chinese Com-
panies (ABEC), an event that had more than 400 registered participants.
In 2018, the II Seminar had “Chinese Investments in Brazil and the
role of Arbitration, Mediation and online means of Conflict Resolution”
as its theme. The event counted on the support and participation of the
Chinese International Economic and Trade Arbitration Commission
(CIETAC), which was represented by Mr. Li Hu, the Deputy Secretary
General at that time, Mr. Cui Xinmin the deputy director of CIETAC’s
Alternative Dispute Resolution Division at that time and Mr. Wang
Yingmin the deputy secretary general of the CIETAC Subcommittee in
Tianjin at that time as well. The success of the seminar on a more specific
theme had approximately 300 participants, evidencing the importance of
continuing the dialogue between FGV Direito Rio and CIETAC.
Then, In November 2019, the director of FGV Direito Rio, professor
Sérgio Guerra, and the coordinator of the Center for Brazil-China Stud-
ies, professor Evandro Menezes de Carvalho, made a technical visit to
China, where they a meeting with Mr. Li Hu at CIETAC headquarters
in Beijing. From this meeting came the proposal to publish a comparative
study on arbitration and mediation in China and Brazil. The Covid-19
pandemic, in the beginning of 2020, delayed the book’s production pro-
cess, aspect which created the opportunity for the Business Law and Ar-
bitration Studies Center of FGV Direito Rio to join the project, under
the coordination of professor Márcio Guimarães.
We brought together specialists from Brazil and China to deal with
issues related to arbitration and mediation which have become increasingly
relevant in both countries, with an obvious potential yet to be explored in
the eventual resolution of disputes involving Chinese and Brazilian com-
panies. The various arbitration institutions in both countries are reforming
their rules, training their teams and improving their service standards in
a more market-aligned manner. Even so, there are very specific aspects
to the dynamics of the legal culture of each country, and that is why it is
necessary to deepen mutual knowledge and foster dialogue between spe-
cialists in the area.
This is the first book in a series that we intend to publish focusing on
the comparative study of Brazilian and Chinese laws. What motivates us
is learning the lessons and acquiring the wisdom which the legal cultures
of our countries bring to law in general and, in the case of this book, to
arbitration and mediation. We expect this work to be useful for all of
those who study and act professionally as arbitrators, mediators, lawyers
and experts in dispute resolution. Likewise, we also hope that initiatives
such as this one by FGV Direito Rio and CIETAC can expand the space
for cooperation between the two countries, aiming at developing a rela-
tionship of trust based on mutual respect and commitment to enrich our
repertoire of legal knowledge, through the comparative study of our re-
spective legal cultures.

Evandro Menezes de Carvalho

Li Hu
Márcio Guimarães
 Table of contents

Introduction ...........................................................................................................5

Current Issues in Shareholder Arbitration under Brazilian Law ......................... 11

Fabiano Robalinho Cavalcanti

Legal Aspects of Arbitration Involving Brazilian Regulatory Agencies ..............37

Sérgio Guerra

General Overview of Arbitration in Brazil .......................................................... 57

Marcelo Roberto Ferro

Arbitration and Brazilian Antitrust System.........................................................79

Carlos Ragazzo
Amanda Barelli

Arbitration and Brazilian Infrastructure............................................................111

Flávio Amaral Garcia

International Commercial Arbitration and Compliance Disputes in Brazil ..... 135

Alice Moreira Franco

Arbitration and Insolvency in Brazil .................................................................. 153

Márcio Souza Guimarães

Recognition and Enforcement of Foreign Arbitral Awards in Brazil................ 181

Peter Christian Sester

Brazilian Contracts and Arbitration ..................................................................225

Fabiane Verçosa
Chinese Institutional Practice on Challenges to Arbitrators .............................241
Li Hu

Beyond Litigation: ADR and Dispute Resolution between Air Carrier and
Passenger – A China’s Perspective .....................................................................267
Huaping Qin

Financial Dispute Resolution in China ............................................................. 309

Xiuming Tao

Rethinking Some Issues of Arbitration in China .............................................. 339

Xuehua Wang

Settlement of E-commerce Disputes in China .................................................. 365

Hong Xue

Navigation for Third-Party Funding in Arbitration of Mainland China .......... 397

Yao Yu

Research on the Combination of Mediation with Arbitration and its Latest

Development...................................................................................................... 425
Zhan Ling
 Current Issues in Shareholder
Arbitration under Brazilian Law
Fabiano Robalinho Cavalcanti1

1. INTRODUCTION

Historically, Brazilian securities market has not been a fertile ground

for shareholder activism. Law no. 6.404/1976 (Brazilian Corporations
Act), which is generally regarded as a well-structured statute, provides
minority shareholders with the right to issue direct and derivative suits
to obtain redress, on behalf of the company or for themselves, for loss/
harm caused by the company, directors and officers or the controlling
shareholders. In practice, however, the number of lawsuits filed has
been modest2.
More recently, however, there has been a surge in shareholder lit-
igation involving Brazilian publicly traded companies. Following the
example of shareholders in other jurisdictions, most notably in the US,

1. Fabiano Robalinho Cavalcanti graduated in Law from the Pontificate Catholic University of Rio de Janeiro
(PUC-RJ) in 1997 and was awarded an LLM from Harvard Law School in 2000. He lectured on Interna-
tional Arbitration at Pontificate Catholic University of Rio de Janeiro in 2006 and 2007. Since 2006, he has
been a professor of Private International Law and Arbitration and Mediation at the Getúlio Vargas Foun-
dation Law School (FGV), where he also lectures on Arbitration of Corporate Disputes on the postgraduate
Corporate Law course.
2. GRINOVER, A. P. A tutela coletiva dos investidores no mercado de valores mobiliários: questões processuais. In:
YARSHELL, F. L.; PEREIRA, G. S. J. (coord.). Processo societário. São Paulo: Quartier Latin, 2012, p. 58.
minority shareholders of companies listed on São Paulo Stock Exchange
have been making greater use of the means assured to them by Brazilian
Corporate Law in order to seek redress for harm caused by: (i) lack of
transparency; (ii) inaccurate provision of information; and (iii) fraudulent
and/or abusive conduct by majority shareholders, officers and directors.
This growth in shareholder litigation has, in turn, seen a significant
increase in arbitration proceedings. That is due to the fact that, since the
early 2000s and following developments in Brazilian Law and in the rules
of corporate governance, the bylaws of publicly traded companies now
commonly include arbitration agreements.
The statutory changes began in 2001, when Brazilian Corporations
Act was amended with the insertion of art. 109, §3. This provision ex-
pressly provided the inclusion of arbitration agreements in companies’
bylaws. Following on from this statutory development, São Paulo Stock
Exchange introduced a rating system identifying and rating publicly traded
companies that have adopted certain practices that are considered import-
ant elements of corporate governance. In order to obtain highest-levels
certification, listed companies must include an arbitration agreement in
their bylaws covering all disputes between the company, its shareholders,
directors and officers. This measure has had a significant practical effect:
out of the four hundred plus companies listed on São Paulo Stock Ex-
change, one hundred and eighty four (184) are listed at the highest levels
of best practice in corporate governance, which means that they have an
arbitration agreement in their bylaws3. Furthermore, nowadays, the vast
majority of the companies that launch an initial public offering on São
Paulo Stock Exchange have arbitration agreements in their bylaws.
The increase in the number of publicly traded companies that have
an arbitration agreement in the bylaws has led to considerable debate

3. Numbers extracted from São Paulo Stock Exchange. Available at: <http://bvmf.bmfbovespa.com.br/cias-listadas/em-
presas-listadas/BuscaEmpresaListada.aspx?idioma=pt-br>. Accessed on: March 5th, 2021.

12
amongst legal scholars and practitioners as to whether the arbitration
provisions bind shareholders that: (i) voted against the inclusion of an
arbitration clause in the bylaws; (ii) abstained from, or for some other
reason did not vote for, the deliberation or (iii) acquired shares after the
arbitration agreement had been inserted in the bylaws. The crux of the
debate was whether shareholders could be obliged to accept an arbitra-
tion to which they did not expressly consent and the extent to which
the will of the majority of shareholders voting in favor of an arbitration
clause should prevail over the will of the other shareholders.
This debate led to a 2015 amendment of the provisions of the Bra-
zilian Arbitration Law (Law no. 9307/96) and a consequent inclusion of
art. 136-A in the Brazilian Corporations Act, providing that an arbitra-
tion agreement may be inserted into a company’s bylaws on the vote of
a majority of the shareholders, following which it will bind all of them,
including dissenters and abstainers4. The dissenters then have an option
of withdrawing from the company, receiving fair value for their shares.
These changes in the law, as well as the incentive of obtaining a high
corporate governance rating, has encouraged several publicly traded com-
panies to incorporate arbitration agreements into their bylaws, binding
shareholders, directors and officers and the corporation itself.
Since arbitration is viewed in Brazil as an efficient means of solving
disputes in general, because, among other reasons, arbitral proceedings
are much faster than court proceedings, the inclusion of arbitration
agreement in the companies’ bylaws has clearly served as an important
incentive for shareholders seeking the enforcement of their rights.
As a result of all the above, a practice of shareholder and corporate
disputes has emerged in arbitration and, within that practice, there were
some issues particular to this kind of dispute that have arisen and need
to be addressed in order to guarantee that arbitration remains as an ef-

4. EIZIRIK, N. A lei das S/A comentada. 2. ed. São Paulo: Quartier Latin, 2015, p. 500. v. II.

13
fective means of solving shareholder and corporate disputes. This article
aims at addressing some of these key issues.

2. BRAZILIAN PRACTICE IN SHAREHOLDER

LITIGATION – GENERAL VIEW

The Brazilian Corporations Act makes provision for a broad range of legal
measures that can be taken to protect the rights of companies and share-
holders. With regard to loss/harm caused by directors and officers, art.
159, caput, of the Act enables the corporation itself, by a majority vote of
a general meeting, to file for damages against the individuals involved.
This type of direct action is classified by legal scholars as an ut universi
corporate lawsuit (‘ação social ut universi’). Actions filed by the sharehold-
ers themselves are known as ut singuli lawsuits5.
If the company does not file an ut universi lawsuit within three months
of the shareholders’ deliberation, individual shareholders (art. 159, §3)
may, acting on behalf of the company, file an ut singuli claim for damag-
es against the directors and/or officers. If the general meeting rejects the
motion proposing legal action, shareholders representing at least 5% of
the total capital (art. 159, §4) may also file the claim. In both cases, any
resulting award of damages will accrue to the company, which must, in
turn, indemnify the plaintiffs for the costs incurred in bringing the lawsuit.
Shareholders are also entitled to file for damages to recover loss caused
to them individually under art. 159. §7 of the Corporations Act.
Shareholders (i) that represent at least 5% of the total capital or (ii)
that provide a court bond to cover court costs and attorney fees, are enti-

5. “No primeiro caso, verifica-se hipótese de legitimação ordinária, uma vez que há coincidência entre o direito
material e a figura do autor da ação, a companhia. Após a deliberação, cabe aos diretores, como representantes
legais da companhia, tomar as providências à propositura da ação, inclusive contratando advogados. A ação
social ˗ chamada ut universi ˗ compete à companhia, que pode cumular o pedido de indenização com o de
nulidade do ato do administrador.” (EIZIRIK, N. A lei das S/A comentada. 2. ed. São Paulo: Quartier Latin,
2015, p. 412. v. II.).

14
tled, under art. 246 §1, to file a claim for damages, on behalf of the com-
pany, against the controlling shareholder. If the claim is successful, any
award of damages will accrue to the company itself, but the plaintiffs are
entitled to recover from the defendant a ‘premium’ equivalent to 5% of
the damages award as well as payment to lawyers’ fees set at the rate of
20% of the award.
Individual shareholders are also entitled to seek damages for loss/
harm caused to them individually by the controlling shareholders or by
the company itself, depending on the case.
The Brazilian Corporations Act further provides for several other
lawsuits that shareholders can file in order to protect their rights and
those of the company, such as applications to set aside the resolutions of
a general meeting.
The Corporations Act has sought to ensure that minority shareholders
are able to take action to protect the rights of the company (and of the
shareholders themselves), even in the face of direct opposition or inertia
by controlling shareholders.
Despite that, the relative reticence of Brazilian shareholders in mak-
ing use of the legal mechanisms is due to several factors. Among them,
it is worth noting that: (i) individual investors often lack the resources to
fund complex and protracted shareholder claims; (ii) the potential risks
and costs of an unsuccessful claim often outweigh the potential benefits
of success of individual shareholders; and (iii) the Corporations Act does
not provide for a class action mechanism in which a group of shareholders
could file a lawsuit seeking a benefit for all shareholders in a certain group.
Perhaps the clearest example of the lack of incentives is the ut singuli
lawsuit provided for in art. 159, §4 of the Corporations Act, by which, as
described before, individual shareholders holding 5% or more of the cap-
ital are able to file suit against directors and officers to recover loss caused
to the company. In practical terms, the Law provides no direct benefit
whatsoever for the plaintiff shareholder. The benefit of the lawsuit accrues

15
to the company, and whilst the company is under a duty to reimburse
the shareholder for the costs of a successful claim, the shareholder must
bear alone the risks of an unsuccessful lawsuit. In this type of lawsuit,
there is no “premium” payable to the shareholder in the event of the
successful outcome, meaning that the shareholder assumes all the risk
and only indirectly (and partially) benefits from a success.
In relation to the lawsuit against the controlling shareholder, pro-
vided for in art. 246 of the Corporations Act, the law took greater care
to create a tangible incentive (the premium of 5% of the quantum of the
award, payable to the plaintiff shareholder by the defendant, as afore-
mentioned). However, in practice, this premium rarely outweighs the
risks and costs involved and has done little to encourage shareholders
to take action.6
This is true of many institutional investors as well as individual
shareholders. Pension and investment funds have clear fiduciary duties
to their quotaholders/investors and are obliged to abide by specific risk
parameters, meaning that they are unlikely to take the financial risk of
pursuing litigation with an uncertain outcome. In circumstances in which
they perceive that harm is being caused to the company, fund managers
will more often than not opt to sell off their stocks rather than fighting

6. Regarding the ineffectiveness of derivative litigation in Brazilian securities market, Guilherme Setoguti Pereira, in
OECD Report Private Enforcement of Shareholder Rights: a comparison of selected jurisdictions and policy alternatives
for Brazil
Brazil, states that: “Despite the importance the LSA grants to derivatives suits, studies have shown that they
are usually regarded as an ineffective mechanism for redress in Brazil. The studies have concluded that there is
scarce litigation pursuing civil liability of managers and controlling shareholders. Some of these studies have
collected empirical data to support their assessment. One of them was conducted by Ana Carolina Rodrigues
and found out that civil liability suits are seldom used as an instrument to seek compensation from managers
of listed companies. The study analyzed public data available and found 32 CVM administrative enforcement
proceedings against managers of listed companies and only 11 liability suits against managers of listed
companies within a given period in time. According to Rodrigues, that comparison suggested that investors
and companies prefer to initiate an administrative proceeding rather than file a liability suit, possibly because
the latter is more costly, ineffective and slow. The problem with that finding is the fact that investors are not
compensated in the CVM administrative proceedings, only in liability suits.” (In: OECD. Private Enforcement
of Shareholder Rights: a comparison of selected jurisdictions and policy alternatives for Brazil. Available at:
<http://www.oecd.org/corporate/ca/Shareholder-Rights-Brazil.pdf>. Accessed on: Feb 18th, 2021. p. 111).

16
for redress for the company and the other shareholders. Few rational
agents are in a position to engage in what is effectively an act of altruism
– taking on high costs and high risk litigation mainly for the benefit of
others, hence the low rate of uptake of the statutory option of taking legal
action. This is a reality that prevails even in circumstances in which sub-
stantial loss is being caused to the company and minority shareholders.
The truth of the matter is that, although it looks good on paper, the
Brazilian Corporations Act has not provided effective mechanisms for
comprehensive defense of shareholder rights. That is certainly the case
for minority shareholders that suffer individual loss, particularly when
the costs and difficulties involved mean that they have little or no in-
centive to risk litigation. The result is that many small investors may
perceive the Brazilian stock market as unfair, as it does not provide an
accessible means of protection against unlawful conduct by more pow-
erful economic agents. In the absence of effective legal remedies, abusive
and illegal acts may go unchecked.
As an alternative to shareholder lawsuits, the Brazilian system (in
Law no. 7.913/89) enables the Public Attorney’s Office (Ministério Pú-
blico)7 to file class actions to protect and defend the rights of investors
in the securities market.
The introduction of the shareholders’ class action established in Law
n . 7.913/89 allows a multitude of investors, regardless of the number of
o

shares held, to benefit from a ruling rendered in a single lawsuit, without

incurring costs (as the action is publicly funded). This greatly reduces
the risks involved in enforcing shareholder rights. It might have been
expected to encourage minority holders to pursue claims, through the
Public Attorney’s Office, with a concomitant reduction in the perceived

7. The Ministério Público (which is also sometimes referred to, in English, as the Public Prosecutor’s Office) has
powers, under the Federal Constitution, to file civil proceedings against individuals and legal entities, including
the government and state-controlled companies, in the defense of minorities, the environment, consumers
and the civil society in general.

17
risk of unlawful behavior in the securities market, the overall benefit
being to encourage a further flow of investment, especially by individual
and retail investors. In practice, however, the class action mechanism in-
troduced by Law no. 7.913/89 has not been frequently used. The Public
Attorney’s Office is more actively engaged in the protection of disadvan-
taged social groups and has not, so far, demonstrated much enthusiasm
for active intervention in corporate disputes and seeking the enforcement
of rights of investors in the financial market.
In this context, it is not surprising that arbitration appears to investors as
a much more efficient means of enforcing their rights. Since the incentives
granted by the law to file a shareholder dispute were historically perceived
as low, the lengthy duration of court proceedings in Brazil would add an
extra deterrent effect. Thus, recourse to arbitration, as an alternative to state
courts, certainly appears as a more effective mechanism for the resolution
of shareholder disputes.
However, it is necessary to bear in mind that certain issues may arise
when corporate disputes, wich involve publicly traded companies, refer to
arbitration in line with the the company bylaws.

3. CONFIDENTIALITY IN ARBITRATION
OF SHAREHOLDER DISPUTES

The Brazilian Arbitration Act (Law no. 9.307/1976) does not impose confi-
dentiality in arbitration proceedings. It merely requires that arbitrators con-
duct their functions with due discretion (art. 13, §6). Arbitrations involving
the Public Administration are required to be public proceedings (art. 2, §3).
In general, it is open to the parties to agree that arbitration proceedings gov-
erned by Brazilian Law are to be held in a confidential manner and in fact
most arbitral institutions in Brazil have binding rules to that effect, which
apply in case none of the parties are members of the Public Administration.

18
 There are three key aspects to confidentiality in arbitration proceed-
ings that are often subject to discussion in the Brazilian practice. First, the
issue of precedents. In judicial proceedings, precedents from case law are
a very useful guideline to the court and also serve as a guidance for legal
practitioners and others as to how similar factual circumstances may be
dealt with in the future and, therefore, might have an effect of reducing
litigation in the sense that a consolidated set of precedents on certain issues
of fact and law serves to clarify the correct interpretation and application
of the law in the case in hand. As such, the use of precedents might be
helpful in the arbitration of shareholder disputes, but is, at present, in-
hibited by strict application of confidentiality.
However, it should be noted that this issue of confidentiality of prec-
edents is not a matter particular to shareholder disputes deriving from
arbitration agreements included in the companies’ bylaws. It is a general
concern related to arbitration and many arbitral institutions are trying to
deal with this matter by making awards public.
A second aspect, which is specific to arbitration proceedings concerning
shareholder disputes in publicly traded companies, is that maintaining the
existence and outcome of proceedings confidential may lead to informa-
tion asymmetry in the market, unduly benefitting the participants in the
arbitration, who will be aware of the potential effect of the proceedings
on a given company’s stock price while other shareholders will trade their
stocks without that knowledge.
When the proceedings involve publicly traded companies, there is a
mandatory duty of disclosure under art. 157, §4 of the Brazilian Corpo-
rations Act as well as Instruction no. 358/02 of the Brazilian Securities
Commission (Comissão
Comissão de Valores Mobiliários – CVMCVM) applies. In accor-
dance with these provisions, company officers must communicate to the
market any information that might be capable of influencing an investor’s
decision as to whether or not buy or sell a given security.

19
 The issue of the confidentiality of arbitration of corporate disputes
in publicly traded companies has already been submitted to the CVM in
Administrative Proceeding no. RJ 2008/0713. The CVM concluded that
the duty to disclose under Instruction no. 358/02 and art. 157, 4 of the
Brazilian Corporations Act shall prevail over confidentiality, because the
latter derives from an agreement between the parties and, as such, cannot
limit the company’s duties under the law to communicate the existence of
proceedings that might have an impact on share prices.
The third aspect that merits specific analysis with respect to the con-
fidentiality of arbitration disputes involving publicly traded companies is
that the same factual event(s) may give rise to more than one set of pro-
ceedings. Given that under the Brazilian Corporate Law system some
rights may be asserted by any member of a given class (e.g. shareholders,
minority shareholders etc.), if an individual commences an arbitration
that is kept confidential, it is possible that other members of that same
class, being unaware of the existence and scope of the arbitration, may
file a similar claim before a different panel, with the consequent risk of
contradictory rulings between different arbitral tribunals.
For example, if a shareholder initiates an arbitration seeking the an-
nulment of a deliberation of a general shareholders’ meeting, the award
to be rendered in this proceeding has potential impacts on the rights and
interests of other investors who are not parties to the proceedings and do
have a legitimate legal interest over the outcome of the dispute, since it
directly affects its rights.
There is, therefore, an apparent need for a system of rules that enables
shareholders and other individuals who have a legitimate interest in the
outcome of an arbitral dispute involving publicly traded companies to be
informed about the existence of the proceedings, observe hearings and
even join said proceedings as parties to the claim. There are mechanisms
that deal with that in the Brazilian law as well as in the arbitration rules
of the major institutions that administer arbitration proceedings, but they

20
clearly need to be improved and the confidentiality of these proceedings
do complicate matters as will be further explained.

4. PROCEDURAL ISSUES RELATED TO

SHAREHOLDER DISPUTES IN ARBITRATION

In addition to the matter of confidentiality, there are several procedural

issues that arise specifically in relation to disputes involving publicly trad-
ed companies, particularly when the disputes refer to arbitration due to
an arbitration agreement included in the bylaws of publicly traded com-
panies. The following section examines some of these issues raised in: (i)
claims filed by shareholders seeking redress for their own loss; (ii) claims
for which a given class of shareholders or all the shareholders have stand-
ing to sue; and (iii) derivative claims brought by shareholders on behalf
of the company.

4.1 Claims for losses suffered by individual shareholders

Certain acts performed by the company, its officers, directors or the con-
trolling shareholder may cause losses directly to a shareholder or a spe-
cific group of individual shareholders of a company, who share common
interests. An example: it might be a decision taken by the company not
to pay dividends that are due to a class of shareholders or to all of them.
The most efficient means of challenging these acts would be by means
of a class action under Law no. 7.913/89, but, as explained before, the
Public Attorney’s Office has historically been somewhat unenthusiastic
in its response to losses caused to investors in the stock market. It may be
that other parties, such as private associations that promote shareholder
rights, might have standing to sue in such a class action, but it is also an
uncommon practice in Brazil.

21
 In practice, shareholders, on the rare occasions they file lawsuits on
their own behalf, tend to do so individually or together with a select group
of other shareholders. That may lead to the filing of several lawsuits aris-
ing out of the same fact or event. When these actions are in the form of
judicial lawsuits, each case will be assigned to a different judge, on the
basis that the plaintiffs are different in each suit. That, in turn, gives rise
to the possibility of divergent orders being made on the same set of facts,
generating legal uncertainty.
Recognizing that legal uncertainty should be avoided by the system
as a general principle, procedural rules applicable to court proceedings
contain provisions and appeals aimed at avoiding conflicting final orders.
In arbitration, on the other hand, there is no mechanism for reducing
the risk of conflicting awards. That means that there is potential risk of
different tribunals reaching divergent conclusions on the same issues of
fact. That may increase the risk of legal uncertainty, particularly in cir-
cumstances in which the proceedings are confidential. Returning to the
example of the company that decided not to distribute certain dividends:
that might lead to a situation in which several shareholders commence
arbitrations before different panels that might then apply the law in a di-
vergent manner, leading to a scenario in which one shareholder might be
granted the right to receive the dividends while the same right is denied
to others. This legal uncertainty is potentially exacerbated by the confi-
dentiality of the arbitration proceedings, so that some shareholders may
be unaware, or only partially aware, of the resolution sought or obtained
by other shareholders. The requirement of confidentiality prevents a party
to one proceeding from drawing the attention of the arbitrators to a prec-
edent decision by another tribunal on the same set of facts.
Whilst this concern is certainly relevant, there are other considerations
to be borne in mind. When the parties agree to submit their disputes to
arbitration, they renounce to resort to the jurisdiction of judicial courts
and, therefore, to all the procedural mechanisms and appeals available to

22
divergent rulings, in exchange for resolution by arbitration, which is gen-
erally faster and where the awards are granted by arbitrators chosen by
the parties, which usually have the knowledge about the subject matter
in dispute. The latter argument, at least in theory, should increase legal
certainty, counterbalancing the risk of divergent decisions.
Furthermore, it is the case that the mechanisms applied to judicial
proceedings with a view to reducing legal uncertainty are, by no means,
perfect and so the difference between judicial and arbitral proceedings in
this respect may not in fact be that great. The use of binding precedents
in judicial proceedings is limited and the existing procedural rules do not,
by any means, guarantee that the system will be free of divergent rulings.
It is reasonable to assume, however, that the likelihood of awards that
apply the law in different ways to the same factual circumstances becoming
final and non-appealable may be higher in arbitral proceedings, since there
is no formal mechanism designed to deal with conflicting rulings, and no
means of citing former (confidential) rulings as precedents. It may be that
lifting the confidentiality of the proceedings may address this difficulty to
some extent, but is unlikely to eliminate it altogether.

4.2 Claims by multiple shareholders

In the context of claims to which multiple shareholders have a standing to

sue (regardless of the quantity of shares owned and whether or not there is
the need to present security for costs), there are some specific issues that
arise with respect to arbitration deriving from agreements inserted in the
bylaws of a publicly traded company. Once again, the question of confi-
dentiality of the proceedings may add to the difficulties. As an example,
one should consider a hypothetical situation in which various shareholders
are legally entitled to apply to set aside of a resolution passed at a share-
holders’ general meeting. Given that, in the circumstances, each share-
holder would have standing to independently file a claim, there might be

23
several proceedings filed seeking the same relief and the rule that prevents
lis pendens would not apply because the plaintiffs would be different, albeit
that cause of action and the relief sought might be the same.
There are at least two issues wich arise that need somehow to be dealt
with: (i) awards rendered on this type of claim may affect the rights and
interests of shareholders who are not party to the lawsuit or the arbitra-
tion; and (ii) it is neither mandatory nor even viable for all shareholders to
be parties to the proceedings, despite the fact that the award might affect
their legal interests and rights.
The first of these two issues is not known and it is not a matter partic-
ular to arbitration, but it also occurs in judicial disputes. It has been the
subject of intense debate, in proceedings before judicial courts, regarding
the effects of an order on third-party shareholders (i.e. shareholders who
were not party to the proceedings). Leading scholars, such as José Carlos
Barbosa Moreira8 and Enrico Tullio Liebman9, have come to different
conclusions about the reach and effect of final orders in such proceedings
and as to whether the other non-party shareholders would be precluded
from seeking the same relief for themselves in separate proceedings.
The debate among civil procedural scholars over this issue is complex
and demands an article itself to duly address the matter. Despite the de-
tails of the debate, what is clear is that orders to set aside a company res-
olution do produce, one way or another, effects that extend beyond the
scope of the lawsuit or arbitration, and affect the rights and interests of
shareholders who are not parties to that specific proceeding.
The second question that arises is closely related to the first. When, in
certain disputes, the final order will affect the rights and interests of all the

8. MOREIRA, J. C. B. Coisa julgada: extensão subjetiva. Direito Processual Civil. Rio de Janeiro: Borsoi, 1971, p. 116.
9. “[…] Tais deliberações não podem conservar ou perder o vigor senão perante todos os sócios, de sorte que, em
caso de acolhimento da impugnação de um deles, se anula a deliberação para todos, ao passo que, em caso de
rejeição, ficaria preclusa a impugnação de todos os outros sócios.” (In: LIEBMAN, E. T. Eficácia e autoridade
da sentença e outros escritos sobre a coisa julgada, translation Alfredo Buzaid and Benvindo Aires. 3. ed. Rio
de Janeiro: Forense, 1984, p. 98)

24
company’s shareholders, is it necessary to join/invite all of them to partic-
ipate in the proceedings? Having grappled with the theoretical aspects of
the issue, legal scholars and the courts at the end have acknowledged that
bringing hundreds or even thousands of parties to any lawsuit would be
unfeasibly complex and on that basis the general consensus has been that
participation of all shareholders in such proceedings is not mandatory10.
Bearing these two issues in mind, there are certain specific questions
that em in relation to shareholder dispute submitted to arbitration.
In judicial proceedings, although it is not mandatory (or even possible
in some cases) to join all the shareholders, any shareholder that may be
affected by the final order is entitled to apply for joinder. That is not gen-
erally the case under the rules of the major arbitral institutions. The rules
usually contain provision for an existing party to request the joinder of a
third party, but not for an application, sponte sua,, by the third party itself11.
The consequences of the absence of this kind of provision are twofold:
first, it remains unclear how shareholders can exercise their legal right to
participate in proceedings that affect their rights and interests; second-
ly, shareholders may, in such circumstances, be left with no option other
than to file a separate claim, leading to parallel proceedings and potentially
conflicting outcomes; something that is inefficient and should be avoided.
Furthermore, most arbitral institutions only permit joinder up to the time
the arbitral tribunal is constituted12 or the terms of reference are executed13.
These obstacles to shareholder participation in arbitration proceedings
are substantially higher when compared to judicial proceedings and may
increase the possibility of challenges to arbitral awards.

10. MUNHOZ, E. S. A importância do sistema de solução de conflitos para o direito societário: limites do instituto
da arbitragem. In: YARSHELL, F. L.; PEREIRA, G. S. J. (coord.). Processo societário. São Paulo: Quartier
Latin, 2012, p. 93.
11. Art. 10, Brazilian Center of Mediation and Arbitration Rules (CBMA). Art. 10, International Court of
Arbitration of the ICC Arbitration Rules. Art. 4.20 of the Arbitration and Mediation Center of the Chamber
of Commerce Brazil-Canada (CCBC).
12. Art. 10.3, CBMA Rules.
13. Art. 4.20, CCBC Rules.

25
 The confidentiality of the arbitral proceedings, together with the
limited timeframe for joinder, adds complexity to the matter, because it
makes it difficult, if not impossible, for other shareholders to learn about
the existence of the arbitration and therefore effectively prevents them
from participating in the proceedings.
Another key matter in relation to claims, in which multiple sharehold-
ers have standing to sue, is the circumstances in which simultaneous arbi-
tration proceedings may be consolidated. Such a mechanism, if executed
properly, provides an ideal solution to ensure shareholder participation
while preventing the risk of multiple and contradictory rulings.
The consolidation of proceedings (either judicial or arbitral) is not always
possible. With regard to judicial proceedings, art. 55, §1, of the Brazilian
Civil Procedure Code (Law no. 13.105/2015) establishes that lawsuits based
on the same cause of action or in which the relief being sought is the same,
should be consolidated before the same judge. Art. 55, §3, also provides for
the consolidation of proceedings whenever there is a risk of conflicting rulings.
However, the law stipulates, for example, that lawsuits are not to be consol-
idated if the first instance court has already issued an order on one of them.
The major arbitral institutions have specific rules providing for consol-
idation of proceedings. However, they usually impose conditions or time
limitations for consolidation that might be difficult to apply to shareholder
disputes involving publicly traded companies. The rules of the Arbitra-
tion and Mediation Center of the Chamber of Commerce Brazil-Canada
(CCBC), for example, establish that consolidation can only occur up to
the signature of the terms of reference14. In other words, even when the
arbitration is in its early stages, even prior to the filing of the Statement
of Claim, it would no longer be possible to consolidate proceedings.
The arbitration rules of the International Court of Arbitration of the
ICC, as well as the rules of the CCBC, establish that consolidation will

14. Art. 4.20, CCBC Rules.

26
only be considered at the request of one of the parties15. These rules are
certainly drafted bearing in mind the usual kind of litigation, in which the
proceedings to be consolidated derive from the same contract or group
of contracts, where all the parties know each other. The difficulty with
shareholder disputes is that parties in one case may not be aware of the
existence of other proceedings dealing with the same issue, particularly
given the rules as to confidentiality. Unlike most contractual disputes, in
corporate shareholder disputes involving publicly listed companies, the
shareholders usually do not know each other and it is perfectly possible for
them to be entirely unaware of proceedings between other shareholders
and the company, in which they are not directly involved.
The CAM B3 Arbitration Center, the arbitral institution constituted
by São Paulo Stock Exchange has consolidation rules that are better suited
to this kind of dispute and that are better designed to avoid contradic-
tory rulings. According to art. 6.2 of these rules, whenever a request for
arbitration is filed that has the same object and/or request16 as arbitration
proceedings that are already underway, the president of the arbitration
chamber may order the consolidation of claims. The CAM B3 does not
make it mandatory for related claims to be consolidated. Rather, art. 6.2
establishes that the president may order consolidation, upon application
or ex officio, independently of any application by the parties, bearing in
mind the circumstances of each case and the stage of the proceedings.
Apart from the arbitration rules of other institutions, the CAM B3
Arbitration Center provides that consolidation may take place regardless
of the request from one of the parties and it is also much more flexible
with respect to the stage of the proceedings when consolidation might
happen. This rule seems to be more in line with the particularities of the
shareholder disputes dealt in this section.

15. Art. 4.20, CCBC Rules. Art. 10, CCI Rules.

16. Notice the similarity between the terms in the CAM B3 Arbitration Rules and those of the Brazilian Civil
Procedure Code.

27
 In relation to confidentiality, arbitral institutions are in a somewhat
difficult position, because they have access to information that is not readily
available to all the shareholders and, specifically, to the parties in the dis-
putes. The confidentiality imposes an extra burden on the institutions, since
they are the ones that are supposed to identify the proceedings in which
there might be conflicting rulings and, therefore, should be consolidated.
Finally, it should be noted that procedural mechanisms, such as join-
der of interested third parties and consolidation of claims, are often seen
as a response to the effects of globalization and the surge of complex cor-
porate structures and contract networks in arbitration, which demand
ways to adapt this system of dispute resolution to so-called multi-party
scenarios17. In line with this concept, joinder of third parties and consoli-
dation of proceedings in arbitrations derived from arbitration agreements
inserted in the bylaws of publicly traded companies must be analyzed with
due care, considering the particularities of this kind of proceedings. Some
adjustments may have to be made to arbitration rules to adjust them to
shareholder dispute. But such changes would not be different from others
that have been made as a response to demands and needs that arbitration
practitioners have identified in its use.

4.3 Derivative lawsuits

Even though multiple shareholders have a standing to file derivative suits

against the company’s directors and officers (art. 159 of the Brazilian Cor-

17. As stated by Jeffrey-Maurice Waincymer: “[…] Because of globalisation of trade and commerce, multi-site
and multi-party manufacturing processes, increased foreign investment and complex corporate groups,
there are now a significant number of commercial endeavours that inevitably involve the activities of more
than two parties. This is a significant practical issue. In 2002, the LCIA reported that more than 50%
of its cases involved more than two parties. (14) It has since been suggested that approximately 40% of
arbitration cases do indeed involve more than two parties. (15) A far greater percentage have implications
for third persons even if they are not directly involved as parties.” (Part II: The Process of an Arbitration,
Chapter 7: Complex Arbitration*, in Jeffrey Maurice Waincymer, Procedure and Evidence in International
Arbitration, © Kluwer Law International; Kluwer Law International 2012, p. 495-608).

28
porations Act) and the controlling shareholder (art. 246), the particular-
ities of such claims for damages demand an analysis aside from the kind
of claim dealt with in the previous sections, because while in a claim for
nullification of a deliberation taken by the shareholders’ general meeting
investors act in defense of their own rights and interests, in derivative
lawsuits the shareholders act on behalf of the company, claiming a right
to which the latter, and not the former, has standing to sue.
One of the most frequent examples of a derivative lawsuit consists
of a claim filed against a controlling shareholder that exercises corporate
control in an abusive manner (art. 116 of the Brazilian Corporations Act),
thus causing harm directly to the company and, derivatively or indirectly,
to its minority shareholders. In such context, as occurs with the ut singu-
li claim for damages against directors and officers, each shareholder that
fulfills the legal requirements (e.g. minimum percentage of owned stock
or that present security for costs) has a standing to enforce, in the com-
pany’s name, its rights to be indemnified.
Excluding the issues outlined in the previous sections, in derivative
lawsuits it is discussed whether or not the filing by a shareholder on behalf
of the company would prevent other shareholders from filing the same
claim due to lis pendens. Precisely this question has been disputed between
parties to some ongoing arbitration proceedings in Brazil.
In Brazilian Civil Procedure Law, lis pendens is a state between two
lawsuits characterized by the identity of three elements: parties, cause of
action and relief sought. In such situation, the existence ((pendens) of the
first claim (litis) leads to the dismissal of the second proceeding.
Regarding derivative lawsuits, despite the fact that the plaintiff would
be formally a different shareholder, materially it is the same, since the
lawsuit is filed on behalf of the company. The cause of action might also
be the same in a hypothesis in which the same harmful conduct is being
discussed, and the relief sought by more than one shareholder on behalf
of the company may as well coincide. Therefore, it appears that the filing

29
of claims by different shareholders on behalf of the company would lead
to lis pendens. This conclusion is supported by noteworthy scholars of the
field, such as Nelson Eizirik18 and Cândido Rangel Dinamarco19.
In the case of derivative lawsuits, although it is the shareholder that is
the plaintiff, rather than the company, the shareholder is acting on behalf
of the company. The question relies on whether there is lis pendens in the
event of there being two or more suits filed by different shareholders (os-
tensibly different claimants), when the cause of action and relief sought
are the same in both. According to authoritative legal scholars, including
Nelson Eizirik20, the answer to that question is yes: there would be lis
pendens in such circumstances, because formally the claimant might be
different, but materially it is the same (i.e. the company).
In view of that, the first concern that is raised is an issue of efficien-
cy and costs, since there might be more than one proceeding seeking the
same relief. Second, it is not reasonable to admit, from the civil procedure
standpoint, that one party (i.e. the company), through different parties
that claim on its behalf, could have various opportunities before different
courts to seek the same relief. Third, if litis pendens is not avoided, there
might be more than one award final and binding granting the same relief
or, even worse, conflicting orders.
There is no doubt that the civil procedure rules that prevent lis pen-
dens apply both to judicial proceedings and to arbitration. However, the
arbitration rules of the main arbitral institutions in Brazil do not contain
provision for dealing with the occurrence of lis pendens or for the conse-
quences of that.
If there are no mechanisms to avoid litis pendens, the first award grant-
ed will most likely have effects over the other proceedings. For example,
shareholder A initiates a derivative arbitration on behalf of company C,

18. Eizirik, N. A lei das S/A comentada: arts. 121 a 188. São Paulo: Quartier Latin, 2011, p. 414. v. II.
19. DINAMARCO, C. R. Processo civil empresarial. São Paulo: Malheiros, 2010, p. 644.
20. Eizirik, N. A lei das S/A comentada: arts. 121 a 188. São Paulo: Quartier Latin, 2011, p. 414. v. II.

30
against the controlling shareholder D, and, afterwards, shareholder B ini-
tiates the very same arbitration, with the same cause of action and seek-
ing the same relief on behalf of company C, against the same controlling
shareholder D.
Leaving the inefficiency issue aside for a moment, if the final award
in the second proceeding, initiated by shareholder B, ends before the first
one initiated by shareholder A, the latter may be dismissed due to the
res adjudicata effect. This situation would be even worse if one considers
that it is likely that shareholder A, the first one to break the inertia of
all shareholders and undertake the risks, costs and liabilities of seeking a
derivative claim on behalf of the company, would not even be aware of
the existence of the second proceeding initiated by shareholder B up un-
til the moment that someone seeks the dismissal of its claim due to the
existence of res adjudicata.
Together with the issues of joinder of third parties and consolidation
of proceedings referred to in the section above, the risk of lis pendens in-
creases the duty of institutions that administer these kind of proceedings
analyzing very carefully the claims presented in different arbitrations and
identifying whenever such claims are the same or there is a risk of con-
flicting decisions. The duty imposed on the institutions in these circum-
stances is even harder because they are the ones that have information
about the existence of the different proceedings in view of the confiden-
tiality imposed by their own arbitration rules. The confidentiality of the
proceeding prevents, in the example aforementioned, shareholder A from
being aware of the existence of the second proceeding and exercising any
right they may have, including arguing the existence of litis pendens that
should lead to the dismissal of the second proceeding.

31
5. CLASSWIDE SHAREHOLDER
ARBITRATION IN BRAZIL

As mentioned before, an alternative mechanism for efficiently protecting the

rights of investors in the securities market in Brazil is the class action provided
for in Law no. 7.913/89, which may be filed by the Public Prosecutor’s Office
in order to prevent and remedy harmful acts21.
The law, however, presents some obstacles to the full efficacy of this tool,
which may explain why so few proceedings have been initiated since the en-
actment of Law no. 7.913/89. The main obstacle is probably the fact that the
only party that expressly has standing to file this class action in accordance
with the statute is the Public Prosecutor’s Office, what limits the use of this
procedural tool, because the prosecutors interests and priorities are often far
from the protecting investors in the securities market.
In order to improve the means of efficiently protecting shareholders’ rights,
some well regarded scholars in the field advocate for a subsidiary application
of the general Brazilian legislation on collective redress (Law no. 7.347/85),
which would grant standing to file the class action to other parties such as
private associations dedicated to protecting minority shareholders’ rights22.
Based on this broader interpretation of the law, a private association
initiated class action on behalf of Petrobras’ minority shareholders before a
judge of the State Court of São Paulo, seeking indemnification for the losses
caused by the facts revealed by corruption scandals involving the company23.
The judge dismissed the case without prejudice not because the plaintiff as-

21. GRINOVER, A. P. A tutela coletiva dos investidores no mercado de valores mobiliários: questões processuais. In:
YARSHELL, F. L.; PEREIRA, G. S. J. (coord.). Processo societário. São Paulo: Quartier Latin, 2012, p. 58.
22. PEREIRA, G. S. J. Enforcement e tutela indenizatória no direito societário e no mercado de capitais. São Paulo:
Quartier Latin, 2018, p. 98-99; EIZIRIK, N. A Fraud-on-the-market Theory pode ser aplicada no direito
societário brasileiro? In: VENÂNCIO FILHO, A.; LOBO, C. A. S.; ROSMAN, L. A. C. (coord.). A lei das
S.A. em seus 40 anos. Rio de Janeiro: Forense, 2017, p. 97; GRINOVER, A. P.. A tutela coletiva dos investidores
no mercado de valores mobiliários: questões processuais. In: YARSHELL, F. L.; PEREIRA, G. S. J. (coord.).
Processo societário. São Paulo: Quartier Latin, 2012, p. 46.
23. State Court of São Paulo. Case nº 1106499-89.2017.8.26.0100. 6th Civil Section.

32
sociation acting on behalf of investors lacked standing to do so, but because
those investors, being shareholders of Petrobras, were signatories of the ar-
bitration agreement inserted in the company’s bylaws. Therefore, not only
those investors, but also the association itself, were bound to seek damages
before an arbitral tribunal24. No appeal was filed against that decision, which
has become final, and the parties initiated an arbitration proceeding.
Nevertheless, in spite of the aforementioned precedent, as well as several
opinions rendered by legal scholars in the field, who advocate for broader in-
terpretation of the statute providing other agents, such as private associations
with a standing to file class actions in defense of investors25, a strict interpreta-
tion of Law no. 7.913/89 still negatively impacts the potential benefit of such
a mechanism for minority shareholders and the securities market as a whole.
In addition, there are two other issues that have not yet been addressed
with respect to arbitration that must be carefully analyzed: (i) whether a class
action could be submitted to arbitration, and (ii) the extension of the effects
of the award granted in an arbitration filed by a private association.
With respect to the first issue, Law no. 7.913/89 expressly establishes that
the Public Prosecutor’s Office has standing to sue to protect rights of inves-
tors in the financial market as well as to seek indemnification for the damages
incurred by them. The statute does not make any reference to arbitration and,
thus, does not establish whether the Prosecutor’s Office would be bound by the
arbitration agreement established in the bylaws of a publicly traded company
when it exercises the power granted to it by the law to act on behalf of the
shareholders. Not being a shareholder, and thus not prima facie being bound
to a commitment to submit disputes to arbitration, it is disputable whether

24. State Court of São Paulo. Case nº 1106499-89.2017.8.26.0100. 6th Civil Section.
25. PEREIRA, G. S. J. Enforcement e tutela indenizatória no direito societário e no mercado de capitais. São
Paulo: Quartier Latin, 2018, p. 98-99; EIZIRIK, N. A Fraud-on-the-market Theory pode ser aplicada no
direito societário brasileiro? In: VENÂNCIO FILHO, A.; LOBO, C. A. S.; ROSMAN, L. A. C. (coord.).
A lei das S.A. em seus 40 anos. Rio de Janeiro: Forense, 2017, p. 97; GRINOVER, A. P.. A tutela coletiva
dos investidores no mercado de valores mobiliários: questões processuais. In: YARSHELL, F. L.; PEREIRA,
G. S. J. (coord.). Processo societário. São Paulo: Quartier Latin, 2012, p. 46.

33
the Public Prosecutor’s Office could or would be obliged to seek this kind of
claim through arbitration.
Additionally, the class action established in the Brazilian Class Action
Act (Law no. 7.347/85) sets forth a particular procedure with several char-
acteristics different from the ones applicable to the standard lawsuits, what
poses additional challenges for its adaptability into arbitration. For example,
the statute provides that class actions shall have a peculiar allocation of pro-
cedural costs, which benefit the plaintiff (art. 18), as well as a mandatory and
automatic appeal in case of a disfavorable ruling, which is applied by courts to
class actions through an analogy with the Brazilian Public Actions Act (art.
19 of Law no. 4.717/65). Both of these elements, among others, could make
it difficult to successfully adapt class actions to arbitration.
In case the argument that private associations also have standing to file a
class action prevails, with the subsidiary application of Law no. 7.347/85 to
the rules established in Law no. 7.913/89, it is still unclear under Brazilian
Law the extension of the effects of the awards issued in lawsuits filed before
judicial courts or arbitral tribunals. There are appeals currently pending before
the Brazilian Superior Tribunal of Justice in which it is disputed whether an
award filed by a private association shall benefit only the members of such
association or whether it benefits the whole class26.
In regard to that, the precedent mentioned before only recognizes that
private associations are bound to arbitration agreements in the same way as
the shareholders who are members of such association, but there are still many
open issues that need to be addressed in order to guarantee that class actions
in defense of all shareholders rights can be submitted to arbitration when the
public traded company has an arbitration agreement inserted in its bylaws.

26. REsp 1438263/SP, Min. Raul Araújo; REsp 1361872/SP, Min. Raul Araújo; REsp 1362022/SP, Min. Raul Araújo.

34
6. CONCLUSION

Since 2001, there has been a substantial increase in the inclusion of arbitration
clauses in the bylaws of many publicly listed companies, mainly as part of the
commitment of these companies to high standards of corporate governance.
There has been a concomitant increase in the number of shareholder disputes
referred to arbitration and in fact there is a clear trend of shareholders using
arbitration rather than judicial proceedings to have their disputes solved.
There are significant advantages to the use of arbitration to resolve share-
holder disputes in Brazil. The court system is overloaded, and despite on-going
attempts by judicial authorities to tackle delays, lawsuits last, on average, five
years27. That is clearly not compatible with the needs of publicly traded com-
panies. Furthermore, shareholder disputes and other Corporate Law matters
represent a very small percentage of the cases before the courts and most judges
usually do not have knowledge and experience of the matter. In arbitration,
on the other hand, the parties are able to appoint arbitrators that have specif-
ic knowledge of the matter in dispute and the proceedings are much faster.
The submission of shareholder disputes to arbitration on the basis of arbi-
tration agreements included in the bylaws of publicly listed companies raises
certain specific issues that need to be addressed by parties, practitioners and
arbitral institutions. Changes to the existing rules might be required. But the
changes needed are no different from many other adjustments that were made
to arbitration rules in view of matters that were identified in the practice. The
matters pointed out here are mere improvements that might have to be made
and they were only identified in the practice in regard of the success in the
use of arbitration to solve shareholders’ disputes in arbitration deriving from
arbitration agreements included in the bylaws of publicly traded companies.

27. Brazilian National Council of Justice (CNJ). Available at: <https://www.cnj.jus.br/julgamento-dos-processos-

mais-antigos-reduz-tempo-medio-do-acervo/#:~:text=Leva%2Dse%2C%20em%20m%C3%A9dia%2C,4%20
meses%20nas%20varas%20estaduais>. Accessed on: June 08th, 2022.

35
 Legal Aspects of Arbitration Involving
Brazilian Regulatory Agencies
Sérgio Guerra1

1. INTRODUCTION

The Federative Republic of Brazil adopted a tripartite political system, ac-

cording to the Federal Constitution of 1988, art. 2: “[…] powers of union,
independent and harmonious with each other – the Legislative, Executive
and Judiciary”. However, the current Federal Constitution of 1988 did
not structure the Brazilian State into just three “powers”.
It established, in practice, public bodies, which are independent of
the three traditional powers. Currently, in addition to those that structure
the separations of power (e.g. the Supreme Federal Court, the National
Council of Justice, the Superior Court of Justice, the courts in general, the
National Congress, the Executive powers at the three levels of the feder-
ation), under the Constitution, there are also independent public bodies,

1. Visiting Researcher at Yale Law School. Post-Doctorate in Public Administration from FGV/EBAPE. Director
and Professor of Administrative Law at FGV Direito Rio. General Coordinator of the International Business
Law Course at University of California (Irvine). Ambassador of Yale University in Brazil. Member of the
Arbitration Committee and Arbitrator of the FGV Chamber of Mediation and Arbitration. Arbitrator of the
Chamber of Arbitration of the Federation of Industry of Paraná and of the Brazilian Center for Mediation and
Arbitration ˗ CBMA. He also acts as an arbitrator in arbitration proceedings at the International Chamber
of Commerce (CCI).
such as the Public Prosecutor’s Office, the Federal Audit Court and the
Brazilian Bar Association (OAB).
The Public Prosecutor’s Office and the Federal Audit Court are in-
dependent bodies since the Constitution has defined their powers so that
they are not hierarchically subordinated to any other body. The Brazilian
Bar Association (OAB) is also considered an independent entity, by de-
cision of the Supreme Federal Court, with functions aimed at protecting
the democratic rule of law.
In addition to the independent bodies created by the Federal Con-
stitution of 1988 – which are not part of the tripartite model – the
State established regulatory agencies endowed with a degree of au-
tonomy, granting them competences to regulate certain economic and
social sectors.
In Brazil, at the federal level, there are eleven regulatory agencies:
the National Electrical Energy Agency (ANEEL); the National Oil,
Gas and Biofuels Agency (ANP); the National Telecommunications
Agency (Anatel); the National Health Monitoring Agency (Anvisa);
the National Water Agency (ANA); the National Supplementary
Health Agency (ANS); the National Film Agency (Ancine); the Na-
tional Land Transport Agency (ANTT); the National Water Trans-
port Agency (ANTAQ); the National Civil Aviation Agency (ANAC);
and the National Mining Agency (ANM), each of them with their
own specificities.
The regulatory model – and its execution – was not defined in the
1988 Constitution. The structural character of this polycentric (non-py-
ramidal) network is not detailed in the charter, which used the term
“regulatory body” to refer to the regulatory authorities. The creation
of regulatory bodies for public telecommunication services and for the
monopolized activities of the oil industry is mentioned only in art. 20,
XI, and art. 177 of the Federal Constitution.

38
 No reference was found in the original text, as there were consti-
tutional amendments2.
As for the creation of regulatory bodies in the financial system3, the
Constitution subsequently specified two other bodies in the federal system.
This provision was added to the constitutional text in the 13th amendment,
of August 21st, 1996, and subsequently revoked by the 40th constitutional
amendment, dated of May 29th, 2003.
The Brazilian Regulatory Agencies were established in 1995, after the
Federal Government launched the Master Plan for the Reform of the State
Apparatus, driven by the need to rebuild the State, in order to rescue its
financial autonomy and ability to implement public policies.
The Master Plan for the Reform of the State Apparatus identified two
key factors that would inspire the design of the project: accountability and
management autonomy. Thus, the initial objective – not fully implemented
– focused on modernization of the public machinery in order to transform
local authorities and foundations, which performed exclusive activities of
the State (with the necessary police powers) into autonomous agencies.
The Plan envisaged that the autonomous agency project would be
implemented in two ways. The legal tools necessary to enable the desired
transformations would be elaborated, along with a survey aimed at tack-
ling obstacles in existing legislation, rules and regulations. The new sys-
tem would be installed in selected municipalities, which would become
experimental laboratories.

2. BRAZIL. Constitutional Amendment nº 8 (August 15, 1995): Art. 21, XI – to exploit, directly or by means
of authorization, concession or permission, telecommunications services, under the terms of the law, which
will provide for the organization of services, creation of a regulatory body and other institutional aspects.
Constitutional Amendment no. 9, of November 9, 1995: Art. 177, §2: The law referred to in §1 will provide
for: I – the guarantee of the supply of oil products throughout the national territory; II – the contracting
conditions; III – the structure and powers of the regulatory body of the Union’s monopoly.
3. Art. 192. The national financial system, structured in such a way as to promote the balanced development of the
country and serve the interests of the community, will be regulated in a complementary law, which will also
provide for: […] II – authorization and operation insurance, pension and capitalization establishments, as
well as the official supervisory body and the official reinsurance body.

39
 The idea of decentralization as seen in the Brazilian Administrative
State process comes from the New Public Management (NPM) in the UK,
adopted in the 1980s to modernize administrative organization. It is a term
used to describe the wave of reforms in the public sector in that period.
We should also note the US influence on the Brazilian Regulatory
Agencies model. In fact, the USA has experienced a broad and contin-
uous development of sectoral regulation since 1887, when the Interstate
Commerce Commission emerged, with regulatory competence, for in-
terstate rail transport.
The creation of regulatory agencies must come from the Head of the
Executive Branch and be approved in law by the National Congress. Un-
der the terms of art. 61 of the 1988b Federal Constitution, the laws gov-
erning the creation of public administration bodies, posts, functions or
public employment in direct and municipal administration are the private
initiative of the President of the Republic.
The defining features of the autonomy of the regulatory agencies are
collegiate organization; impossibility of ad nutum dismissal of its directors;
financial and budgetary autonomy, and, lastly, decision-making independence.
In spite of the criticism of the sub-constitutional legislation, the au-
thorities on doctrine and jurisprudence at the Supreme Federal Court
did not identify any unconstitutionality in the creation of these entities in
respect of the provisions of art. 84 of the Federal Constitution of 19884,
which assigns to the Head of the Executive Branch the management of
public administration.
A new statute has recently been passed (Law no. 13,848, June 25, 2019),
which details the arbitration competence of the regulatory agencies with-
out further elaboration of their format or scope. The regulatory agencies
were given the competence to issue standards, inspection and sanction

4. BRAZIL. Federal Constitution (1988). Art. 84. It is the exclusive responsibility of the President of the Republic:
II – to exercise, with the assistance of the Ministers of State, the top management of the federal administration.

40
and empowered to resolve disputes between regulated agents, to act with
regard to judicial function and conflict in respect of administrative and
regulatory arbitration.
Besides dispute settlement mechanisms, powers of commercial ar-
bitration administered by arbitral chambers were established, where the
regulatory agencies appear as required. The inclusion of arbitration within
the scope of action of the regulatory agencies, be it regulatory or commer-
cial arbitration, is desirable, given the technical complexity of regulatory
matters, which manifest a wide range of potentially arbitrable issues.
In the context of the new statute this paper will examine some char-
acteristics of regulatory arbitration, i.e the administrative processes car-
ried out by regulatory agencies for the resolution of conflicts, in order to
determine whether there is similarity, or not, to the category instituted
in Brazil by Law no. 9.307/96 (commercial arbitration).
In addition, it will investigate the legality of regulatory agencies par-
ticipating in commercial arbitration (objective arbitrability), as required,
in situations in which these entities are simultaneously exercising both
the granting power and regulatory function.
Finally, the paper will examine the legality of regulatory agencies to
function as arbitrating tribunals (commercial arbitration within the agen-
cy) in conflicts between regulated agents.
The questions arising from the issues addressed, in short, are: (i) Does
regulatory or administrative arbitration share all or some characteristics
of commercial arbitration?; (ii) How should we understand arbitrations
in which regulatory agencies are exercising their regulatory function and
acting as the granting authority in commercial arbitration, especially con-
sidering that the arbitrators themselves, within the concept of compe-
tence-competence, decide whether they are competent to hear the case?;
(iii) Can commercial arbitration between regulated agents in a given sec-
tor be carried out by regulatory agencies, acting as arbitrating tribunals?
What would be the practical consequences if this possibility is admitted?

41
2. JUDICIAL FUNCTION OF REGULATORY
AGENCIES: REGULATORY ARBITRATION AS
AN ADMINISTRATIVE PROCESS SUBJECT
TO JURISDICTIONAL CONTROL

In the Brazilian state regulatory field, the organizational model formal-

ized by the Legislative Branch, with participation of the Executive in
the formulation and implementation of the State Reform Master Plan,
took into account the experiences of another federal state (the USA),
adopting the model in which the regulatory agencies have normative,
executive and adjudication competence.
The special autonomous jurisdiction that Brazilian doctrine classifies
as an adjudicative function and conflict, regulatory or administrative ar-
bitration corresponds to the competence to institute an administrative
process in which the autarchy, ultimately, decides, via deliberation of
its highest authority, the Directing Council, a conflict between regu-
lated agents.
In fact, the adjudicative function of the regulatory agencies is differ-
ent from the adjudicative function of the US equivalents that inspired
the national model, as in the US model; in many cases, we see the par-
ticipation of an administrative law judge.
In Brazilian regulatory arbitration, the intervention of the Regulato-
ry Agency, which has the final administrative decision-making power,
consists of the establishment and undertaking of the procedure, with all
guarantees of due legal process up to the stage of judgment of the con-
flict between the regulated agents, formulating and imposing a technical
decision against which no administrative appeal can be made.
Regulatory arbitration, therefore, does not have the characteristics
of commercial arbitration, as it is no more than a regulatory adminis-
trative process, whose general rules are governed by Law no. 9.784/99.

42
 Commercial arbitration, forming a system with its own principles,
requires prior arbitral commitment, whereby the parties agree that con-
flict is resolved according to certain rules, by one or more arbitrators
chosen by the parties, observing a series of principles, rites and special
provisions governed by Law no. 9.307/96.
Regulatory arbitration, as an administrative process, can always be
submitted to the control of the Judiciary, whether the final decision is
reached in an administrative act or any procedural acts at any stage, in
case the regulatory agency deviates from the general principles of law.
Thus, regulatory or administrative arbitration does not have the char-
acteristics of commercial arbitration regulated by Law no. 9.307/96, con-
stituting an administrative process subject to judicial control.

3. COMMERCIAL ARBITRATION: REGULATED

COMPANIES VERSUS REGULATORY AGENCY

A more complex issue than the categorization of regulatory arbitration as

a function governed by administrative proceedings, subject to review by
the Judiciary, includes aspects related to commercial arbitration involving
regulatory agencies. This issue is relevant as a number of commercial ar-
bitrations between regulated companies (claimants) and regulatory agen-
cies (the requested authorities) are pending before Brazilian Arbitration
Chambers. Some arguments in favor of commercial arbitration between the
regulatory agency and regulated companies may be presented. By opting
for the contracting of commercial arbitration to resolve conflicts during
the execution of long-term concession contracts, the regulatory agency is
not compromising the public interest, but choosing a more effective way
to defend the interest of society in sectors of systemic complexity.
This is an alternative, provided by law, to keep the scope of the con-
tract more attractive to investors who need quick solutions to face pos-

43
sible long-standing disputes with the Government when submitted to
jurisdictional procedures. Furthermore, commercial arbitration is replete
with guarantees for litigants, as it is assumed that the arbitrators are
highly experienced and knowledgeable in regulatory matters submitted
to arbitration, and able to decide impartially and based on the parity of
public and private sectors. Access to the Judiciary is even allowed if there
is any nullity in the course of the arbitral proceedings5.
The controversial point as to the legality and legitimacy of commer-
cial arbitration involving regulatory agencies and regulated companies
does not concern subjective arbitrability, given the express provision of
the Arbitration Law6. What is debated is what may or may not be the
object of commercial arbitration, i.e. the scope of objective arbitrabil-
ity in commercial arbitration established for the resolution of conflicts
between regulated agents and regulatory agencies.
The issue is to determine whether questions arising from contrac-
tual clauses, agreed between regulatory agencies and regulated com-
panies, when interwoven with matters subject to regulatory choices,
are arbitrable.
For a position on the issue, it should be noted that the Arbitration
Law (Law no. 9.307, of September 23rd, 1996) provides, in its art. 1,

5. Law no. 9.307/96. Art. 32. The arbitration award is void if: VIII – the principles mentioned in art. 21, §2, of this Law.
Art. 33 are disrespected. The interested party may apply to the competent Judiciary body for a declaration of nullity of
the arbitral award, in the cases provided for in this Law. §1 The demand for the declaration of nullity of the arbitral
award, partial or final, will follow the rules of common procedure, provided for in Law no. 5.869, of January 11th,
1973 (Civil Procedure Code), and must be proposed within up to 90 (ninety) days after receiving notification of the
respective sentence, partial or final, or the decision of the request for clarification. §2 The sentence that deems the
request to be valid shall declare the arbitration sentence null and void, in the cases of art. 32, and will determine, if
applicable, that the arbitrator or the court will issue a new arbitration award. §3 The decree of nullity of the arbitral
award may also be required in challenging the enforcement of the award, under the terms of arts. 525 et seq. of the
Civil Procedure Code, if there is judicial enforcement. §4 The interested party may enter court to request the delivery
of a complementary arbitration award, if the arbitrator does not decide all the requests submitted to arbitration.
6. Law no. 9.307/96. Art. 1 Persons capable of contracting may use arbitration to settle disputes related to available
property rights. §1 Direct and indirect public administration may use arbitration to settle disputes related to
available property rights. §2 The competent authority or body of direct public administration for the conclusion
of an arbitration agreement is the same for the execution of agreements or transactions. (Paragraphs 1 and 2 were
included in the arbitration law by Law no. 13.129/2015).

44
that the parties may “[…] resort to arbitration to settle disputes relat-
ing to available property rights”.
On the one hand, what can be contracted by the Regulatory Agen-
cy with the private agent can be submitted to arbitration, including
contractual sanctions when they pass from legal headquarters, in the
phase of police power, to the negotiating field.
However, on the other hand, the function of regulation and the
corresponding category of administrative (regulatory) choice is not part
of the contract, as it constitutes an unavailable and non-delegable7 right
exercised, in law, by the regulatory agencies. Its performance, bringing
together various functions (executive, regulatory and adjudicatory), is
aimed at the implementation of public policies in the economic field
and in the guarantee of legal rights, by regulating the execution of pub-
lic services and economic activities of public utility in complex sectors.
Based on the Federal Constitution of 1988, the regulatory func-
tion is fundamental to State action on business decisions and activities,
along with technical and scientific foundations, which aim at meeting
the general substantive interest, and must weigh the effects of these
decisions on the regulated subsystem according to the interests of key
social groups, and even individual interests in specific cases. Its legal
basis is to seek reflective solutions that point to the lowest cost of con-
stitutionally protected interests.
In a transparent way, regulatory choices must pursue a systemic
balance, adopting mechanisms that involve, where necessary, effective
participation and popular support. In complex issues, the regulatory
choice must be preceded and motivated by prior studies of regulatory
impact, which indicate the costs and benefits of the choice, demon-
strating its prospective effects. In addition, the basis for regulatory

7. See the express legal provision regarding the non-delegability of state functions in public-private partnership
contracts. Law no 11.079/2004: Art. 4 The following guidelines will be observed when contracting a public-
private partnership: […] III – non-delegability of the functions of regulation, jurisdiction, exercise of police
power and other exclusive activities of the State.

45
choices must be of technical preponderance (not political), based on
intelligible standards and principles produced in respect of purposely
open legal norms, defining the space for both fully and relatively linked
and discretionary choices.
Thus, if there is any conflict between the contracting parties and the
Regulatory Agency on one hand, and, on the other, the regulated com-
pany in which there is no consensus on the interpretation of a legal or
regulatory provision involving the promotion of public policies with di-
rect repercussions in the execution of the contract, the regulatory choice
should remain intact, as it is an unknown matter, and its submission
to commercial arbitration is a defence. In this case, it is not a matter
of inequality or of breaking parity in a partnership contract, given that
the regulatory function is not part of the contracted business, subject to
commercial arbitration. It is not subject to the contractual norm. Only
contractual matters may be subject to arbitration.
In effect, the existence of an arbitration agreement does not render
any and all questions arising from the conclusion of an administrative
contract involving regulatory choices, which are the exclusive competence
of a public law entity, in this case, the regulatory agency, which unites,
in a single municipal entity, complex functions (executive, normative and
judiciary). Guided by this logic, the submission of non-patrimonial and
unavailable rights to the arbitration court must be understood as a legal
offence, since compliance with the objective arbitration requirement is
an essential condition for the commercial arbitration to be valid.
To this effect, except for special, gray area situations which can only
be identified in a specific case, with the assessment of data needed to
confirm or not that the theme is subsumed to issues typical of the reg-
ulatory function, it is understood, as a general rule and in thesis, that
matters related to regulatory choice are reserved and private, by force
of law, to the competence of the regulatory autonomous entity; and,
therefore, as they are unavailable, they are non arbitrable. All others,
including the application of contractual sanctions, forfeiture decrees,
economic and financial rebalancing, and others of the same legal and

46
contractual nature, are subject to commercial arbitration and covered by
the competence-competence principle.

4. COMMERCIAL ARBITRATION
BETWEEN TWO OR MORE REGULATED
COMPANIES: REGULATORY AGENCY AS
AN INSTITUTIONAL ARBITRATION BODY

The third point to be examined refers to the legality of these special au-
tarchies, in an institutionalized sense, to act in disputes between regulated
market participants in commercial arbitration, including the creation of
commissions or chambers, competing with the private sector.
The first issue addresses the question of who may, under Law no.
9.307/96 act as an arbitrator in commercial arbitration. Law no. 9.307/96
provides that any capable person, who has the confidence of the parties, can
be an arbitrator, by mutual agreement, establishing a selection process and
adopting the rules of an institutional arbitration body or specialized entity.
In the case of the appointment of several arbitrators, these, by majori-
ty – according to the law – will elect the president (the oldest, when there
is no consensus). Some arbitration bodies or specialized entities have lists
of arbitrators, and it is possible for the parties to ignore any movement
that imposes limits on the choice outside the list.
The second aspect is to determine who cannot be an arbitrator, in the
sense defined by the General Law of Arbitration (Law no. 9.307/96). Ac-
cording to the rules of conduct, anyone with relationships characteristic
of cases of impediment or who is under judicial suspicion in relation to
the parties or the litigation cannot act as an arbitrator. The causes of im-
pediment and suspicion are provided for in arts. 144 to 148 of the Code

47
of Civil Procedure and concern the impartiality of the judge in the exer-
cise of their job8.
For this reason, the aforementioned arbitration law provides that the
arbitrator is obliged to reveal, before accepting the function, any fact that
shows justified doubt as to the confidence of the party in receiving a fair
trial, i.e. regarding impartiality and independence, and whether their ap-
pointment is the object of an exception that, if accepted, will cause their
withdrawing from the process.
As we examine these two aspects, who can and cannot be an arbitrator,
we observe a particular misunderstanding of the legal nature of arbitration
and the regulatory function, which ultimately leads to the mistaken under-
standing that: (i) the regulatory agency, through its Board of Directors in
the final instance, has the competence in the same manner as an institu-
tional arbitration body; or (ii) the regulatory entity would be allowed, at
its discretion, to create a state arbitral chamber within its organizational
structure, in a form close or identical to private institutional arbitration
bodies to which Law no. 9.307/96 refers.
This “movement” towards the legalization of the performance of reg-
ulatory entities in the performance of the “arbitration function”, close to
or identical to the arbitration procedure existing in private arbitration

8. Art. 144. The judge is barred, forbidden to exercise his functions in the process: I – in which he intervened as the party
agent, served as an expert or a member of the Public Prosecutor’s Office or testified as a witness; II – that he was
familiar with in another degree of jurisdiction, having rendered a decision; III – when, as a public defender, lawyer
or member of the Public Prosecutor’s Office, his spouse or partner, or any relative, blood or similar, in a direct or
collateral line, up to the third degree, is included; IV – when he or she is a party to the proceedings, his or her spouse
or partner, or relative, consanguineous or similar, in a direct or collateral line, up to and including the third degree;
V – when he is a partner or member of the board of directors or of the administration of a legal entity that is a party
to the process; VI – when he is a presumptive heir, donor or employer of any of the parties; VII – in which it appears
as part of an educational institution with which he has an employment relationship or arising from a service provision
contract; VIII – in which he is a client of the law firm of his spouse, partner or relative, consanguineous or the like,
direct or collateral, up to the third degree, including, even if sponsored by a lawyer from another office; IX – when
taking action against the party or its lawyer. Art. 145. There is suspicion if the judge is: I – a close friend or enemy of
either party or its lawyers; II – receives gifts from people who have an interest in the case before or after the process
has started, advises any party on the object of the case or provides means to meet the costs of the litigation; III –
when either party is its creditor or debtor, spouse or partner or relatives, in a direct line up to and including third
degree; IV – interested in judging the process in favor of either party.

48
chambers, arose at the initiative of the regulatory agencies themselves. In
this sense, it is important to refer to the decision relating to the internal
resolution of conflicts by means of arbitration issued in 1999 (Joint Res-
olution no. 1 of ANEEL, Anatel and ANP).
The normative ruling, which dealt with the sharing of infrastructure,
stated that those interested in an area already covered by another agent in
their sector should negotiate the use of the excess capacity of this agent
before requesting to share; and, where the applicant did not agree with
the reasons alleged by the infrastructure owner for the infeasibility of shar-
ing, it could “[…] request the arbitration of the agencies”. This provision
was changed in 2001, removing the term “arbitration”, and including the
clause “requiring the performance of the Agencies”.
In 2019, this Commission was nullified by Decree no. 9.759, of June
20199, which established “[…] collegiate bodies of direct, autarchic and
foundational federal public administration”, in addition to “[…] guidelines,
rules and limitations” for the creation of new collegiate bodies10.
In this regard, we should note regulations issued by Anatel. The Ana-
tel creation law (Law no 9.472, of July 16th, 1997), in its art. 19, XVII,

9. Decree no. 9.759, June 2019: Art. 1 This Decree extinguishes and establishes guidelines, rules and limitations for
collegiate bodies of direct, autarchic and foundational federal public administration. Single paragraph. The
application of this Decree covers collegiate bodies instituted by: I – decree, including those mentioned in laws
in which there is no indication of their competencies or of the members that compose them; II – normative act
inferior to decree; and III – act of another collegiate body.
10. In Opinion no. 00020/2019/DEPCONSU/PGF/AGU, the Federal Attorney General’s Office expressed its opinion
on the application of the act of the Chief Executive to the commissions created by the regulatory agencies: “a)
the edition of Decree no. 9.759/2019 represented the exercise of the constitutional competence of the President
of the Republic to issue rules on the organization and functioning of the federal public administration, equally
applicable to direct and indirect administration; b) the special regime granted by law to regulatory agencies does
not guarantee immunity from the powers of the President of the Republic conferred by art. 84, VI, “a”, of the 1988
Federal Constitution; c) the Attorney General’s Office signed an understanding in Opinion AC no. 051/2006 in
the sense that “the acts of regulatory agencies regarding their ordinary management activities (middle activity)
are subject to the internal control of the Executive Branch”, and not allowing the administrative autonomy of
the aforementioned agencies is equated with independence in relation to the general administrative parameters
stipulated by the President of the Republic; and d) Decree no. 9.759/2019 should be applied to collegiate bodies
of all federal public administration, direct and indirect, with due regard only to the express reservations provided
by its own art. 2, single paragraph.”

49
lists, among agency competences, the attribution of “[…] administratively
composed conflicts of interests between telecommunications service pro-
viders”, determining that it will be up to Anatel to administratively resolve
conflicts between its regulated agents. Likewise, item XVI guarantees the
competence to “[…] deliberate at the administrative level regarding the
interpretation of telecommunications legislation and on omitted cases”.
Anatel’s Internal Regulation – Resolution no. 612, of April 29th, 2013
– devotes Chapter XIII to “Administrative Procedures for Conflict Resolu-
tion”, and admits mediation, administrative arbitration and administrative
complaint – in addition to others provided for in specific regulations – as
types of procedure (art. 92).
For the provision of telecommunication services, networks must be de-
ployed, with interconnection mandatory. Resolution of matters on which
there is no consensus regarding interconnection contracts will be resolved
by means of arbitration, undertaken by the agency itself. Resolution no.
410, of July 11th, 2015, already revoked, which regulated the General In-
terconnection Regulation, included a specific annex to regulate Anatel’s
own arbitration process.
The Regulation provided that there would be an Arbitration Com-
mittee made up of three members appointed by the president of Anatel,
which should meet whenever the agency is instigated (art. 2).
The Committee Rapporteur, the “Rapporteur Arbitrator”, would
acquire such status when selected randomly in the distribution of the
arbitration or homologation request (art. 3). The status of arbitrator
would be reaffirmed, while the members of the Commission would be
obliged to disclose, as in the arbitration law, information related to
cases where any fact or circumstance could compromise their impar-
tiality and independence as a judge (art. 4 §1). Likewise, the parties
could instigate arbitrator impediment or suspicion at the first appro-
priate opportunity (art. 4 §2). In addition, confidential treatment of
matters that might jeopardize national security or damage any party

50
was guaranteed (art. 5 §1), and the parties could count on the assis-
tance of lawyers throughout the procedure (art. 6).
The arbitration of interconnection contracts at Anatel also admitted
the possibility that the parties reach an agreement, to be ratified by the
signature of the Commission (art. 10), and if the matter was resolved
by the arbitrators its decision would be subject to appeal to the Board
of Directors (art. 20) and, ultimately, a reconsideration request would
be admitted under the terms of Anatel Internal Regulations (art. 24).
The other rules of procedure were also provided for in Resolution 410,
denoting an “institutionalized character”, and exhaustively regulated in
the arbitration procedure within this regulatory agency. Finally, art. 26
of the aforementioned Resolution stipulated that “[…] by mutual agree-
ment the parties may develop their own arbitration process, forwarding
the result for Anatel’s assessment and approval”.
In addition to the use of the term “arbitration”, and due to the features
adopted in that rule, which is characteristic of commercial arbitration
(duty of disclosure, impediment and suspicion etc.), the regulated parties
were unduly directed towards an atypical, hybrid procedure, which caused
some confusion between bodies, as regards commercial arbitration versus
the administrative regulatory arbitration process.
This rule was revoked by Resolution no. 693, of July 17th, 2018, appar-
ently to rule out any possibility of interpretation that the Agency could
function as if it were the Arbitral Chamber or Tribunal.
In view of the above, it is fair to conclude that commercial arbitra-
tion, as a private method of conflict resolution, of a non-state nature,
with its own characteristics and principles, is not embedded in the model
of regulatory agencies. There are provisions expressed in the commercial
arbitration law that demonstrate this incompatibility, such as the risks of
invalidating the arbitral award, by the Judiciary, when emanating from
those who could not be arbitrators. Furthermore, we notice disrespect of
the principles of Law no. 9.307/96, notably impartiality, and the absence

51
of an adequate structure to administer an arbitration procedure, due to
the complexities of its system11.
The arbitration function constitutes an activity incompatible with the
performance of public agents who work at the regulatory agency itself, in
view of the patent bias, prohibited by international guidelines12, which
configures conflict of interest, even if the work of the civil servant occurs
in an unpaid manner, beyond working hours.

5. CONCLUSION

The regulatory function, set out in art. 174 of the 1988 Federal Consti-
tution, was based on the idea that modern forms of public interest man-
agement should administer and implement strategic policies for society
in a systemic manner, i.e, in the social system as well as the scientific and
technological fields, umbilically linked to the economic order.
In this scenario, the state finds itself compelled to adopt modern,
effective management practices, without prioritizing economic aspects,
nor losing sight of its eminent function of defending the public interest,
the good of each citizen.
The search for up-to-date, efficient management in the socioeco-
nomic and political arenas has generated new skills and strategies for
the exercise of administrative power, with a view to the full integration
of these changes and interdependencies within the Brazilian legal-con-
stitutional context.
With this constitutional premise in mind, in the mid 1990s a new

11. Law no. 9.307/1996: Art. 11. The arbitration commitment may also contain: […] V – the declaration of
responsibility for the payment of fees and expenses with arbitration; and VI – the setting of the fees of the
arbitrator or arbitrators.
12. According to the IBA Guidelines on Conflicts of Interest in International Arbitration, “[…] it is the most
important ethical principle guiding the performance of every arbitrator that the effective existence of a bias
on the part of the arbitrator should lead him to refuse such an assignment. This principle applies regardless
of the stage of the arbitration process. The principle is so eloquent in itself that many national laws do not
even expressly state it.”

52
theoretical framework for Public Administration was sought, to replace
the Weberian bureaucratic perspective hitherto followed. In this regard,
as administrative reform was enacted aimed at the renovation of state
structures absorbed from the French bureaucratic model, in 1995 the
Brazilian Federal Government published the Master Plan for State Re-
form, directing Public Administration towards a more efficient pattern
of management based on private initiative.
The approach stemmed from the recognition that contemporary de-
mocracies lack autonomous and independent entities. Thus, regulatory
agencies were created for the governing of economic activities with re-
spect to scientific considerations and, at the same time, with a measure
of protection against political pressures.
The “Administrative State” process has been explained as a requirement
of the international market. Regardless of the political party in power, the
regulatory agencies help attract and secure multinational companies seeking
to invest resources in places where the rules of the game are known and
will be maintained by entities independent of the political-electoral game.
The advantage of the agencies is that they can isolate regulatory activ-
ities from short-term political considerations and the influence of special
public interests of regulated companies. They contribute to luring foreign
investments and are aimed, above all, at demonstrating that there is legal
certainty and commitment to the maintenance of contractual rules, with-
out problems inherent to political processes.
The Brazilian pattern of “Administrative State” points to the search for
balance between the State, citizen and regulated agent, so that the regula-
tory body, decentralized from federal power, may remain equidistant from
these three entities. The adequacy of the regulatory choice, in view of the
various interests concerned and of the eclectic circumstances that arise in
daily life, requires flexibility for its correct assessments and decision-making.
The regulation must be implemented by a prospective interpretation
that should guide the regulatory agent, weighing costs and benefits of the

53
regulatory action – normative, executive and judiciary – not only in the light
of prior facts but, especially, focused on future impact.
Finally, as regards arbitration by agencies, it was concluded that regula-
tory arbitrations represent administrative processes. Some subjects submitted
to commercial arbitration are not objectively arbitrable in conflicts between
regulated agents and regulatory agencies in view of the characteristics and
unavailability of rights inherent to regulatory choices.
Neither did it seem legal to regulators to act as an arbitral tribunal in
order to resolve conflicts between private agents, distorting their autar-
chic nature, nor to create state chambers to act in competition with pri-
vate arbitration bodies. The state regulatory function is not in line with
the commercial arbitration function, established in Law no. 9.307/96, a
non-state method with characteristics and principles that do not fit the
autarchic model.
In view of the problem investigated above, involving commercial ar-
bitrations where the regulatory agency is exercising its regulatory function
demanded by the private party, as a contracting party, in commercial ar-
bitration, it can be maintained that in this complex function – not to be
confused with other contractual issues, which are fully arbitrable as they
are available rights – the competence of the regulatory agencies must be
preserved, as they are non-delegable and, therefore, unavailable.
In theory, the regulatory choice cannot be the object of commercial
arbitration, so that arbitrators should, according to the competence-com-
petence principle, consider themselves incompetent to decide on the dis-
pute, in whole or in part, if in addition to matters subject exclusively to
the state function there are matters of a contractual nature.

54
 General Overview of Arbitration in Brazil
Marcelo Roberto Ferro1

1. INTRODUCTION

Clearly inspired by Uncitral Model Law2, Brazilian Arbitration Act

(Law no. 9.307/1996, “BAA”) was enacted in 1996. One can say that
after twenty-four years from the enactment of the BAA, Brazil has gone
from Stone Age to Golden Age in terms of arbitration. Indeed, in the
years that followed, Brazil took several important steps towards regu-
lation and development of arbitration practice. In 2001, the Brazilian
Federal Supreme Court (STF) recognized that the BAA (in providing
the possibility of derogation of state jurisdiction) did not violate the
current Federal Constitution (enacted in 1988). One year later, one step
further has been taken by ratifying the New York Convention. In 2015,
the BAA was modified (by enactment of Federal Law no. 13.129/2015)
to introduce a few relevant concepts which were already recognized by
case law, amongst others; the arbitrability of disputes involving govern-
ment entities; as well as the possibility of state courts rendering interim

1. Partner at Ferro, Castro Neves, Daltro & Gomide Advogados. Professor at the Catholic University of Rio de
Janeiro (PUC-RJ).
2. On historical development of the BAA, see Peter SESTER, Comentários à lei de arbitragem e à legislação
extravagante. Rio de Janeiro: Quartier Latin, 2020, p. 29.
relief before the constitution of the arbitral tribunal. Since Brazil has
not signed the Washington Convention, there are no cases related to
investment arbitration.
The enormous development of arbitration in Brazil has given rise,
across the country, to a series of arbitral institutions, worth mentioning,
among others, the Mediation and Arbitration Center of the Brazil-Can-
ada Chamber of Commerce (CAM-CCBC), the Brazilian Center for
Mediation and Arbitration (CBMA), the Market Arbitration Cham-
ber (indicated for resolving disputes involving companies listed on São
Paulo Stock Exchange and in the New Market segment), and Camarb
and Arbitration and Mediation Centre of the American Chamber of
Commerce – Amcham. These are all serious institutions with current
regulations and well-organized offices, with expressive acceptance by
the Brazilian legal community. In addition, as proof of the success of
arbitration in the country, besides the relevance of Brazilian cases at the
international level, ICC installed an office in São Paulo in 2017, which
already has a significant number of Brazilian cases, including the Public
Administration.
In fact, over the last years, the massive number of new general and
specific statutes involving arbitration, as well as the constant production
of new case law, makes it a complex task to identify the salient issues on
national level. As a result, to be consistent with the narrow boundaries
of this paper, a general overview will be presented in three parts: the first
devoted to a general outline of the BAA (I); the second to the legislative
developments since 1996 to promote the development of arbitrations
involving State entities (II); and finally the third on the recognition of
foreign arbitral awards (III).

58
2. THE STRUCTURE OF THE BAA

BAA, with its amendments, is made up of seven chapters and 47 articles

so arranged: General Provisions; Arbitration Convention and its effects;
Arbitrators; Arbitration Procedure; Arbitral Award; Recognition and Ex-
ecution of Foreign Arbitral Awards; Final Provisions. A relevant feature
is its monist approach, as it does not distinguish between domestic and
international arbitration, but only the sentence between national (hand-
ed down in Brazil), or foreign, subjecting the latter to the homologation
process before the Superior Court of Justice (SCJ) so that it takes effect in
Brazil. Consequently, over the years, there have been many arbitral pro-
ceedings administered under the rules of major international institutions
– such as ICC, LCIA, AAA.
As to the arbitrability, the BAA has a broad scope, encompassing any
conflicts related to civil and commercial natures. In fact, according to art. 1
“[…] those who are capable of entering into contracts may use arbitration
to resolve conflicts regarding freely transferable property rights”3. As far
as adhesion contracts are concerned, the BAA imposes an extra formal-
ity, only enforcing arbitral clauses in such contracts if the adhering party
initiates the arbitration or expressly gives their specific written consent
to the arbitration, in either case, the arbitration clause must be written
in a separate document or in bold type4. On the other hand, questions
related to family law, social security rights, antitrust and environmental
regulations, where a public interest is involved, are not arbitrable. Labour
claims, whether collective or individual, may also be subject to arbitration,

3. The English version of the BAA was obtained from the website of Brazilan Arbitration Committee – CBAr.
Available at: <http://cbar.org.br/site/legislacao-nacional/lei-9-30796-em-ingles/>. Accessed on: June 08th, 2022.
4. In this regard, the SCJ has precedents related to contracts subject to the Consumer Law, as well as corporate
contracts, recognizing, in both cases, the validity of the arbitration clause, provided that the legal requirements
are met. It should be noted, however, that this rule does not fall within the concept of public policy, so that
the SCJ recognizes enforceability to a foreign arbitral award that has recognized the validity of the arbitration
clause in adhesion contracts, even without any emphasis, as required by the cited provision of the BAA.

59
and in the latter, the presence of two cumulative requirements is required:
that the employee’s remuneration is more than twice the maximum limit
established for the benefits in the General Social Security System and that
the arbitration is agreed upon at the initiative of the employee or upon their
express agreement.
Concerning the choice of law, BAA does not restrain the choice of any
law applicable to the merits of the case – except if one of the parties is a
State entity –, or even apply general principles of law, customs, usages and
rules of international trade, as long as their choice does not violate good
morals and public policy (art. 2, paragraphs 1 and 2).
The BAA accepts the competence-competence principle – both its
negative and positive effects – on art. 8, acknowledging that the arbitral
tribunal has jurisdiction to decide the issues concerning the existence,
validity and effectiveness of the arbitration agreement, as well as of the
contract containing the arbitration clause. There are precedents in case
law recognizing a chronological priority rule in arbitral proceedings, al-
lowing access to the courts only after the delivery of the arbitral award.
The same art. 8 also recognizes the doctrine of separability, stating that
“[a]n arbitration clause which forms part of a contract shall be treated as
an agreement independent of the other terms of the contract. A decision
that the contract is null and void shall not entail ipso jure the invalidity of
the arbitration clause”.
In the presence of an empty arbitration clause – as opposed to a full
arbitration clause, which contains all the elements relevant to the initia-
tion of the arbitration process, such as number of arbitrators, applicable
law, rules of a given institution –, or a pathological clause, the BAA pro-
vides, on art. 7, for the party’s possibility to request the court’s interfer-
ence to complete the arbitration clause and determine the installation of
the arbitration. This rule represents a significant contribution to the en-
forceability of the arbitration clause. There is another important example
of cooperation and communication between judges in arbitrators, the so-

60
called “arbitral letter”, foreseen in art. 22-C of the BAA, by way of which
the arbitral tribunal may request to the courts the enforcement of specific
orders during the course of the arbitration, for example, freezing of bank
accounts, subpoena of witnesses, seizure of real estate assets5.
As far as confidentiality is concerned, the BAA does not provide for confi-
dentiality in the proceedings. However, in case it is related to State entities, it is
mandatory that the proceedings are public, or respect the principle of publicity
and therefore cannot be confidential6. The major Brazilian arbitral institutions
have specific rules providing for confidentiality in the arbitration procedure.
There are no limits in terms of the selection of the arbitrators, but the
chosen ones must meet the requirements of independence and impartiality.
As stated in art. 13 of the BAA, “[…] any individual with legal capacity,
who is trusted by the parties, may serve as arbitrator”. Art. 14 provides that
the circumstances under which the judges are barred from hearing a case
apply to the individuals acting as arbitrators. There are no provisions relat-
ed to the arbitrator’s immunity, which means they may be held liable for
their acts when they have acted with malicious intent or gross negligence.
With respect to interim measures, the BAA entitles the arbitrator to
grant any preliminary or interim relief, which, in general, is a common
standard in national laws. Nevertheless, according to art. 22-A, before the
constitution of the arbitral tribunal, the parties may request interim mea-
sures before the court, provided the urgency of the relief is demonstrat-
ed7. In such a situation, whether granted or denied by the court, once the
arbitral tribunal is formally constituted, it will decide whether to upheld
or revoke the judicial decision8.

5. “Article 22-C. An arbitrator or the arbitral tribunal may issue an arbitration letter so that the judicial court
offers assistance or imposes compliance, in the area of their territorial jurisdiction, of an action requested
by the arbitrator.
6. “Article 2, Paragraph 3. Arbitration that involves public administration will always be at law and will be subject
to the principle of publicity.”
7. “Article 22-A. Before commencing the arbitration, the parties may seek provisional measures of protection and
urgent relief from a judicial court.”
8. “Article 22-B. Once arbitration has been commenced, the arbitrators will have competence for maintaining,

61
 As to the evidentiary phase of the proceedings, the BAA gives the ar-
bitral tribunal ample discretion to request the evidence it deems pertinent,
including documents in possession of the opposing party, without, however,
representing acceptance of the discovery, as known in American practice9.
With regards to the award, arts. 24 and 26 of the BAA provide that
the domestic award must be written and signed by the arbitrators. It must
contain a report including the qualification of the parties, and a summary
of the dispute, the grounds of the decision, with the analysis of factual and
legal issues, the final decision granting or denying the relief sought, the
date of the award and the place where it was rendered. There is a specific
provision on art. 31 establishing an equivalence of legal effects between
the arbitral award and the judicial award, which shall encompass the res
judicata effect.
Any request for setting aside an arbitral award must be filed within
ninety days of receiving the award, according to art. 33, paragraph 1.
With respect to the grounds of such a motion to set aside, BAA provides
few possibilities for the annulment of an arbitration award, by listing
only seven hypotheses in art. 32, as follows: the arbitration agreement
is null and void, the persons who handled the award could not have act-
ed as arbitrators, the award does not comply with the requirements set
forth in art. 26, the award is issued outside the limits of the arbitration
agreement, the award was pronounced for malfeasance, graft, or passive
corruption, the award was rendered out of the time limit stipulated by
the parties, or the award violated the principles of due process, equal
treatment to the parties, impartiality of the arbitrator.
Regarding enforcement, domestic arbitration awards can be imme-
diately enforced in Brazil without the need for any additional require-

modifying or revoking the provisional or urgent measures granted by the Judicial Authority.”
9. “Article 22. The sole arbitrator or the arbitral tribunal, either ex officio or at the parties’ request, may hear parties’
and witnesses’ testimonies and may rule on the production of expert evidence, and other evidence deemed
necessary.”

62
ments. Foreign arbitral awards are subject to the homologation process
before the SCJ10.
Concerning anti-suit injunctions pertaining to arbitration, although
SCJ’s decisions have, at least since 2004, been mainly contrary to the
granting thereof, based on the principle of competence-competence11, The
granting of a measure of this nature is considered possible – albeit very
exceptional – to stay or strike out an arbitral procedure when, for example,
the arbitration agreement is manifestly null and void, inoperative or inca-
pable of being performed12 Or when the BAA reputes the issue non-arbi-
trable, such as matters involving non-disposable property rights13. It is also
possible to contemplate anti-suit injunctions against the enforcement of
an arbitral award set aside in the country of origin, as decided in EDF vs.
Endesa case 14, the first case in which the SCJ ruled on the recognition of
a foreign arbitral award effectively annulled in the country of origin, and
the decision was to deny the application for recognition.

3. LEGISLATIVE DEVELOPMENTS

For many years, the chronic dysfunctions of Brazilian State posed a signif-
icant obstacle to the use of arbitration to resolve disputes with the Public
Administration. Those dysfunctions led the malfunctioning of the State in its
relationships with private parties and contaminated the administrative law.
Starting on the second half of the 1990s, with the State reform, a re-
newal of the administrative law could be seen, which was based on critiques

10. See part III.

11. “SCJ, Special Appeal nº 612.439/RS, 2nd Panel, Reporting Justice João Otávio de Noronha, j. October 25, 2005;
see also Writ of Mandamus nº 11.308/RS, Special Appeal nº 1.302.900/MG, Special Appeal 1.355.831/SP,
Special Appeal 1.278.852, Special Appeal 1.327.619/MG, Recognition of Contested Foreign Award nº 854/
EX, Special Appeal nº 1.569.422/RJ.
12. These are the examples of prima facie defects, referred to also in Article II(3) of the
New York Convention.
13. BAA, Article 1.
14. SEC 5.782, Plenary Session, Reporting Justice Jorge Mussi, j. December 2, 2015.

63
that questioned the supremacy of the public interest over the private in-
terests, not to mention the authoritarianism that resulted from unilateral
decisions, and, finally, as to certain special prerogatives of the State over
the private individuals. This environment of new paradigms furthers the
recognition of arbitration as a means to resolve disputes involving the
Public Administration, although still rather incipient. Indeed, Law no.
8.987/1995, which governs the concessions of public services, provides that
one of the essential clauses of the concession contract is the one related
“[…] to jurisdiction and to the amicable means to resolve disputes under
the contract” (art. 23, item XV). Although that provision did not specif-
ically refer to arbitration15, its language already represented a broadened
view of the dispute resolution methods within the administrative scope.
Beginning in the 2000s, the acclamation of that method by our legis-
lation became clear, with the enactment of several federal16 and state17 acts
that governed public interest matters, in a number of different sectors,
always providing for arbitration as a means of dispute resolution.

15. Later on, Law no. 11.196/2005 included art. 23-A in that statute, which expressly referred to arbitration as a
dispute resolution mechanism in concession contracts, to be governed by the Arbitration Act, with seat in
Brazil and conducted in Portuguese.
16. E.g., in the oil and gas sector, the Petroleum Act (Law no. 9.478/1997); the Pre-Salt Oil & Gas Exploration
Act (Law no. 12.351/2010); the inclusion of arbitration clause in ANP’s 11th Bidding Round for Petroleum
Exploration, held on March 14th and 15th, 2013; the Natural Gas Act (Law no. 11.909/2009); in the telecom
sector, the General Telecommunications Act (Law no. 9.472/1997); in the electricity sector, the Electric Sector
Act (Law no. 10.848/2004); Law no. 13.448/2017; in the infrastructure sector, Law no. 10.233/2011; the PPPs
Act (Law no. 11.079/2004); the Road Transportation Act (Law no. 11.442/2007); the Ports Act (Law no.
12.815/2013 and Decree no. 8.465/2015); Law no. 13.334, of 2016.
17. E.g., Act of the State of São Paulo on Public-Private Partnerships (Law no. 11.688/2004); Act of the State of
Minas Gerais on the use of Arbitration by the Direct and Indirect Public Administration (Law no. 19.477/2011);
State PPP Acts: Amapá (Law no. 921/2005, art. 12); Amazonas (Law no. 3.363/2008, art. 13); Bahia (Law
no. 9.290/2004, art. 9); Ceará (Law no. 13.557/2004, art. 11, II); the Federal District (Law no. 3.792, of 2006,
art. 11, II); Goiás (Law no. 14.910/2004, art. 15); Mato Grosso do Sul (Law no. 4.303/2012, art. 17, IX);
Paraná (Law no. 17.046/2012, art. 13, II); Pernambuco (Law no. 12.765/2005, art. 9, III); Piauí (Law no.
5.494/2005, art. 9); Rio de Janeiro (Law no. 5.068/2007, art. 18, XI); Rio Grande do Norte (Complementary
Law no. 307/2005, art. 20); Rio Grande do Sul (Law no. 12.234/2005, art. 6, III, (d)); Santa Catarina (Law
no. 12.930/2004, art. 10, III, (e)); São Paulo (Law no. 11.688/2004, art. 11); Sergipe (Law no. 6.299/2007,
art. 22, IV); and Tocantins (Law no. 2.231/2009, art. 9).

64
 In 2005, the issue of the legitimacy of arbitration clauses involving
mixed capital companies18 reached the SCJ, which, by means of its Second
Panel, decided that “[…] the contracts executed by mixed capital companies
that exploit the economic activity of manufacturing or commercializing
goods or providing service (Federal Constitution art. 173, Paragraph 1)
and which include an arbitration clause submitting any disputes arising
out of the agreement to arbitration, are valid and effective.”19 That view
was ratified in the following year by the First Section of the same Court,
formed by a larger number of Justices, which affords security as to the
stability of the decision20. The court went even further to determine that
“[…] one cannot refuse applicability of the arbitral jurisdiction to admin-
istrative disputes involving state economic rights; instead, it should be
even encouraged, considering that it is more expeditious, pursuant to the
terms of art. 23 of Law no. 8987/95, which governs the concessions and
permissions of public services, and which provides, in item XV, among
the essential clauses of the concession contract of public services, for those
related to ‘jurisdiction and to the amicable means to resolve disputes un-
der the contract.’” 21
Finally, in 2015, Law no. 13.129 supervened, which accepted once and
for all the possibility of arbitration as a means to resolve disputes with the
Public Administration, by including paragraph 1 in art. 1 of the BAA:
“[d]irect and indirect public administration may use arbitration to resolve
conflicts regarding transferable public property rights.” Soon after that,
firmly establishing the case law that went back to 2005 with respect to
the acceptance of arbitration involving state-owned companies and mixed

18. Mixed capital companies are private corporate legal entities whose shares are owned by the Public Administration
and by private individuals, the stakeholders responsible for influencing its management. Its scope is to carry out
an economic activity or public service granted by the State. These entities are established as private companies
and governed by the rules on business companies, specifically the Brazilian Corporations Law.
19. Special Appeal 612.439/RS, Reporting Justice João Otávio Noronha, 2nd Panel, hearing session of October 25, 2005.
20. Public Law matters are decided by the 1st and 2nd Panels, each formed by five Justices. The 1st Section combines
both Panels, hence with ten Justices.
21. ROMS 11.308/DF, Reporting Justice Luiz Fux, 1st Section, hearing session of June 28th, 2006.

65
capital companies, Law no. 13.303/2016 was enacted, which governs the
legal statute of the state-owned companies, of the mixed capital compa-
nies and of their subsidiaries within the scope of the Federal Union, the
states, the Federal District and the municipalities, and which expressly
states (art. 12, sole paragraph) that “[…] the mixed capital company may
settle by means of arbitration any disputes between shareholders and the
company, or between controlling and minority shareholders, pursuant to
the terms of its bylaws.”
More recently, Federal Law no. 13.448/2017 set forth general guidelines,
applicable to the public ventures of the Investment Partnerships Program
(PPI), of the federal government, for purposes of extension and renewed
bidding of partnership contracts in the road, railroad, and airport sectors
within the federal Public Administration. As to the renewed bidding22 of
the contracts, the law subjects it to the execution of an amendment with
the current contractor, which must include, among other provisions, sub-
mission to arbitration or to another private mechanism of dispute resolu-
tion of issues involving calculation of indemnification by the competent
authority. We can see, therefore, that the new law gave the arbitration
commitment the status of prerequisite for the renewed bidding procedure.
The circumstance that the Public Administration is a party to an
arbitration proceeding calls for certain peculiarities, some of which are
considered in the general laws and others in specific laws of each sector.
First, regarding the applicable law, paragraph 3 of art. 2 of the BAA
provides that arbitrations involving the public administration will always
be in law, therefore precluding any judgment in equity or ex aequo bono.
The provision does not mention an obligation to choose Brazilian law,
which would reveal the legislator’s intention to preserve the parties’ free-
dom as to this matter; so much that recently, in the Conflict Prevention

22. This renewed bidding is a procedure that encompasses the amicable termination of the partnership agreements
and execution of a new contractual structure for the project, under new conditions and with new contractors,
by means of a bid procedure conducted for such purpose.

66
and Extrajudicial Resolution Journeys organized by the SCJ in 2016, sev-
eral issues interpretation proposals related to arbitration were approved,
and the possibility to use it in arbitrations involving the Public Admin-
istration international rules on trade and/or usage and practices applica-
ble to the respective technical areas was recognized. Corroborating that
view, certain special statutes expressly provide for the application of Bra-
zilian law23. Consequently, when Brazilian statutes want the dispute to
be resolved under Brazilian law, they expressly state so, and, absent such
a statement, the general rule of the parties’ autonomy will prevail. In our
opinion, therefore, there is no breach of the principle of legality if the
parties allow the application of foreign law24.
As to confidentiality, the BAA, as amended by the aforementioned
Law no. 13.129/2015, provides for publicity as the rule in arbitration pro-
ceedings involving the public administration (art. 2, paragraph 3), which
is in line with the provisions of the Access to Information Act (Law no.
12527/2011, arts. 23 and 31) and of the Federal Constitution, which
ensure the right to information about public administration acts (art. 5,
XIV and XXXIII, art. 37, main section and paragraph 3, II), allowing
confidentiality only to protect information deemed sensitive for the safety
of the State and the society or to preserve people’s privacy and honor25.
Naturally, no one maintains that respect to the principle of publicity entails
granting free access to all documents of the proceedings, or even the
right to attend hearings, which could compromise the very viability of

23. E.g., Ports Decree (Decree no. 8.465/2015), art. 3, II.

24. See SOUZA JR. L. G. e. Sinal verde para a arbitragem nas parcerias público-privadas (a construção de um novo
paradigma para os contratos entre o estado e o investidor privado). Revista de Direito Administrativo, Rio de
Janeiro, v. 241, p. 153, jul. 2005. Also: SUNG A. C. S. Possibilidade de escolha de legislação estrangeira para
reger arbitragens internacionais envolvendo a administração pública. In: FINKELSTEIN, C. (org.). Direito
e arbitragem: estudos acadêmicos. Belo Horizonte: Arraes, 2016, p. 102-103.
25. Please see this guideline approved in the Conflict Prevention and Extrajudicial Resolution Journeys organized
by the Superior Court of Justice: “4. In the arbitration, the Public Administration shall promote the publicity
referred to in Article 2, Paragraph 3 of Law no. 9.307/1996, subject to the provisions of Law no. 12.527/2011,
which may be mitigated in cases of confidentiality set forth by the law, at the arbitrator’s judgment.”

67
the arbitration proceeding or its proper administration by the institution
chosen by the parties26. In any case, some Brazilian arbitral institutions
have already produced internal rules to allow them to observe the publicity
involving arbitration proceedings to which the public administration is a
party27. Finally, it is worth noting that, in all specific statutes that authorize
arbitration as a means to resolve disputes with the Public Administration,
there are provisions about publicity28.
With regard to language, the BAA does not require that Portuguese
be mandatorily used, even though in practice this is the most common
language in proceedings involving the Public Administration. There are
also instances in which a foreign language is simultaneously adopted. In
some specific statutes, however, one can notice a stricter approach by the
legislator in requiring the mandatory use of the national language29, which,
in our view, does not rule out the possibility of the parties agreeing to use
another language in addition to Portuguese. That can be justified in many
cases, notably for the sake of better understanding of technical terms or

26. DI PIETRO, M. S. Z. A arbitragem em contratos administrativos. Repercussões da nova Lei n. 13.129, de

26.5.15. In: CÂMARA, A. F. et al al. (org.). Estudos de direito administrativo em homenagem ao professor
Jessé Torres Pereira Júnior. Belo Horizonte: Fórum, 2016, p. 284.
As per Carlos Alberto Carmona’s suggestion, it is up to the parties to determine in the arbitration clause or in the
Terms of Reference the level of publicity they want to establish, as well as a dossier accessible to the public,
including by electronic means (in Arbitragem e administração pública – primeiras reflexões sobre a arbitragem
envolvendo a administração pública, Revista Brasileira de Arbitragem, © Comitê Brasileiro de Arbitragem
– CBAr & IOB; Kluwer Law International 2016, Volume XIII Issue 51, p. 7-21).
27. Resolution no. 15/2016, of the Brazil-Canada Chamber of Commerce – BCCC, provides that the parties shall
mention in the Terms of Reference which information and documents may be disclosed and how they will be
made available to third parties, observing the confidentiality protected by the law, trade secrets, third parties’
documents, private contracts with confidentiality clause, and matters protected by intellectual property rights.
The BCCC may inform to third parties that there is an arbitration proceeding in place, the date of the request
for arbitration, and the names of the parties, which information may also be provided in its website. The
hearings will be reserved to the parties and their attorneys, subject to the parties’ agreements in the Terms of
Reference. CAMARB’s rules are similar to BCCC’s.
28. Ports Decree (Decree no. 8.465/2015), art. 3, IV.
29. Investment Partnerships Program (PPIs) (Law no. 13.448/2017), art. 31, paragraph 3; PPPs Act (Law no.
11.079/2004), article 11, III; Public Concessions Act (Law no. 8.987/95), article 23-A; Ports Decree (Decree
no. 8.465/2015), article 3, III.

68
even to increase the number of arbitrators, expert witnesses, and lawyers
available to act in the proceeding30.
In what concerns the seat, the BAA does not require that Brazil be the
seat of arbitration proceedings involving the Public Administration, even
though that requirement is expressly stated in specific laws31 – certainly
because of greater trust in the Brazilian court system, should be necessary
to file action for annulment of the arbitration award, and for financial
reasons. Accordingly, except for those arbitrations involving the specific
sectors mentioned before, nothing prevents the invitation to bid or the
administrative contract from establishing, as the seat of the arbitration,
a country other than Brazil – although it is worth bearing in mind that
the arbitral award rendered abroad needs to be recognized by the SCJ in
order to produce effects in Brazil.
Concerning the arbitral institution, the regime varies considerably, since
the Arbitration Act, clearly inspired by the Model Law, admits both insti-
tutional and ad hoc arbitration, although it favors the former32. In specific
statutes, however, the legislator chooses among different solutions, from
admitting ad hoc arbitration33 to even allowing the choice of an institution
headquartered in Brazil34, subject to certain requirements35. There is big
debate on how to choose those institutions. Some maintain that, since
they offer a specific service, they should be subject to the Public Bid Act

30. According to Andre Junqueira, this has been a frequent requirement by foreign investors in arbitrations involving
conflicts arising out of infrastructure projects. “A previsão de arbitragem na Lei Federal 13.448/2017.” Revista
de Arbitragem e Mediação, [s. l.], v. 54, p. 65-76, jul./sept.2017.
31. Investment Partnerships Program (PPIs) (Law no. 13.448/2017), article 31, paragraph 3; PPPs Act (Law no.
11.079/2004), article 11, III; Ports Decree (Decree no. 8.465/2015), article 3, III.
32. In accordance with art. 4, paragraph 1 of the Ports Decree (Decree no. 8.465/2015), preference will be given to
institutional arbitration, and the option for ad hoc arbitration must be justified.
33. Ports Decree (Decree no. 8.465/2015), art. 4; Act of the State of Minas Gerais on the Use of Arbitration by
the Direct and Indirect Public Administration (Law no. 19.477/2011), art. 4.
34. Ports Decree (Decree no. 8.465/2015), art. 4, paragraph 2, I. Investment Partnerships Program (PPIs) (Law
no. 13.448/2017), art. 31, paragraph 3.
35. Ports Decree (Decree no. 8.465/2015), art. 4, paragraph 2: “II – to be regularly established for at least three years;
III – to be regularly operating as an arbitral institution; and IV – to be recognized for its good reputation,
skill, and experience in the administration of arbitration proceedings.”

69
(“Lei de Licitações”) – which would require prior accreditation36 pursuant
to specific qualification criteria, allowing them to be chosen when the
invitation to bid is drafted, when the contract is executed, or when the
dispute arises – while others, more liberal, maintain that a bid procedure
should be waived, pursuant to the terms of art. 25, II, paragraph 2 of the
Public Bid Act37, since the arbitral institution provides unique profes-
sional technical services, which would, consequently, make competition
based on objective judgment criteria unfeasible amongst different service
providers38. In practice, and considering the public administration’s shal-
low acquaintance with arbitration, not often does it use ad hoc arbitration,
notably if the dispute arises after the contract is executed39.
As it comes to the appointment of arbitrators, two observations must
be made regarding nationality and freedom of choice. As to nationality,
Brazilian law does not prevent foreign arbitrators from acting in arbitrations
involving the Public Administration, although the Ports Decree (Decree
no. 8.465/2015), art. 5, sole paragraph, establishes the bizarre require-
ment that they obtain a work visa, which is criticized by both national

36. Andre Junqueira is right when he calls attention to “[…] the risk of an adverse selection, since only those
arbitration chambers that are small and with little experience could accept to be subject to qualification criteria
and prices preestablished by the Public Administration.” In: Nova lei das concessões – a previsão de arbitragem
na Lei Federal no 13.448/2017. CBAr Blog, published on June 21st, 2017. Available at: <http://www.cbar.org.
br/blog/artigos/nova-lei-das-concessoes-a-previsao-de-arbitragem-na-lei-federal-n-13-4482017>. Accessed
on: July 12th, 2017.
37. This is, incidentally, the criterion adopted by the Ports Decree (Decree no. 8.465/2015), art. 7, paragraph 3.
38. See OLIVEIRA, G. J. de; SCHWARSTSMANN G. B. Arbitragem público-privada no Brasil: a especialidade
do litígio administrativo e as especificidades do procedimento arbitral, Revista de Arbitragem e Mediação,
[s. l.], v. 44, p. 150-171, [s. d.].
39. It is quite common for disputes against the Public Administration to arise in connection with the nonperformance
of contractual obligations by any of the parties or seeking to restore the economic and financial balance of the
contracts. In cases like that, even when there is not an arbitration clause, the public administration may enter
into a submission agreement, as already decided by the Superior Court of Justice in Special Appeal 904.813,
Reporting Justice Nancy Andrighi, 3rd Panel, hearing session of October 16th, 2012. In the Conflict Prevention
and Extrajudicial Resolution Journeys, a guideline was approved to the effect that, “2. Even if there is not an
arbitration clause, the public administration may enter into a submission agreement.”

70
and international legal scholars40-41. Regarding the freedom to choose the
arbitrator, it is in principle unrestricted, although some domestic arbitral
institutions still work with a system of closed lists of arbitrators, with the
requirement that the whole tribunal, or just the president, be part of the
list, which represents some limitation. There is, however, another sig-
nificant restriction on the freedom to choose the arbitrators established
in the rule – again, bizarre – of art. 3, paragraph 3 of the Ports Decree
(Decree no. 8.465/2015), according to which the entire tribunal must be
chosen by the parties by mutual agreement. It is not hard to imagine all
sorts of problems that such rule may cause in the future, but fortunately
it is limited to disputes emerged in the ports sector42.
We should also mention a typical aspect of Brazilian laws, which,
on the topic of liability for the costs of the proceeding, require that the
private party advance those costs, even if the public administration is the
claimant in the arbitration43. That benevolence with the public entity –
explained by enormous bureaucracy and budget limitations – may lead
to complicated situations in the course of the arbitration proceeding, if,
for example, only the Public Administration requests the production of
costly and extensive expert evidence. Naturally, the arbitral award will
determine who is liable for paying the costs of the proceeding, in ac-
cordance with the criteria discussed by the parties, but there is no doubt
that this constitutes unequal treatment between them. It is expected that

40. CARMONA, C. A. Arbitragem e administração pública – primeiras reflexões sobre a arbitragem envolvendo a
administração pública. Revista Brasileira de Arbitragem, Comitê Brasileiro de Arbitragem – CBAr & IOB;
Kluwer Law International 2016, v. XIII, issue 51, p. 7-21.
41. Naturally, lower participation of foreign arbitrators is owing to the fact that, in various statutes, it is required
that they be fluent in Portuguese, as this is the mandatory language of the arbitration, as we can see in the
Investment Partnerships Program (PPIs) (Law no. 13.448/2017), art. 31, paragraph 3; PPPs Act (Law no.
11.079/2004), art. 11, III; Public Concessions Act (Law no. 8.987/95), art. 23-A.
42. An arbitration proceeding was recently established with grounds on the Ports Decree, and the solution adopted
by the parties was to defer to the arbitral institution the power to appoint the three arbitrators, providing
a list with nine names and allowing the parties to veto three of them. All names were in a closed list of
arbitrators of that institution, which already represented significant security for the parties.
43. Investment Partnerships Program (PPIs) (Law no. 13.448/2017), art. 31, paragraph 2; see Ports Decree (Decree
no. 8.465/2015), art. 3, VII. Arbitration Act of the State of Minas Gerais (Law no. 19.477/2011).

71
a more frequent use of arbitration by the public sector eventually puts an
end to this benefit.
Finally, the delicate issue of the enforcement of the arbitral award.
This is a complex matter, to the extent that there is a constitutional pro-
vision in Brazil according to which payment of awards against state en-
tities must be made by the so-called precatório, a court-issued registered
warrant (art. 100)44, which in practice delays payment for several months.
However, with the intent of increasing the number of national and foreign
partners in public-private partnerships, art. 16 of the PPPs Act (Law no.
11.079/2014) created a guarantee fund, the purpose of which is to offer
payment guarantees of the pecuniary obligations undertaken by the public
entities by virtue of the partnerships they may enter into45. It is therefore
possible to enforce the arbitral award against the public entity using the
balance existing in the referred fund46.
The SCJ also ruled on an issue related to the arbitrability of decisions
taken by a regulatory body in a concession agreement. This is the fa-
mous case Petrobras S.A. vs. Agência Nacional do Petroleo (ANP), also
known as “Parque das Baleias” case. It deals with a conflict of jurisdictions
whereby both the Federal Court of Rio de Janeiro and the Arbitral Tri-
bunal constituted under the ICC Rules of Arbitration considered to have
jurisdiction to rule on the validity of the arbitration clause contained in
the concession contract for the exploration of oil in “Parque das Baleias”
oilfield. The contract was entered into by a consortium in one hand and

44. Precatório is a warrant of payment for the public entity to include in its budget for the following fiscal year the
sums necessary to pay for court judgments and, by extension, arbitral awards. The respective payments are
made in chronological order of submission of the warrants and against the corresponding revenues. Those
warrants of payment must be submitted by July 1st of each year, in order to be paid by the end of the next
fiscal year (Federal Constitution art. 100, paragraph 5).
45. The Public-Private Partnerships Guarantee Fund (FGP) will be capped to a total of R$ 6 billion (approximately
US$ 2 billion).
46. See OLIVEIRA, G. J. de; SCHWARSTSMANN G. B. Arbitragem público-privada no Brasil: a especialidade
do litígio administrativo e as especificidades do procedimento arbitral, Revista de Arbitragem e Mediação,
[s. l.], v. 44, p. 150-171, [s. d.].

72
the National Agency for Petroleum and Gas (ANP) on the other hand.
In the case at hand, the parties disputed if a claim regarding a resolution
issued by ANP, as regulator, on the limits of the oilfield was arbitrable
or not. ANP considered it to be an ius imperii issue and the consortium
challenged this interpretation and alleged that, in any case, the arbitral
tribunal should be the one to decide on its jurisdiction. The SCJ, by a
majority vote, decided that the arbitral tribunal had jurisdiction based
on the competence-competence principle47.

4. RECOGNITION OF FOREIGN
ARBITRAL AWARDS BY THE SCJ

For a foreign award to become effective in Brazil against a Brazilian

party, or a party with assets located in the country, has to be recog-
nized (“homologação”) by the SCJ48 49. The applicable legal rules are
arts. 960 et seq. of the Brazilian Civil Procedure Code (“CPC”), arts.
34 et seq. of the BAA, and arts. 216 et seq. of the Internal Rules of Pro-
cedure of the SCJ.50 It is worth mentioning that the applicable rules
do not require previous ratification by the State court in the coun-
try of origin. Nevertheless, in 2015, the SCJ ruled on the recogni-

47. CC 139.519/RJ, Rel. Min. Regina Helena Costa, j. October 11th, 2017.
48. BAA, art. 35. “In order to be recognized or enforced in Brazil, a foreign arbitral award is only subject to
recognition by the Superior Court of Justice (SCJ).”
49. The SCJ is composed of 33 Judges organized into six chambers. In fact, if the defendant does not contest the
recognition request, it will be subject to the sole analysis of the president of the SCJ, with authority to ratify
the award and to provide the order of exequatur. On the other hand, if the recognition request is contested,
the proceeding shall be submitted to the analysis of the Special Court, which is composed of the fifteen most
senior Judges.
50. “The Code provides, therefore, for two kinds of priority, both based on the speciality criterion, in what respects
the recognition of a foreign arbitral decision. First, it recognizes the prevalence of the international law rules
over the domestic law rules; then, within the scope of the domestic law, it provides for the prevalence of the
special law (Law no. 9.307/1996) over the general law (the Code of Civil Procedure of 2015).” (ARAUJO, N.
de; ALMEIDA, R. R. O Código de Processo Civil de 2015 e a homologação de laudos arbitrais estrangeiros. In:
CARMONA, C. A.; MARTINS, P. B.; LEMES, S. F. (coord.). 20 anos da Lei de Arbitragem: homenagem a
Petrônio R. Muniz. São Paulo: Atlas, 2017, p. 710).

73
tion of a foreign arbitral award effectively annulled in the country or-
igin, and the decision was to deny the application for recognition 51.
The legal requirements for the recognition request are set out in art.
37, and are quite simple52. However, the SCJ does not rubber-stamp all
decisions submitted for confirmation. Consistent with art. V(2)(b) of
the New York Convention, the BAA specifically authorizes the SCJ to
refuse confirmation of awards that violate the national public policy, or,
according to Brazilian law, the subject matter of the dispute is not sus-
ceptible of being resolved by arbitration53. In other words, awards that
violate fundamental principles of Brazilian law will not be recognized
in Brazil54. The court appropriately exercises restraint in analyzing the
merits of cases already decided by arbitral tribunals seated abroad55. Oth-
er arguments that the defendant can raise to challenge the recognition
request are provided for in art. 38 of the BAA56.

51. EDF vs. Endesa and YPF (SEC no. 5.782). It was a judgment rendered in an ICC arbitration seated in Buenos
Aires, Argentina, brought by EDF International S.A. (“EDF”) against Endesa Latinoamérica S.A. (“Endesa”)
and YPF S.A. (“YPF”), in view of the purchase by EDF of the shares Endesa and YPF held in two other
companies, Empresa Distribuidora y Comercializadora Norte S.A. and Eletricidade Argentina S.A. Given the
foreign exchange crisis in Argentina, EDF sought to review the price of the share purchase and sale agreement,
while Endesa and YPF presented a counterclaim to pursue an adjustment in the contract value by virtue of
the adjustment in the electricity price agreed by the parties in the transaction. The arbitral award granted in
part both EDF’s claims, to order Endesa and YPF to pay to EDF, respectively, US$ 147 million and US$
40 million, and the counterclaim, to order EDF to pay approximately US$ 58 million. Both parties filed for
annulment of the arbitral award in the Argentinean court, and the National Chamber of Commercial Appeals
of the City of Buenos Aires annulled the decision before the application for recognition was decided by the SCJ.
52. The requesting party must present the original of the arbitration award or a duly certified copy, authenticated
by the Brazilian consulate and accompanied by an official translation, and the original of the arbitration
agreement or duly certified copy, accompanied by an official translation.
53. BAA, art. 39.
54. According to the research carried out by Leonardo Melo, “[…] since July 2002, when the country finally became
a Member State of the New York Convention of 1958, its Judiciary has refused recognition in only six cases
out of fifty-seven decided on the merits.” (p. 1-2).
55. SEC 866; SEC 760; SEC 611; SEC 3035; SEC 6.761/GB.
56. I – the parties to the arbitration agreement were incapable; II – the arbitration agreement was not valid according
to the law to which the parties submitted it, or, in the absence of indication, by the law of the country where the
arbitration award was made; III – has not been notified of the appointment of the arbitrator or of the arbitration
procedure, or has violated the adversarial principle, making the full defense impossible; IV – the arbitration
award was issued outside the limits of the arbitration agreement, and it was not possible to separate the excess
part from that submitted to arbitration; V – the institution of the arbitration is not in accordance with the

74
 It is interesting to note, also, that the BAA expressly provides for the
mandatory observance of the international treaties in matters of recognition
and enforcement of foreign judgments, which certainly encompasses the
New York Convention. Nonetheless, although it has an express provision
about the necessary requirements for the recognition of the awards, the
Convention has not been relied upon very often by the SCJ57.
Among the matters that have been dealt with by the SCJ, it is of great
interest to the international community the fact that there are only a very
few decisions refusing recognition of foreign arbitral awards. Indeed, as
one Brazilian author correctly pointed out:

“Since July 2002, when the country finally became a Member State
of the New York Convention of 1958, its Judiciary has refused rec-
ognition in only six cases out of fifty-seven decided on the merits,
and the last case in which recognition of a foreign arbitral award was
fully refused took place in 2010. Brazil has, therefore, an excellent
track record of foreign arbitral awards recognized by its Judiciary58.”

In a recent study carried out by Professor Nadia de Araujo, from the

Catholic University of Rio de Janeiro, these figures have been updated
to ten cases where the SCJ refused to recognize the foreign award out of
ninety-three cases decided on the merits. This means that out of the thir-
ty-six new cases decided on the merits from 2015 to June 2019, only four
have been refused recognition.

arbitration commitment or arbitration clause; VI – the arbitral award has not yet become binding on the parties,
has been annulled, or has been suspended by a judicial body of the country in which the award is rendered.
57. For a complete and thorough explanation on the process of recognition of foreign awards in Brazil, see MELO,
L. C. Recognition and enforcement of foreign arbitral awards in Brazil: a practitioner’s guide. Netherlands:
Kluwer Law International, 2015.
58. MELO, op. cit.

75
5. CONCLUSION

As we can see, the development of arbitration in Brazil can be effectively

noticed not only from the increase in the number of domestic and interna-
tional arbitrations involving Brazilian parties59, but also from the profusion
of laws, notably at public administration level, which denotes a relevant
political statement by the Brazilian State as to its belief in appropriate and
quick solutions for disputes involving important sectors of the economy.
Arbitration becomes, therefore, part of the economic and financial equa-
tion of the administrative contract, making it more attractive particularly
for the foreign capital, in view of greater efficiency, stability, and security
in the resolution of the disputes60. It is in practice a standard of protection
of the investor, without the need for it to adhere to the ICSID system.
As a consequence, arbitration is adopted not as an alternative means of
dispute resolution, but rather as the most suitable one.

59. For many years, Brazil has been occupying prominent positions (third or fourth places) in number of arbitrations
administered by the ICC involving Brazilian parties.
60. Surveys have been made only in Brazilian arbitral institutions showing that, in 2015, arbitrations involving
entities of the public administration corresponded to 4% of the cases and concerned sums exceeding US$ 3
billion. In 2016, that percentage raised to 9%, and the sums exceeded US$ 7 billion.

76
 Arbitration and Brazilian Antitrust System
Carlos Ragazzo1
Amanda Barelli2

1. INTRODUCTION

The use of alternative methods of dispute resolution has always received

great acceptance in private disputes involving disposable rights, oriented
under the dictates of the autonomy of the parties’ will. For years, the
arbitrability of disputes affecting any public interest was under strict
scrutiny; in the same fashion, the arbitrability of antitrust disputes faced
some challenges before being accepted. The challenges identified in the
past to adopt arbitration in antitrust disputes were, inter alia: the scope
of the arbitrators’ powers, the possibility of choosing the applicable law,
the arbitrator’s obligation to bring competition issues, the possibility and
extension of judicial review, and issues related to consent.
The discussion about the arbitrability of antitrust disputes seems to be
overcome nowadays. The Brazilian Public Administration demonstrates
great permeability to the adoption of arbitration3, which has proved to

1. Professor of Antitrust Law, FGV Law School. PHD, State University of Rio de Janeiro (UERJ). LL.M from
New York University (NYU).
2. Master in Law, State University of São Paulo (USP) and University of Pennsylvania (UPenn).
3. In addition to the broad academic production on the subject, there are clear advances towards making arbitration
be a helpful tool that is also compatible with the pursuit of public in-
terest. The applicability of arbitrability in antitrust disputes has gained
new contours related to its use as a tool for public enforcement. In partic-
ular, in what concerns competition, arbitration has proved to be useful
to the merger control review.
The path taken – and the challenges faced – by the Administrative
Council of Economic Defense (CADE) is not far from that taken by
the European Commission since 1992, when arbitration was adopted
for the first time as part of the remedies needed to approve a merger
case4. With a shorter track record, CADE has adopted arbitration as a
tool for monitoring remedies imposed for the clearance of merger cases
starting in 2014. Experience analysis of the European Commission has
not only guided the adoption of arbitration by CADE in past cases but
may also be useful in anticipating future issues.
The analysis proposed in this paper seeks to highlight the parameters
for adopting arbitration as an instrument of public enforcement in merger
control in Brazil from a parallel with the experience and challenges faced
by the European Commission.

a reality for Public Administration. A recent example of this movement was the publication, in September
2019, of Decree n. 10.025/2019, which provides for arbitration to settle disputes involving the federal public
administration in the port, road, rail, waterway and airport transport sectors. Another evidence is the existence
of several options of arbitrators specialized in public law in the main arbitration institutions of the country
(by way of illustration, the Arbitral Chamber of the State of São Paulo had at least 16 options, according to
the list of arbitrators disclosed in its website in 2019). According to public information available, at least six
disputes involving Public Administration have been submitted to CCBC since 2015.
4. EUROPEAN COMMISSION. Case COMP/M. 235 – Elf Aquitaine and Thyssen/Minol yssen/Minol. Decision of: September
4th, 1992. Available at: <https://ec.europa.eu/competition/mergers/cases/decisions/m235_en.pdf>. Accessed
on: June 08th, 2022.

80
2. EUROPEAN COMMISSION EXPERIENCE IN
THE USE OF ARBITRATION AS A TOOL TO
ENFORCE REMEDIES IN MERGER CONTROL

Initially, the EU competition authority – the European Commission

– demonstrated reasonable distrust in adopting arbitration in antitr ust
disputes. In particular, it sought to safeguard its jurisdiction to investi-
gate and sanction competition cases (i.e. the jurisdiction of competition
authorities are divided into repressive and preventive control; the first
concerns the sanctioning of anticompetitive conduct, while the second
evaluates potential risks to the market arising from merger and acquisi-
tion transactions). In this sense, in a decision of December 23rd,19775,
in an investigation involving the analysis of licensing agreements for
exclusive distribution of Campari products in the Netherlands, Belgium,
Germany and France, which had the presence of an arbitration clause 6,
the European Commission maintained its jurisdiction to assess the
compatibility of any arbitration awards with competition law. This EC
decision demonstrated the authority concerns resulting from potential
litigation being submitted to arbitration and, in order to address this
fear, it was determined that any arbitration award should necessarily
be submitted to the European Commission’s scrutiny7.

5. EUROPEAN COMMISSION. Decision n.º 78/253/EEC of 23rd December 1977. Available at: <https://eur-lex.
europa.eu/legal – content/EN/TXT/PDF/?uri=CELEX:31978D0253&from=en>. Accessed on: June 08th, 2022.
6. According to the arbitration clause in the licensing agreements, the arbitration would be based in Milan and, in
one of the agreements, in Switzerland, and the panel would consist of three arbitrators who would first seek
an amicable solution between the parties.
7. According to the European Commission decision: “Arrangements should also be made to ensure that the
Commission is informed of any awards made under the arbitration clause, as there is a risk that the agreements
might be interpreted without regard for this Decision, so that the Commission might have to amend it.
There is a greater risk at arbitration than in the ordinary courts that interpretation of the agreement may go
beyond the limits imposed by the exemption, particularly where the arbitrators, whose function, as in this
case, doesn’t produce an amicable settlement, are not bound by the substantive law. Furthermore, review
of arbitral awards for their compatibility with arts. 85 and 86, inasmuch as these fail to be regarded as part
of EEC public policy is not necessarily available in non – Member States” (see Case COMP/M. 235 – Elf
Aquitaine and Thyssen/Minol
yssen/Minol).

81
 A few years later, in 1989, in an investigation involving United Inter-
national Pictures’ contracts with its distributors, the European Commis-
sion found that several clauses in these contracts could negatively affect
the markets. To address the issues identified by the EC, UIP offered to
review the contracts with its distributors to include in the option to sub-
mit any disputes to arbitration.8 UIP’s distributors would then have the
option to litigate in court or choose arbitration if a dispute arose related
to the reproduction of UIP’s products.
Such decisions are examples of how the European Commission’s pre-
vious experience in investigations on anticompetitive conducts created a
favorable environment for the expansion of arbitration to merger control,
a procedure in which the authority evaluates the potential competitive
risks that a merger poses to the market, exercising its preventive function.
The first merger case to adopt arbitration as a remedy occurred in
1992. The transaction involved the acquisition of Minol Mineralölhandel
and other assets related to the fuel chain in Germany by Elf. After the
transaction, Elf would have control of assets throughout the fuel chain
in a certain region of Germany. Anticipating potential discriminatory
conduct that could hinder competition in the fuel distribution segment
post-transaction, the European Commission required the conclusion of
private agreements with third parties, with the inclusion of arbitration
clauses, to guarantee the access of competing distributors to fuel tanks in
certain locations.
The decision does not detail the terms of the commitment to include
arbitration, only stated that: “arbitration by mutually agreed independent
experts will be provided in case of disputes relating to the application of the
agreement.”9. There is also no information whether arbitration has been

8. EUROPEAN COMMISSION. DECISION No IV/C.2/30.566 – UIP Cinema, OJ [1999] C 205/6 item 4.2.9
Available at: <https://ec.europa.eu/competition/antitrust/cases/dec_docs/30566/30566_6_5.pdf>. Accessed
on: June 08th, 2022.
9. See Footnote 4.

82
initiated or even whether the European Commission has exercised any kind
of control over the arbitration proceedings. The generic format and the
absence of details on important aspects of the arbitration proceeding (e.g.,
the institution, composition of the arbitration panel, applicable procedure
and law, venue of the arbitration, scope etc.) revealed the initial stage of
the discussion. However, the Minol/Elf case was an important precedent
of the use of arbitration to resolve competition concerns in merger control.

2.1 Arbitration as a dispute resolution

mechanism in antitrust cases

In order to understand how the arbitration mechanism works in merger

cases, some preliminary concepts are needed. The conditions imposed to
clear transactions by antitrust agencies are called merger control reme-
dies, which are commonly classified into (i) structural conditions, mea-
sures that imply the definitive transfer of rights (for example, the transfer
of an asset/company) capable of immediately creating a new competitive
force (either a new competitor itself or strengthening the position of an
existing competitor), and (ii) behavioral conditions, measures that do not
imply the transfer of ownership. Behavioral remedies are defined by exclu-
sion and include a broad range of measures such as: supply obligations on
non-discriminatory basis, change of commercial policies, right of access
to inputs, extinction of exclusivity relations, among others. Due to the
contractual nature of most behavioral remedies usually applied for long
periods, arbitration is used as a means to settle disputes over compliance
with such measures10.
The decision to impose remedies in merger control aims to counter-
balance the anticompetitive effects of a merger case. Therefore, the deci-

10. There is broad literature and studies on the differences between behavioral and structural remedies in competition
law. See: DAVIES, S.; LYONS, B. Mergers and merger remedies in the EU: assessing the consequences for
competition. Cheltenham/England: Edward Elgar Publishing Limited, 2007.

83
sion for the approval of a merger subject to remedies would be an inter-
mediate solution between blocking a transaction and its unconditional
clearance. The remedies must be directly connected to the competitive
problems identified in a case-by-case analysis. According to Lévêque,
antitrust remedies must: (i) be effective; (ii) have low administrative costs
(both for authorities and individuals); (iii) solve the competition concern
specifically identified; and (iv) the assets which are object of the remedy
must be efficiently allocated11.
In scenarios where behavioral and structural remedies are applicable,
competition authorities around the world expressly demonstrate preference
for structural remedies over behavioral ones. The reasons for the preference
for structural remedies are well known and are reflected in instructional
guides from various authorities around the world12.
Structural remedies are considered more effective to solve competition
concerns, their effects are immediate, they result in lower uncertainties
regarding implementation and lower monitoring costs; and they gen-
erate less distortion in the future functioning of markets. However, as
the proportionality of restriction vis-à-vis the competition concerns is
an obligation to be observed by competition authorities, as well as the
need of adequacy between the remedy and the competition concern, be-
havioral remedies are often used to the detriment of structural remedies.
The adoption of arbitration clauses in structural commitments sub-
mitted by the merging parties was accepted by the European Com-
mission in some specific cases in the past.13 However, the most recent

11. LÉVÊQUE, F. A preliminary assessment of merger remedies in the EU electricity sector. Paper presented and
Symposium organized by École des Mines, October 4th, 2001, Paris. Available at: <http://www.cerna.ensmp.
fr/Documents/cerna_regulation/ColloqueMAs/Leveque.pdf>. Accessed on: June 08th, 2022.
12. In this sense, see the CADE Remedies Guide points to such preference (see item 2.2.1). Available in: <https://
cdn.cade.gov.br/Portal/centrais-de-conteudo/publicacoes/guias-do-cade/Guide-Antitrust-Remedies.pdf
cdn.cade.gov.br/Portal/centrais-de-conteudo/publicacoes/guias-do-cade/Guide-Antitrust-Remedies.pdf>.
Accessed on: June 08th, 2022.
13. Some examples serve to materialize the use of arbitration forecast in structural remedies. In 1997, as part of
the analysis of the transaction involving Guiness and Grand Metropolitan, the European Commission decided
that the conditions for the clearance would include the divestiture of rights related to certain whiskey brands,

84
practice of the EC demonstrates that the adoption of arbitration in cas-
es of disagreement over commercial terms of disinvestment has fallen
into disuse. The provision of a solution via arbitration associated with
structural remedies adopted in past decisions involved potential issues
over the conditions of the disinvestment. The scope of the arbitration
was connected to the investigation of commercial conditions compatible
with market practices. Since the early 2000s, the practice adopted by the
European Commission regarding structural remedies has involved the
divestiture of a viable business to a suitable buyer as a precondition for
granting regulatory authorization to close the transaction. This has greatly
reduced the possibility of conflict between the parties arising from the
divestiture: (i) the concept of a viable business consists in the sufficiently
detailed package of assets to be divested (which would include tangible
and intangible assets, such as licenses, employees, contracts with clients
and suppliers)14; and (ii) the concept of a suitable buyer consists of an

including intellectual property rights. Since Guiness and Grand Metropolitan would still need to acquire such
products, the divestiture was linked to the prior execution of a supply agreement. Such a supply would have
to be concluded under market terms and, if the applicants and the prospective purchaser could not agree on
the terms of the divestiture, the matter would be taken to arbitration governed by the rules of the London
Court of International Arbitration (EUROPEAN COMMISSION. Case no. IV/M.938 – Guinness and Grand
Metropolitan. Decision of: October 15th, 1997. Available at: <https://eur–lex.europa.eu/legal–content/EN/
ALL/?uri=OJ:L:1998:288:TOC)>. Accessed on: June 08th, 2022. In 1999, the two Denmark’s largest pig
slaughter cooperatives (Danish Cooperatives Danish Crown and Vestjyske Slagterier
Slagterier) submitted their business
combination to the European Commission. Due to the high level of concentration of this combination, the
approval was conditioned to the revision of several articles of incorporation of the cooperatives among other
conditions. If the members of the cooperatives could not reach an agreement on the revision of the statute, the
disputed issue would be taken to arbitration. The parties involved in the dispute should agree on the name
of the sole arbitrator to compose the arbitration panel and, if there were no consensus, the president of the
Court of Commerce and Maritime of Copenhagen would be appointed as sole arbitrator. (EUROPEAN
COMMISSION. Case no. IV/M 1313 – Danish Crown and Vesjyske Slagterier. Decision of: March 9th, 1999.
Available at: <https://ec.europa.eu/competition/mergers/cases/decisions/m1313_en.pdf>. Accessed on: June
08th, 2022. In this case, there was also provision for arbitration related to the divestiture of a company in which
the cooperatives had a stake. An expert should determine the price and, if there was no agreement regarding
the sales conditions, the disputed terms should also be submitted to a sole arbitrator, who should necessarily
be an independent accountant.
14. Comprehensive discussions on the feasibility of the asset to be divested were developed in: Case
COMP/M.7932 Dow/DuPont, Case COMP/M.6690 Syniverse/Mach, Case COMP/M.8677 Siemens/
Alstom, Case COMP/M.5658 Unilever/Sara Lee, Case COMP/M.6857 McCain Food Group/Lutosa
Business.

85
economic agent independent of the parties, with sufficient economic re-
sources and expertise to remain in the market as an effective competitor.
From the Bosch and Rexroth case, in 2000, it became a common
requirement to indicate a potential upfront buyer15. In some cases, the
requirement is that the remedy be implemented before the closing of
the transaction ((fi
fix-it-first
rst))16. The design of the disinvestment package
precedes the conclusion of the analysis by the competition authority.
The disinvestment package needed to clear the merger often relies on
a broad market test (in which third parties potentially affected by the
transaction are consulted), alignment with other agencies and defini-
tion of the deadline for the disinvestment. Due to the policy applicable
to structural remedies that anticipates the negotiation of disinvestment
conditions (by imposing the identification of the buyer or even the im-
plementation of the disinvestment in a previous manner), the disputes
previously submitted to arbitration were literally emptied. As a result,
arbitration is currently associated with behavioral remedies.

2.2 Development of arbitration as a dispute

solving mechanism for behavioral remedies

In 1992, still in the first cases where arbitration became a reality in merger
control, Du Pont’s acquisition of Imperial Chemical Industries’ interna-
tionally consolidated nylon business received regulatory approval by the
European Commission subject to the obligation to guarantee the supply

15. There were several cases where such a requirement was made as a condition for obtaining European Comission’s
approval: Case COMP/M.7932 Dow/Dupont, Case COMP/M.8084 Bayer/Monsanto, Case COMP/M.7801
Wabtec/Faiveley Transport, Case COMP/M.7265 Zimmer/Biomet, Case COMP/M.7061 Huntsman/
Rockwood titanium dioxide assets, Case COMP/M.7018 Telefonica Deutschland/ E – Plus, Case
COMP/M.6990 Syniverse/Mach, Case COMP/M.6497 Hutchison 3G Austria/Orange Austria, Case
COMP/M.6992 Hutchison 3G UK/Telefonica Ireland and Case COMP/M.6203 Western Digital/Viviti.
16. EUROPEAN COMMISSION. COMP/M.7278 – General Electric and Alstom. Case Decision of: 24 February
2016. Available at: <https://ec.europa.eu/competition/mergers/cases/decisions/m727868573.pdf>. Accessed
on: June 08th, 2022.

86
of nylon carpet fibers to third parties17. In the event of a disagreement on
the supply conditions between any prospective client and the resulting
company, the arbitration would be applied. The adoption of arbitration
in this case was determined in a few lines in the final decision approving
the transaction, without further details on the arbitration process. Also,
in 1997, a decision involving The Boeing Company’s acquisition of Mc-
Donnell Douglas Corporation provided for arbitration to resolve disputes
over the imposed remedies18. Arbitration would be used in the event of
disputes over the value of Boeing’s royalties for the use of its patents for
the manufacture or sale of aircraft for commercial use.
Later, the possibility of using arbitration in behavioral remedies be-
came more solid. In 2000, the establishment of a joint venture that would
combine BASF
BASF’s polypropylene and Shell
Shell’s polyethylene businesses was
cleared subject to the guarantee of access to technology licensing con-
tracts to competitors19. In this case, the European Commission accepted
the adoption of arbitration commitments in the modality “pendulum
arbitration”, according to which the two parties involved would submit
to the arbitrator the solution they considered appropriate and the ar-
bitrator should choose one of the proposals presented. In this case, the
European Commission retained jurisdiction to overview the arbitration,
thus possibly reviewing the award if incompatibilities with European
Commission’s previous decisions were identified.
From the cases aforementioned, it is possible to identify arbitration
is adopted as a form of dispute resolution involving remedies which im-

17. EUROPEAN COMMISSION. Case no. IV/M.214 – Du Pont and ICI. Decision of: September 30th, 1992.
Available at: <https://ec.europa.eu/competition/mergers/cases/decisions/m214_en.pdf>. Accessed on: June
08th, 2022.
18. EUROPEAN COMMISSION. Case no. IV./M.877 – Boeing and McDonnell Douglas. Decision of: July 30th,
1997. Available at: <https://ec.europa.eu/competition/mergers/cases/decisions/m877_19970730_600_en.pdf>.
Accessed on: June 08th, 2022.
19. EUROPEAN COMMISSION. Case no. COMP/M.1751 – Shell and BASF BASF. Decision of: March 29th, 2000.
Available at: <https://ec.europa.eu/competition/mergers/cases/decisions/m1751_en.pdf>. Accessed on: June
08th, 2022.

87
posed behavioral obligations of: (i) ensuring competitors’ access to inputs
on non-discriminatory basis20; (ii) adopting commercial policies to reduce
barriers to entry for competitors21; (iii) maintaining the terms of contracts
with suppliers on non-discriminatory basis22; (iv) licensing intellectual
property rights on non-discriminatory basis23; and (v) maintaining quality
in the provision of services24.
The adoption of arbitration in merger control composes a public pol-
icy choice aligned with the reduction of monitoring costs of behavioral
remedies, but also with clear gains of efficiency in the monitoring process.
First, the detection of non-compliance with behavioral remedies can be
easily and quickly detected by private agents in the affected market25. It is
expected that agents directly affected by a potential conduct violating the
decision of the competition authority will be in a better position to iden-
tify and contest potential non-compliance conducts, rather than public
agents. The provision of alternative dispute resolution over the obligations
imposed through the restriction collaborates with a quicker solution, dis-
couraging possible incentives to breach the competitive decision. In ad-
dition to saving public and scarce resources (and greater efficiency, given
the profile of the arbitrators), arbitration awards are also internationally

20. For example: Case COMP/M.235 – Thyssen/Minol yssen/Minol; Case COMP/M.1185 – Alcatel/Thomson CSF – SCS
(EUROPEAN COMMISSION. Case no. COMP/M.1185 – Alcatel/Thomson CSF – SCS. Decision of: June
4th, 1998. Available at: <https://ec.europa.eu/competition/mergers/cases/decisions/m1185_fr.pdf>. Accessed on:
June 08th, 2022. And case COMP/M.1795 – Vodafone Airtouch/Mannesmann (EUROPEAN COMMISSION.
Case no. IV/M.1795 – Vodafone Airtouch/Mannesmann. Decision of: July 26th, 2003. Available at: <https://
ec.europa.eu/competition/mergers/cases/decisions/m1795_en.pdf>. Accessed on: June 08th, 2022.
21. For example: Case COMP/M.562 – Swissair/Sabena, and Case COMP/M.259 – British Airways/TAT Airways/TAT.
22. For example: COMP/M.1684 – Carrefour/Promodès (EUROPEAN COMMISSION. Case no. COMP/M.1684.
Carrefour e Promodès. Decision of: January 25th, 2000. Available at: <https://ec.europa.eu/competition/mergers/
cases/decisions/m1684_20000125_230_3219706_FR.pdf>. Accessed on: June 08th, 2022.
cases/decisions/m1684_20000125_230_3219706_FR.pdf
23. For example, Case COMP/M.1751 – Shell/BASF (Footnote 17).
24. For example, Case COMP/M.1795 – Vodafone Airtouch/Mannesmann (Footnote 18).
25. Possibilities of behavioral medicine violation can occur in the form of quality reduction; creation of technical
unfeasibility easily circumvented; reduction of input production. Thus, the monitoring of remedies by the
competition authorities involves a complex process that extrapolates the understanding only of the past
analysis that culminated in the application of the remedy, but also involves a reasonable understanding of
the market dynamics in which the remedy was applied.

88
recognized and have limited possibilities of appeals26, which makes arbi-
tration an attractive and quick instrument in case of disputes.
From the cases mentioned, the development in the use of arbitration
for disputes involving long-term behavioral remedies is clear. While the
first references to arbitration applicable to disputes in antitrust cases were
brief and without any detail, recent cases better define essential issues of
any arbitration procedure, such as: chosen institution, applicable law, meth-
od to appoint arbitrators, scope of the arbitrable dispute, review power of
the competition authority, inversion of the burden of proof, deadline for
issuing an arbitration award.

2.2.1 EC’s reviewing and intervention power over the arbitral proceedings

One of the central issues when the European Commission arbitration

is included in merger control decisions is the degree of interference in
the arbitration process. In the first decisions, the terms were broad (see
Minol/Elf27 and Du Pont/ICI28 cases) and it was not clear whether the
European Commission retained any oversight or review power over the
arbitration process.
In 1999, the merger between Allied Signal and Honeywell was cleared
conditioned to the adoption of arbitration associated with behavioral re-
strictions29. Any dispute arising from the supply obligations imposed should
be solved by arbitration. Two points are relevant: (i) Comission’s approval
of the appointed arbitrator’s name is required; and (ii) the Commission
should be informed of all stages of the arbitration procedure. It was also

26. OECD Secretariat, Key Findings 8 – 9, OECD Hearings: Arbitration and Competition (2010), Available at:
<http://www.oecd.org/competition/abuse/49294392.pdf>. Accessed on: June 08th, 2022.
27. See Footnote 4.
28. See Footnote 17.
29. EUROPEAN COMMISSION. Case no. COMP/M.1601 – Allied Signal and Honeywell Honeywell. Decision of: December
1st, 1999.Available at: <https://ec.europa.eu/competition/mergers/cases/decisions/m1601_en.pdf>; <https://
ec.europa.eu/competition/mergers/cases/decisions/m1751_en.pdf>. Accessed on: June 08th, 2022.

89
determined the appointment of an independent expert who would have
an amicus curiae function, and who would be responsible for keeping the
antitrust authority informed.
In 2000, Dow Chemical
Chemical’s acquisition of unitary control of Union Car-
bide Corporation also resulted in the application of remedies related to
the licensing of its PE technologies on a non-discriminatory basis.30 The
arbitration model chosen to ensure that licensing would take place under
market conditions was “pendulum arbitration” (same type of arbitration
was applied in the JV between BASF and Shell Shell, described above). In both
cases, the competition authority should be informed of the developments
of the arbitration. In Vivendi/Canal +/Seagram31, the EC decided to adopt
arbitration and granted the arbitrator extensive evidentiary powers. How-
ever, the arbitrator could not disclose confidential information and it would
be up to the competition authority to establish the criteria to define which
information should be considered confidential or business secrets in ac-
cordance with EU competition rules.
In British Sky Broadcasting’
Broadcasting’s acquisition of a 40% stake in Kirch Pay
TV, the parties have undertaken design an arbitration procedure to re-
TV
solve any disputes relating to competitors’ access to pay TV products and
submit it for approval by the European Commission.32 If the EC did not
agree with the arbitration procedure proposed by the parties, the compe-
tition authority itself could conduct the arbitration. The EC further stated
in its decision that no aspect of the arbitration procedure could interfere
with its jurisdiction.

30. EUROPEAN COMMISSION. Case no. COMP/M.1671 – Dow Chemical and Union Carbide. Decision of:
May 3rd, 2000. Available at: <https://ec.europa.eu/competition/mergers/cases/decisions/m1671_en.pdf>.
Accessed on: June 08th, 2022.
31. EUROPEAN COMMISSION. Case no. COMP/M.2050 – Vivendi/Canal+/Seagram. Decision of: October
13th, 2000. Available at: <https://ec.europa.eu/competition/mergers/cases/decisions/m2050_en.pdf>. Accessed
on: June 08th, 2022.
32. EUROPEAN COMMISSION. Case no. IV/JV.37 – BSkyB and Kirch Pay TV. Decision of: December 21st,
2000. Available at: <https://ec.europa.eu/competition/mergers/cases/decisions/jv37_en.pdf>. Accessed on:
June 08th, 2022.

90
 Even if the EC admits the adoption of arbitration for the resolution
of disputes arising from remedies imposed in merger control, there are
always caveats related to its power to interfere in the arbitration process.
In the first cases where arbitration was used, it was possible to verify that
the European Commission reserved for itself greater control, which may
be the result of a certain insecurity regarding the use of the method. The
tendency to interfere in the arbitration process has been reduced over
time, and even with less interference, the parties are still obliged to keep
the European Commission informed of the developments in arbitration.

2.2.2 Celerity in arbitral proceedings

The length of the proceedings for dispute resolution is usually a determin-

ing factor in the choice of arbitration. The decisions that accepted arbitra-
tion in the package of conditions necessary for the approval of a merger
included considerations on the need for speed (and therefore a specific
term for its closure). In this regard, the decisions impose a fast-track pro-
cedure and, in at least one case33, the EC even used the term “even faster
track procedure”. To ensure speed, the EC has the practice of imposing
a time limit for the issuance of the arbitral award once the procedure has
been initiated. The maximum time limit set for the arbitrator to issue a
decision is generally between one and six months.
In some cases, such as in Alcatel/Thomson CSF34, the deadline set for
the issuance of an arbitration award was two months. In the Carrefour/
Promodès35 case, the deadline for issuing an arbitration award was three
months. However, in several cases, the guidance is that the arbitrator is-
sues his or her opinion within one month, usually as of the obtaining of

33. EUROPEAN COMMISSION. Case no. COMP/M.2389 – Shell and DEA. Decision of: July 10th, 2001.
Available at: <https://ec.europa.eu/competition/mergers/cases/decisions/m2389_20011220_600_en.pdf>.
Accessed on: June 08th, 2022.
34. See Footnote 20.
35. See Footnote 20.

91
all information from the parties involved in the dispute36. The period for
award issuance begins with the appointment of the last arbitrator who
composes the panel37.

2.2.3 Distribution of the burden of proof in arbitration proceedings

Another relevant factor regarding the insertion of arbitration obligations

concerns the distribution of the burden of proof in the course of the ar-
bitration proceeding. As a general rule, when the adoption of arbitration
is sufficiently detailed in the agreed obligations, from the European ex-
perience, it is common that the burden of proof falls on the parties that
have assumed the commitments before the competition authority, and
the initiation of the arbitration procedure would depend only on the pre-
sentation, by a third party possibly harmed, of sufficient evidence of some
practice that violates the terms of the commitments assumed.
In the Vodafone/Mannesmmann case38, the parties agreed that the
third-party initiating arbitration proceedings should only provide suf-
ficient elements to establish an initial case (“
(“prima
prima facie evidence rule”).
After the submission of evidence supporting the complaint, if Vodafone
did not contest with detailed data/information on the appropriateness of
the conduct to the elements of the European Commission decision, the
arbitration should be decided in favour of the third party. The same logic
40
was applied to the Vivendi/Canal +/Seagram39, Telia/Sonera and Shell/

36. See Case no. COMP/M.2389 – Shell/DEA (Footnote 31); Case COMP/M.1795 – Vodafone Airtouch/Mannesmann
(Footnote 18) and Case no. COMP/M.1601 – Allied Signal and Honeywell (Footnote 27).
37. EUROPEAN COMMISSION. Telia and Sonera. Case no. Comp/M.2803. Decision of: September 27th,
2006. Available at: <https://ec.europa.eu/competition/mergers/cases/decisions/m2803_en.pdf>. Accessed
on: June 08th, 2022.
38. See Footnote 20.
39. See Footnote 31.
40. See Footnote 37.

92
DEA41 merger. Similarly, in the BSkyB/Kirch Pay TV42 case, the burden
of proof fell on the plaintiffs, who were required to present the necessary
evidence, in addition to that required by the arbitrator, in a timely manner.

2.2.4 Selection of the arbitral institution and

composition of the Arbitration Panel

It is difficult to identify a decision pattern with respect to the arbitration

panel composition in European Commission decisions. The same is true
regarding the preference for any specific arbitral institution. There is more
reference to the International Chamber of Commerce (ICC)43 and the Lon-
don Court of International Arbitration44. However, notwithstanding the
references aforementioned, such cases are not representative, so that a
standard or preference for such institutions can be established.
The decisions also do not clarify whether the selection of the institu-
tions would have come from an initiative of the merging parties or would
have been a suggestion of the competition authority. Another possibility
is that the selection of a certain institution would have a relationship with
the main institutions in countries where a potential dispute could arise or
even the adoption of an institution with a greater international presence.
In this sense, the decision in Telia/Sonera45 case set forth that disputes
relating to Sweden would be arbitrated under the rules of the Stockholm

41. See Footnote 33.

42. See Footnote 32.
43. See Case no. COMP/M.2389 – Shell and DEA (Footnote 33); Case no. COMP/M.2050 – Vivendi/Canal+/
Seagram (Footnote 31), BP/E.ON (EUROPEAN COMMISSION. Case no. IV/M.2533 – BP/E.ON. ON. Decision
ON
of: December 20th, 2001. Available at: <https://ec.europa.eu/competition/mergers/cases/decisions/m2533_en.pdf
)>. Accessed on: June 08th, 2022.
44. See, for example, the Case no. IV/M.1795 – Vodafone Airtouch/Mannesmann (Footnote 20); and Glaxo Wellcome/
SmithKline Beecham (EUROPEAN COMMISSION). Glaxo Wellcome/SmithKline Beecham. Case no. IV/M.3083.
Decision of: May 8, 2000. Available at: <https://ec.europa.eu/competition/mergers/cases/decisions/m1846_
en.pdf>. Accessed on: June 08th, 2022.
en.pdf
45. See Footnote 37.

93
Chamber of Commerce and the language adopted would be Swedish. For
disputes related to Finland, the language adopted would be Finnish and
the arbitral rules would be those of the Helsinki Chamber of Commerce.
In relation to the appointment of arbitrators, there are cases where the
European Commission has reserved to itself the prerogative to approve
the appointment by the parties involved in the dispute. This was the case
in the British Airways/TAT46case. In that case, the Commission deter-
mined that if the parties could not agree on the arbitrator, the appointment
should be done by British Airways, but it would still be subject to confir-
mation by the European Commission’s Director General for Competi-
tion47. In the Carrefour/Promodès case, the Commission determined that
the parties had to reach a consensus on the arbitrator. If this was not pos-
sible, the arbitrator would be appointed by the president of the Chamber
of Commerce of Madrid or Paris, depending on where the dispute arose.
In the case of Glaxo Wellcome/SmithKline Beecham, the arbitrator should
be nominated by the president of the Law Society of England and Wales
if no agreement was reached48.
In the SEB/Moulinex case49, the appointment would be made directly
by the president of the Commercial Court of Lyon if a dispute arose be-
tween the applicants and a third party. In the Dow/Union Carbide case, the
responsibility to appoint the arbitrator would fall on the Netherlands Arbi-
tration Institute if the parties could not reach a consensus on the matter.
In cases where two arbitrators are appointed, it is common for each party

46. EUROPEAN COMMISSION. Case no. IV/M.259 – British Airways/TAT Airways/TAT. Decision of: December 11th,
1992. Available at: <https://ec.europa.eu/competition/mergers/cases/decisions/m259_en.pdf>. Accessed
on: June 08th, 2022.
47. “In the event that no agreement is reached within a reasonable time, BA will nominate an arbitrator, whose
appointment will fall to be confirmed by or on behalf of the Director General for Competition of the
European Commission.”
48. Also, in BP/E.ON (Footnote 43), if the parties could not reach an agreement, the mayor of Düsseldorf would
be responsible for appointing the arbitrator.
49. EUROPEAN COMMISSION. Case no. IV/M.2621. SEB/Moulinex. Decision of: November 11th, 2003.
Available at: <https://ec.europa.eu/competition/mergers/cases/decisions/m2621_20031111_590_en.pdf>.
Accessed on: June 08th, 2022.

94
involved in the dispute to appoint an arbitrator for the arbitration panel. In
cases with three arbitrators, rules providing that arbitrators appointed by
the parties would appoint the president of the arbitral tribunal have already
been adopted, which is a common procedure overall50.

2.2.5 Arbitrations initiated in the determination

of noncompliance with remedies

Given the confidential nature of most of the disputes submitted to arbi-

tration and even the possibility of a composition before the issuance of the
arbitral award, there is no representative number of decisions in arbitra-
tion in the area of merger control. There is, however, at least one case of
arbitration in competition matters arising from merger control remedies
in the Newscorp/Telepiu case51. In this case, the approval of the merger
was conditioned on the adoption of a divestment package and behavioral
remedies designed to reduce barriers to entry in the pay TV market in
Italy. Any dispute with a third party relating to the remedies would be
submitted to arbitration under the ICC rules. In February 2010, RTI Ita-
lia SpA initiated arbitration proceedings against a subsidiary of Newscorp.
The dispute sought to determine whether the rights to the FIFA match-
es would be subject to the negotiated remedies. In the end, the arbitral
tribunal concluded that the worldwide rights to the 2010 FIFA World
Cup matches should not be considered as within the scope of the remedy.

50. See Case no. COMP/M.2050 – Vivendi/Canal+/Seagram (Footnote 31).

51. EUROPEAN COMMISSION. Newscorp/Telepiu. Case no. IV/M.2876. Decision of: July 20th, 2010. Available
at: <https://ec.europa.eu/competition/mergers/cases/decisions/m2876_20100720_600_3230355_EN.pdf>.
Accessed on: June 08th, 2022.

95
3. CADE’S EXPERIENCE IN THE USE OF ARBITRATION
TO ENFORCE ANTITRUST REMEDIES

CADE has a relatively recent experience with arbitration being applied to

merger control. In fact, the introduction of the suspensory regime by the Law
12.529/2011 (Brazilian Competition Law), according to which transactions
that meet the notification criteria may not close without prior authorization
from CADE. The suspensory merger control regime has significantly mod-
ified the dynamics of merger control analysis in Brazil. Before the Brazilian
Competition Law, the merger control regime in the country was not sus-
pensive. The modifications to the merger control regime, which can still be
considered recent in the country, made the antitrust authority more open
to innovative solutions – such as the adoption of arbitration – and all agents
(CADE and private agents) more engaged with the celerity of the analysis.
The information and considerations presented here bring an analysis cutoff
from 2012 when the Brazilian Competition Law came into force.
In July 2020, CADE’s Department of Economic Studies (DEE) or-
ganized a study on remedies applied in merger control.52 Following the
logic of adapting the remedy to the competitive concern identified, the
document pointed out a predominance of behavioral remedies over struc-
tural remedies in the last six years (between 2014 and 2019). According to
the data analyzed, in 53% of the cases exclusive behavioral remedies were
adopted, in 22% of the cases exclusive structural remedies were adopted,
and in 25% of the cases packages of remedies included both behavioral
and structural measures53.

52. See Working Document 002/2020 Antitrust Remedies at CADE: an analysis of jurisprudence. Available at:
<http://www.cade.gov.br/noticias/estudo-analisa-a-aplicacao-de-remedios-antitruste-pelo-cade>. Accessed
on: June 08th, 2022.
53. Among the main behavioral remedies already adopted by CADE are: (i) quantity control/offer limit; (ii) quality
control/goals; (iii) commitment to supply; (iv) non-discrimination measures; (v) non-exclusivity measures; (vi)
access to essential facility; (vii) Chinese wall; (viii) governance and/or compliance; (ix) intellectual property
licensing; (x) price caps.

96
3.1 How arbitration is used as a dispute
resolution mechanism

Brazilian experience with the adoption of arbitration in merger control is

more recent when compared to the experience of the European Commis-
sion. The first case in which CADE adopted arbitration in merger con-
trol occurred in 2014. The transaction involved the dissolution of a joint
venture between Fosbrasil S.A. and Vale Fertilizantes54. As a result of the
transaction, Fosbrasil became the unitary controller of the joint venture
(Bromisa Industrial Comercial Ltda.). The scope of the arbitration in this
case was to ensure that Fosbrasil consolidation of control over Bromisa
would not entail the adoption of discriminatory strategies or practices in
the supply of third parties by the future JV. The opinion of the Reporting
Commissioner points to the adoption of arbitration as an effective way
to resolve commercial disputes resulting from discriminatory behavior,
and at the same time, it would reduce monitoring costs imposed on the
competition authority.
The following year, in 2015, CADE accepted the inclusion of arbi-
tration in the scope of remedies needed to approve the combination of
ALL and Rumo Logística’s businesses55. In this case, arbitration was an
instrument not only to solve potential discriminatory conducts, but also
with the explicit purpose of constituting a mechanism of external discour-
agement to the adoption of possible discriminatory/exclusionary behavior.
In 2016, CADE approved a merger between BM&FBovespa S.A.
Bolsa de Valores, Mercadorias e Futuros and Cetip S.A. Mercados56.
The package of remedies negotiated with CADE aimed at ensuring that

54. Merger Case no. 08700.000344/2014 – 47. Applicants: Bromisa Indústria e Comercial Ltda, ICL Brasil Ltda
and Fosbrasil S.A. Judgment Session (DOU): December 18th, 2014. (SEI 0008010).
55. Merger Case no. 08700.005719/2014 – 65. Applicants: América Latina Logística S.A. and Rumo Logística S.A.
Judgment Session (DOU): February 11th, 2015. (SEI 0022458).
56. Merger Case no. 08700.004680/2016 – 30. Applicants: BM&FBovespa S.A. – Stock Exchange, Markets and
Futures, CETIP S/A – Organized Markets. Judgement Session (DOU): 3.28.2017. (SEI 0316944).

97
competitors would have access to the infrastructure of central deposito-
ry services. Arbitration in this case assumed a central role, with a clear-
er prevision regarding the procedures related to the appointment of the
panel, selection of the institution, celerity of the arbitral proceeding and
applicable legislation. Unlike the cases above, the scope of arbitration in
this case was not restricted to identifying the existence of discriminatory/
exclusionary behavior, also encompassing dispute resolution as a way to
establish both price and access rules to central depository services rendered
by the merger entity.
To date, the last case in which CADE adopted arbitration was in the
remedies imposed to approve the transaction between Time Warner and
AT&T57, also a merger with behavioral commitments. As a way to foster
consensus, the innovation brought by this case is the need to demonstrate
that, prior to the commencement of arbitration, the parties tried to reach
an agreement, under penalty of suspension of the procedure for a period
of three months.

3.2 Development of arbitration as a dispute

solving mechanism for behavioral remedies

As described before, CADE’s experience is limited to cases after 2014 due

to the change in the merger review regime to a suspensory review system
only in 2012. With the introduction of the pre-merger analysis regime,
merger analysis in Brazil has become significantly more prospective. From
the perspective of private agents, it has imprinted urgency in the creation
of creative solutions and a more proactive stance in the definition of a
package of remedies that would mitigate the competitive risks identified
in a prior manner.

57. Merger Case no. 08700.001390/2017 – 14. Applicants: AT&T and Time Warner. Judgement Session (DOU):
10.24.2017. (SEI 0400801).

98
 In this context, CADE’s experience connects arbitration to monitoring/
reducing incentives to engage in discriminatory or otherwise anticompeti-
tive conduct by the resulting company from a merger. There is no parallel
in Brazil between the adoption of arbitration in remedies of a structur-
al nature, especially considering that the practice of applying structural
remedies has followed the development of the European Commission’s
practice. In line with the practice of other global competition authorities,
CADE has required upfront buyer and fix-it-first to ensure that remedies
are timely implemented. The limited instances in which arbitration was
used were related to the adoption of behavioral remedies which, as noted
before, correspond to most of the measures used by CADE to approve
a transaction.

3.2.1 CADE’s reviewing and intervention

power over the arbitral proceedings

In ICL/Bromisa, CADE has retained its jurisdiction to assess non-com-

pliance with the remedies imposed by CADE, regardless of the result of
the arbitration. In the second case where arbitration was adopted ((ALL/
Rumo case), CADE included an obligation to inform the commencement
of arbitration proceedings but did not clearly define whether an interven-
tion in the arbitral proceeding would be possible and in which hypotheses.
In Bovespa/Cetip, the scope of the arbitration was broad. The arbitral
tribunal would have jurisdiction to effectively propose solutions to resolve
dispute between the parties (not being limited to the identification of
possible discriminatory conduct as in previous cases). However, CADE
maintained its jurisdiction to investigate non-compliance, regardless of
the commencement of any arbitral proceeding. Moreover, the merging
parties had the duty to inform CADE of the commencement and status
of any arbitral proceeding.

99
 Finally, in the Time Warner/AT&T merger, CADE imposed duties on
the parties to provide information on any arbitral proceeding initiated and
included caveats regarding the non-binding effects of a potential arbitral
awards in relation to its jurisdiction over the compliance of the commit-
ments assumed on account of the clearance of the merger.

3.2.2 Celerity in arbitral proceedings

In the first case where arbitration was adopted (ICL/Bromisa), there was
no public consideration about celerity requirements of the arbitral pro-
ceeding or even the establishment of any deadline for the issuance of the
arbitration award. On the contrary, the commencement of arbitration
would actually require CADE’s assessment on the necessity.
In the second case in which arbitration was an element of the composi-
tion of the behavioral remedy package ((ALL/Rumo), CADE demonstrated
greater concern with the celerity of the arbitral proceeding, stipulating a
6-month deadline to the issuance of the arbitral award. However, the ar-
bitral proceeding would be preceded by a direct complaint process to the
company (in the figure of a Supervisor). Thus, CADE has negotiated with
the parties the institution of a prior channel of direct complaints to the
company (in the figure of a Supervisor) that should provide clarifications
within a period of up to fifteen days. If the response were not satisfactory,
the third party could initiate the arbitral proceeding at Rumo’s expense.
In the case of the arbitration commitments in Bovespa/Cetip and Time
Warner/AT&T, although references to the need for a reasonable deadline
Warner/AT&T
for a final decision by the arbitral tribunal (which would be six months)
are provided, the wording adopted in the merger control agreement leaves
open the possibility of a higher decision deadline58.

58. According to the Merger Control Agreement: “Arbitration shall have a reasonable duration, preferably less than
six (6) months counted from the establishment of the Arbitral Tribunal”.

100
3.2.3 Distribution of the burden of proof in arbitration proceedings

There was no in-depth discussion of the burden of proof in the first expe-
rience with the adoption of arbitration in merger control (ICL/Bromisa).
Here, the scope of arbitration was reduced to an opinion on the existence
of reasonableness in the justification presented by the company for the
refusal to supply products to third parties. Although there was no clear
definition of the burden of proof, there was a provision that if the third
party initiated the arbitral proceedings based on untrue or misleading in-
formation, the costs of establishing and conducting the arbitration would
be transferred to the third party litigant. In any other case, the costs of
the arbitration would be borne by Bromisa.
In subsequent cases, no express conditions were established on the
standard of evidence or distribution of the burden of proof to be adopted
in future arbitral proceedings. Selection of the arbitral institution and Com-
position of the Arbitration Panel. In ICL/Bromisa, the arbitral proceeding
would be conducted by a single arbitrator, appointed by ICL and approved
by CADE. A curious fact related to the case is that the commencement of
the arbitral proceeding relies on CADE’s initiative. First, the third party
would report the refusal to supply by Bromisa to CADE. After, ICL would
be notified about the complaint and, after its response, CADE would de-
cide whether the matter should be submitted to arbitration. Even after
such a decision, the arbitral proceeding would only commence after the
third party’s formal acceptance to arbitration. Such model for the deter-
mination of the commencement of the arbitral proceeding does not find
any parallel with the European cases described before.
In the ALL/Rumo case, there is no indication of an institution, but
there is definition of the composition of the arbitration panel. Thus, each
party would be responsible for the appointment of one arbitrator and the
arbitrators would jointly appoint the president of the arbitral tribunal. The
same methodology was adopted in the subsequent cases Bovespa/CETIP

101
and Time Warner/AT&T. However, for these two last cases, the selected
institution was the Brazil-Canada Chamber of Commerce Arbitration
and Mediation Center (CAM-CCBC).

3.2.4 Arbitrations initiated in the determination

of noncompliance with remedies

According to public information available on the compliance of com-

mitments agreed upon with CADE in the ALL/RUMO case, Agrovia
initiated an arbitral proceeding against Rumo due to potential adoption
of discriminatory conducts in the provision of rail transportation services.
The dispute was taken directly to the Brazil-Canada Chamber of Com-
merce (CAM – CCBC) without CADE having been urged to manifest.
As the terms of the case did not foresee direct interference of CADE
beyond the prerogative of being informed about the progress of arbitra-
tion, the Attorney General of CADE – PROCADE, the body of the
competition authority responsible for monitoring the compliance of the
commitments, declared that it would not interfere in private disputes and
notified Rumo to submit clarification on the compliance of the obligations
assumed before CADE.59 Subsequently, Rumo submitted its response
and CADE considered that it was not a case of non-compliance with the
commitments assumed. In any case, Agrovia filed a request for reconsid-
eration of the decision issued – which was denied by CADE – and there
is no public information on the outcome of the arbitration before CCBC.
According to public information, the commitments assumed in the
Bovespa/Cetip case have also been subject to discussions withing an arbitra-
tion proceeding60. The arbitral proceeding was initiated before the CCBC

59. See ProCADE Opinion no. 237/2015/UCD/PFE – CADE/PGF/AGU. Merger Case no. 08700.005719/2014
– 65. Applicants: América Latina Logística S.A. and Rumo Logística S.A.
60. Available at: <https://istoe.com.br/ats-recorre-a-processo-de-arbitragem-contra-a-b3>. Accessed on: June
08th, 2022.

102
at the end of 2017 and there is public information available that the parties
involved settled the dispute at the end of 201961. The dispute concerns
the access to the central depository services provided by the company. In
addition to the arbitral proceeding, the interested third party also filed a
complaint with CADE alleging the noncompliance with the commitments
assumed under the merger case. CADE started an investigation that is
still in progress before the General Superintendence.62

4. CONCLUSION: TRENDS IN THE DEVELOPMENT

OF ARBITRATION IN COMPETITION PRACTICE

The European Commission experience is rich in examples that have guid-

ed CADE in the past and may suggest new directions for merger control
policy in Brazil, especially in what refers to remedies enforcement design.
From the background of the European Commission, some parallels can
be drawn with the adoption of arbitration by CADE in merger control.
The first feature concerns the type of case in which arbitration was adopt-
ed. In Brazil, the solution occurred only in merger control cases in which
behavioral measures were adopted, which is in line with the use made in
Europe after the evolution of structural remedy systems.
Regarding the power to review or intervene in the arbitral proceedings,
as occurred in Europe, the cases where arbitration was initially adopted
had a significant power of interference from the competition authority.
Similarly, the first cases in which arbitration was adopted in merger control
in Brazil, CADE preserved its jurisdiction, which, in some cases, consist-
ed in the possibility of initiating the arbitration process (or significantly
reducing its scope). In terms of timing, both the European Commission

61. Available at: <https://valor.globo.com/financas/noticia/2019/12/23/b3-chega-a-acordo-com-ats-e-abre-caminho-

para-eventual-concorrncia.ghtml>. Accessed on: June 08th, 2022.
62. Administrative Inquiry no. 08700.002656/2016-57. Stakeholders: ATS Brasil S.A., BM&F Bovespa. In progress
investigation (SEI0185946)

103
and CADE are concerned that the procedure should be as expeditious
as possible. Nevertheless, what is observed is that in Europe the terms
stipulated for the issuance of the arbitration award are, in general, shorter
than in Brazil (or even stricter than those stipulated in Merger Control
Agreements at CADE).
From the path followed by the European Commission, it is possible
to identify additional trends in the adoption of arbitration in merger con-
trol. First, there is a tendency towards the inclusion of details on issues
such as the burden of proof and the standard of evidence required for
the commencement of arbitral proceedings. Secondly, timing might be
an issue of growing concern when arbitral proceedings are considered in
merger control agreements. Thirdly, a better definition of the hypoth-
eses of review and supervision of the arbitral proceeding by CADE, in
order to avoid that private disputes – which should be directly referred
to arbitration – see CADE as an additional forum for discussion.
In general it is also possible to point out a continuity of the trend
towards greater use of arbitration and other creative solutions in merger
control, now no longer as a result of the change in the law, but of the
growing complexity of business groups that submit mergers for analysis
by CADE and the recurrence of transactions affecting digital markets.
These two elements impose a growing need to think about remedies
that incorporate the reality of these new structures and less resistance
to creative solutions63.
In this sense, hybrid or even exclusively behavioral remedies tend to
experience a growth for the next few years (as already verified by CADE’s

63. In a speech given in July 2019, the EU Commissioner Margrethe Vestager noted that in digital markets the
merging parties may not always be straightforward competitors and the issue may not necessarily be the
removal of a competitor but how markets interact and whether there are important input services such as
access to key technology. In her speech the Commissioner made reference to the Qualcomm/NXP case in
which the commitments related to ensuring the interoperability of the merged entity’s products with those of
rivals as well as access to patents under fair and reasonable terms (there are other examples of such remedies
at EU level in the high tech sector). Decision of 18th January 2018, Case M.8306.

104
Department of Economic Studies – DEE study64) which would point
to a trend of greater use of arbitration by CADE as a public enforcement
tool. Finally, as a third trend, it is possible to venture the use of arbi-
tration in merger control from new outlines that would extrapolate the
mere association with competitive remedies in the light of foreign ex-
periences, in the terms below.
In a recent case, March 2020, involving the acquisition of Aleris
Corporation by Novelis Inc.65, the U.S. Department of Justice agreed
to submit to arbitration a dispute over the definition of the relevant
market to be adopted in the case. The DOJ filed a process to block the
transaction and part of the concerns identified resided in how the rele-
vant market had been defined. The merging parties and the DOJ then
agreed to refer the dispute over market definition to arbitration. The
advantages identified by the DOJ in agreeing to submit the matter to
arbitration resided mainly in the possibility of submitting the matter
to an experienced arbitrator in competition law and economics. Such
consent can also be attributed to the negative judicial results obtained
by the DOJ in recent judicial disputes. At the end of the proceeding,
the arbitral tribunal confirmed that the market definition adopted by
the DOJ; however, the parties reached an agreement on the remedies
necessary to approve the case.

5. REFERENCES

ATS recorre a processo de arbitragem contra a B3. IstoÉ. Econo-

mia. November 18th, 2017. Available at: <https://istoe.com.br/
ats-recorre-a-processo-de-arbitragem-contra-a-b3/>. Accessed on:
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64. See Footnote 52.

65. See U.S. v. Novelis Inc. and Aleris Corporation. 1:19 – cv – 02033. Ohio Nothern. 503 (2020).

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______. Merger Case no. 08700.000344/2014-47. Applicants: Bromisa
Indústria e Comercial Ltda, ICL Brasil Ltda and Fosbrasil S.A. Judg-
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______. Merger Case no. 08700.004680/2016-30. Applicants: BM&F-
Bovespa S.A. – Stock Exchange, Markets and Futures, CETIP S/A
– Organized Markets. Judgement Session (DOU): 3.28.2017. (SEI
0316944).
______. Merger Case no. 08700.005719/2014-65. Applicants: América
Latina Logística S.A. and Rumo Logística S.A. Judgment Session
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______. Merger Remedies Guide.
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AGU. Merger Case no. 08700.005719/2014-65. Applicants: América
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______. Working Document 005/2020 Antitrust Remedies at CADE:
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DAVIES, S.; LYONS, B. Mergers and merger remedies in the EU: as-
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ical and Union Carbide. Decision of: May 3rd, 2000.
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3G Austria/Orange Austria. Decision of: September 20th, 2013.

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_________________________.Case no. COMP/M.7018 – Telefonica
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109
 Arbitration and Brazilian Infrastructure
Flávio Amaral Garcia1

1. INTRODUCTION2

The use of arbitration as a mechanism of settling disputes involving

public bodies is already a reality in the Brazilian infrastructure sector.
Brazil is at a crucial moment, in which the national development —
objective expressly stated in art. 1 of the Federal Constitution — depends
upon significant private and foreign investments in the infrastructure
sector3. Part of these investments is related to administrative contracts,
especially to contracts of concession and public-private partnerships.
The risk of all conflicts resulting from such administrative contracts
being mandatorily subject to the State jurisdiction can cause the with-

1. Professor of Administrative Law at Fundação Getúlio Vargas. PhD in Public Law from Uneversidade de Coim-
bra. State attorney of Rio de Janeiro. Lawyer and arbitrator.
2. The present paper counted on the valuable contribution provided by Luiza Brumati.
3. “Despite all uncertainty related to Brazil’s future, there are some permanent deficiencies whose solution becomes
even more relevant to the recovery strategy, as for instance, the necessity of investments in the national in-
frastructure. The Brazilian infrastructure shortage is expressive. Estimations by the World Bank[1] show
the necessity of anual investments at around 4.25% of the GDP to improve Brazilians’ life quality compared
to the current less than 2 %.” SEILLIER, M.; GADELHA, B. Retomada econômica no pós-COVID: o
investimento em infraestrutura como indutor de prosperidade. Portal Brasil: Economia e Governo, 2020.
Available at: <http://www.brasil-economia-governo.org.br/2020/07/13/retomada-economica-no-pos-covid-o-
-investimento-em-infraestrutura-como-indutor-de-prosperidade/#respond>. Accessed on: August 17th, 2020.
drawal of potential foreign investors and companies, or even the pricing
of the judicial risk at the time of the bid to participate in the public tender.
The flexibility of the procedure, with less formalist rules than those that
characterize the judicial proceedings (as long as their fundamental guaran-
tees are respected), more rapidity in dispute resolution, as well as the tech-
nical knowledge that determines the choice of arbitrators and their perfor-
mance, are advantages usually pointed out when arbitration is chosen and,
as a result, are in favor of its admissibility in the field of the administrative
relations and Public Law.
Arbitration consists of an extremely important dispute resolution mech-
anism in a globalized world, providing the parties with more legal security,
for they consensually elect this solution as an adequate means of seeking
their interests and settling their disputes.
The experts’ intervention in order to judge legal disputes, the rapidity of
the resolution and, as a consequence, the possibility of relieving the Judicia-
ry Power are virtues that turned arbitration into a mechanism that carries
out the Law effectively. The State does not have the monopoly on Justice,
which might be sought by other equally legitimate means.
The State shouldn’t be deprived of any such advantages of arbitration,
since it uses more and more administrative contracts to operationalize pub-
lic interests, which should supposedly be pursued.. To govern by contracts4 is
one of the pillars that support the administrative activity in the 21st century.
Public contracts in the infrastructure sector have actually been adopting
arbitration. The National Oil Agency (ANP)5, the National Land Transport

4. About the topic, see GAUDIN, J.-P. Gouverner par Contrat: l’action publique en question. Paris: Presses de
SciencesPo, 1999. Acentuando a contratualização da ação administrativa, ver CHEVALLIER, J. L’État
post-modern. 3. ed. Paris: LGDJ, 2008; RICHER, L. La Contractualisation comme technique de gestion des
affaires publiques. In: GONOD, P. (org.). L’Actualité Juridique: Droit Administratif. Paris: Dalloz, 2003;
GONÇALVES, P. Reflexões sobre o Estado Regulador e o Estado Contratante. Coimbra: Coimbra Editora,
2013; MELO, A. M. B. A ideia de contrato no centro do universo jurídico-político. In: GONÇALVES, P.
(org.). Estudos de Contratação Pública – I. Coimbra: Coimbra Editora, 2008. p. 8-21.
5. It is mentioned for instance the arbitration clause in contracts of the 16th Block Bid Round; 15th Block Bid Round;
13th Block Bid Round. Available at: <http://rodadas.anp.gov.br/pt/concessao-de-blocos-exploratorios-1>.

112
Agency6, the National Civil Aviation Agency7 and the National Electric
Energy Agency8, among others, have been constantly including arbitration
clauses9 in their contracts, expressly electing such a dispute resolution method.
This contractual provision, in all the different Brazilian infrastructure
sectors, is backed by Brazilian legislation and jurisprudence, which will be
observed in the following topics.

2. THE LEGISLATIVE ARCHITECTURE

OF ARBITRATION IN BRAZIL

In Brazil, the general regulation of arbitration resulted from the edi-

tion of Law no. 9.307/96, better known as Brazilian Arbitration Law.
However, since the aforementioned law did not expressly provide or
forbid the possibility of public bodies resorting to arbitration, there
was legal controversy regarding its suitability to public legal relations 10.

Accessed on: August 17th, 2020.

6. We can mention, among others, arbitration clause in the following contracts: Federal Freeway BR-101/RJ,
section: access to the Presidente Costa e Silva bridge (Niterói) – between RJ-071; and the Federal Freeway
BR- 101/SC, between Paulo Lopes (km 244+680) and the SC/RS border. Respectively available at: <http://
portal.antt.gov.br/index.php/content/view/38911/Edital_de_Concessao_n__01_2015___Ponte_Rio_Niteroi.
html> and <https://www.antt.gov.br/documents/359170/382172/Contrato.pdf/f9f5f5e6-0f9b-029d-0acd-
3f56a36cb8a7?t=1592832775773>. Accessed on: August 17th, 2020.
7. The Public Consultation no. 3/2020 from ANAC presented drafts of Concession Contract and its respective appen-
dixes regarding the concession of the enlargement, maintenance and exploitation of more than 20 airports. In
such drafts, there is an arbitration clause. Available at: <https://www.anac.gov.br/assuntos/paginas-tematicas/
concessoes/sexta-rodada/documentos/minuta-de-contrato>. Accessed on: August 17th, 2020.
8. The arbitration clause, for example, in the following contracts: UHE Santa Branca and PCH Paranoá. Re-
spectively available at: <https://www.aneel.gov.br/documents/10184//15102753//Contrato+de+Con-
cess%C3%A3o+de+Gera%C3%A7%C3%A3o+n%C2%BA+017-2016> and <https://www.aneel.gov.br/
documents/655808/15017491/Contrato+de+Concess%C3%A3o+de+Gera%C3%A7%C3%A3o+n+001-20
16/2c0ae458-74a9-c707-acf1-2e55598316b0?version=1.0>. Accessed on: August 17th, 2020.
9. The arbitration agreement, defined by art. 3 of Law no. 9.307/96 (Arbitration Law), is genus, whose species are the
arbitration clause and the arbitration commitment. The arbitration clause is the contract stipulation established
by the parties prior to any determined dispute. According to the Arbitration Law, the arbitration clause can
be full, art. 5, or empty, art. 6, caput. It will be full when the arbitration rules are already set and empty when
no sufficient elements provides how the arbitration procedure must be held. The arbitration commitment in
its turn, according to art. 9 of the Arbitration Law, is the agreement by which the parties adopt arbitration
as a means of settling a dispute involving one ore more persons, in or out of court.
10. The main allegation was that the adoption of arbitration proceedings depended on express law authorizing its

113
 This is not a polemical matter anymore. With the advent of Law
n . 13.129/15, which amended Law no. 9.307/96 (Brazilian Arbitra-
o

tion Law), paragraph 1 of chapter 1 categorically established that “[…]

direct or indirect Public Administration may use arbitration to settle
disputes related to available patrimonial rights”.
We emphasize that several sectorial laws – even prior to the amend-
ment of the General Arbitration Law – did already admit in an ex-
press way the use of arbitration. It is the case, for instance, of Law no.
8.987/9511, which refers to the public service concession contract, and
of Law no. 11.079/04, which deals with public-private partnerships12.
Arbitration is currently an alternative dispute resolution method
consolidated in the majority of the infrastructure sectors, with expressed
provision in its regulating laws. In the following lines, we will mention
some examples of such sectors.
The electric energy trading stage introduced arbitration in an express
way. Law no. 10.848/04, which regulates the electric energy trading,
establishes that the rules regarding eventual disagreements among the
members of the Electric Energy Trading Chamber will be determined
by the trading agreement and by its bylaws, which will be supposed to
deal with the arbitration mechanism and the arbitration agreement13.

use. There was also a possible violation of the principles of non-obviation of jurisdiction and unavailability of
public interest. In order to deepen this discussion, see: GRAU, E. R. Arbitragem e contrato administrativo.
Revista da Faculdade de Direito, Porto Alegre, n. 21, abr. 2017. ISSN 2595-6884. Available at: <https://
seer.ufrgs.br/revfacdir/article/view/72370>. Accessed on: August 17th, 2020.
11. Law no. 8.987/95, amended by Law no. 11.196/05, made clear in art. 23-A: “Article 23-A. The concession
contract may provide the use of private mechanisms in order to settle disputes arising from or related to the
contract, including the arbitration procedure, to be held in Brazil, in Portuguese, according to Law no. 9.307,
from September 23rd, 1996 (included by Law no. 11.196, from 2005).
12. Law no. 11.079/04 provides in its art. 11: “Article 11. The bid invitation shall contain a draft of the contract,
expressly appoint the bid subjection to the rules of this Law and observe, in which concerns paragraphs 3
and 4 of art. 15, the arts. 18, 19 and 21 of Law no. 8.987, of February 13th, 1995. The Law may also provide:
III – the use of private mechanisms in order to settle disputes, including the arbitration procedure, to be held
in Brazil, in Portuguese, according to Law no. 9.307, of September 23rd, 1996, in order to resolve conflicts
deriving from or related to the contract.”
13. Article 4 of Law no. 10.848/04 provides: “Article 4. It is authorized the creation of the Electric Energy Trading
Chamber – CCEE, non-profit legal entity of Pravite Law, under authorization of the Granting Power and

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 In the oil sector, following the international practice, arbitra-
tion has been widely employed either for dispute resolution involving
concession contracts14 or production sharing agreements15. Laws no.
9.478/9616 and no. 12.351/1017, respectively, expressly authorize the
use of arbitration for dispute resolution in both cases.
It is worth mentioning that the standard draft of the concession
contract for the exploitation and production of oil and natural gas of
the National Oil Agency for its 16th Concessions Round18 establishes
an arbitration clause that precisely determines the patrimonial rights
that would be considered available and that, as a result, could be re-
solved through arbitration. Such a detailing is not provided by arbitra-
tion in the sectorial legislation. We will address this topic again later.

regulation and inspection by the Electric Energy National Agency – ANEEL, in order to make possible the
electric energy trading on which rules this Law. [...] Paragraph 5. The rules for settling eventual disputes among
members of the CCEE shall be established by the trading agreement and by its bylaws, that shall deal with
the arbitration mechanism and agreement according to Law no. 9.307, of September 23rd, 1996. Paragraph
6. Public and semipublic companies, their subsidiaries or controlled, entitled to concession, permission and
authorization, are allowed to become members of the CCEE and to participate in the arbitration mechanism
and agreement according to paragraph 5 of this article.
14. “In the concession regime, the risk of investing and finding or not oil or natural gas belongs to the concession-
ary company, which is the owner of all oil and natural gas that happen to be found and produced in the area
that was granted. According to the model of contract, the concessionary must pay government take, such as:
signing bonus, payment for occupation or retention of the area (in the case of land blocks), royalties and, in
the case of large production fields, special participation.” Available at: <http://rodadas.anp.gov.br/pt/enten-
da-as-rodadas/os-regimes-de-concessao-e-de-partilha>. Accessed on: August 17th, 2020.
15. “In the sharing bids promoted by ANP, the winning company will be the one that offers to the Brazilian State
the largest share of oil and natural gas (i.e. the largest share of the oil surplus). The consortiums that exploit
the pre-salt layer are composed by Pré-sal Petróleo S.A. (PPSA), representing the Federal Government and
by the winning companies of the bidding rounds.” Available at: <http://rodadas.anp.gov.br/pt/entenda-as-ro-
dadas/os-regimes-de-concessao-e-de-partilha>. Accessed on: August 17th, 2020.
16. Law no. 9.478/1996 expressly provides in its art. 43: ‘‘Article 43. The concession contract shall faithfully reflect
the conditions of the bidding notice and the winning bid; and shall have as essential clauses: X – the dispute
resolution rules related to the contract and its execution, including international conciliation and arbitration.”
17. Law no. 12.351/10 provides in art. 29, item XVIII, the following: “Article 29. Are essencial clauses of the
production sharing agreement: [...] XVIII – the rules regarding dispute resolution, which may include con-
ciliation and arbitration.
18. “33.5. After the procedure provided in paragraph 33.2, if one of the parties considers that there are no conditions
for an amicable solution to the dispute or conflict referred to in that paragraph, the matter shall be submitted to
arbitration. [...]” Available at: <http://rodadas.anp.gov.br/arquivos/Round16/edital/contrato_R16_08082019.
pdf>. Accessed on: August 17th, 2020.

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 Another interesting point to be observed in the arbitration clause
of the aforementioned National Oil Agency’s standard draft is the fact
that the procedure will be administered by an arbitral institution which
will be chosen by the parties in agreement. If the parties do not agree,
the National Oil Agency will appoint one of the following institutions:
(i) the International Court of Arbitration of the International Chamber
of Commerce; (ii) the London Court of International Arbitration; or
(iii) the Permanent Court of Arbitration in The Hague. As seen, these
are notoriously acknowledged institutions which ensure the quality of
the arbitral procedure.
In other sectors, legislation made effective progress in the use of
arbitration. It is the case of Law no. 13.448/2017, which dealt with the
prorogation and new bids of partnership contracts in the airport, road
and railway sectors, with express provision to the use of arbitration
for settling disputes related to its discipline. Although it is turned ex-
clusively to these three sectors, the aforementioned law contemplated
aspects that are particularly interesting, including in the interpretation
of the other laws that deal with arbitration and Public Administration.
Law no. 13.448/2017 (i) attributed to the arbitral commitment a
character of pre-requisite for the feasibility of the new bid, in its art.15,
item III19; (ii) set an array of matters considered to be available pat-
rimonial rights20; and (iii) determined that the Executive Power Act

19. Article 15 of Law no. 13.448/2017 provides the following: “Article 15. The new bid of the sharing agreement
shall be conditioned to the application of the additional term with the present contracted party, in which
will appear, among other pertinent elements judged by the competent body or entity: III – the arbitration
commitment between the parties with provision to submit, to arbitration or other private dispute resolution
mechanism allowed by the applicable legislation, matter that involve the calculation of damages by the com-
petent body or entity, relating to the proceedings established by this Law.”
20. Article 31 of Law no. 13.448/2017 enacts: “Article 31. The disputes arisen from contracts in the sectors dealt with
by this Law after final decision by the competent authority, in which concerns available patrimonial rights,
may be submitted to arbitration proceedings or other alternative dispute resolution mechanisms. Paragraph
4. Are considered disputes regarding available patrimonial rights, according to this Law: I – matters related
to the reestablishment of the economic and financial balance of the contracts; II the calculation of damages
derived from the extinction or the transfer of the concession contract ; and III – default of contractual obli-
gations by any of the parties.”

116
will regulate the accreditation of arbitration chambers for the purposes
subject to its legal discipline21.
But that is not all. The normative universe regarding the use of
arbitration is not limited to the laws. Numerous federal public insti-
tutions, by means of a decree, regulated arbitration relevant aspects
under their respective jurisdictions.
The Federal Government regulated the matter, by means of Federal
Decree no. 10.025/19, welcomed by the doctrine22, determining top-
ics such as the subject of arbitration, general rules of procedure, arbi-
tration agreement, deadlines and costs, the choice of the Arbitration
Chamber and arbitrators and the arbitral award. Decree no. 10.025/19
was celebrated by the doctrine as a rule which consolidated even more
arbitration in Brazil.
It is relevant to highlight that two important states of the Brazil-
ian Federation also passed their normative acts regulating procedural
aspects of arbitration under their respective jurisdictions. It is the case
of the State of Rio de Janeiro, via Decree no. 46.245/18 and the State
of São Paulo, with the edition of Decree no. 64.356/19.
As we can see, it is possible to verify that arbitration used as a means
of settling disputes in the infrastructure sectors has consistent legislative
support and means to be effectively put into practice. Jurisprudence, in
its turn, seems to follow this evolution. This will be shortly examined.

21. Paragraph 5 of the aforementioned art. 31 of Law no. 13.448/2017 provides: “Paragraph 5. An act of the Exec-
utive Power shall regulate the accreditation of Arbitration Chamber in accordance with this Law.”
22. That is why the Infrastructure Arbitration Decree must be positively regarded, especially because it brings tech-
nical improvements and more legal security to the arbitration practice, which has been growing more and more
each day: disputes involving the Public Administration (both direct and indirect) and private agents contracted
to execute and/or operate infrastructure works. TOLEDO, L.; MEDINA, R.; SARRA, A.; FARAH, L. O
novo decreto da arbitragem de infraestrutura. Available at: <https://www.jota.info/paywall?redirect_to=//
www.jota.info/opiniao-e-analise/artigos/o-novo-decreto-da-arbitragem-de-infraestrutura-19102019>. Ac-
cessed on: August 18th, 2020.

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3. THE EVOLUTION OF BRAZILIAN
JURISPRUDENCE

Courts do not systematically recognize the viability of arbitration involv-

ing the Public Administration.
The Brazilian Federal Court of Auditors23 initially adopted a position
opposed to the adoption of arbitration by public bodies. Its first mani-
festation in this sense took place in 1993 with Decision no. 286/199324,
which originated from consultation of the then minister of Mines and
Energy. At that time, Law no. 9.037/96 (Brazilian Arbitration Law) had
not even been edited yet, which can help us understand the conservative
attitude of the Federal Court of Auditors.
However, even after the edition of Law no. 9.307/96, the Federal
Court of Auditors maintained its refractory attitude regarding the use of
arbitration, backing its constraining position by two main arguments: (i)
the exigency of specific formal law that authorizes the use of arbitration25;
(ii) the principle of unavailability of public interest.
By the way, we can observe that in two judgements the Federal Court
of Auditors completely disregarded the existence of sectorial legislation
providing the possibility of using arbitration26. In Decisions no. 1.796/2011

23. The Brazilian Federal Court of Auditors has express provision in art. 71 of the Federal Constitution, and it is
its responsibility to provide aid to the National Congress in the external control of the accounting, financial,
budgetary, operational and patrimonial audit of the Federal Public Administration. At present, The Brazilian
Federal Court of Auditors creates important administrative jurisprudence of several different subjects involv-
ing Public Administration, having been criticized by the doctrine due to some ultra vires activity. Minister
Bruno Dantas of the Brazilian Federal Court of Auditors dealt with this subject in a paper named O risco de
infantilizar a gestão pública. Available at: <https://oglobo.globo.com/opiniao/o-risco-de-infantilizar-gestao-pu-
blica-22258401>. Accessed on: August 19th, 2020.
24. TCU. Decision 286/93 – Plenary – Minute 29/93. Process no. TC 008.217/93-9. Interested party: Federal
Deputy Paulino Cícero, Minister of Mines and Energy. Entity: Companhia Hidroelétrica do São Francisco.
Rapporteur: ministro Homero Santos. J. 15.07/1993.
25. Decision no. 906/2003, Rapporteur. Min. Lincoln Magalhães da Rocha, J. 16.07.2003 and Decision 215/04,
TC no. 010.139/2002-0. Rapporteur. Min. Ubiratan Aguiar, Plenary, Session March 10th, 2004, Minute no.
07/2004, DOU 22.03.2004.
26. It is worth remembering that the legislative amendment expressly providing the possibility of using arbitration
with the public Administration only took place after the enactment of Law no. 13.129/15, which amended

118
and no. 2.573/201227, the Federal Court of Auditors ignored the legal
provisions to decide which economic and financial matters regarding the
tax authority of the Public Administration could not be dealt with via
arbitration for being unavailable public interest. At that time, Law no.
8.987/1995 (Public Services Concession Law), with the wording given by
Law no. 11.196/2005, as well as Law no. 10.233/2001 (Water and Land
Transports Law) expressly admitted the possibility of using arbitration.
The first advancement in the Federal Court of Auditors’ scope came
with Decision no. 2.094/200928, according to which the Federal Court of
Auditors understood that Petrobras, as a semipublic company was entitled
to use arbitration because it was subjected to the private companies regime.
Other advances in the Federal Court of Auditors’s scope may be
identified by the occasion of the second stage of airport concessions in
the cities of Guarulhos, Campinas and Brasília. The Court of Auditors
understood that arbitration procedures were admissible when the matter
merely involves patrimonial nature “[…] representative of the public in-
terest, secondary or instrumental”29.
In the field of the jurisprudence of Judicial Tribunals, the understand-
ing in favor of arbitration involving the public bodies has always proven
to be a consistent trend. Without intent of exhausting the judgements, it
is worth mentioning some important legal precedents.

Law no. 9.307/06

27. TCU. 2.573/2012. Rapporteur. Min. Raimundo Carreiro, writer for Decision Minister Walton Alencar. J.
Rodrigues Nardes, J. 26.09.2012.
28. Backed by the position assumed by the Superior Court of Justice, it was established that “[…] the contracts
made with PETROBRAS, no matter if the subject is related to the core-activity (trading and transport of
oil, for instance) or to the supporting activity (platform construction), find themselves under the aegis of the
private legal regime; from which derives the understanding that, differently from administrative contracts,
there is no dispute related to the possibility of PETROBRAS, as a semipublic company, establishing an ar-
bitration clause, in accordance with REsp n.º 606.345-RS STJ.” TCU. Decision no. 2.094/2009, Rapporteur.
min. José Jorge, J. 09.09.2009.
29. TCU. Decision no. AC-157-3/12-P. Process 032.786//2011-5. Rapporteur. min. Aroldo Cedraz, Plenary,
session 01.02.2012, Minute no. 3/2012. In the same line, see decision 2.145/2013.

119
 The oldest and most paradigmatic precedent is the Lage Case30. The
question began with the Decree-Law no. 9521, from 1946, which estab-
lished the incorporation of Organização Lage’s assets. The Decree insti-
tuted the competence of the Arbitral Tribunal to determine the amount
to be paid in damages31. In 1948, the Arbitral Tribunal delivered the
judgement, and the government sent the project of law to the Congress
in order to open a credit line for the payment. Nevertheless, the project
was shelved by decision of the Attorney General of the National Trea-
sury, who pleaded the unconstitutionality of the arbitration procedure.
Due to such circumstances, the heirs resorted to the Judiciary; and the
case, after several appeals, was submitted to the Supreme Court. In 1973,
which means long before the Arbitration Law, the Constitutional Court
decided that it was not possible to prevent the Federal Government from
submitting a matter that may be an object of transaction to an arbitral
solution. By unanimous decision, it decided favorably to the lawfulness
of the arbitral award to determine the amount to be paid in damages by
the incorporation of Organização Lage’s assets during World War II.
The Superior Court of Justice, in its turn, has been playing an ex-
tremely relevant role in the consolidation and acknowledgement of the
use of arbitration by the Public Administration. We will find below some
of the judgements.
By the occasion of the judgement of the Special Appeal no. 612.43932,
the Supreme Court’s Second Panel decided that the arbitration in a pow-
er purchase agreement would be possible, having as parties a semipublic
company, energy distribution concessionary, and a private company, even

30. STF, AI 52181, Rapporteur: Bilac Pinto, Judgement Date: 14/11/1973, Full Court, Publishing Date: DJ 15-02-1974.
31. Article 4 of Decree-Law no. 9.521 of 1946 instituted the competence of the Arbitral Tribunal: “Article 4. The
Federal Government shall pay for the incorporation of the assets and rights specified in article 2 an amount in
damages corresponding to the just value such assets and rights had at the time the Decree-Law no. 4.648, from
September 2nd, 1942 entered into force ; and the respective quantum shall be determined by the Arbitral Tribu-
nal to be instituted in accordance with art. 12 of the present Decree-Law.”
32. STJ, REsp 612.439/RS, Second Panel, Rapporteur. min. João Otávio de Noronha, j. 25.10.2005, DJ 14.9.2006.

120
without specific legislative authorization, for semipublic companies are
subject to the private companies regime. In this sense, a decision in the
Special Appeal no. 606.34533 and in the Appeal filed against the mono-
cratic decision of justice Luiz Fux in the Writ of Mandamus no. 11.30834.
It is also worth highlighting the important precedent of the Superior
Court of Justice in the Conflict of Jurisdiction no. 139.519/RJ35, which
examined the dispute between the National Oil Agency and Petrobras36,
with regard to which the Court should be entitled to assess matters re-
lated to the existence, validity and efficacy of the arbitration clause of the
exploitation contract, development and production of oil and natural gas.
The Superior Court of Justice was deferent to the Arbitral Tribunal, ap-
plying the principle of Kompetenz-Kompetenz37.
Brazilian jurisprudence has been honoring and acknowledging the va-
lidity of legislation that accepts the viability of arbitration involving the
public bodies. However, this does not mean that no remaining doubt or
even pending issues of greater consolidation of arbitration involving public
bodies still exist, as we will show.

4. SOME PARTICULARITIES OF ARBITRATION

INVOLVING PUBLIC ADMINISTRATION

The arbitration procedures in which the public bodies take part are sub-
jected to an influx of rules of Public Law that raise discussions that do

33. STJ, REsp 606.345/RS, Second Panel, Rapporteur. min. João Otávio de Noronha, J. 17.5.2007, DJ 8.6.2007.
34. STJ, AgRg in MS 11.308/DF, First Section, Rapporteur. min. Luiz Fux, J. 28.6.2006, DJ 14.8.2006.
35. STJ, Conflict of Jurisdiction No 139.519/RJ. Rapporteur. min. Napoleão Nunes Maia Filho, DJ. 10.11.2017.
36. In the referred judgement, minister Regina Helena Costa categorically stated the possibility of the Public Ad-
ministration being a party in arbitration: “Every time the Administration contracts, there is availability of patri-
monial right, so there can be an arbitration clause, which does not mean there is availability of public interest.”
37. As we know, the Kompetenz-Kompetenz principle refers to the arbitrator’s competence to judge his own com-
petence, resolving arising challenges to his capacity to judge, to the extent of his powers, to the arbitrability
of the dispute, assessing the efficacy and the extent of the powers granted by the parties, either by means of
arbitration clause or arbitration commitment.” FONSECA, R. G. da. O princípio competência-competência
na arbitragem: uma perspectiva brasileira. Revista de Arbitragem e Mediação, [s. l.], v. 9, p. 277-303, 2006.

121
not take place in private arbitration; after all, legal entities of Public Law
and those of Private Law have distinguished ways of constituting their
respective wills and, as a consequence, of dealing with their resulting acts
and contracts.
Furthermore, there are rules of Public Law that have legal consequences
that are not a subject of discussion in private arbitration. We are going to
examine some relevant aspects that have been debated by Brazilian scholars.

4.1 The choice of arbitrators and the arbitration chamber38

The adoption of arbitration in administrative contracts creates the necessity

to harmonize it with some rules of Public Law which are more restrictive
and constraining to the autonomy of the parties. If in private relations
the choice of the Arbitration Chamber depends exclusively on the will of
the parties, this does not happen when it comes to arbitration procedures
involving a public body. The main reason why freedom of choice suffers
restrictions is the principle of equity.
All private entities that somehow establish some sort of legal relation
with public bodies have the subjective right to an equitable treatment.
Thus, the public will is obedient to rationality and to a constituting pro-
cess different from that of the private will.
The public choices, apart from being motivated, may not cause a dif-
ferent treatment that creates continuous advantages to certain private par-
ties, systematically electing, for instance, the same Arbitration Chamber
to settle their disputes. Such an observation does not allow us to conclude
that the Arbitration Chamber election process should have a level of objec-
tivity that could accept comparison and choice by means of public tender.

38. Subject discussed in the paper “Comentários ao Decreto Federal n° 10.025/19”. GARCIA, F. A.; MOREIRA,
E. B. In: Direito Administrativo e Alternative Dispute Resolution. CUELLAR, L.; MOREIRA, E. B.;
GARCIA, F. A.; CRUZ, E. S. Belo Horizonte: Fórum, 2020, p. 226-233.

122
 As we have already adduced before39, public tenders are definitely not
the adequate way of promoting the choice of the institution that will be
responsible for the arbitral proceedings. On the other hand, as we previ-
ously stated, such a choice must be motivated and, above all, open to all
those potentially interested who fulfill the requisites previously defined
by the Public Administration.
Along with equity, the public bodies also owe obedience to the effica-
cy, justifying the adoption of certain parameters that may make possible
the election of experienced Arbitration Chambers with reputed aptitude.
It is even better that such parameters and requisites should be defined ex
ante, i.e. in abstract and general normative acts which guide public choices
when the arbitration clause or the arbitration commitment is concluded.
Registration has been figuring as the harmonizing solution between
the principle of equity (making possible that any Arbitration Chamber
can have the right to register) and the principle of efficiency (by defining
the minimum requisites that ensure high security and quality standards).
The previous registration of Arbitration Chambers solution was an option
chosen by the States of Rio de Janeiro (Decree no. 46.245/201840) and São
Paulo (Decree no. 64.356/201941). It consists basically of establishing mini-
mum requisites for the acceptance of the Arbitration Chambers that show
interest in participating in future disputes involving Public Administration.
It would be up to one of the contractors (the service provider), at the

39. “[...] the formal bidding process is not the adequate way of ensuring an effective choice of the Arbitral Chamber,
let alone the arbitrators. If we try to regard the bid as a logical and mandatory precedent, we will be obliquely
annihilating the arbitration in the Public Administration itself and all the undeniable benefits deriving from
it in the administrative legal relations.” GARCIA, F. A. Licitações e contratos administrativos: casos e
polêmicas. 5 ed. São Paulo: Malheiros, 2018. p. 332
40. Article 14 – The institutional arbitral body, national or foreign, shall be previously registered in the State of Rio
de Janeiro and respect the following requisites: I – availability of representation in the state of Rio de Janeiro;
II – have been regularly operational for at least five years; III – be regularly functioning as an arbitral institu-
tion; IV – have notorious aptitude, competence and experience in the administration of arbitral proceedings,
which shall be proven by at least fifteen previous arbitration procedures in the year prior to the registration.
41. Article 13 – The registration of the Arbitration Chambers consists of the creation of a referring list of the en-
tities that fulfill minimum requisites for being appointed to administer arbitration proceedings involving the
direct or indirect Public Administration and its bodies.

123
time of the conclusion of the administrative contract or arbitration clause,
to choose among the registered Chambers. As we previously noticed42,
the possibility of a contractor (the service provider) participating in the
choice of the Arbitration Chamber is meritorious and such a decision
should not be made unilaterally in the Public Administration. Allowing
a private party to participate in the choice of the Arbitration Chamber
realizes the consensus principle, undeniably providing additional legiti-
macy to the dispute resolution procedure.
The federal model accepted the accreditation solution (registration),
as shown in art. 10 of Decree no. 10.025/2019, establishes as minimum
requisites for the Arbitration Chambers: (i) having been regularly func-
tioning for at least three years; (ii) having reputed aptitude, competence
and expertise in the conduction of the arbitral proceedings; (iii) having
their own bylaws available in Portuguese.
Art. 11 of the Federal Decree no. 10.025/19 provides that the arbitration
agreement will be able to stipulate that the appointment of the Chamber to
be responsible for the arbitral proceeding will be up to one of the contrac-
tors (the service provider), among those previously accredited. Paragraph 1
of art. 11 of Decree no. 10.025/2019 provides that Public Administration
will be able to object, within fifteen days, to the choice of the Chamber by
the private party. In such case, the claimant will appoint another accredited
Chamber within fifteen days from the day his objection was announced.
With regard to the choice of arbitrators, the prevailing understanding
has been the fact that there is evident discretionary room for the public
body to choose the arbitrators, as observed in the Statement recently ap-
proved at the First Administrative Law Day of the Council of the Fed-
eral Judiciary43.

42. “[...] Being arbitration a mechanism that materializes consensus, the definition of Arbitration Chamber must
preferably be subject of a decision agreed by the parties, not defined a priori and unilaterally, by one of the
parties.” GARCIA, F. A. Licitações e contratos administrativos: casos e polêmicas. 5 ed. São Paulo: Mal-
heiros, 2018. p. 339.
43. ID 2968 and 2842 – From the First Administrative Law Day of the Council of the Federal Judiciary: “The
appointment and acceptance of arbitrators by the Public Administration do not depend on formal public
selection, like auctions or bids, they must instead be previously reasoned, in writing, taking into account the

124
 This discretion in the choice of an arbitrator is, nonetheless, unlimited.
However, it is contrasted by the appointed arbitrator’s own expertise and
by the demonstration of their knowledge regarding the matter of dispute
(positive requisites), as well as potential conflicts of interest with the par-
ties or even with the subject of the dispute (negative requisites).
Objectively: the appointment of arbitrators by the public bodies shall
be subject to a motivation capable of comparing their competence, ex-
pertise and experience with the subject of the dispute to be settled via
arbitration. Art. 12 of Decree no. 10.025/2019 provides the requisites for
the choice of arbitrators44.
The sole paragraph of art. 12 of Decree no. 10.025/2019 was con-
cerned with facilitating the access to Brazil of arbitrators and sup-
porting teams living abroad, exclusively to participate in arbitration
hearings based in the country, qualifying their entrance as a business
trip, according to paragraph 3 of art. 29 of Decree n o. 9.199/201745.

4.2 Publicity

Law no. 9.037/1996, having its wording determined by Law no. 13.129/2015,
provides in paragraph 3 of art. 2 that the arbitration which has the Public
Administration as one of the parties shall respect the principle of publicity.

most relevant elements.” These statements are not biding to form jurisprudence, but they represent an under-
standing resulted from a broad debate with both legal and academic communities.
44. The requisites are the following: (i) having full civilian capabilities; (ii) having knowledge compatible with the
nature of the dispute; (iii) not having, with the parties or the submitted dispute, relations that characterize
the possibilities of impeachment or suspicion of the judges, according to the Civil Procedure Code, or other
conflicts of interest established in the legislation or in internationally accepted guidelines, or in the rules set
by the chosen arbitration institution.
45. The visitor’s visa may be granted to the visitor who comes to the country for a short stay, without intention
to set up residence, on tourism, on business, transit, to perform artistic or sports activities, or in exceptional
situations of national interest. [...] Paragraph 3. For the purposes referred to in this article, business activities
comprise the participation in meetings, fairs and corporate events, press coverage or shooting and reports,
the prospection of comercial opportunities, the signature of contracts, audit or consulting activities, being a
member of an airplane or ship crew, as long as the enactment of paragraph 1 is observed and the activity to
be performed does not exceed the time enacted in art. 20.

125
This could not have been different. Publicity being one of the principles
that inform the participation of the Public Administration, according to
art. 37 of the Federal Constitution, in its caput, arbitrations cannot be
secretive or occult.
The publicity of arbitration is therefore the rule. The question that has
been subject of discussion consists of identifying if it is up to the public
body or to the arbitral institution to promote it.
Decrees no. 46.245/201846 and no. 64.356/201947 of the State of Rio de
Janeiro and São Paulo, respectively, decided to bestow this responsibility
upon the Public Power. Decree no. 10.025/2019 of the Federal Govern-
ment, in its turn, in paragraph 1 of art. 3, atributes to the Arbitral Chamber
the duty of “[…] providing the access to information referred to in item
IV of the caput”, except if it is determined otherwise.
The best option seems to be the understanding that it is the States’ duty
to give access to the information regarding the arbitration. This is due to
some reasons: (i) the Chambers are private institutions with modus operandi
characterized by discretion and confidentiality; (ii) the Public Administration
has a culture of publicity, with active and passive duties with regard to the
transparency of data and information that it possesses; and (iii) the Public
Power has an institutional structure to meet the demand for publicity48.
The prevailing doctrinal understanding seems to argue that it is up to
the Public Power to make public, as observed in this recent statement ap-
proved by the occasion of the First Administrative Law Day of the Coun-

46. “Article 13 – The acts of the arbitration procedure shall be public, excepted the legal possibilities of secrecy, legal
confidentiality, trade secrets resulting from direct exploitation of economic activity by the State, individual or
private entity that has any connection with the Public Power. [...] Paragraph 2 – The State Attorney’s Office
shall make the acts of the arbitration procedure available through requirement from an eventual interested party.”
47. “Article 12 – The acts of the arbitration procedure shall be public, excepted the legal possibilities of secrecy or
legal confidentiality. Paragraph 2 – The State Attorney’s Office shall make the acts of the arbitration proce-
dure available on the internet.”
48. Reflections taken from the paper “Comentários ao Decreto Federal n° 10.025/19”. GARCIA, F. A.; MOREI-
RA, E. B. In: Direito Administrativo e Alternative Dispute Resolution. CUELLAR, L.; MOREIRA, E.
B.; GARCIA, F. A.; CRUZ, E. S. Belo Horizonte: Fórum, 2020. p. 226-233.

126
cil of the Federal Judiciary: “The Public Administration shall promote the
publicity of arbitration procedures to which it is a party, in the terms of
the Access to Information Law”49.

4.3 Payment of costs

Another question that is worth highlighting refers to the arbitration

costs. The understanding that has been prevailing is that it is up to the
private party to pay the costs in advance. The reason for this lies in the
budgetary restrictions, which prevent the Public Administration from
providing immediate payment of the costs and other initial expendi-
tures relating to arbitration procedures.
Th e Brazilian Arbitration Law failed to address the topic, but
paragraph 2 of art. 31 of Law no. 13.448/2017 provides that “[…] the
costs related to the arbitral procedure, when installed, shall be paid in
advance by the private partner; and, when determined, they shall be
restituted according to ensuing final deliberation in the scope of the
arbitration. In the same way, there is art. 9 of the Federal Decree no.
10.025/2019.
Although the chosen solution, from our point of view, is asym-
metric, causing inequality in the arbitration procedure, it is true that
it provides legal security to the economic agents, who already know
in advance that they will be urged to pay for the inicial costs of the
arbitration procedure. Finally, even though it is not the ideal solution,
it is undeniable the rules of the game are already set.
Decree of the State of Rio de Janeiro no. 46.245/201850 and De-
cree of the State of São Paulo no. 64.356/201951, to a certain extent,

49. ID 2430 and 2962 – From the First Administrative Law Day of the Council of Federal Judiciary.
50. “Article 9 – The expenditures on arbitration shall be paid in advance by one of the contractors (the service pro-
vider) when they are the arbitration claimant, including arbitrators’ fees, eventual expenditures on experts’
analysis and other expenditures related to the procedure.”
51. “Article 9 – The State Attorney’s Office shall be responsible for the wording of the arbitration agreements that
shall be used by the direct Public Administration and its entities. Paragraph 1 – The arbitration agreements
shall contain the following elements: 5. advance payment of the expenditures by the claimant; […]”

127
reduced this asymmetry when they determined that the Public Ad-
ministration should be responsible for paying the costs when it is the
arbitration claimant.

4.4 Objective arbitrability

Verifying the objective limits of what can be arbitrable consists of an even

more complex challenge of our time. It is in the so-called objective arbi-
trability that lies the main debate involving Brazilian public arbitration.
In Brazilian Law, art. 1 of the Law no. 9.307/1996 was adopted as a
criterion of the available patrimonial rights in order to determine what
can be arbitrable.
The legal relations established by legal entities in Public Law are filled
with several available patrimonial rights which can, therefore, be sub-
mitted to arbitration. In order to understand the criterion adopted, it is
preferable to examine patrimonial rights and available rights separately.
Patrimonial rights are those economically assessable and are different
from non-patrimonial rights, which, in opposition to the former, admit
economic valuation, as we can observe in personality rights and pure
family rights. Administrative contracts essentially defend patrimonial
rights. Price, forms of payment and other elements that constitute the
notion of economic and financial balance of the adjustment are rights
susceptible to economic valuation52.
To prove this fact, Law no. 13.140/2015 – which rules on the me-
diation between private agents as a means of settling disputes and on
self-determination of conflicts in the scope of the Public Adminis-

52. Diogo de Figueiredo Moreira Neto states that: “All the interests and rights derived from those that have pat-
rimonial expression, i.e. that can be monetarily quantified, are in trade and constituted for this reason, and
normally as object of the contract that aims at providing the Administration or its delegates with the in-
strumental means they need to satisfy the final interests that justify the State itself are available.” NETO,
D. F. M. Arbitragem nos contratos administrativos. In: GARCIA, F. A. (coord.). Revista de Direito da
Associação dos Procuradores do Novo Estado do Rio de Janeiro XVIII/33-34 (“Direito Arbitral”), Rio de
Janeiro, Lumen Juris, 2006.

128
tration – makes clear, in its art. 32, paragraph 5, that “[…] under the
jurisdiction of the Chambers, subject dealt with in the caput, we un-
derstand the prevention and resolution of conflicts between the Public
Administration and private agents that involve economic and financial
balance” – which reinforces the currently adopted premise. The rights
resulting from default by one of the parties in the contractual relation
and which may be remediable by means of economically measurable
damages are also patrimonial.
Available rights are, in their turn, those which can be contracted
and negotiated by the parties and represent their respective wills in
the definition of their interests. There are, on the other hand, legal
relations whose constitution or extinction are not subject to the will
of the parties, typifying unavailable rights or interests.
As a result, interests and rights contractable and negotiable by the
Public Administration are available and susceptible of resolution by
means of arbitration. It would not be congruent or logical to presup-
pose that rights are available to bind the parties in a contractual rela-
tion of administrative nature characterized by reciprocal manifestation
of their will regarding its content and unavailable for the adoption of
the arbitral solution53.
There is no waiver of right by the Public Administration when it
accepts arbitration as a means of settling a dispute deriving from an
administrative contract. In the exercise of its freedom of choice, and
analyzing the parameters legally established, the arbitral tribunal sim-
ply prefers the State jurisdiction. It is the way of resolving the dispute
that assumes a distinct feature.
Normally, if the right is patrimonial (economically assessable) and
available (negotiable according to the will of the parties), arbitration

53. As explained by Alexandre Santos de Aragão: “It does not make sense to understand that the rights are available
so that they can be established through the conclusion of an agreement (administrative contract) and, on the
other hand, understand that they are unavailable to prevent disputes regarding rights allegedly constituted by
this contract from being willingly submitted to arbitral solution.” ARAGÃO, A. S. de. Arbitragem e regu-
lação, Revista de Arbitragem e Mediação 27/70, São Paulo: RT, 2010.

129
takes place as a legitimate dispute resolution mechanism in administrative
contracts.
There is consensus in the Brazilian legal framework about what can be
arbitrable. Matters relating to the reestablishment of the economic and fi-
nancial balance of the contracts, to the amount in damages resulting from
the extinction or the transference of the concession contract, and also from
default of contractual obligations by any of the parties, have already been
considered arbitrable by the legislator, according to paragraph 4 of art. 31
of Law no. 13.448/17, having been reinforced by art. 2, sole paragraph of
Decree no. 10.025/19.
This does not mean that only these matters are suitable for arbitration.
As long as the right is patrimonial and available, the dispute can be solved
via arbitration. There is an upcoming trend towards arbitration clauses that
can list other arbitrable disputes by exemplifying them.

4.5 Arbitral award and court-ordered payment

In case the private party wins the arbitration procedure and the award im-
poses the payment of a pecuniary obligation to the Public Administration
and its bodies, the writs of payment regime shall be necessarily observed.
Such is not the case when the arbitration involves a body of the indirect
Public Administration with legal personality in Private Law like, for exam-
ple, semipublic or public companies.
As we had the opportunity to expose, in an art. jointly written with pro-
fessor Egon Bockmann Moreira, the writs of payment consist of the way
employed by the Judiciary Power to request an amount owed by the Public
Treasury resulting from an unappealable decision, according to art. 100 of
the Federal Constitution. The president of the Court, after being requested
by the judge in charge, requires the public body in debt to provide payment,
which shall be included in the following year’s budget. The payment takes
place in a chronological way, according to the nature of the debt54.

54. Subject addressed in the paper “Comentários ao Decreto Federal nº 10.025/19”. GARCIA, F. A.; MOREIRA,

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 Thus, as to arbitration awards, it will be necessary that the party files
a lawsuit in order to execute the arbitral award, at the end of which the
assigned judge will take the necessary measures so that the debt figures
in the payment order. In this regard, the arbitration award does not differ
from a final judicial decision that convicts a public body.
Court-ordered payment finds axiological fundament in the principle
of equity. It was sought to create a procedure that avoids preferences or
privileges at the time of the payment of debts of public bodies, indistinctly
reaching arbitration or judicial awards.
Besides, it is undeniable that the Brazilian court-ordered payment sys-
tem greatly worsens the creditor’s situation, provided that it is usually a
lengthy process. It tends to create serious difficulties for receiving amounts
owed. It generates extraordinary costs and discourages public contracts
(or causes extraordinary pricing).
What is new about the matter is the interesting solution provided by
Federal Decree no. 10.025/2019, which, in paragraph 2 of art. 15, express-
ly provides three hypotheses of receiving additional government-ordered
payments as long as agreed by the parties55.

5. CONCLUSION

Celerity is, as widely known, recognized as one of the great virtues of

arbitration when compared to the judicial dispute resolution way. Set-
tling the dispute in as short a time as possible is a measure that ensures
legal security as well as efficiency in the public contractual relations; after
all, the prolongation of disputes represents significant additional costs

E. B. In: Direito Administrativo e Alternative Dispute Resolution. CUELLAR, L.; MOREIRA, E. B.;
GARCIA, F. A.; CRUZ, E. S. Belo Horizonte: Fórum, 2020. p. 226-233.
55. Paragraph 2. The enactment of the caput does not stop, as long as it is agreed by the parties, the compliance with
the arbitration award from taking place by means of: I- Instruments provided in the contract that replace dam-
ages, including the mechanisms of economic and financial rebalance; II – compensation of assets and duties
that do not involve tax payment, including fines, according to art. 30 of Law no. 13.448, from June 5, 2017; or
III – attribution of payment to a third party, according to the possibilities envisaged by Brazilian legislation.”

131
of transaction for both contractors, not to mention the loss suffered by
society and users.
In long-term and complex contracts – like concession and public-private
partnership contracts – disputes must be anticipated and even predictable.
Legal security is not a synonym of absence or conflict, but it consists of the
manner, the way, the mechanism, able to deal with and resolve disputes.
Conflict governance is therefore a crucial subject in any long-lasting, and
of course, changing relation.
In the infrastructure sector, investors seek quick answers to their de-
mands and potential conflicts. As we sought to demonstrate, Brazil has
got a solid legal and jurisprudential framework that provide a support to
arbitrations involving Public Administration, which is proven by the ar-
bitration procedures currently afoot in the most varied economic areas.

132
 International Commercial Arbitration
and Compliance Disputes in Brazil
Alice Moreira Franco1

1. INTRODUCTION

Over the past few years, China has had an impressive impact in Latin
America. In Brazil, especially, business relationships with China have been
greatly enhanced since the 2010s. The growth of these cross-border busi-
ness transactions and the enactment of the Anticorruption Act (Law no.
12.846/2013), among other reasons, led Brazilian and international market
players to demand the implementation and strengthening of compliance
practices. More recently, a new set of compliance rules was created after
the enactment of the General Data Protection Act (Law no. 13.709/2018),
regulating the use of personal data, which is an increasingly tradable asset.
More stringent compliance rules have directly caused an increase in liti-
gation seeking to make companies liable for their lack of or non-compliance
with their own compliance and governance policies. As a result, interna-

1. Partner at Ferro, Castro Neves, Daltro & Gomide Advogados (FCDG). LLM from Harvard Law School.
Member of the Data Protection and Privacy Committee of OAB/RJ, Special Committee on Data Protec-
tion of the National OAB, Arbitration and Mediation Committee of ICC Brazil and the Permanent Forum
on Arbitration Law of EMERJ. Admitted to the New York State Bar. President of the Board of Directors
of Darcy Vargas Foundation.
tional commercial arbitration appeared as a significant method to resolve
those disputes. Nowadays, with the growth of collective transactions, class
arbitration appears as a controversial new proceeding whose several benefits
potentially make it an effective mechanism to resolve collective conflicts.

2. THE RISE OF COMPLIANCE WITHIN BRAZILIAN

COMPANIES: FROM THE ANTICORRUPTION ACT
TO THE GENERAL DATA PROTECTION ACT

Trade between Brazil and China expanded considerably in the recent past,
going from $3.2 billion in 2001 to $98.9 billion in 2019. China became
Brazil’s main trading partner in 2009 and the leading exporter to Brazil
in 2012. China is major source of foreign direct investment into Brazil,
with a growing presence in key industries such as power generation, oil,
telecommunications, financial services, and manufacture2,3.
The ongoing Covid-19 crisis has slowed down the global economy but,
despite the plunge in the value of exports due to the depreciation of Bra-
zil’s currency against the US dollar, the overall volume of goods exported
in July 2020 grew compared to July 2019, especially agricultural products
(21.1% increase). China was the main driver of this considerable growth,
purchasing 15.4% more Brazilian goods in the first seven months of 2020
compared to the same period in 20194.

2. Section about the People’s Republic of China on the website of Brazil’s Ministry of Foreign Affairs. Available
at: <http://www.itamaraty.gov.br/en/ficha-pais/5988-people-s-republic-of-china>. Accessed on: September
30th, 2020.
3. Brazil-China relations are not only bilateral but also include multilateral international cooperation mechanisms
such as the BRICS, G20, WTO and BASIC. Relations were elevated to “Global Strategic Partnership” level
through the 2012 Brazil-China Ten-Year Cooperation Plan (2012-2021) and the 2015 Joint Action Plan.
Brazil and China Joint Action Plan, published on 20th May 2015. Available at: <https://www.defesanet.com.
br/en/br_cn_e/noticia/19181/BR-CN%E2%80%94-Joint-Action-Plan-BRAZIL-and-CHINA-2015-2021/>.
Accessed on: September 30th, 2020.
4. VILELA, P. R. “Brazil balance of trade sees record surplus in July: lower imports and a depreciated currency
explain the result” published on the Empresa Brasil de Comunicação website on 4th August 2020. Available
at: <https://agenciabrasil.ebc.com.br/en/economia/noticia/2020-08/brazil-balance-trade-sees-record-surplus-

136
 Brazil’s increased international economic significance naturally puts
more pressure on Brazilian companies to adjust to international com-
pliance policies and procedures. In Brazil, this process occurred in a
very peculiar political and regulatory setting in which, in the wake of
“Operation Car Wash”5, society demanded that companies and their
managers be held accountable for losses resulting from their failure to
adopt anticorruption compliance practices6.
Under enormous social pressure for change in the wake of widespread
demonstrations, the Anticorruption Act (Law no. 12.846/2013) became
Brazil’s most significant statute in furtherance of compliance practices,
dramatically changing the accountability of businesses. Among myriad
novelties, the Anticorruption Act extended to companies the liability
that previously fell solely on their employees, introducing fines of up to
20% their annual revenue.
The Anticorruption Act extended administrative and civil liability
to legal entities without excluding the individual liability of their direc-
tors or officers or of any natural person who perpetrates, coperpetrates
or participates of the wrongdoing.
Directors and officers will be held accountable for any wrongdoing
only to the extent of their culpability. Under the new statute, a company
is held objectively liable for the actions of its representatives, meaning
that neither intent nor culpability needs to be proven for the legal entity
to be held accountable. As a renowned legal scholar explained:

july>. Accessed on: September 30th, 2020.

5. Operation Car Wash is the largest anticorruption investigation in Brazil’s history and uncovered an enormous
bribery scheme involving Petrobras, which at one point was the fifth most valuable company in the world. The
operation also led to massive fines and economic and reputational harm for some of Brazil’s major corpora-
tions. Despite having caused a surge in anticorruption efforts, Operation Car Wash has been severely criticized
for its breach of civil principles of criminal procedure and of fundamental constitutional rights of defense.
6. CLAYTON, M. Entendo os desafios de Compliance no Brasil: um olhar estrangeiro sobre a evolução do Com-
pliance anticorrupção em um país emergente. In: DEL DEBBIO, A.; MAEDA, B. C.; AYRES, C. H. S.
(coord.) Temas de anticorrupção e compliance. Rio Janeiro: Elsevier, 2013, p. 152.

137
 […] the Act compels [companies] to structure their activities in
such a way that prevents any agent linked to them from engaging
in corrupt conducts”, so that “[the] liability of a legal entity will ul-
timately result from its failure to implement appropriate controls7.

The alarming financial and reputational repercussions faced by major

Brazilian businesses led stakeholders, shareholders and clients to pres-
sure them into implementing and strengthening compliance programs.
This market pressure, a byproduct of Operation Car Wash and of the
enactment of the Brazilian Anticorruption Act, was the main element
behind the nationwide corporate compliance drive.
Businesses immediately responded to the problem using a preven-
tive approach. A Deloitte and ICC Brazil report8 clearly showed the
development of compliance and good business practices in Brazil. Ac-
cording to that report, in 2012-2014 only 24% of Brazilian companies
had a compliance program, while in 2018-2020 that figure jumped to
65%. And even more companies began assessing the risk within their
business relations: in 2012-2014, only 18% of companies surveyed were
worried about the compliance practices of their contractors and business
partners, and now 62% assess their entire business chain so as to cre-
ate a more cohesive, responsible and cooperative system. In less than a
decade, concern with compliance moved from the fringes of Brazilian
legal practice to its very core.
The General Data Protection Act (LGPD – Law no. 13.709/2018)
became effective in August 2020 and created a new “compliance chal-

7. JUSTEN FILHO, M. A ‘Nova’ Lei Anticorrupção Brasileira (Lei Federal 12.846). Informativo Justen, Pereira,
Oliveira e Talamini, Curitiba, n. 82, Dec. 2013. Free translation of the following original text: “[...] a Lei
impõe é [que as empresas] estruturem as suas atividades de modo a impedir que algum sujeito a elas vinculado
pratique condutas de corrupção”, de modo que “[a] responsabilização da pessoa jurídica decorrerá, em última
análise, da falha na implantação de controles apropriados”.
8. Research Integridade corporativa no Brasil: evolução do compliance e das boas práticas empresariais nos
últimos anos. Deloitte’s website. Available at: <https://www2.deloitte.com/br/pt/pages/risk/articles/integ-
ridade-corporativa-evolucao-do-compliance.html>. Accessed on: September 30th, 2020.

138
lenge” to Brazilian businesses. Said Act established the legal bases in
which organizations may process9-10 personal data, meaning any piece
of information that relates to an identified or identifiable natural per-
son. Personal data now may be processed only in a legitimate and spe-
cifically allowed basis. Although many may criticize its implementation
cost, the LGPD seeks to strike a balance between being severe enough
to offer individuals a clear and tangible protection of their personal in-
formation and being flexible enough not to hinder business activities
and public interests.
The LGPD aims at several targets depending on the interpretation
perspective. From a social standpoint, it can be perceived as a tool to
control political power, because, as professor Yuval Harari explained,
the concentration of data is a potential threat to democracy and to any
organization, private or public, that controls data will be the actual social
ruler11. From an individual standpoint, the LGPD grants a number of

9. The LGPD lists ten circumstances allowing an entity to process personal data. “Art. 7 Personal data may be
processed only in the following circumstances: I – with the data owner’s consent; II – so that the controller
complies with a statutory or regulatory requirement; III – by the government, to treat and share data as nec-
essary to implement public policies established in statute and regulations or based on contracts, agreements or
similar instruments, in compliance with the provisions in Chapter IV in this Act; IV – by research institutions
for research purposes, using data anonymization whenever possible; V – whenever necessary in performance
of a contract or of preliminary procedures related to a contract to which the data owner is party, at the data
owner’s request; VI – in the regular exercise of rights in a judicial, administrative or arbitration proceeding,
the latter pursuant to Law no. 9.307, dated September 23rd, 1996 (Arbitration Act); VII – to protect the life
or health of the data owner or of a third party; VIII – in protection of health and only in relation to a pro-
ceeding performed by health professionals, health services or health authorities; IX – when necessary in the
legitimate interest of the controller or of a third party, except where the data owner’s fundamental right to the
protection of personal data prevails; or X – in protection of credit, including as established in applicable law”.
10. Art. 5, X, LGPD: “Processing” is defined as “any operation carried out with personal data, such as those that
concern the collection, production, receipt, classification, use, access, reproduction, transmission, distribution,
processing, filing, storage, deletion, evaluation or control of the information, modification, communication,
transfer, dissemination or extraction”.
11. Article by Yuval Noah Harari in The Atlantic, Why Technology favors Tyranny? Available at: <https://www.
theatlantic.com/magazine/archive/2018/10/yuval-noah-harari-technology-tyranny/568330>. Accessed on:
September 30th, 2020. “Currently, humans risk becoming similar to domesticated animals. We have bred
docile cows that produce enormous amounts of milk but are otherwise far inferior to their wild ancestors.
They are less agile, less curious, and less resourceful. We are now creating tame humans who produce
enormous amounts of data and function as efficient chips in a huge data-processing mechanism, but
they hardly maximize their human potential. If we are not careful, we will end up with downgraded

139
rights over one’s personal data whose violation may make the control-
ler and the processor jointly and severally liable for information secu-
rity breaches and/or for improper and unauthorized use of data or for
non-compliance with the law. From a business standpoint, the LGPD
must be seen as another compliance rule.
The LGPD imposes a general compliance requirement on all busi-
nesses that collect, use or store any personal data and not only on big
companies that collect copious amount of complex data as part of their
everyday operations and that rely on analytics to run the necessary in-
formation of their businesses.
In similarity with the European General Data Protection Regu-
lation (GDPR), the LGPD includes an extra-territoriality provision,
meaning that the duty to comply extends beyond Brazilian territory.
The LGPD applies to any processing operation carried out by a nat-
ural person or legal entity under public or private law, irrespective of
the means used, of the country where it is registered or of the country
where the data is located, provided that: (a) the processing operation
is carried out in Brazil; (b) the purpose of the processing activity is to
offer or to provide goods or services in Brazil or to treat the data of
individuals located in Brazil; or (c) the personal data processed was
collected in Brazil12.
More specifically, the LGPD also governs the transfer of data outside
Brazil13, which is an essential daily element of any international opera-
tion. The LGPD created two sets of rules, one for countries deemed to
offer adequate personal data protection and the other for “non-adequate”

humans misusing upgraded computers to wreak havoc on themselves and on the world. If you find
these prospects alarming – if you dislike the idea of living in a digital dictatorship or some similarly de-
graded form of society – then the most important contribution you can make is to find ways to prevent
too much data from being concentrated in too few hands, and also find ways to keep distributed data
processing more efficient than centralized data processing. These will not be easy tasks. But achieving
them may be the best safeguard of democracy.”
12. Art. 3 in the LGPD.
13. Arts. 33 to 35 in the LGPD.

140
countries. Transfers to an “adequate” country are the simplest way to
send personal data outside Brazil and do not need contractual or other
approvals. The list of adequate countries is to be prepared by a National
Data Protection Authority (ANPD) yet to be organized, although the
LGPD has been in effect since August 2020.
In the absence of that list, data may be transferred abroad only if
organizations use appropriate tools to safeguard personal data, such as
specific contractual rules, model standard contractual clauses, binding
corporate rules and approved certificates, at a level of protection com-
mensurate with LGPD requirements.
Examining the transfer of data within Brazil-China business relation,
China has made progress in stepping up its privacy regulation by intro-
ducing a GDPR-inspired national standard that, although non-binding,
serves as a key reference for organizations seeking to comply with the
often general and vague data protection requirements in China’s Cyber
Security Law14 and with other data protection regulations15. However,
until now Japan is the only Asian country deemed to offer adequate data
protection under European Union rules (GDPR).
Thus, in order to comply with the LGPD, most, if not all organiza-
tions, should develop information governance programs, data privacy
policies and employee training programs, to name but a few methods.
Detailed and documented information governance programs also help
ensure proper response in the event of a breach and provide the neces-
sary documentation for regulatory audits and investigations.
According to the World Economic Forum’s Global Risk Report, the
global economy faces increased cyberspace threats. The greatest concerns

14. Translation of the Cybersecurity Law of the People’s Republic of China. Available at: <https://www.newamerica.
org/cybersecurity-initiative/digichina/blog/translation-cybersecurity-law-peoples-republic-china/>. Accessed
on: September 30th, 2020.
15. IAPP Resource Center, China’s New Cybersecurity Law: a legal update. Available at: <https://iapp.org/
resources/article/chinas-new-cybersecurity-law-2/. Accessed on: September 30th, 2020>. Accessed on: Sep-
tember 30th, 2020.

141
of global corporate experts and decision-makers are the environmental
crisis, large-scale cyberattacks and the breakdown of critical information
infrastructure and networks. The numbers are alarming and 76.1% of
respondents think cyberattacks will increase in 202016.
Organizations must then establish robust data security policies not
only in satisfaction of compliance requirements but also to address cy-
bersecurity issues. As happened with anticorruption law, data privacy
compliance can be seen as a differentiator in the marketplace. Companies
accused of data privacy violations risk jeopardizing their reputations and
losing customer trust and business opportunities. Every company will
ultimately wish to make sure that all companies it interacts with comply
with the risk mitigation requirements in the LGPD.

3. ARBITRATION AS A POSSIBLE SOLUTION

TO SOLVE COMPLIANCE DISPUTES

The existence of an effective compliance program is a competitive ad-

vantage, as the lack of internal controls can make closing a deal more
difficult. Creating or improving existing compliance mechanisms re-
quires considerable financial investment, disruptive internal restruc-
turing and a close team effort. Although there are long-term gains,
companies will certainly face short-term sacrifices. As the saying goes:
“If you think compliance is expensive, try non-compliance”17.
Brazilian companies have acted so as to prevent future conflicts, but
in the short term there has been and will be an increase in litigation
seeking to make companies or their stockholders liable for the harm
caused by the inexistence of compliance and governance policies that
could have prevented managers from engaging in unlawful practices

16. World Economic Forum, The Global Risks Report 2020, published on January 15th, 2020. Available at: <https://
www.weforum.org/reports/the-global-risks-report-2020>. Accessed on: September 30th, 2020.
17. Famous saying by former U.S. Deputy Attorney General Paul McNulty.

142
or information security incidents, improper and unauthorized use of
data and non-compliance with the law.
For instance, in response to Operation Car Wash and to the Anti-
corruption Act and in an effort to restore investor confidence, in 2014
Petrobras wrote off R$ 44,6 billion in assets associated with R$ 6,2
billion in improper payments, reporting a R$ 21,6 billion loss for that
fiscal year that wiped out four years’ worth of profits18.
Petrobras notoriously found itself the defendant in a web of global
noncompliance disputes including, among others: (a) five class actions
filed before a US District Court by investors and another 33 individ-
ual opt-out cases involving more than 500 individual plaintiffs19; (b) a
securities fraud class action in the Netherlands; (c) an arbitration pro-
ceeding initiated in Argentina by Consumidores Financieros Asociación
Civil para su Defesa; and (d) five class arbitration proceedings20 initi-
ated in Brazil before the São Paulo Stock Exchange Market Arbitra-
tion Chamber (“CAM B3”) claiming damages from Petrobras for its
misreporting of information related to its managers’ unlawful actions.
As the best-established cross-border commercial and corporate dispute
resolution mechanism, arbitration was chosen by Petrobras’ shareholders
to resolve their noncompliance disputes with Petrobras.

18. Report published on Petrobras website on April 22nd, 2015. Available at: <https://petrobras.com.br/fatos-e-da-
dos/divulgamos-nossas-demonstracoes-contabeis-auditadas.htm>. Accessed on: September 30th, 2020.
19. Applying Brazilian law, in 2015 US District Judge Rakoff dismissed the claim because the arbitration provision
covered only investors who purchased Petrobras securities at the Bovespa stock exchange after Petrobras had
amended its bylaws to include an arbitration clause. In 2018, Petrobras settled for US$ 2.95 billion in one of
the largest ever foreign company settlements in the United States. Despite the settlement, in 2019 Judge Ra-
koff ordered most documents attached to the parties’ summary judgement papers unsealed. See this last deci-
sion at: <https://law.justia.com/cases/federal/district-courts/new-york/nysdce/1:2014cv09662/435841/948/>.
Accessed on: September 30th, 2020.
20. The Arbitral Tribunal handling one of those class proceedings has recently entered a partial award ordering
Petrobras to indemnify the claimant funds and stockholders for their losses, but the amount of the award will
be calculated only in the liquidation phase. Petrobras subsequently filed to have the award voided and the
Courts of Rio de Janeiro have suspended its effects until said action is finally adjudicated.

143
 Personal data litigation will also continue to expand significantly,
especially considering Brazil’s penchant for litigation21-22. However,
the Brazilian Judiciary will not have the capacity to decide all these
future issues; thus, some of the new legal challenges and disputes must
be submitted to arbitration and to other dispute resolution methods23.
The use of international commercial arbitration to resolve personal
data disputes offers many benefits. One of the most significant is the
fact that the disputing parties usually appoint arbitrators based on their
expertise, in this case, in data protection law. This can be significant
because Brazilian courts of general jurisdiction typically lack such spe-
cial knowledge. Data protection is increasingly recognized as a “hot
topic” not only in cybersecurity but also in international arbitration24.
Not all personal data right objectively arbitrable in Brazil can be
settled by means of arbitration. Under the Civil Code (art. 852) and
Arbitration Act (art. 1), only disputes involving pecuniary rights may
be submitted to arbitration25-26. Given that the LGPD contains no pro-

21. On September 21st, 2020, merely three days after the LGPD became effective, the Brasília-based Office of
the Prosecutor for the Federal District and for Federal Territories (“MPDFT”) filed the first ever civil
action based on the public interest under the LGPD. The MPDFT’s dedicated data privacy and artifi-
cial intelligence unit (“Unidade
Unidade Especial de Proteção de Dados e Inteligência Artificial
cial” or “ESPEC”) is the
first Brazilian special unity focusing solely on protecting personal data and privacy of Brazilian citizens.
22. On September 30th, 2020, a court for the first time ordered a company to pay damages for pain and suffering
due to violation of the Consumer Protection Code and of the LGPD (the judge’s decision was retrospec-
tive because the lawsuit had been filed before the LGPD became effective).
23. BOTTINO, C.; PERRONE, C.; CARNEIRO, G.; HERINGER, L.; VIOLA, M. Lei Geral de Proteção
de Dados Pessoais e resolução de conflitos: experiências internacionais e perspectivas para o Brasil, ITS,
April 2020. Available at: <https://itsrio.org/pt/publicacoes/lgpd-e-resolucao-de-conflitos/>. Accessed on:
September 30th, 2020.
24. TRAKMAN, L.; WALTERS, R.; ZELLER, B. Is international arbitration prudent when dealing with personal
data challenges?. In: Transnational Dispute Management, [s. l.], v. 17, issue 2, February 2020. Available at:
<https://bityli.com/vVVgcC>. Accessed on: September 30th, 2020.
25. Although Brazilian Arbitration Act allows the use of arbitration to resolve conflicts involving freely transfer-
able pecuniary rights, under the later Brazilian Civil Code objective arbitrability is defined merely in respect
to the pecuniary aspect, setting aside the importance of transferability, meaning to some scholars that even
pecuniary rights that are not transferable can be submitted to arbitration.
26. Another legal discussion pertaining objective arbitrability refers to the notion that non-arbitrable subjects
usually involves matters of public policy. However, public policy is not listed as an arbitrability requirement,
but is accepted as an “obligation” of the Tribunal to apply the mandatory rules of the country of the seat to

144
vision barring the use of arbitration to resolve personal data disputes,
satisfaction of that requirement will suffice.
Moreover, whenever the relation is formalized in a contract of ad-
hesion (that is, standard-form contracts imposed on a party that does
not have the opportunity to negotiate its terms and conditions), the
validity and effectiveness of the arbitration clause depends on it being
in boldface type and specifically signed by the adhering party27.
Understanding the methods to obtain personal data is another sig-
nificant criterion to better establish whether the arbitration clause is
valid. As explained, the LGPD protects information pertaining to an
identified or identifiable person, which can be: name, date of birth, res-
idential address and any personal information processed by “automat-
ed means”, including IP addresses, cookie identifiers etc. The absence
of express consent to process such data will also mean lack of consent
to arbitration. These practical difficulties can be increased by the very
nature of a person’s consent for downstream processors and miners to
use his personal data28. If the person and the targeted downstream user
have not agreed to an arbitration clause, the arbitral tribunal may refuse
to hear the case.
The fact is that personal data is often captured, stored and used by
many other platforms beyond the parties that consented to the use of
their data. In fact, it is unlikely that the individual will ever identify

prevent the risk of the arbitral award being set aside. Thus, public order rule is not a restriction, but a limit to
law enforcement, to be observed by both a judge and an arbitrator. In effect, in waiving state jurisdiction, the
parties are not waiving the material right to be applied, especially not public order rule.
27. Brazilian Arbitration Law: Article 4. An arbitration clause is an agreement whereby the parties to a contract
agree to submit to arbitration any disputes that might arise with respect to that contract. […] Paragraph
2. Arbitration clauses in contracts of adhesion will be valid only if the adhering party takes the initiative to
initiate an arbitration proceeding or if that party expressly agrees to its initiation by signing or initialing the
relevant clause in an attached written document or printed in boldface. Available at: http://cbar.org.br/site/
en/brazilian-legislation/law-no-9-307-96-english/. Accessed on September 20, 2020.
28. TRAKMAN, L.; WALTERS, R.; ZELLER, B. Is international arbitration prudent when dealing with per-
sonal data challenges? In: Transnational Dispute Management, [s. l.], v. 17, issue 2, February 2020, p. 12-
13. Available at: <https://bityli.com/FkftwV>. Accessed on: September 30th, 2020.

145
or interact with some of those companies. Invoking the consent of an
individual to the downstream use of his personal information is again
unfeasible because once the data is traded downstream, the person will
not know, nor be reasonably expected to know, anything about the use
of his/her personal data.
Although the LGPD clearly made all downstream users liable29,
the arbitral tribunal may find it difficult to accept jurisdiction over
the dispute without a straightforward consent to arbitration along a
lengthy and intricate chain of users within a complex global network.
Therefore, a well-drafted arbitration clause is essential to sidestep
those pitfalls and to clearly bind all the parties involved, but, in prac-
tice, probably arbitration will be more frequent in disputes between
controllers and processors30.
Within that liability continuum, the LGPD clearly regulates col-
lective damages related to personal data processing. Going back to
the aforementioned Petrobras class arbitration proceedings in Brazil,
although the underlying disputes are more closely related to corporate
law, the legal discussions concerning the formalities and requirements
of this novel and hybrid type of arbitration can be extremely signifi-
cant to commercial arbitration, especially those related to the LGPD.
There is no settled understanding on the convenience of class ar-
bitrations31 and most international arbitration rules are silent on the

29. LGPD: Art. 42. Controllers or operators whose personal data processing activities cause pecuniary, individual
or collective damage or pain and suffering to others in violation of personal data protection law shall redress
that damage or pain and suffering. §1 So that data owners are effectively indemnified: I –processors are jointly
liable for the any damage caused by the processing when they violate their obligations under data protection law
or when they fail to follow controllers’ lawful instructions, in which case processors are deemed equivalent to
controllers, except as established in art. 43 in this Act; II – controllers who are directly involved in the process-
ing that caused the damage to the data owners will be jointly liable, except as established in art. 43 in this Act.
30. See also BOTTINO, C.; PERRONE, C.; CARNEIRO, G.; HERINGER, L.; VIOLA, M. Lei Geral de
Proteção de Dados Pessoais e resolução de conflitos: experiências internacionais e perspectivas para o Bra-
sil, ITS, April 2020, p. 29. Available at: <https://itsrio.org/pt/publicacoes/lgpd-e-resolucao-de-conflitos/>.
Accessed on: September 30th, 2020.
31. In the US arbitration is unfortunately misused to avoid class actions even when collective action relief is available.
Companies include in their arbitration clauses a provision banning collective action so that only individual

146
matter32. This type of proceeding may become more popular in coming
years as the use of different collective redress mechanisms increases in
several jurisdictions33. In Brazil, the Petrobras class arbitrations, al-
though still controversial, can be perceived as a watershed in making
international class arbitration a promising tool to redress data protec-
tion violations.
Class arbitration can be defined as a type of arbitration allowing
one or more parties to bring a claim before an arbitral tribunal on be-
half of others in a similar position. The claimant represents a group of
claimants. Class arbitration, while a relatively recent phenomenon, is
commonly viewed as a procedural mechanism mixing arbitration with
the class action procedures applicable under US litigation law or with
similar collective lawsuits in other jurisdictions.
In Brazil, class actions or collective claims are governed by Law
7.347/8534, originally enacted to protect the environment, consumers,
artistic, esthetic, historical, tourism and landscape heritage and assets.
The scope of that act was later expanded to include all diffuse or col-

litigation is permitted. That led a scholar to write that “[…] a national data privacy law will lack teeth if it
does not include a mandatory arbitration carve-out to ensure companies do not use such a provision to avoid
any private right of action that is created by the new law”. GRAHAM, E. The importance of a mandatory
arbitration carve-out in a US privacy law. Privacy Perspectives, published on May 22nd, 2019 on the IAPP
website. Available at: <https://iapp.org/news/a/the-importance-of-a-mandatory-arbitration-carve-out-in-a-
us-privacy-law/>. Accessed on: September 30th, 2020. See also Digital News Daily, Vimeo wants appellate
court to compel arbitration in biometric privacy battle, published on June 19th, 2020. Available at: <https://
www.mediapost.com/publications/article/352779/vimeo-wants-appellate-court-to-compel-arbitration.html>.
Accessed on: September 30th, 2020.
32. Two American institutions created special class arbitration rules: American Arbitration Association (AAA) and
Judicial Arbitration and Mediations Services (JAMS).
33. USA, Canada, Germany, Spain. See Strong, S.I. From Class to Collective: The De-Americanization of Class
Arbitration. In: Legal Studies Research Paper Series: School of Law – University of Missouri, n. 2010-16.
Available at: <https://bityli.com/LUbIJA. Accessed on: September 30th, 2020. NERY, A. L. B. A. F. Class
Arbitration: instauração de processo arbitral para a resolução de conflitos envolvendo direitos de natureza
transindividual. 2015. Doutorado (Direito) – PUC-SP, 2015. Available at: <https://tede2.pucsp.br/bitstream/
handle/7003/1/Ana%20Luiza%20Barreto%20de%20Andrade%20Fernandes%20Nery.pdf>. Accessed on:
September 30th, 2020.
34. Full text available at: <http://www.planalto.gov.br/ccivil_03/leis/l7347orig.htm>. Accessed on: September
30th, 2020.

147
lective rights, anticompetitive practices, defamation, crimes against
the dignity of racial, ethnical and religious groups and the protection
of public and social assets. Class actions may be filed by, among oth-
er entities, any civil association in existence for at least one year and
whose institutional purpose includes the defense of the rights or in-
terests subjacent to the relevant class action.
Class arbitration has been praised for (theoretically) increasing the
efficiency and reducing the costs of adjudicating numerous single claims.
It ultimately aims at treating all claimants equally and at avoiding con-
flicting decisions when different tribunals have to decide based on the
same facts. Class arbitration further allows claimants to optimize their
resources by consolidating their cases, giving them greater leverage35.
Despite all those benefits, Petrobras class arbitrations in Brazil
have so far failed to avoid conflicting decisions not least because there
are five different proceedings separately discussing the same or very
similar facts and rights, with no communication or exchange of evi-
dence between them. All proceedings are strictly confidential under
CAM-B3 rules36.
The need to provide information to potential claimants in class
arbitration proceedings may undermine the confidentiality that is an
important feature of international commercial arbitration. Exactly be-
cause class arbitration was created to affect a large number of parties,
significant information must be disclosed not only to the actual parties
but to all potential parties. As the US Supreme Court explained: “[…]
the presumption of privacy and confidentiality that applies in many bi-

35. BLAVI, F.; VIAL, G. Class Actions in International Commercial Arbitration. In: Fordham International
Law Journal, [s. l.], v. 39, issue 4, article 2.
36. CAM-B3 rules on confidentiality: 9.1 Confidentiality. Arbitration proceedings are confidential and all parties,
arbitrators and members of the Arbitration Chamber shall refrain from disclosing any information relating to
such proceedings except in compliance with the instructions or rules of regulatory bodies and with the applicable
legislation. Available at: <http://www.b3.com.br/en_us/b3/qualificacao-e-governanca/market-arbitration-cham-
ber-cam/regulation/>. Accessed on: September 30th, 2020.

148
lateral arbitrations shall not apply in class arbitrations, thus potentially
frustrating the parties’ assumptions when they agreed to arbitrate37.
It is widely accepted that the public interest may supersede confi-
dentiality. Under the Brazilian Arbitration Act (Law 9.307/1996), for
example, arbitration proceedings to which the government is party can-
not be confidential because they are deemed to be in the public interest,
so that the principle of government transparency prevails38. Similarly,
class arbitration proceedings are recommended not to be confidential
so that class members will be fully aware of any opportunity to fully
exercise their rights in relation to a pending claim.
If an individual initiates a confidential arbitration involving a claim
common to all other members of his class, other class members will
not learn of the proceeding and will lose the opportunity to join it or
to request the consolidation of that proceeding with another one. To
address this concern, the arbitral tribunal should order service of no-
tice on all identifiable class members and/or publication of a general
notice in media outlets.
The current Brazilian arbitration framework certainly needs im-
provement to enhance the effectiveness of class arbitrations. One of
the numerous scholarly reports prepared to strengthen the system
suggested two mechanisms to extend to third parties the res judicata/
ultra partes effect of an arbitral award: acting so that all affected par-
ties learn (i) from the initiation of the proceeding (i.e. allowing their
active participation in the formation of the arbitral tribunal and in the
discussion of rights) and (ii) from the decision reached (i.e. allowing
affected parties to claim their rights within the bounds of the ruling) 39.

37. BLAVI, F.; VIAL, G. Class Actions in International Commercial Arbitration. In: Fordham International
Law Journal, [s. l.], v. 39, issue 4, article 2, p. 811.
38. Brazilian Arbitration Law: “Art.2. […] Paragraph 3. Arbitration involving the government will always be at law
and will be controlled by the principle of government transparency”. Available at: <http://cbar.org.br/site/en/
brazilian-legislation/law-no-9-307-96-english/>. Accessed on: September 30th, 2020.
39. CVM, OCDE, SPE. Strengthening the enforcement of shareholders’ rights: interim report, October 2019,

149
 International commercial arbitration procedures must be crafted to
guarantee an efficient process that protects the authority of arbitral tri-
bunals, minimizes judicial intervention and at the same time manages
to align the interests of the parties to solve collective disputes. Afterall,
class arbitration can be a tool for procedural cost-effectiveness and to
promote access to Justice and the application of the law.

4. CONCLUSION

Compliance practices are increasingly used as a tool to mitigate corpo-

rate liability. Their purpose is to identify the chain of responsibility for a
certain act, to take action to prevent potential unlawful acts (both by the
company and by its clients) or, if the act has already been committed, to
reduce or mitigate its consequences in relation to the company and to its
employees. International commercial arbitration is the natural and best
method to resolve such disputes.
Transnational export and trade of personal data is expanding on a
monumental scale, which will likely lead to numerous disputes over the
use of personal data across regions and states, especially because of the
LGPD’s extraterritorial reach.
It is therefore crucial for Brazil to implement an adequate, efficient
and enforceable legal framework that can provide a fast and effective re-
sponse to individuals or groups whose personal data rights are violated.
Access to effective private enforcement mechanisms is the key to develop
a strong data protection environment.

p. 22. Available at: <http://editor.economia.gov.br/Economia/noticias/2019/12/arquivos/cvm-sharehold-

ers-rights-ingles.pdf>. Accessed on: September 30th, 2020.

150
 Arbitration and
Insolvency in Brazil
Márcio Souza Guimarães 1

1. INTRODUCTION

Since the edition of the Brazilian Arbitration Law (Federal Law nº.
9.307/96 – BAL), arbitrations cases in Brazil have grown steadily each
day, as both legal practitioners and business overcome the initial resis-
tance and skepticism towards alternate dispute resolution methods2. De-
spite the Covid-19 pandemic, according to the published ICC Dispute
Resolution Statistics3, 946 arbitration cases were registered in 2020, of
which Brazil was the most represented nationality within Latin Amer-
ica with 150 parties, rising from third to second place in the worldwide
nationality ranking for the first time.

1. Former professor of Commercial Law at FGV Direito Rio. SJD at Université Toulouse 1 Capitole (Centre de
Droit des Affaires). Visiting Professor at Université Paris 2 Panthéon-Assas. Max Schmidheiny, professor at
University of Saint Gallen (Switzerland). Academic founder of the Brazilian Academy of Civil Law. Former
member of the Public Prosecutor’s Office of the State of Rio de Janeiro. Lawyer and Arbitrator listed in sev-
eral chambers, including FGV Arbitration and Mediation Chamber.
2. Peter Sester states: “Before analyzing BAL article by article, I review the legal or technical reasons why arbitration
took so long to materialize in Brazil.” SESTER, Peter. “The Rise of Arbitration in Brazil”. In: International
Arbitration: Law and Practice in Brazil. Oxford: Oxford University Press, 2020, p. 4.
3. Available at: https://iccwbo.org/publication/icc-dispute-resolution-statistics-2020/. Accessed in November 8,
2021.
 Disputes arising from the corporate sector have always represented a large
number of arbitration cases in Brazil4: for example, according to Arbitra-
tion and Mediation Center of the Brazil-Canada Chamber of Commerce
(CAM-CCBC), one of the country’s largest arbitration chambers, the ma-
jority of cases under their administration in 2019 involved corporate-related
agreements disputes and business contracts5. Litigation and disputes are,
indeed, a very part of the corporate world, which gather a myriad of differ-
ent interests that tend to be in conflict.
Those frequent conflicts of interest often escalate when one of the par-
ties is going through an economic and financial crisis, which tend to turn
disputes of corporate nature even more complex. Considering the social
function of businesses and the special legal protection granted to those who
pursue economic activities – in Brazil, Federal Law nº 11.101/2005 – an
adequate and expedite solution, such as those provided by an Arbitral Tri-
bunal, becomes a matter of public interest. It is not rare, however, that the
very public nature of conflicts involving an insolvent company create points
of friction between the Brazilian insolvency system, under the State’s juris-
diction, and arbitration, an eminently private dispute resolution method.
In this article, we will present an overview of the Brazilian insolvency
system under Federal Law nº. 11.101/2005 (Brazilian Bankruptcy Law –
BBL) and its possible consequences over arbitration proceedings, such as
the viability of submitting insolvency-related disputes to the jurisdiction of
an Arbitral Tribunal and the possibility of an insolvent company to sign a
contract containing an arbitration clause.

4. Prof. Ferreira Lemes notes that, in 2019, corporate disputes represented 47,72% of the conflicts submitted to
the Arbitration and Mediation Center of the Brazil-Canada Chamber of Commerce (CAM-CCBC), one
of Brazil’s largest arbitration chambers. Market Arbitration Chamber (CAM-BOVESPA), which has a
securities-market-oriented profile, corporate disputes represented 92,60% of the cases in that same year.
Available at: http://selmalemes.adv.br/artigos/An%C3%A1lise-%20Pesquisa-%20Arbitragens%20Ns.%20
e%20Valores-%202010%20a%202017%20-final.pdf and http://selmalemes.adv.br/artigos/Analise-Pesqui-
sa-ArbitragensNseValores-2020.pdf. Accessed on: November 8th, 2021.
5. Available at: https://ccbc.org.br/cam-ccbc-centro-arbitragem-mediacao/en/arbitration-statistics/. Accessed on:
November 8th, 2021.

154
2. BRAZILIAN INSOLVENCY

Risk is an inherent part of business.6 As much as success is expected to

benefit not only the entrepreneur, but the whole community, failure is
also a possible outcome of participating in a highly competitive activi-
ty, where standing out depends on constant innovation and adaptation.
Considering the social consequences of an economic and financial crisis in
business (such as unemployment, decrease in tax collection, and others), it
is important to create adequate legal interpretation7 regarding insolvency
treatment and its repercussions, including those concerning arbitration8.
The task to harmonize the State’s exclusive jurisdiction over insol-
vency proceedings (judicial restructuring or liquidation) and the private
jurisdiction of arbitration is not always simple, but is crucial one in order
to maintain legal certainty. To address the matter of insolvency and its
implications in arbitration proceedings under Brazilian law, we will first
(A) present a general overview of the country’s insolvency system and (B)
address its consequences on the debtor’s legal capacity and, consequen-
tially, to agree to an arbitration clause.

2.1 Overview of the Brazilian insolvency system

The backbone of the Brazilian insolvency system is the idea that busi-
nesses should be preserved whenever possible. Even though failure is an
inherent risk to such activities, enterprises deserve a second chance when

6. Professor Elizabeth Warren states that at some point, every business will face difficult moments: “Businesses
fail. Sometimes they collapse in a loud crash. Sometimes they drift downward, like a balloon with a slow leak.
But fast or slow, noisy or quiet, business that were once fueled by optimism may someday face their demise.”
WARREN. Elizabeth. Chapter 11: Reorganizing American Business. New York: Aspen Publishers, 2008,
p. 1.
7. GUIMARÃES, Márcio Souza. Le rôle du ministère public dans les procédures collectives: approche de
droit comparé français et brésilien. France: ANRT, 2011, p. 9.
8. GUIMARÃES, Márcio Souza. Insolvency and Arbitration. In: SESTER, Peter (ed.) International Arbitration:
Law and Practice in Brazil. Oxford: Oxford University Press, 2020, p. 499-518.

155
facing merely temporary difficulties, considering its role as the country’s
main source of employment, wealth and social development9. For those
cases, Federal Law nº 11.101/2005 provides debtors with the option to
file for a judicial restructuring proceeding, allowing them to overcome a
transient economic and financial crisis by collectively renegotiating debts
with its creditors before a state court.
Article 47 of BBL expresses this notion as it provides that the judicial
restructuring proceeding’s purpose is to allow the recovery of the compa-
ny from its transient economic and financial crisis, in order to maintain
the productive source, the employment of its workers and the creditors’
interests, thus preserving business, promoting its social function and stim-
ulating economic activities.
Through the judicial restructuring proceeding, the debtor and its cred-
itors are gathered before a court to collectively renegotiate their contracts
and define the adequate recovery measures to be taken by the company
to overcome the economic and financial crisis.
The joint negotiations start with the presentation of a restructuring plan
by the debtor up to 60 (sixty) days proceedings’ filing.10 Once presented
the plan, the creditors, gathered in a general assembly of creditors,11 will
deliberate on whether they will accept the debtor’s new payment condi-
tions and other proposed restructuring methods. If the plan is rejected by
the creditors, they may present their own restructuring plan within thirty
days12 or, if that is not their option, the restructuring proceedings will be
converted into a forced liquidation proceedings named falência,13 which
will be further explained.

9. GUIMARÃES, Márcio Souza. “A ultrapassada teoria da empresa e o direito das empresas em dificuldades”.
In: WAISBERG, Ivo; RIBEIRO, José Horácio Halfeld Rezende (org.). Temas de insolvência: estudos em
homenagem ao professor Manoel Justino Bezerra Filho. São Paulo: IASP, 2017, p. 682.
10. Art. 53 of BBL.
11. Art. 35, I, “a” of BBL.
12. Art. 56, §4º of BBL.
13. Art. 56, §8º of BBL.

156
 Otherwise, if the creditors accept the debtor’s plan, the court will exam-
ine exclusively its formal and legal aspects,14 being barred from analyzing the
merit of the collective negotiation. In this context, according to the Brazilian
insolvency system, the business’ feasibility and its future operations are a
matter to be decided exclusively by the debtor and their creditors, who are
responsible for making a joint effort to preserve the public interest inherent
to economic activities.
During this whole period, individual executive claims are stayed in order
to enable the debtor to build and approve a plan of restructuring (article 6 of
BBL). Cognitive claims, however, may follow their regular course, as they
do not affect the debtor’s payment capability.
Once the plan is approved by the creditors (general assembly of cred-
itors) and confirmed by the court, the debtor is legally obliged to comply
with its terms. If the reorganizational measures are not duly carried out,
the court will declare the debtor’s bankruptcy.15 The court, the judicial
administrator (a judicial assistant appointed by the court),16 the Attorney
General’s Office and the creditors are responsible for overseeing the plans’
compliance within a two-year maximum period, during which the debtor
will be officially under the judicial restructuring proceedings, unless the
judge order an immediate closure17.
After that time frame, even though the judicial restructuring pro-
ceedings is declared terminated by the court, any creditor may require the
specific execution of an undertaken obligation or even file for the debtor
bankruptcy if the debtor does not implement any of the plan’s terms.18
During the whole judicial restructuring proceeding, as a rule, the debtor
still holds property to its assets and may continue to do regular business

14. Art. 58 of BBL.

15. Art. 61, §1º of BBL.
16. Like the trustee in United States (Section 1104 of the Bankruptcy Code) and mandataire and administrateur
judiciaire in France (art. 811-1 of French Commercial Code).
17. Art. 61 of BBL.
18. Art. 62 of BBL.

157
using those resources,19 as its legal capacity remains unchanged. Therefore,
judicial restructuring proceedings has no impacts over the debtor’s exist-
ing contracts, which means they remain effective and must be complied,
including arbitration agreements and full legal capacity to sign new ones,
as will be exposed in the third part of this article.
Not all economic and financial crisis, however, are merely transient.
In some circumstances, the distress is so extreme that it is no longer pos-
sible to carry on with business’ activities, in which case it is preferable to
eliminate the enterprise from the market through a liquidation ((falência),
thus preventing the aggravation of damages inflicted to the community
by the breach in credit reliability.
In such context, BBL’s article 75 states that by removing the debtor
from its activities, the falência proceeding has three main goals: (i) to pre-
serve and optimize the use of the business’ assets and productive resourc-
es, including the intangible ones; (ii) to allow the speedy liquidation of
the unfeasible businesses, in order to efficiently reallocate resources in the
economy and (iii) to foster entrepreneurship, including by allowing the
swift return of the bankrupt entrepreneur to economic activities.
The liquidation proceeding ((falência) may be initiated by the debtor
himself (voluntary petition) or by request of one of its creditors (involun-
tary petition). One of the most significant consequences of the bankrupt-
cy decree according to BBL is the formation of what Brazilian doctrine
calls juízo universal da falência, or universal jurisdiction over the debtor’s
interests. Once the liquidation proceeding is commenced, the bankruptcy
court has exclusive jurisdiction over all debtor’s assets and affairs.20 Com-
menting on this subject, Marcelo Sacramone21 notes that:

19. BBL imposes, however, that the debtor seeks court approval before disposing or encumbering permanent
assets during the restructuring period, as determined by its article 66.
20. Article 76 of BBL.
21. SACRAMONE, Marcelo Barbosa. Comentários à lei de recuperação de empresas e falência. 2. ed. São Paulo:
Saraiva Educação, 2021, p. 404.

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 By universality, it is understood that the bankruptcy court will be the
only one with jurisdiction over the debtor’s assets and to determine
the suspension of individual claims (article 6 of BBL), in order to
assure that all creditors submit to the bankruptcy proceeding and
are classified and paid according to their obligations’ nature. The
universal court will be the only one with jurisdiction to analyze all
matters related to the liquidation of the bankrupt estate’s assets, and
the only one with jurisdiction to determine creditors payment, which
enables compliance to the legal order of payment between classes
of creditors and the guarantee that they will be treated equally to
others belonging to the same class – the par conditio creditorum
principle.22

In order to guarantee an orderly and effective proceeding, the bank-

ruptcy court appoints a trustee, known as administrador judicial (judicial
administrator), responsible for tasks such as cataloguing, seizing and eval-
uating the debtor’s assets; creating a list of creditors and grouping them
according to the legal categories; deciding which debtor’s contracts will be
maintained and which will be terminated; amongst many others intended
to maximize the results of the debtor’s assets realization and conduct a
fair liquidation procedure.
Once the debtor’s assets have been evaluated, the trustee will promote
public bids to sell them and, subsequently, use the proceeds of the sale to
pay creditor according to the legal preference order (articles 83 and 84 of
BBL), guaranteeing equitable treatment of all creditors ((par conditio credi-

22. In the original wording: Por universalidade, entende-se que o juízo falimentar será o único competente à arre-
cadação de todos os bens e à suspensão das execuções individuais (art. 6º) para assegurar que os credores se
submetam ao procedimento falimentar e sejam classificados e satisfeitos conforme a natureza de suas obriga-
ções. O Juiz Universal será o único competente para apreciar todas as questões materiais para liquidar os bens
da Massa e o único competente para realizar o pagamento da coletividade de credores, o que torna possível a
satisfação conforme a ordem legal de preferência de pagamento entre as classes e a garantia de que os credores
serão tratados de forma idêntica aos demais de sua classe, o princípio do par conditio creditorum.”

159
torum). The liquidation proceeding is terminated either when all creditors
are paid or when there are no more assets to be sold.
It is important to note that even though the liquidation proceeding
intends to eliminate a failed venture from the market, this does not mean
that the debtor’s contracts are automatically terminated as a consequence
of the bankruptcy ruling.
According to BBL’s article 117, the judicial administrator is responsi-
ble for determining which of the debtor’s contracts are to be maintained
and which are to be interrupted, always considering the maximization of
assets’ value and the debtor’s best interest. This decision, however, does
not affect the arbitration agreements previously signed by the debtor,
which are considered autonomous contracts under Brazilian law, as will
be further explained.

2.2 Insolvency proceedings and consequences

over debtor legal capacity

Under the BBL the effects of a judicial restructuring are not the same
as those caused by a liquidation proceeding ((falência).
As previously stated, during the whole judicial restructuring pro-
ceeding, the debtor still holds property to its assets and may continue to
do regular business using those resources (debtor in possession – DIP),
even though it may suffer a few restrictions regarding the alienation or
encumbrance of permanent assets, which must be previously authorized
by the court. In this scenario the debtor’s legal capacity remains unal-
tered throughout the restructuring proceedings.
Since the debtor remains responsible for the business’ activities, the
court’s role (assisted by the judicial administrator) during the judicial
restructuring proceeding is to supervise and encourage the collective ne-
gotiation, ensuring the regularity of the reorganizational process accord-

160
ing to BBL and general principals of law, such as good faith and abuse
of rights protection. Claims related to the debtor’s interests may follow
their regular course before the competent jurisdiction, and not before the
judicial restructuring court, whose attribution is limited to matters re-
lated to the collective agreement to be made by debtor and its creditors.
Hence debtor’s legal capacity remains unaltered throughout the restruc-
turing proceedings. The debtor also maintains his capacity to freely enter
new contracts, the only restriction being the alienation or encumbrance
of permanent assets, which must be previously authorized by the court if
made during the restructuring period. Naturally, this reasoning applies to
the arbitration clauses assumed on previous contracts and the liberty to
agree to new ones, since the restructuring proceeding has no automatic
consequence on them, as will be demonstrated on Part III of this article.
Otherwise when it comes to the liquidation proceeding, falência, article
103 of BBL determines that once the bankruptcy has been ruled, the debtor
loses the right to manage or dispose of its assets. Since the main goals of the
proceeding are to preserve and optimize the use of the business’ assets and
productive resources, which must be quickly liquidated to efficiently real-
locate resources in the economy, the court appointed trustee – the judicial
administrator – becomes responsible for evaluating them and, subsequently,
sell them in public bids, using the sales products to pay as many creditors
as possible, according to the legal order of preference.
The fact that the debtor and its administrators no longer have the right
to dispose, encumber or alienate their assets, results in some restrictions
regarding the debtor’s legal capacity and procedural acting under Brazil-
ian law. Since the debtor (entrepreneur) no longer has administration and
disposal powers over the insolvent company’s assets once the liquidation
proceeding is initiated, they cease to be able to act in legal proceedings.
Once the judicial administrator’s tasks is the bankrupt estate’s legal
representation, as determined by article 76 of BBL, the debtor can only
participate in the liquidation proceeding on their own behalf in a few

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specific cases – such as contesting the creditor’s list prepared by the ju-
dicial administrator or appealing against the trustee’s appointment or
remuneration23. They do not, however, legally represent the bankrupt
estate in any way, neither in arbitration proceedings.
As previously stated, arbitration agreements are independent (or “sep-
arable”) from the contract within which they are found, as determined by
article 8 of Federal Law 9.307/96 – Brazilian Arbitration Law (“BAL”):

Article 8. The arbitration agreement is autonomous in relation to

the contract within they are inserted, and therefore, the contracts’
invalidity does not entail, necessarily, the arbitration agreement
invalidity.24

According to Gary Born25, the rationale for the separability presump-

tion, a principle adopted by most arbitration systems across the world,
is that the parties’ agreement to arbitrate “consists of promises that are
independent from the underlying contract: ‘the mutual promises to arbi-
trate [generally] form the quid pro quo of one another and constitute a
separable and enforceable part of the agreement’”.
In this context, arbitration agreements signed by the bankrupt com-
pany remain valid and are not affected by the judicial administrator’s
decision on the contract compliance, under art. 117 of BBL. Since the
judicial administrator becomes responsible for determining which of the
pre-liquidation contracts must be carried out, the implementation of fu-
ture contracts involving the bankrupt state’s interests is also under their

23. The Superior Tribunal of Justice has recognized the debtor’s legitimacy to participate in proceedings regarding
those matters. REsp 706.401/PR, Rel. Min. Raul Araújo, Quarta Turma, julgado em 1º.04.2014, DJe de
04.08.2014 and EDcl no REsp 1.324.873/SP, Rel. Min. Maria Isabel Gallotti, Quarta Turma, julgado em
11.12.2012, DJe 04.02.2013.
24. In the original wording: “A cláusula compromissória é autônoma em relação ao contrato em que estiver inserta,
de tal sorte que a nulidade deste não implica, necessariamente, a nulidade da cláusula compromissória.”
25. BORN, Gary B. International Arbitration: Law and Practice. Kluwer Law International, 2012, pp. xxvii
– xxviii.

162
initiative, including arbitration agreements26. In the latter case, however,
previous judicial authorization is necessary, since new contracts necessarily
implies encumbrance of the debtor’s assets and, therefore, may jeopardize
the debtor’s payment ability (and, consequentially, creditors’ interests) and
the liquidation proceeding’s success27.

3. ARBITRATION

As in most legal systems, autonomy of the free will is the general principle
over which arbitration in Brazil is grounded28. Since it is a voluntary ex-
ception to the State’s jurisdiction, parties that wish to submit contractual
disputes to private jurisdiction must express their willingness through a
formal arbitration agreement, as stated by article 3 of Brazilian Federal
Law 9.307/96 (Brazilian Arbitration Law – BAL)29.
Considering its contractual nature30, an arbitration agreement is only
considered valid when it is signed by parties fully capable of entering a
legally binding agreement, according to the article 1 of BAL.31 Since in-

26. In China, article 20 of Enterprise Bankruptcy Law of the People’s Republic of China: “After the people’s court
accepts an application for bankruptcy, any civil action or arbitration involving the debtor that has been started
but has not yet been concluded shall be suspended; however, the action or arbitration can proceed after an
administrator takes over the debtor’s property.” and article. 25: “An administrator shall perform the following
duties: (7) participating in legal actions, arbitrations or any other legal procedure on behalf of the debtor;”.
27. Art. 22, III, “o”, of BBL.
28. In China, art. 4 of Arbitration Law of the People’s Republic of China: The parties’ submission to arbitration
to resolve their dispute shall be on the basis of both parties’ free will and an arbitration agreement reached
between them. If a party applies for arbitration in the absence of an arbitration agreement, the arbitration
commission shall not accept the case.
29. Article 3: Interested parties may submit their disputes to arbitration through an arbitration agreement, namely
an arbitration clause and an arbitration commitment. In the original wording: “As partes interessadas podem
submeter a solução de seus litígios ao juízo arbitral mediante convenção de arbitragem, assim entendida a
cláusula compromissória e o compromisso arbitral.”
30. GUIMARÃES, Márcio Souza. Recuperação judicial: o plano de recuperação judicial. In: COELHO, Fábio
Ulhoa (coord.). Enciclopédia Jurídica da Pontifícia Universidade Católica de São Paulo. São Paulo: 2017.
31. Article 1: Capable parties may submit to arbitration proceedings in order to settle disputes related to disposable
pecuniary claims. In the original wording: “As pessoas capazes de contratar poderão valer-se da arbitragem
para dirimir litígios relativos a direitos patrimoniais disponíveis.” The same in Arbitration Law of the People’s

163
solvency proceedings may affect the debtor’s legal capacity under Brazilian
law, the impacts of the judicial restructuring and liquidation proceedings
on arbitration agreements must be differentiated.

3.1 Insolvency and arbitration agreements

Express valid consent is what bounds an individual to an arbitration agreement.

In this context, the key to determine if an insolvency proceeding –
whether a judicial restructuring or a liquidation proceeding ((falência) – will
affect an arbitration clause is to examine if, at the time the agreement was
made, the parties (and especially the insolvent company) held their full legal
capacity. Thus, the moment the dispute arises is irrelevant for this matter.
Indeed, the arbitration agreement produces its effects, including the
waiving of the State’s jurisdiction, immediately since its conception and
signature. As Felipe Moraes32 notes, since the arbitration clause corresponds
to a bilateral legal transaction with instant consequences, the posterior loss
of legal capacity of one of the parties is irrelevant:

As a bilateral legal transaction, the arbitration clause has, essentially,

two effects, the positive and the negative. Both the positive (which
guarantees the possibility of installing an arbitration) and the negative
(of waiving the State’s jurisdiction) effects are produced during the

Republic of China, Article 17: “An arbitration agreement shall be null and void under one of the following
circumstances: arbitration.”
32. MORAES, Felipe. Arbitragem, falência e recuperação judicial. In: LEVY, Daniel; PEREIRA, Guilherme
Setoguti J. (coord.). Curso de arbitragem. São Paulo: Revista dos Tribunais, 2018, p. 551. In the same position
Raphael Nehin Corrêa: “Thus, the bankruptcy of a company that has agreed to an arbitration clause does not
prevent the commencement or continuation of an arbitration. There will only be a shift in the debtor’s repre-
sentation in the arbitration proceedings, as the judicial administrator will now represent the bankrupt estate”.
In the original wording: “Assim, a decretação da falência de empresa signatária de cláusula compromissória
não gera impedimento para a instauração ou prosseguimento de arbitragem. Ocorrerá apenas uma alteração da
representação da devedora no procedimento arbitral, passando o administrador judicial a representar a massa
falida. CORRÊA, Raphael Nehin. “Arbitragem e insolvência”. In: MELO, Marcelo (ed.) Arbitragem no
Brasil. São Paulo: Impressão Régia, 2010, p. 91.

164
 conception of an arbitration agreement. (…) It is a perfect and finished
contract or pact, with its effects already materialized through the op-
tion of arbitration, with the resulting dismissal of State’s jurisdiction.33

Were this not the case, the validity of an arbitration agreement would
be subject, ad aeternum, to resolutive conditions (i.e., eventual loss of legal
capacity or unavailability of property rights), which would lead to legal
uncertainty, as Renato Stephan Grion, Luiz Fernando Valente de Paiva
and Guilherme Piccardi de Andrade Silva34 highlights:

The arbitration convention must be considered valid and effective

if, at the moment of the agreement, the parties were fully capable
of celebrating contracts, and not at the moment the dispute arises.
If this were not the case, the validity of an arbitration agreement
would be subject, ad aeternum, to resolutive conditions such as
eventual loss of capacity of parties involved or eventual unavailabil-
ity of their property rights.35

As aforementioned, the judicial restructuring proceeding has no effect

on the debtor’s legal capacity, which remains unaltered as the company

33. In the original wording: “Entendida como negócio jurídico bilateral, a cláusula compromissória tem, essencial-
mente, dois efeitos, o positivo e o negativo. Tanto o efeito positivo (garantidor da possibilidade de instalar o
juízo arbitral) quanto o negativo (o de afastar a competência da jurisdição estatal) são produzidos durante a
concepção da cláusula arbitral. A cláusula compromissória, portanto, é suficiente para excluir a jurisdição estatal
e para estabelecer a arbitral como forma de resolução de conflitos. Por isso, produz todos os efeitos que dela
se espera já no momento de sua celebração. Trata-se de contrato ou de pacto perfeito e acabado, com efeitos
já realizados por meio da opção pela arbitragem, com o consequente afastamento da jurisdição estatal.”
34. GRION, Renato Stephan; DE PAIVA, Luiz Fernando Valente and SILVA, Guilherme Piccardi de Andrade.
A arbitragem no contexto das recuperações judiciais e extrajudiciais e das falências. In: MELO, Leonardo de
Campos; BENEDUZI, Renato Rezende (coord.). A reforma da arbitragem. Rio de Janeiro: Forense, 2016,
p. 90.
35. In the original wording: “A convenção arbitral deverá ser considerada válida e eficaz se, no ato da contratação,
havia capacidade plena da parte para a celebração de negócios jurídicos, e não no momento em que efetiva-
mente surge o conflito a ser dirimido pela arbitragem. Ora, não fosse assim, estaria a validade da convenção
arbitral sujeita, ad aeternum, a condições resolutivas, quais sejam, a eventual falta de capacidade contratual das
partes envolvidas e a eventual indisponibilidade de seus respectivos direitos patrimoniais.”

165
will continue to be managed and represented by its administrators (debt-
or-in-possession proceedings). Therefore, an insolvent company with an
ongoing judicial restructuring proceeding may take part on arbitration
since their previous contracts must be regularly complied, being irrele-
vant if the latter was initiated before or after the insolvency proceeding.
Additionally, they remain fully capable of signing new contracts con-
taining arbitration agreements. Since the only legal restriction regarding
new contracts is the alienation or encumbrance of permanent assets (ar-
ticle 66 of BBL), which is not the case of an arbitration agreement, there
is no obstacle to the celebration of a contract containing an arbitration
clause related to available property rights, a matter related exclusively to
the parties’ autonomy. In fact, an arbitration agreement made by a com-
pany going through a judicial restructuring is not only possible, but also a
desirable measure, as it reduces cost of transaction and mitigates the risk
of doing business with an insolvent company36.
Regarding the liquidation proceeding ((falência), two possibilities un-
fold, depending on whether the debtor binds himself to an arbitration
agreement before or after the bankruptcy ruling. In the first case, as men-
tioned before, the validity of the clause depends on the debtor’s full legal
capacity the moment the contract was celebrated. Posterior shifts in the
legal capacity scenario, as it happens with the bankruptcy ruling, are ir-
relevant. In the second case, since the debtor (entrepreneur) is removed
from the company’s management,37 the judicial administrator becomes

36. GUIMARÃES, Márcio Souza. Direito das empresas em dificuldade. In: PINHEIRO, Armando Castelar;
PORTO, Antônio J. Maristrello; SAMPAIO, Patrícia Regina Pinheiros (coord.). Direito e economia:
diálogos. Rio de Janeiro: FGV Editora, 2019, p. 362.
37. It is important to notice that even though the entrepreneur is removed from the company’s management, the
insolvent company does not automatically lose its legal capacity once the liquidation proceeding is initiated. It
may still fully exercise its civil rights, such as the right to participate in a legal claim or to celebrate a contract.
Confirming this perception, Brazilian Superior Tribunal of Justice has recently decided that until the liqui-
dation proceeding is finished, the insolvent company has standing to sue for possession protection. During
that ruling, Justice Antonio Carlos Ferreira clarified that: “The liquidation decision, which causes dissolution,
is the first act of the proceeding and does not imply, in itself, the extinction of the company’s legal character.
Extinction, preceded by the assets’ liquidation and revenue distribution, only occurs at the ending of the liq-

166
its legal representative, which is why agreeing to an arbitration clause de-
pends on their initiative38 – naturally, always in the best interests of the
bankrupt estate and its creditors.
The conclusion is that in any case – whether in a judicial restructuring
or a falência – the initiation of an insolvency proceeding does not authorize
the judicial administrator to deny the arbitration agreement’s effectiveness,
nor prevent the start of an arbitration or suspends it.
Even though BBL did not expressly confirm this conclusion until re-
cently, Brazilian’s Courts of Justice have been endorsing the validity of
previously agreed arbitration clauses in the last years, deciding that they
are not, in fact, affected by the party’s liquidation proceedings.39 Along

uidation proceeding, which, however, can be interrupted, if the reasons that justified dissolution are reverted.”
(In the original wording: “A decretação da falência, que enseja a dissolução, é o primeiro ato do procedimento
e não importa, por si, na extinção da personalidade jurídica da sociedade. A extinção, precedida das fases de
liquidação do patrimônio social e da partilha do saldo, dá-se somente ao fim do processo de liquidação, que,
todavia, pode ser antes interrompido, se acaso revertidas as razões que ensejaram a dissolução.”). Voto-vista
no AgRg no REsp n° 1.265.548/SC, Rel. Ministro Raul Araújo, Quarta Turma, julgado em 06/11/2018,
DJe 12/11/2018.
38. This is not an unanimous opinion among Brazilian scholars. Donaldo Armelin believes that during the falência,
it is not possible, under Brazilian law, to validly agree to an arbitration clause, considering that the debtor
loses their assets’ availability. Paulo Fernando Campos Salles de Toledo, on the other hand, observes that the
bankrupt company’s assets are still available – as such, they are to be sold during the liquidation proceedings
in order to pay creditors; it is the debtor himself that may not dispose of them. In this context, the author
insists that the bankrupt estate may agree to an arbitration clause, if duly represented by the judicial admin-
istrator. ARMELIN, Donaldo apud TOLEDO, Paulo Fernando Campos Salles de. Arbitragem e Insolvên-
cia. In: WALD, Arnoldo (org.). Doutrinas essenciais: arbitragem e mediação, vol. IV. São Paulo: Editora
Revista dos Tribunais, 2014, p. 522-523. Along the same lines, Carlos Alberto Carmona states that even
though there is a shift in the insolvent company’s representation, its subjective arbitrability remains unaltered:
“As we can see, depersonalized entities (universalities granted with active and passive representation such as
condominiums, bankrupt estates, deceased estates, de facto company), as long as authorized, may partake on
arbitration, since they have the capacity to exercise their legal rights.” (In the original wording: “Como se vê,
os entes despersonalizados [universalidades dotadas de representação ativa e passiva como condomínios em
edifícios, massas falidas, espólios, sociedades de fato], desde que autorizados, podem valer-se da arbitragem,
eis que têm capacidade de ser parte e de estar em juízo (...)”.) CARMONA, Carlos Alberto. Arbitragem e
processo: um comentário à Lei 9.307/96. 3. ed. São Paulo: Atlas, 2009, p. 37-38.
39. For all, São Paulo Court of Justice (Tribunal de Justiça de São Paulo - TJSP), Embargos de Declaração 644.204-
4/4-01, Rel. Des. Maia da Cunha, 10.12.2009. Superior Court of Justice has analyzed the same matter during
the monocratic ruling of an Injunction nº 14.295/SP, an emblematic case involving a healthy insurance company
undergoing an extrajudicial liquidation, a proceeding similar to the falência but destined to specific econom-
ic activities. In that ruling, it was emphasized that: “The first aspect to be highlighted is that the arbitration
clause was agreed upon by the parties before the extrajudicial liquidation of INTERCLÍNICAS, occasion

167
the same lines, in 2016 the Federal Justice Council edited proposition nº
6 during the I Journey of Dispute’s Prevention and Extrajudicial Solu-
tion, which states that the grant of a judicial restructuring or the liquidation
decision does not authorize the judicial administrator to deny the arbitration
agreement’s effectiveness, does not prevent the start of an arbitration proceed-
ing, nor suspends it.40 Recently in 2020, BBL has been updated to reflect
the consolidated jurisprudential and doctrinal comprehension regarding
the possibility of an insolvent party taking part in arbitration proceeding
based on a previously signed arbitration agreement. In its current redac-
tion, paragraph 9 of article 6 replicates the aforementioned proposition
nº 6’s wording, expressly guaranteeing that insolvency is not a reason to
set aside a valid and effective arbitration clause.
However, it is not possible to overlook the fact that either commenc-
ing or carrying on an arbitration proceeding by an insolvent party could
involve costly arbitration fees. In this case, the debtor’s legal representa-
tives may seek third-party funding, balancing the costs and gains – and, in
the case of a falência, sharing this decision with the creditors, considering
the transparency that must underline this type of proceeding. Otherwise,
lack of funds is definitely not a reason to avoid arbitration.

on which it had full legal capacity, having opted to subject the resolution of available property rights to an
arbitration proceeding, concerning their client portfolio’s transfer. Therefore, at the time the arbitration clause
was implemented, both the subjective requirement, consistent in the civil capacity to hire, and the objective
requirement, correspondent to the availability of the property right, were present. Thus, there is no doubt on
the validity of the arbitration agreement on this case.” (In the original wording: “O primeiro aspecto a ser
ressaltado é que a cláusula compromissória foi firmada pelas partes antes da decretação da liquidação extraju-
dicial da INTERCLÍNICAS, oportunidade em que esta detinha capacidade plena para contratar, tendo então
optado por sujeitar à arbitragem a resolução de direitos patrimoniais disponíveis, concernentes à transferência
de sua carteira de clientes. Assim, no ato de celebração do compromisso arbitral estavam presentes tanto o
seu requisito subjetivo, (...) consistente na capacidade civil para contratar, quanto seu requisito objetivo, (...)
correspondente à disponibilidade do direito patrimonial. Não há, pois, dúvida alguma acerca da validade da
cláusula compromissória na espécie”. STJ, Medida Cautelar 14.295/SP (2008/0122928-4), Rel. Min. Nancy
Andrighi, DJe 13.06.2008.
40. We were a scientific member of this Journey and the author of this proposition. In the original wording: “O pro-
cessamento da recuperação judicial ou a decretação da falência não autoriza o administrador judicial a recusar
a eficácia da convenção de arbitragem, não impede a instauração do procedimento arbitral, nem o suspende”.

168
 Applying similar reasoning, Superior Tribunal of Justice41 has already
recognized that an arbitration agreement cannot be waived because of
one of the parties’ (in that case, an insolvent company) alleged finan-
cial vulnerability, which would supposedly lead to the State’s Court ju-
risdiction. In that occasion, once more, the 3rd Chamber honored the
kompetenz-kompetenz principle, which means the Arbitral Tribunal has
competence (or jurisdiction) to decide the extent of its own competence.
Even though insolvency proceedings do not authorize the denial of
the arbitration agreement’s effectiveness, we understand that in case of a
liquidation proceeding ((falência), the judicial administrator must request
the bankruptcy court’s authorization prior to initiating an arbitration
proceeding or agreeing to an arbitration clause,42 since this is a costly,
complex proceeding and, thus, may affect the insolvent company’s ability
to pay its debts (and, therefore, the liquidation proceeding’s goal). Sim-
ilar measures are not required in case of a judicial restructuring, whereas
the debtor remains in charge of business’ management, being able to
make all business decisions, including the one to initiate an arbitration
proceeding or signing new contracts containing arbitration clauses.
Finally, it is important to note that arbitration proceedings are not
affected by the stay period (article 6 of BBL) under Brazilian law. As
previously mentioned, the suspension of claims’ goal is to prevent indi-
vidual enforcement measures against the debtor’s assets, which would
impair a proper restructuring the entirety of debts, in case of a judicial
restructuring, or equal treatment among creditors, in case of a liquida-
tion proceeding. Arbitral jurisdiction, on the other hand, is essentially
cognitive, and deprived of executive force – which is why arbitral awards’

41. STJ. REsp 1598220/RN, Rel. Ministro Paulo de Tarso Sanseverino, Terceira Turma, julgado em 25/06/2019,
DJe 01/07/2019.
42. This viewpoint is not consensual. Felipe Ferreira Machado defends that the judicial administrator does not
need judicial authorization before entering an arbitration agreement. MORAES, Felipe Ferreira Machado
Moraes. “Arbitragem e falência”. In: CARMONA, Carlos Alberto; LEMES, Selma Ferreira e MARTINS,
Pedro Batista (coord.). Vinte anos da lei de arbitragem. São Paulo: Atlas, 2017, p. 785.

169
enforcement depends on legal action43 – and therefore, may follow its
regular course even though one of the parties is undergoing through
insolvency proceedings.

3.2 Insolvency arbitrability

In an economic and financial crisis, it is natural that creditors, debtors,

shareholders and stakeholders have conflicting interests, which is why
insolvency proceedings tend to be a breeding ground for conflicts44. For
this reason, there has been discussion on the possibility of utilizing ar-
bitration as a dispute settlement method in judicial restructuring and
liquidation proceedings ((falência).
Regarding the judicial restructuring proceeding, as mentioned be-
fore, the debtor and its creditors seek to settle on a collect agreement,
aiming to recover a viable business that is going through a transitory
crisis. For this reason, the reorganizational plan is essentially a contract,
whose main consequence is the novation of the original debts, with the
concession of new payment forms and other restructuring measures45.
Therefore, the crisis’ solution is a matter related exclusively to the cred-
itors and the debtor, who will have full freedom to determine which
measures are more adequate in each case, according to article 50 of
BBL – which also lists a few examples of restructuring methods, such

43. The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York
Convention”), adopted in Brazil, requires courts of contracting States to give effect to arbitration agreements
and to recognize and enforce arbitration awards issued in foreign States, a measure that require the filling of
a claim in the State that recognition and enforcement is sought. Also in art. 18 of Reg. n. 848/15 - European
Insolvency Regulation.
44. SADDI, Jairo. Análise econômica da falência. In: TIMM, Luciano Benettti (org.) Direito e Economia no
Brasil. São Paulo: Atlas, 2012, p. 340.
45. Sérgio Campinho: “Thus, in our vision, the judicial restructuring must be understood as a judicial contract, with
the novation feature, implemented through a restructuring plan, obeyed, by the debtor, certain conditions
of objective and subjective order for its’ implementation”. CAMPINHO Sérgio. Falência e recuperação de
empresa: O novo regime da insolvência empresarial. 9. ed. Rio de Janeiro: Renovar, 2018. p. 11-13.

170
as the partial selling of assets, salary reduction or share capital increase.
Being a judicial contract, what prevails in the reorganizational plan is
the parties’ private autonomy.
This also includes, naturally, the ability to choose the most appropriate
dispute resolution mechanism. If the debtor and creditors chose to submit
eventual conflicts to an Arbitral Tribunal, there is no obstacle to inserting
an arbitration agreement to the restructuring plan; on the contrary, this
could be a very positive measure. The two-year-maximum period of judi-
cial supervision (during which the creditors, Court and Attorney General’s
Bankruptcy office oversee the plan compliance), is the most critical phase of
a restructuring process. During that time frame, if any of the agreed obliga-
tions are not complied by the debtor, the judicial restructuring is converted
into a liquidation proceeding46, which is why the disputes emerged in that
period tend to be extremely risky for all parties involved47. In this scenario,
fast and just decisions regarding disputes that may arise, such as those pro-
vided by an Arbitral Tribunal, are desirable, considering the risks involved.
Arbitration not only reduces transactional costs, but also offers a swifter
resolution for disputes (when compared to those provided by State courts),
which is adequate for a long, complex proceeding involving many different
interests and matters such as the judicial restructuring. Also, the reorgani-
zational plan often contains multifaceted and specific themes such as cor-
porate reorganizations, share control disputes, asset divestitures, etc., which

46. Article 22, II, “b” of BBL.

47. About the mentioned 2-year-period Luiz Fernando do Vale de Almeida notes: “And it is precisely this gap that
makes space for the use of arbitration in insolvency proceedings, since in the period of implementation of the
plan, the debtor is at risk of seeing the ‘reconstruction’ converted into bankruptcy, due to the nonperformance
of any obligation. Thus, such disputes may be resolved by the arbitral instrument. (...) arbitration may be the
component endowed with speed and dexterity to accommodate such malfunctions and to seek to remedy
them.” (In the original wording: “E é exatamente este hiato que abre espaço para a utilização da arbitragem na
recuperação, na medida em que no período de implementação do plano, recai sobre o devedor o risco de ver a
‘reconstrução’ convertida em falência, devido ao descumprimento de alguma obrigação. Assim, tais contendas
vislumbradas podem ser dirimidas pelo instrumento arbitral. (...) a arbitragem pode ser o componente dotado
de celeridade e destreza para acolher tais avarias e para procurar dirimi-las”. GUILHERME, Luiz Fernando
do Vale de Almeida. “A arbitragem na recuperação judicial de empresas”. Revista de Direito Empresarial e
Recuperacional, ano I, n. 0, 2010, p. 131-132.

171
are not always mastered by judges.48 Thus, a decision issued by an Arbitral
Tribunal composed exclusively by expert arbitrators on those areas grants a
higher level of legal certainty to the restructuring process.49
Even though it is possible to include an arbitration clause in the restruc-
turing plan, the agreement may not replace specific procedural institutions
set forth in BBL, such as the creditors general assembly, as noted by Justice
Luis Felipe Salomão and Prof. Paulo Penalva Santos:50

As a rule, the arbitration agreement is applicable to questions con-

templated on the judicial restructuring plan, as professor José Emilio
Nunes Pinto highlighted in an important article on the matter. What
is not possible is the use of arbitration as a substitute for specific
procedural institutions regarding the judicial restructuring (…).
For example, an arbitration agreement to examine subjects under
the exclusive responsibility of the general assembly of creditors.51

48. Brazilian Courts still suffer from lack of specialization, especially on small districts on which insolvency proceed-
ings are not a part of the daily routine. For this reason, BBL has been recently updated (Law 14.112/2020)
and one of its cornerstones is now professional specialization.
49. On the matter, José Emílio Nunes Pinto remarks that: “Given the complexity of judicial proceedings and the
horizontal and vertical appeal system, it is reasonable to imagine that the debtor and its creditors seek a fast,
specialized and efficient way of these controversies. For that matter, we are certain that arbitration is the
most adequate mechanism to face these questions in the specific phases they arise, mainly for allowing that
the whole proceeding is conducted by specialists on the controverted subject.” (In the original wording: “[…]
dada a complexidade dos procedimentos judiciais e o sistema horizontal e vertical de recursos, é razoável se
imaginar que o devedor e os credores busquem uma forma célere, especializada e eficiente de solução dessas
controvérsias. Para tanto, não temos dúvida que a arbitragem é o mecanismo mais adequado para enfrentar
essas questões na etapa específica que venham a surgir, sobretudo por permitir que todo o procedimento ve-
nha a ser conduzido por especialistas na questão de fundo da controvérsia”.) PINTO, José Emílio Nunes. A
arbitragem na recuperação de empresas. Revista de Arbitragem e Mediação. Ano 2, nº 7, out-dez 2005, p.
88.
50. SALOMÃO, Luis Felipe; SANTOS, Paulo Penalva. Recuperação judicial, extrajudicial e falência: teoria e
prática. 6. ed. Rio de Janeiro: Forense, 2021, p. 382. In the same lines, Raphael Nehin Corrêa: “As the restruc-
turing plan is nothing more than a contract between creditors and debtor with the purpose of the company’s
recovery, in our view, there is no obstacle to the inclusion of an arbitration clause in it in order to establish
arbitration as a dispute resolution mechanism concerning the fulfillment of the obligations provided for in the
plan. In fact, the matters related to the implementation of the restructuring plan deal with available property
rights, since the discussion will be the compliance or not of contractual obligations agreed upon in the plan.”.
Op. cit. p. 85.
51. In the original wording: “Em princípio, é cabível a cláusula arbitral em questões previstas no plano de recupe-

172
 Even though the adoption of arbitration as a dispute resolution mech-
anism on the judicial restructuring plan is undoubtedly beneficial, there
are still unanswered questions on the matter. An important question that
has been debated is whether the arbitration clause, once included in a
creditor-approved plan, binds all of the creditors (even those who were
not present to the assembly or expressly objected to it), since arbitration
is always based on a consent agreement between parties.
There is no consensus on the matter. Raphael Nehin Corrêa,52 on one
side, believes that the arbitration agreement does not bind creditors that
did not vote for its inclusion or that were not present at the general assem-
bly of creditors, as the arbitration agreement has consensual nature and
is considered autonomous related to the contract (in this case, the plan)
in which it is included.53 Others, like Alberto Macedo,54 defend that the
majority principle also applies to this case, since the judicial restructur-
ing relies on a cooperative behavior model, which is why the disagreeing
minority must also submit to the arbitration agreement. Since there is no
notice of rulings on this matter until this day, the question remains
unanswered by the Courts.55

ração judicial, conforme salienta o Professor José Emilio Nunes Pinto em importante artigo sobre o tema. O
que não é possível é a previsão de arbitragem para substituir institutos específicos do processo de recuperação
judicial (…). Por exemplo, uma cláusula arbitral para examinar matérias que são da competência exclusiva da
Assembleia geral de credores”.
52. CORRÊA, Raphael Nehin. Arbitragem e insolvência. In: MELO, Marcelo (ed.). Arbitragem no Brasil: vo-
lume I. São Paulo: Impressão Régia, 2010.
53. In the same lines, José Emilio Nunes Pinto, op. cit., p. 91.
54. MACEDO, Alberto. Arbitragem e recuperação de empresas. In: JOBIM, Eduardo; MACHADO, Rafael
Bicca (coord.). Arbitragem no Brasil: aspectos jurídicos relevantes. São Paulo: Quartier Latin, 2008, p. 36.
55. It is interesting to note that similar doubt emerged when article 136-A Brazilian Federal Law 6.404/76 started
to explicitly allow the inclusion of an arbitration agreement in a company’s bylaws. At the time, scholars ques-
tioned whether a shareholder who did not explicitly agree to the arbitration clause would have his withdraw-
al right ensured by the company. Another question that emerged at that time was whether the shareholder
should be binded to an arbitration agreement if he voted against its inclusion. The debate, however, lost its
object in 2015, when an amendment was made on the Federal Law 6.404/76, assuring the withdrawal right
to shareholders who did not agree with the inclusion of an arbitration agreement on the company’s bylaws.
The reasoning applied was that if the shareholder does not exercise this right, it is tacitly adhering to the ar-
bitration clause. V. SESTER, Peter. Comentários à lei de arbitragem e à legislação extravagante. São Paulo:
Quartier Latin, 2020, p. 486.

173
 Regarding the liquidation proceeding ((falência), at first it could seem
incompatible with arbitration. As Vesna Lazic56 states, insolvency and
arbitration are both legal procedures, but of a very different type of nature.
They have distinct purpose and underlying policies and dissimilar objectives and
principals. Indeed, while arbitration is a private, confidential proceeding,
as a rule, the liquidation proceeding involves public interest, which is why
it is guided by transparency and publicity principles.
Nevertheless, it is possible to utilize arbitration as a dispute solution
method to solve conflicts emerged between creditors and the debtor during
a liquidation proceeding. Certain specific rules, however, must be obeyed.
As we underlined when commenting the possibility of inserting an arbi-
tration agreement in the judicial restructuring plan, matters inherent to
the liquidation proceeding, such as the bankruptcy ruling or those relat-
ed to the creditor’s general assembly’s decisions, also known as the “core
claims”, are under exclusive bankruptcy’s court jurisdiction, which may
not be waived by the parties’ private agreement since it is constitutional-
ly granted.57 Those claims are subject of public policy, and, thus, do not
constitute available property rights, leading to its unarbitrability.
Contractual disputes between the bankrupt estate and its creditors,
however, may be submitted to an Arbitral Tribunal, if the parties have
agreed to it, as Antonio Caramelo58 notes:

In the majority of legal systems, the arbitration decision is accepted

on merely contractual disputes between the debtor and other inter-
ested parties, such as the claim to receive a certain amount of money
(with the possible restriction that the Arbitral Tribunal may declare
the credit’s existence, but may not condemn the bankrupt estate to

56. LAZIC, Vesna. Insolvency proceedings and commercial arbitrations. The Hague: Kluwer Law International,
1998, p. 42.
57. Article 109, I of the Brazilian Federal Constitution.
58. CARAMELO, Antonio Sampaio. Critérios de arbitrabilidade de litígios: revisitando o tema. In: WALD, Ar-
noldo (coord.). Arbitragem e mediação. Ano 7, nº 27, out-dez 2010, p. 157-158.

174
 its respective payment, which depends on the collective proceeding
under the State Courts’ jurisdiction) or the claim to restore assets
that are not owned by the bankrupt estate.59

Therefore, as asserted by Caramelo, matters such as credit verification

may be discussed in an arbitration proceeding – but the credit itself may
not be paid outside of the liquidation proceeding, since the bankruptcy
court has exclusive jurisdiction on executive measures over the debtor’s
assets. As it was stated regarding the judicial restructuring proceeding, ar-
bitration also consists in an extremely beneficial dispute resolution method
in this case it grants a fast and effective response to an emerged conflict,
reducing the transactional costs to the interested parties.
Finally, it is important to reiterate that subjective arbitrability is not
compromised by the liquidation decision ((falência). As previously stated,
what happens in the liquidation proceeding is a shift on the debtor’s le-
gal representation: since the entrepreneur is removed from the company’s
management, the judicial administrator becomes its legal representative.
Thus, the insolvent company can partake on an arbitration proceeding, if
they have validly consented to an arbitration agreement – whether before
or after the bankruptcy ruling – case in which the judicial administrator
will legally represent it.
The same understanding is adopted in other countries, in which the
bankruptcy trustee acts as a representative of the bankruptcy estate and
is charged with managing assets of the debtor and protecting the rights
of the creditors.60

59. In the original wording: “Na maioria das ordens jurídicas, admite-se a decisão por arbítrio de litígios meramente
contratuais existentes entre o devedor e terceiros, tal como o pedido de pagamento de uma soma de dinheiro
(com a possível restrição de o tribunal arbitral poder declarar existente o crédito sobre a massa insolvente,
mas não poder condenar esta no respectivo pagamento, que depende do processo coletivo a cargo do tribunal
estadual competente) ou o pedido de separação de bens não pertencentes à massa insolvente”.
60. Section 704 of Chapter 7 of the U.S. Bankruptcy Code; Chapter VII of the Insolvency Act 1986 (England)
and art. L. 811-1 of French Commercial Code.

175
4. CONCLUSION

The key to determine if an insolvency proceeding – whether a judicial

restructuring or a liquidation proceeding ((falência) – will affect an arbi-
tration clause is to examine if, at the time the agreement was made, the
parties (and especially the insolvent company) held their full legal capacity.
The judicial restructuring proceeding has no effect on the debtor’s legal
capacity. For this reason, they remain fully capable of signing new con-
tracts containing arbitration agreements and may take part on arbitration,
being irrelevant if the latter was initiated before or after the insolvency
proceeding. This scenario shifts in the case of a liquidation proceeding
(
(falência ), in which the debtor loses the right to manage or dispose of its
assets. If the arbitration agreement was signed before the bankruptcy rul-
ing, the validity of the clause depends on the debtor’s full legal capacity at
the moment the contract was celebrated; if an insolvent company wants
to agree to an arbitration clause after the bankruptcy ruling, it must be
represented by their legal representative, i.e., the court-appointed judicial
administrator. Even though insolvency proceedings do not authorize the
denial of the arbitration agreement’s effectiveness, we understand that in
case of a liquidation proceeding ((falência), the judicial administrator must
request the bankruptcy court’s authorization prior to initiating an arbitration
proceeding or agreeing to an arbitration clause for transparency purposes.
It is also possible to utilize arbitration as a dispute solution method to
solve conflicts emerged between creditors and the debtor during the re-
structuring and liquidation proceedings. Arbitration reduces transactional
costs and offers a swifter resolution for disputes, which is adequate for
a long, complex proceeding involving many different interests and mat-
ters such as insolvency proceedings. It is important to notice, however,
that matters inherent to those proceedings such as the bankruptcy ruling
or those related to the creditor’s general assembly’s decisions, known as

176
“core claims”, are under exclusive bankruptcy’s court jurisdiction since they
subject of public policy, which may not be waived by the parties’ private
agreement since it is constitutionally granted.

5. REFERENCES

BORN, Gary B. International Arbitration: Law and Practice. Kluwer

Law International, 2012, pp. xxvii – xxviii.
CAMPINHO Sérgio. Falência e recuperação de empresa: O novo Re-
gime da Insolvência Empresarial. 9. ed. Rio de Janeiro: Renovar, 2018.
CARAMELO, Antônio Sampaio. Critérios de arbitrabilidade de litígios:
revisitando o tema. In: WALD, Arnoldo. Arbitragem e mediação.
Ano 7, nº 27, out-dez 2010.
CARMONA, Carlos Alberto. Arbitragem e processo: um comentário à
Lei 9.307/96. São Paulo: Atlas, 2009, p. 83.
CORRÊA, Raphael Nehin. Arbitragem e insolvência. In: MELO, Marce-
lo (ed.). Arbitragem no Brasil: volume I. São Paulo: Impressão Ré-
gia, 2010.
GRION, Renato Stephan; DE PAIVA, Luiz Fernando Valente; SILVA,
Guilherme Piccardi de Andrade. A arbitragem no contexto das recu-
perações judiciais e extrajudiciais e das falências. In: MELO, Leonardo
de Campos; BENEDUZI, Renato Rezende (coord.). A reforma da
arbitragem. Rio de Janeiro: Forense, 2016, p. 90.
GUILHERME, Luiz Fernando do Vale de Almeida. A arbitragem na
recuperação judicial de empresas. Revista de Direito Empresarial e
Recuperacional, ano I, n. 0, 2010, p. 131-132.
GUIMARÃES, Márcio Souza. Le rôle du ministère public dans les
procédures collectives: approche de droit comparé français et brésil-
ien. France: ANRT, 2011.

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reito das empresas em dificuldades. In: WAISBERG, Ivo; RIBEIRO,
José Horácio Halfeld Rezende (org.). Temas de insolvência: estudos
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__________________________. Recuperação judicial: o plano de recu-
peração judicial. In: COELHO, Fábio Ulhoa (coord.). Enciclopédia
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lo: 2017.
__________________________. Direito das empresas em dificuldade.
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SAMPAIO, Patrícia Regina Pinheiros (coord.). Direito e economia:
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__________________________. Insolvency and Arbitration. In: SES-
TER, Peter (ed.) International Arbitration: Law and Practice in
Brazil. Oxford: Oxford University Press, 2020, p. 499-518.
LAZIC, Vesna. Insolvency proceedings and commercial arbitrations.
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LEMES, Selma Ferreira. Arbitragem em números e valores. Available
at: http://selmalemes.adv.br/artigos/Analise-Pesquisa-ArbitragensN-
seValores-2020.pdf. Accessed on August 14th, 2019.
MACEDO, Alberto. Arbitragem e recuperação de empresas. In: JOBIM,
Eduardo; MACHADO, Rafael Bicca (coord.). Arbitragem no Brasil:
aspectos jurídicos relevantes. São Paulo: Quartier Latin, 2008.
MORAES, Felipe Ferreira Machado Moraes. Arbitragem e falência.
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TINS, Pedro Batista (coord.). Vinte anos da lei de arbitragem. São
Paulo: Atlas, 2017.
MORAES, Felipe. Arbitragem, falência e recuperação judicial. In: LEVY,
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PINTO, José Emílio Nunes. A arbitragem na recuperação de empresas.
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SACRAMONE, Marcelo Barbosa. Comentários à lei de recuperação
de empresas e falência. 2. ed. São Paulo: Saraiva Educação, 2021.
SADDI, Jairo. Análise econômica da falência. In: TIMM, Luciano Ben-
ettti (org.) Direito e Economia no Brasil. São Paulo: Atlas, 2012.
SALOMÃO, Luis Felipe; SANTOS, Paulo Penalva. Recuperação ju-
dicial, extrajudicial e falência: teoria e prática. 6. ed. Rio de Janeiro:
Forense, 2021.
SESTER, Peter (ed.). International Arbitration: Law and Practice in
Brazil. Oxford: Oxford University Press, 2020.
_____________. Comentários à lei de arbitragem e à legislação
extravagante. São Paulo: Quartier Latin, 2020.
TOLEDO, Paulo Fernando Campos Salles de. Arbitragem e Insolvên-
cia. In: WALD, Arnoldo (org.). Doutrinas essenciais: arbitragem e
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WARREN, Elizabeth. Chapter 11: Reorganizing American Business.
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179
 Recognition and Enforcement of
Foreign Arbitral Awards in Brazil
Peter Christian Sester1

1. IMPORTANT SWITCH POINT:

NATIONALITY OF THE AWARD

From a Chinese perspective, one of the key issues when negotiating

arbitration agreements with Brazilian business partners should be to
agree on the nationality of a possible future award. Both China and
Brazil have ratified the New York Convention (NYC), hence, the na-
tionality of the award is a switch point on the path to cross-border
recognition and execution of arbitral awards; the choice is between
mandatory exequatur proceedings (if the award was rendered in Chi-
na, for instance), or a possible challenge of the award in case of a Bra-
zilian award.

1. Since 2020 Professor of Commercial Arbitration and Buiness Law at FGV Direito Rio. Professor of International
Business Law and Law & Economics at University St. Gallen (Switzerland) – 2014 to 2019. Professor of
Civil, Business and Tax Law and director of the Institute for Law and Finance, Goethe University Frankfurt
a. M. – 2013 to 2014. Honorary Professor of Corporate and Capital Market Law at the University of Freiburg
(Germany) – 2003 to 2012. Professor of European and International Business Law at Karlsruhe Institute of
Technology (previously University of Karlsruhe) and Director of the Institute for Information and Business
Law – 2002 to 2012. Assistant Professor at University of Marburg, Institute for Business and Comparative
Law (English Law and US Law) – 1998 to 2002.
 In this context, it is important to note that the Brazilian Arbitration
Law (BAL) follows a monistic approach.2 Therefore, it does not distin-
guish between national and international arbitration, but establishes a
single set of rules, applicable to both types of arbitration. The BAL only
distinguishes between domestic and foreign awards because the latters
are subject to exequatur.
The BAL of 1996, which anticipated the technical ratification of the
New York Convention, which only occurred in 2002, applies a strict
territorial approach to the qualification of awards. According to the
sole paragraph of art. 34 of BAL, an award is a domestic award if it was
rendered on Brazilian territory, irrespectively of the arbitration or the
headquarters of the administrating arbitration institution.
Differently from many national arbitration laws around the world,
the BAL does not mention the seat of the arbitration as a decisive cri-
terion (art. 10 IV BAL), but requires that the arbitration agreement sets
out the place where the award shall be rendered (art. 11 (I) of BAL).3
According to the Brazilian Superior Court of Justice (STJ) “[…] in our
national judicial order the geographic criterion (ius soli) has been chosen
to determine the nationality of arbitral awards, which, in turn, is deter-
mined exclusively by the place where the decision was rendered. […] the
fact that the request for the commencement of arbitration proceedings
was filed to the International Court of Arbitration of the International
Chamber of Commerce (ICC) does not have the impact to change the
nationality of the award”.4 This ruling dates to 2011, hence before the
ICC established, in 2017, a Brazil Office in São Paulo, where requests

2. SESTER, Peter Christian. International Arbitration: Law and Practice in Brazil. Oxford: Oxford University
Press, 2020. p. 11 and p. 26; SESTER, Peter Christian. Business and Investment in Brazil. Oxford: Ox-
ford University Press, 2022. p. 145-148.
3. SESTER, Peter Christian. Comentários à Lei de Arbitragem e à legislação extravagante. São Paulo: Quartier
Latin, 2020. p. 170.
4. STJ, Third Chamber, Special Recourse, Number 1.231.554-RJ, reporting Justice Nancy Andrighi, judged on
May 25th, 2011; see SESTER, Peter Christian. Comentários à Lei de Arbitragem e à legislação extrava-
gante. São Paulo: Quartier Latin, 2020. p. 84.

182
for arbitration can be submitted with the Secretariat of the ICC Inter-
national Court of Arbitration.
As a consequence of its territorial approach, the BAL requires that each
and every (domestic) award clearly defines the place where the award was
rendered (art. 26 (IV) of BAL). The lack of this information may justify
a challenge of the award (art. 32, (III) of BAL).
Hence, when dealing with Brazilian business parties, Chinese coun-
terparties should carefully analyze the differences between Brazilian an-
nulment and exequatur proceedings. Given the fact that the topic of this
section is the recognition and enforcement of foreign awards, I will focus
on that, and only briefly compare annulment to exequatur proceedings.

2. COMPARING ANNULMENT WITH

EXEQUATUR PROCEEDINGS

The main difference between the two proceedings is that the request
for exequatur shall be submitted straight to the court of third in-
stance, the so-called Superior Tribunal de Justiça (STJ, comparable to
the French Cour de Cassation or the German Bundesgerichtshof
Bundesgerichtshof). Con-
sequently, no appeal or regular challenge to a decision granting ex-
equatur is admissible.5
In contrast, annulment proceedings start on the level of the first
instance. Appeal is possible, and even the filing of a so-called Special
Recourse (on legal grounds only) to the STJ does not pose severe ob-
stacles. As a matter of fact, if one party decides to challenge an award
the probabilily to end up in the third instance is not low and takes time
(minimum 5 years). However, the overall success-rate of requests to set
an award aside corresponds in Brazil to those rates known from classi-
cal international arbitration clusters, such as Geneva, Paris, London,

5. See remarks on arts. 34-35 of BAL in the present paper.

183
and New York. But one has to admit that the timeframe is an issue
in Brazil. Annulment proceedings may easily last for four to six years.
An important difference between annulment and exequatur proceedings is
the list of grounds that justify to set an award aside or deny exequatur. While
the list of grounds which justify annulment (see arts. 32 of BAL) does not
include explicitly the violation of national substantive law, the list of grounds
which justify rejecting a request for exequatur establishes such a public policy
backstop (see art. 39 (II) of BAL). However, what seems at first sight to be
an important difference is less relevant in practice. First, because the Special
Court of the STJ rarely denies exequatur on the grounds of a substantive
public policy violation, and, second, because in recent years some Chambers
(“Turmas”) of the STJ and its Second Division (“Segunda Seção”) rendered
decisions which indicate that the Court will not tolerate arbitral awards that
shock one sense of justice, in the light of Brazilian substantive law.6
Last but not least, it is important to note that different organs within
the STJ decide on annulments suits and exequatur proceedings. Special
recourses (a special type of appeal) in the course of annulment proceedings
fall within the competence of a Chamber (“Turma”) of the STJ, typical-
ly the third or the fourth Chambers. Each Chamber is composed of five
judges (“Ministros”). The third and fourth Chambers are specialised in
commercial and civil law. The respective judges have a vast experience in
arbitration and have contributed significantly to its development in Bra-
zil. Exequatur proceedings, on the other hand, fall within the competence
of the Special Court (“Corte Especial”) of the STJ. This organ is staffed
with the fifteens most senior Justices of the STJ, which includes in total
33 Justices. Hence, specialists of criminal and administrative law, among
others, will rule on applications for recognition of foreign arbitral awards.

6. See the Opinion of Justice Paulo de Tarso Sanseverino on the case STJ, Third Chamber, Special Recourse (REsp)
Number 1.550.260-RS, judged on December 12th 2017 and STJ, Second Division (“Segunda Sessão”), Com-
petence Conflict (CC) Number 151.130-SP, decision reported by Justice Luis Felipe Salomão, judged on
November 27th 2019; for an analysis of this Case Law see SESTER, Peter Christian. Comentários à Lei de
Arbitragem e à legislação extravagante. São Paulo: Quartier Latin, 2020. p 370-374.

184
However, what sounds strange in the first place is working pretty well in
practice. The case law on exequatur is consistent and arbitration friendly.

3. THE LEGAL SOURCES OF THE BAL, AND

PARTICULARLY ITS NORMS ON EXEQUATUR

The authors of the BAL, essentially, used the Spanish Arbitration Law
of 1988 and the UNCITRAL Model Law on Commercial Arbitration
of 1985 as a starting point, when drafting the law project in the early
1990s. They obviously also took into consideration the New York Con-
vention of 1958 (NYC) and the Inter-American Convention of 1975
(also known as the Panama Convention). The BAL’s chapter on the
recognition and enforcement of foreign awards was closely modelled on
the NYC, although the convention was not applicable in Brazil at the
time of drafting the BAL. Brazil did not adopt the NYC until 2002.
As a matter of fact, Brazilian courts and legal scholars still rarely re-
fer to the NYC. The reason being the result of a very smart move made
by the authors of the BAL. In 1991 and 1992, when they were drafting
the law project, it was completely unclear whether and when the Brazil-
ian legislator would ratify the NYC. Therefore, the BAL drafting group
needed to find a standalone solution to raise Brazil to the level of those
countries that had already adopted the NYC and had implemented a
state-of-the-art legal framework for arbitration. Hence, the authors of
the BAL drafted the Chapter on the Recognition and Enforcement of
Foreign Awards (arts. 34-40 of BAL) in close alignment with the rules
of the NYC. Thus, when elaborating the BAL, its authors “softly” an-
ticipated the NYC’s formal ratification, which was completed roughly
ten years later. During this decade, the STJ got so used to apply the
rules of the BAL on exequatur that it still did not switch to apply or
quote directly the NYC.

185
 The differences between both legal documents are not significant; one
issue is, however, remarkable. According to the BAL, exequatur can only
be requested if the respective arbitral award qualifies as a foreign award in
the sense of art. 34, sole paragraph of the BAL. As previously outlined,
the said norm only refers to the place where the award was effectively ren-
dered, and not for instance to the seat of the arbitral tribunal. Hence, if
the arbitration law of the state, where the award was effectively rendered
(e.g., China), does not qualify an award as a national award, the problem
of a so-called a-national or non-national award may arise.7 As a matter
of fact, Brazil ratified both alternatives of art. 1 (1) of the NYC. Conse-
quently, a request for exequatur can be filed to the STJ on the grounds
that the award is not classified as a domestic award in the country of its
origin, hence, where the award was actually rendered.8

4. WORDING OF CHAPTER VI OF
THE BAL AND COMMENTS

4.1 Art. 34

A foreign arbitral award shall be recognized and enforced in Brazil in ac-

cordance with international treaties that have effectiveness in the internal
legal system, and, in the absence of such treaties, in strict accordance with
the terms of the present Law.
Sole paragraph: An award shall be considered a foreign arbitral award
if it was rendered outside the national territory.

7. GAILLARD, Emmanuel; BERMANN, George A. Guide on the Convention of the Recognition and En-
forcement of Foreign Awards. New York: Brill/Nijoff, 2017. p. 392.
8. Article 1 Decree Law (“Decreto”), Number 4.311/2002. SESTER, Peter Christian. Comentários à Lei de Ar-
bitragem e à legislação extravagante. São Paulo: Quartier Latin, 2020. p. 393.

186
4.1.1 NYC and other ratified international treaties

In order to become fully effective in Brazil, a foreign award needs to be

recognized by the Brazilian judiciary; fully effective means that the foreign
award will be placed on a par with domestic awards regarding all legal
aspects (arts. 18, 31, 35 of BAL, and art. 961 of Brazilian Civil Proce-
dure Code).
As previously mentioned, the authors of the BAL were so smart that
they actually anticipated the ratification of the NYC by drafting Chap-
ter VI perfectly in line with the NYC. As a tribute to future ratification,
and to the principles of public international law, they already addressed
a potential conflict of norms: if Brazil ratified an international treaty ad-
dressing the recognition and enforcement of foreign awards, said treaty
shall prevail. Hence, the hierarchy of norms is clear: the NYC (ratified in
2002) ranks higher than the BAL.
However, both legal documents are so similar, and the STJ, having
exclusive jurisdiction for exequatur, grew so familiar with the BAL that it
hardly ever makes reference to the NYC, although it has applied the content
of the convention to almost all exequatur procedures for eighteen years.
Brazil also ratified a number of other multilateral9 and bilateral inter-
national treaties dealing with the recognition and enforcement of foreign
arbitral awards. Within their particular scope of application, these treaties
enjoy lex specialis status vis-à-vis the NYC.

4.1.2 Definition of foreign awards

The sole paragraph of art. 34 of the BAL applies the principle of territo-
riality to distinguish foreign and domestic awards. The chosen connecting

9. Inter-American Convention on International Commercial Arbitration (the so-called Panama Convention), rati-
fied by Decree Number 1.902, May 9th, 1996; ratified by Decree Number 2.411, December 2nd, 1997; ratified
by Decree Number 4.719, June 4th, 2003.

187
factor is consistent with the approach of the NYC. Given the Convention’s
priority in the norm hierarchy and the fact that it served as a reference
model for the BAL, it should be used when interpreting the term foreign
award in the sense of art. 34 of the BAL.
According to professor Gary Born10, “most courts around the world
(when applying the NYC) answer the key question about where an award
is made as follows: an award is made at the seat of arbitration, either as
specified in the arbitration agreement or (failing such agreement) by the
arbitral tribunal or institution. When arbitral hearings are held outside
the seat, for the sake of convenience, or when the arbitrators (who reside
in different places or for convenience) sign an award in different states,
this should affect neither the arbitral seat nor the place where the award
is deemed to be made. Likewise, the delivery of an award to a party in its
home jurisdiction, outside the seat of arbitration, has no effect on where
the award is ‘made’. Under the Convention, an award is ‘made’ in only one
place, and that place is the contractually specified seat of arbitration”.11
This opinion is consistent with art. 20 (I) in combination with art. 31
(3) of the UNCITRAL Model Law. However, the STJ held that, accord-
ing to art. 34 of the BAL, the nationality of an award is defined in Brazil
strictly based on territoriality (or ius soli). What matters is the place where
the award was effectively rendered rather than where the arbitration request
was filed12, or where the arbitration was seated. Subject to art. 10 IV of
BAL, an arbitration agreement must indicate the place where the award
shall be rendered, while the indication of the seat is not mandatory (art.
11 I of BAL). These rules only apply to arbitration agreements that are
subject to the BAL, but they highlight the connecting factor that enjoys
priority under the BAL. However, if determining the place where the

10. BORN, Gary. International Arbitration: Law and Practice. 2nd ed. Wolters Kluwer, Alphen aan den Rijn,
2016. p. 377-378.
11. Ibid, p. 377-378.
12. STJ, Third Chamber, Special Recourse, Number 1.231.554 reported by Justice Nancy Andrighi, judged on
May 24th, 2011.

188
award was effectively rendered poses difficulties in an international arbi-
tration (in the sense of the UNCITRAL Model Law), the contractually
specified seat of arbitration should be used as a default rule (according to
art. 31 (3) of UNCITRAL Model Law).

4.1.3 Recognition and enforcement of foreign awards

Art. (I) (1) NYC, Chapter VI of the BAL, and the UNICITRAL Model
Law (arts. 35 and 36) distinguish recognition and enforcement without
defining these terms. Concerning the NYC, commentators broadly agree
that while recognition refers to the process of considering an arbitral award
binding, yet not necessarily enforceable, enforcement refers to the process
of giving effect to an award.13
Recognition in the sense of the BAL means that a foreign award is
placed on a par with national awards, for instance, with regard to the res
judicata effect in Brazil (arts. 485 (V) and 502 et seq of CPC). This is the
defensive dimension of an award and its exequatur. Enforcement goes
further because of its compulsory or aggressive dimension. It refers to a
request for assistance by the Brazilian judiciary in cases of non-compliance
with the award. After a successful application for exequatur, the foreign
award turns into an enforceable judicial title (art. 515 (VIII) of CPC),
fully equivalent to a domestic award or court sentence (art. 515 (I) and
(VII) of CPC) for the purpose of enforcement in Brazil.

4.2 Art. 35

In order to be recognized and become enforceable in Brazil, foreign arbitral

awards are solely subject to recognition by the Superior Court of Justice.

13. GAILLARD, Emmanuel; BERMANN, George A. Guide on the Convention of the Recognition and En-
forcement of Foreign Awards. New York: Brill/Nijoff, 2017. p. 13-14.

189
4.2.1 One-stop recognition procedure

The Brazilian legislator adopted a one-stop approach to exequatur and

put the respective proceedings on the level of the STJ. Theoretically, an
interested party could file an Extraordinary Appeal (“Recurso Extraor-
dinário”) to the Brazilian federal constitutional court, the Supremo Tri-
bunal Federal (STF). The threshold, however, is very high. Hence, the
Extraordinary Appeal has little practical use in the context of exequatur.

4.2.2 Competence of the STJ: Special Court (“Corte Especial”)

The interested party shall address its request for exequatur of a foreign
award to the president of the STJ, who may straightforwardly grant the
request if neither the counterparty nor the Federal Prosecutors Office
(Ministério Publico Federal) objections the request.
The procedural rules for an exequatur request are established in arts. 36
and 37 of the BAL, arts. 960 to 965 of the Civil Procedure Code (CPC),
and arts. 216–A to 216–N of the Internal Regime of the STJ (Regimento
Interno do Superior Tribunal de Justiça, hereafter RISTJ). These provi-
sions are discussed below (see comments on arts. 36 and 37 of the BAL).
The competence of the STJ’s president is regulated in arts. 216–A and
216–K. In case of objections against the request for exequatur, the presi-
dent shall submit the request to the Special Court (art. 216-K of RISTJ).
Thirty-three judges are appointed to the STJ (art. 1 of RISTJ). How-
ever, most cases are decided by specialized chambers; five judges constitute
such a chamber (art. 2 §4 of RISTJ). In general, annulment suits against
domestic arbitral awards are decided by the STJ’s Third or Fourth Cham-
ber, which are also competent to rule on appeals on civil and commercial
law matters.
Instead, the Special Court decides only cases of extraordinary relevance
(e.g., crimes committed by governors of the Brazilian states or recourses

190
based on conflicting decisions within the STJ; see art. 11 (I) and (XIII)
of RISTJ).
Fifteen judges, including the STJ president, constitute the Special
Court. To be precise: the fifteen longest-serving Justices, irrespectively
of their specialization (art. 2 §2 of the RISTJ). These Justices, many of
whom are not specialized in commercial or arbitration matters, decide
on applications for exequatur. If the respective case concerns a legal issue
that is subject to consolidated case law, the reporting Justice could decide
straightforwardly (art. 216-K sole paragraph of RISTJ). So far, this option
has not been used in practice.
What might look like “overkill” (fifteen Justices!) from an international
perspective is actually working quite well. This is because in most cases
the members of the Special Court will follow the decision proposed by
the reporting judge. However, if another Justice wishes to see and anal-
yse the case (“pedir visto”), the exequatur procedure may become lengthy
(e.g., the famous Abengoa case14).

4.3 Art. 36

The provisions of arts. 483 and 484 CPC shall, where appropriate, apply
accordingly to the exequatur procedure required for the recognition and
enforcement of foreign arbitral awards.

4.3.1 Reference to the Civil Procedure Code (CPC)

Subject to art. 36 of the BAL, the CPC provisions on the recognition and
enforcement of foreign court judgments apply accordingly to the exequatur
of foreign arbitral awards. The wording of art. 36 of the BAL still makes

14. STJ, Special Court (CE), Contested Request for Exequatur (HDE), Number 120 EX 2016/03117356-0 re-
ported by Justice Nancy Andrighi in the Official Journal on March 12th, 2019.

191
reference to arts. 483 and 484 of the CPC/1973, which were revoked in
the course of the overhaul of the CPC in 2015. The new Code includes
provisions on the recognition of foreign court judgments in a separate
chapter (arts. 960 to 965 of CPC/2015).

4.3.2 Norm hierarchy

According to art. 960 §3 of the CPC/2015, exequatur procedures are reg-

ulated by “[…] treaties and the law, and subsidiary by the provisions of this
chapter”. Hence, the legislator explicitly confirmed the following norm
hierarchy, which follows from general principles of national and interna-
tional law: (1) NYC, (2) BAL (lex specialis), (3) CPC (applicable by refer-
ence, art. 35 of the BAL), and (4) Internal Regime of the STJ (applicable
by reference, art. 35 of the BAL in combination with art. 960 §3 and §2
of the CPC). The competence of the STJ follows directly from the Bra-
zilian Federal Constitution (art. 105 (I) (i) of CFRB/1988). Arts. 216–A
to 216–N of the Internal Regime of the STJ (RISTJ) provide detailed
rules on exequatur procedure, and are to a large extent self-explanatory.

4.4 Art. 37 BAL

The exequatur of a foreign arbitral award may be requested by an interested

party. The initial application shall contain the specifications required by
procedural law, in accordance with art. 282 of the “old” Civil Procedure
Code (1973), and shall be supplied, mandatorily, with:
I. the original award or a duly certified copy thereof, which shall be
authenticated by the Brazilian consulate, and an official translation shall be
annexed;
II. the original of the arbitration agreement or a duly certified copy
thereof, which shall be authenticated by the Brazilian consulate, and an
official translation shall be annexed.

192
4.4.1 Complementary rules and interpretation

Art. 37 BAL was modelled on art. IV of the NYC, and corresponds to

art. 35 of the UNCITRAL Model Law. Hence, the NYC and existing
international case law may, in principle, be used to interpret art. 37 of the
BAL. However, arts. 216–A to 216–N of RISTJ contain detailed rules
on formal requirements and on procedural issues.

4.4.2 Application by an interested party

Application or request for exequatur must be addressed to the STJ’s

president. The application shall indicate the amount involved in the
case, and the evidence the applicant intends to produce.
The application may be filed by an interested party. STJ case law on
the interpretation of the term “interested party” is not fully consolidated.
According to some decisions, the term is interpreted rather broadly and
encompasses not only the original arbitration parties but also their suc-
cessors and third parties.15 In 2008, the STJ recognized an award, upon a
request filed by a person who was not a party of the arbitration proceedings,
yet who claimed that they needed the decision to be effective in Brazil, in
order to use it as defense in other legal proceedings.16
In 2006, the STJ ruled that the assignee of an award (or the un-
derlying claim) who did not take part in the arbitration may not file an
application for exequatur.17 The STJ’s essential argument was that the

15. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 269 reported by Justice Fernando Gonçal-
ves and published in the Official Journal on June 10th, 2010; STJ, Special Court (CE), Contested Request for
Exequatur (SEC) 8.308 reported by Justice Eliana Calmon and published in the Official Journal February
28th, 2013; STJ, Special Court (CE), Contested Request for Exequatur (SEC) 3.035 reported by Justice Fer-
nando Gonçalves in the Official Journal on August 31st, 2009.
16. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 1.302 reported by Justice Paulo Gallotti
and published in the Official Journal (DJ) on October 6th, 2008.
17. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 968 reported by Justice Felix Fischer and
published in the Official Journal DJ on September 25th, 2006.

193
court would need to analyse the underlying assignment agreement, and
that such analysis is not admissible in exequatur proceedings. In anoth-
er decision, the STJ ruled that in the absence of at least some kind of
legal succession relationship between an original party of the arbitra-
tion proccedings and an interested third party, the latter may not apply
for exequatur.18
At least in the case of universal succession (e.g., by means of a true
merger or heritage), there should be no doubt that the successor may file
an application for exequatur.19 The same should apply in case of cessio legis
(e.g., art. 786 of Civil Code),20 because in both cases there is no need to
analyse contractual agreements, which are underlying the succession (e.g.,
assignment agreement).

4.4.3 Necessary documents and formal requirements

Subject to art. 37 (I) of the BAL, the party applying for exequatur shall sup-
ply the original award or a duly certified copy thereof. Certification may be
issued by the arbitration institution that administrated the proceedings. To
date, the STJ has not had the opportunity to decide whether or not a partial
award shall be supplied together with the final award. The French Court de
Cassation held, with regard to art. IV of the NYC, that once the applicant
supplied the final award, it satisfied the requirements of the said conven-
tion.21 Courts around the world have consistently held that the applicant
does not need to supply dissenting opinions where such opinions exist.22

18. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 14.385 reported by Justice Nancy Andrighi
and published in the Official Journal (DJ) on August 21st, 2018.
19. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 3.035 reported by Justice Fernando Gon-
çalves and published in the Official Journal (DJ) on August 31st, 2009.
20. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 14.930 reported by Justice Og Fernandes
and published in the Official Journal (DJ) on June 27th, 2019.
21. GAILLARD, Emmanuel; BERMANN, George A. Guide on the Convention of the Recognition and En-
forcement of Foreign Awards. New York: Brill/Nijoff, 2017. p. 115.
22. Ibid, p. 115-116.

194
 According to arts. 37 (I) and 216–C of RISTJ, the party applying for
exequatur shall supply an official translation of the arbitral award, which
shall be certified by an official translator or a translator sworn in Brazil.
Furthermore, arts. 37 (I) and 216–C of RISTJ required that the original
award or certified copy thereof shall be authenticated by the Brazilian
consulate in the country of the award’s origin. In 2016, Brazil ratified the
Hague Convention on Abolishing the Requirements of Legalisation for
Foreign Public Documents of 1961.23 Hence, authentication can be made
by means of an apostille.
Subject to art. 37 (II) of the BAL, the party applying for exequatur
shall also supply the original of the arbitration convention or a duly certi-
fied copy thereof. If the arbitration convention (arbitration agreement) is
not contained in one single document signed by all arbitration parties, it
is indispensable to supply all documents necessary to prove written con-
sensus, in order to submit the dispute to arbitration. The STJ does not re-
quire any other document than those listed in art. 37 (I) and (II) of BAL.24
Hence, the interested party need not supply the Terms of Reference etc.
According to arts. 37 (II) and 216–C of RISTJ, the applying party
shall supply an official translation of the arbitration agreement. Further-
more, the document(s) shall be authenticated by the Brazilian consulate.
The comments on art. 37 (I) apply accordingly.

4.4.4 Consequences of formal errors

If the STJ’s president concludes that the application was incomplete or

suffered from formal errors, they will grant the applicant a reasonable time
frame within which to resolve the issue and to supply an application that
fully satisfies all requirements established by the law (art. 216–E of the

23. See Decree Law 8.660/2016.

24. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 6.855 reported by Justice Jorge Mussi and
published in the Official Journal (DJ) August 24th, 2017.

195
RISTJ). Should the time frame expire without result, the STJ president
will extinguish the application for exequatur without a decision on the
merits (art. 216–E of RISTJ). According to STJ case law, an extinguished
first application poses no obstacle to filing a new application once the is-
sues have been resolved (art. 40 of the BAL).25

4.4.5 Proceedings according to the RISTJ

If the STJ’s president concludes that the application fully satisfies all formal
requirements, they will summon the counterparty, which may contest the
application for exequatur within fifteen days (art. 216–H of the RISTJ).
Furthermore, the president will give the Federal Prosecutors’ Office the
opportunity to challenge the application within fifteen days (art. 216–L
of the RISTJ). If the counterparty contests or the Federal Prosecutors’
Office challenges the application, the president will send the case files to
the STJ’s Special Court (art. 216–K of the RISTJ). If the counterparty
contests the application, the applicant may file a reply and the counterparty
a further reply, each within five days (art. 216–J of the RISTJ).
According to art. 961 §3 and art. 216–G of the RISTJ, the STJ may
grant interim or urgent relief, provided fumus boni juris and periculum in
mora are given. Whether or not provisional measures granted by the ar-
bitral tribunal may be recognized and enforced in Brazil is an open ques-
tion. According to most courts around the world, such decisions do not
fall within the scope of the NYC, at least as long as they do not contain a
binding and final decision on some of the claims.26 However, according to
art. 960 §3, in combination with §1 of the CPC and art. 18 of the BAL,
the exequatur of an interlocutory award should be possible in Brazil.

25. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 3.035 reported by Justice Fernando Gon-
çalves and published in the Official Journal (DJ) on August 31st, 2009.
26. GAILLARD, Emmanuel; BERMANN, George A. Guide on the Convention of the Recognition and En-
forcement of Foreign Awards. New York: Brill/Nijoff, 2017. p. 21.

196
4.5 Art. 38

The exequatur of a foreign arbitral award for the purpose of recognition and
enforcement may only be refused if the contesting party furnishes proof that:

I. the parties to the arbitration agreement were under some incapacity;

II. the arbitration agreement was not valid under the law to which
the parties subjected it or, failing any indication thereon, under
the law of the country where the award was rendered;
III. the contesting party was not given proper notice of the appoint-
ment of the arbitrator or of arbitration proceedings, or that the
principle to be heard in adversarial proceedings was violated or
the right to full defence was made impossible;
IV. the arbitral award was rendered to issues not falling within the
limits of the arbitration agreement, provided that the excessive
part cannot be separated from the part submitted to arbitration;
V. the constitution of arbitration is not in accordance with the arbi-
tration contract or arbitration clause;
VI. the arbitral award has not yet become binding for the parties, or
has been set aside or suspended by the judicial authority of the
country in which the award was rendered.

4.5.1 Legal nature of art. 38 of the BAL

Art. 38 of the BAL was modelled on art. V of the NYC and corresponds
largely to art. 36 (1) (a) of the UNCITRAL Model Law. The grounds for
denying exequatur listed in art. 38 of the BAL are both mandatory and
exhaustive. Furthermore, the defendant shall assert and provide proof of
the facts that justify an exception. The STJ cannot consider them ex offi-
cio; this is only the case regarding the issues listed in art. 39 of the BAL.
Given the exceptional and exhaustive nature of the list set forth in art. 38

197
of the BAL, the norm should be interpreted restrictively. It does not grant
the STJ the competence to review the merits and an alleged injustice of
the decisum or the reliefs.27

4.5.2 Incapacity of a party

According to art. 38 (I) of the BAL, the STJ shall reject exequatur if the
defendant furnishes proof that one of the parties to the arbitration con-
vention had no legal capacity when signing it. Legal capacity encompass-
es legal personality and the capacity to enter into binding contracts. Art.
38 (1) of BAL is silent on the question, about which law shall determine
whether incapacity was given.
Pursuant to art. V (1) (a) of NYC, the incapacity of parties should be
assessed under “the law applicable to them”. However, the wording of art.
V (1) (a) of NYC clearly establishes that the law applicable to the capac-
ity of a party differs from the law governing the validity of an arbitration
agreement, as stated in the second part of the provision.28 Courts applying
the NYC have followed different approaches in choosing the applicable
law to determine a party’s capacity, depending on what is being alleged
by the party opposing recognition and enforcement: (1) the incapacity of
a party stricto sensu;; or (2) the person’s lack of authority ((falsus
falsus procurator
procurator))
to enter into an agreement on behalf of another party.
As Gaillard and Bermann report,29 in the few cases addressing the
incapacity of a natural or legal person stricto sensu, courts have generally
determined the applicable law to that party’s capacity pursuant to their

27. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 11.969 reported by Justice Raul Araújo and
published in the Official Journal (DJ) on February 2nd, 2016; STJ, Special Court (CE), Contested Request
for Exequatur (SEC) 14.385 reported by Justice Nancy Andrighi and published in the Official Journal on
August 21st, 2018.
28. GAILLARD, Emmanuel; BERMANN, George A. Guide on the Convention of the Recognition and En-
forcement of Foreign Awards. New York: Brill/Nijoff, 2017. p. 147.
29. Ibid.

198
own legal system (in particular their own Private International Law). For
instance, the Spanish Supreme Court applied the Spanish conflict of laws
regime to determine that a party’s capacity should be assessed pursuant to
its personal law, that is, the law of that party’s nationality.
With respect to an individual’s capacity, commentators have distin-
guished civil law jurisdictions, in which such capacity is generally gov-
erned by the law of the person’s nationality, from common law jurisdic-
tions, where an individual’s capacity is generally governed by the law of
the person’s domicile or habitual residence.
Although Brazil is a civil law jurisdiction, according to its Private In-
ternational Law a person’s domicile is the decisive connecting factor (art.
7 Introduction Law to the Norms of Brazilian Law, hereafter LIND). As
regards the capacity stricto sensu of legal persons, in many jurisdictions the
applicable law will be the law of the place of incorporation or the place of
(main) business of the entity at issue. Under LIND, the place of incor-
poration is decisive (art. 11 of the LIND).30
According to the Brazilian Civil Code (see arts. 116 and 118), a person’s
lack of authority to enter into an agreement on behalf of another party ((falsus
procurator) has the same effect as a party’s incapacity to celebrate an arbitra-
procurator
tion agreement. However, LIND contains no explicit provision on the law
applicable to representation and power of attorney. Gaillard and Bermann
report31 that concerning a party’s authority to conclude an arbitration agree-
ment on behalf of another party, some courts have assessed the validity of
a party’s power to conclude an arbitration agreement on behalf of another
party pursuant to the personal law of the party that was purportedly bound
by the arbitration agreement. For instance, the Spanish Supreme Court held
that when the act of representation is carried out by a company’s organ, the

30. SESTER, Peter Christian. International Arbitration: Law and Practice in Brazil. Oxford: Oxford University
Press, 2020. p. 177-178.
31. GAILLARD, Emmanuel; BERMANN, George A. Guide on the Convention of the Recognition and En-
forcement of Foreign Awards. New York: Brill/Nijoff, 2017. p. 148.

199
national law of that entity will apply. In Brazil, this would mean that the in-
corporation rule of art. 11 of the LIND would apply to both the nationality
of the legal entity and the validity of an act of representation, as performed
by one of its organs or members of organs.
When a party’s authority to conclude an arbitration agreement on behalf
of another party is based on power of attorney, a German court held that
its invalidity should be assessed pursuant to the law of the state where the
power of attorney was to be exercised.32
Art. 38 (I) of the BAL and art. V (1) (a) of NYC both use the past
tense concerning the question of incapacity, which indicates that inca-
pacity should be assessed on the basis of the facts that existed, when the
arbitration agreement was concluded. Most courts around the world have
adopted this interpretation of the NYC.33
In this context, it is important to note that the BAL contains a specific
provision on the representation of public entities (art. 1 §2 of the BAL).34

4.5.3 Invalidity of arbitration convention

Art. 38 (II) of the BAL refers to invalidity as a consequence of formal or

substantial issues. The norm is modelled on art. V (1) (a) of the NYC in
combination with art. II (2) of the NYC.
An arbitration agreement is generally considered to be invalid if it re-
fers to a dispute whose subject matter renders it incapable of settlement
by arbitration under the law applicable to the arbitration agreement (so-
called objective non-arbitrability doctrine35). Law in this sense encompasses
statutory law, consolidated case law, and/or predominant legal doctrine.

32. Ibid 147.

33. Ibid 148-149.
34. SESTER, Peter Christian. International Arbitration: Law and Practice in Brazil. Oxford: Oxford University
Press, 2020. p. 32-34.
35. See BORN, Gary. International Arbitration: Law and Practice. 2nd ed. Wolters KluwerAlphen aan den Rijn,
2016. p. 87-90.

200
Hence, the court deciding on an exequatur request will verify whether
or not a dispute decided by the foreign award was capable of submission
to arbitration under Brazilian law (art. 39 (I) of BAL). It will also check
objective arbitrability according to the law chosen by the party or, in the
absence of such choice, according to the law of the place where the award
was rendered. This double check can lead to controversial results.
Let me illustrate this by using an example: a dispute, submitted to ar-
bitration, between a majority shareholder and a group of Brazilian minori-
ty shareholders of a listed stock corporation incorporated and operating
mainly in Germany. The bylaws of said company contain an arbitration
clause. No choice of law clause was inserted in the arbitration agreement
or any other document. An arbitral tribunal seated in Paris renders an
award in the French capital that grants the Brazilian party a payment re-
lief. The successful shareholders file an application for exequatur to the
STJ because: (1) the majority shareholder owns valuable assets in Bra-
zil, and (2) art. 136–A of the Brazilian Stock Corporation Act explicitly
admits arbitration clauses in the bylaws of a listed corporation. Hence,
no conflict with art. 39 (I) of the BAL will arise. However, according to
predominant German doctrine such arbitration clauses are invalid if the
corporation is subject to German Stock Corporation Law ((Aktiengesetz).
German stock corporation law is applicable to our case, irrespectively of
whether the real seat or incorporation theory is applied. Consequently,
the STJ could reject the application for exequatur on the grounds of art.
38 (II) of the BAL or art. V (1) (a) of the NYC.
However, German courts would not do so if they have to decide such
cases. In a series of decisions, German courts have applied the more fa-
vourable-right-provision of art. VII (1) (second alternative) of the NYC
and granted recognition for enforcement if the arbitration agreement
complies with the more liberal rules of the jurisdiction where enforcement

201
is sought.36 In our case, Brazilian Stock Corporation Law (Law 6.404 of
1976) is more liberal!
One of the most discussed issues regarding the validity of the arbi-
tration convention is the in writing requirement set forth in art. 4 §1 of
the BAL and art. (II) (2) of the NYC. It is important to note that the
more favourable-right-provision of art. VII (1) (second alternative) of
the NYC may have an important impact on the issue.
Art. II (2) of the NYC defines the “in writing” requirement. An
“agreement in writing” includes “[…] an arbitral clause in a contract, or
an arbitration agreement, signed by the parties or contained in an ex-
change of letters or telegrams”. Prior to UNCITRAL – as Gaillard and
Bermann report37 – addressing the issue, national courts had diverged
on whether the more-favourable-rule principle embodied in art. VII (1)
of NYC applied to the requirement that an arbitration agreement be
“in writing” pursuant to art. II (2) of the NYC. In 2006, UNCITRAL
stated that art. VII (1) of the NYC “[…] should be applied to allow
any interested party to avail itself of rights it may have, under the law
or treaties of the country where an arbitration agreement is sought to
be relied upon, to seek recognition of the validity of such an arbitration
agreement”. Since then, national courts have more consistently enforced
arbitration agreements pursuant to the less stringent formal require-
ments available under their national laws or treaties as provided for by
art. VII (1) of the NYC.
As a matter of fact, since its overhaul in 2006 the UNCITRAL
Model Law defines “in writing” in a much broader and up-to-date way.
According to art. 7 (4) of UNCITRAL Model Law, the requirement
that an arbitration agreement be in writing is met by electronic com-
munication if the information contained therein is accessible so as to

36. GAILLARD, Emmanuel; BERMANN, George A. Guide on the Convention of the Recognition and En-
forcement of Foreign Awards. New York: Brill/Nijoff, 2017. p. 154.
37. Ibid, p. 154.

202
be usable for subsequent reference. “Electronic communication” means
any communication that the parties make by means of data messages;
“data messages” mean information generated, sent, received, or stored
by electronic, magnetic, optical, or similar means, including but not
limited to electronic data interchange (EDI), electronic mail, telegram,
telex, or telecopy.
Art. 4 §1 of the BAL makes no reference to the formal requirements
of contracting set forth in arts. 427 to 434 of the Civil Code. Hence, par-
ties do not need to sign on the same document before two witnesses or go
to a public notary. Art. 4 §1 of the BAL explicitly permits parties to in-
clude an arbitration agreement by means of reference. The Brazilian Stock
Corporation Act goes even one step further. According to its art. 136–A,
all shareholders are bound by an arbitration clause adopted by majority
vote on a respective amendment to the corporate bylaws.38 Subject to art.
136–A §1 of the Stock Corporation Act, the clause becomes binding upon
publication of the minutes of the respective shareholder meeting.39 In light
of these provisions, it is clear what the Brazilian legislator considers to be
essential to fulfil the “in writing” requirement: an unequivocal declaration
of the parties’ consent to submit (future) disputes to arbitration, which
shall be contained in (one or several) documents; individual signatures are
not decisive, but of course highly recommendable.
In the first years after the BAL came into force, the STJ adopted a
rather restrictive or conservative approach.40 In the meantime, its inter-
pretation of the “in writing” requirement has become broader. Thus, for
several years the STJ has considered arbitration agreements to be valid if

38. For stock corporation arbitration in Brazil see SESTER, Peter Christian. International Arbitration: Law and
Practice in Brazil. Oxford: Oxford University Press, 2020. p. 395-404, and SESTER, Peter Christian. Co-
mentários à Lei de Arbitragem e à legislação extravagante. São Paulo: Quartier Latin, 2020. Third Chapter.
39. SESTER, Peter Christian. Comentários à Lei de Arbitragem e à legislação extravagante. São Paulo: Quar-
tier Latin, 2020. p. 484-487.
40. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 978, reported by Justice Hamilton Carvalhido
and published in the Official Journal (DJ), March 5th, 2009; STJ, Special Court (CE), Contested Request for
Exequatur (SEC) 967 reported by Justice José Delgado and published in the Official Journal, March 20th, 2006.

203
they have been accepted by means of conduct implying the intent of ac-
ceptance, provided that conduct is documented.41
The STJ typically adopts a restrictive approach to arguments brought
forth by the defendant that challenge the validity of the arbitration agree-
ment on the grounds of alleged errors in the declaration to conclude an
arbitration agreement.42
The court also rejected the defence that an arbitration clause is invalid
because it is part of a standard term contract.43 The STJ refused to anal-
yse art. 4 §2 of BAL within exequatur procedures because according to
the court such analysis would require reviewing the merits of the award.44
Art. 38 (III) of BAL is modelled on art. V (1) (b) of NYC and cor-
responds to art. 36 (ii) of the UNCITRAL Model Law. The provisions
address due process in arbitral proceedings. Specifically, art. 38 (III) of BAL
provides that parties must have had proper notice of both the appoint-
ment of arbitrators and arbitration proceedings, as well as, more broadly,
an opportunity to present the case from their perspective.45
As Gaillard and Bermann report, proper notice has been interpreted
narrowly by courts around the world. As a rule, more liberal standards are

41. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 11.593 reported by Justice Benedito Gon-
çalves and published in the Official Journal (DJ) on December 18th, 2015; STJ, Special Court (CE), Con-
tested Request for Exequatur (SEC) 3.709 reported by Justice Teori Albino Zavascki and published in the
Official Journal (DJ) on June 29th, 2012; STJ, STJ, Special Court (CE), Contested Request for Exequatur
(SEC) 866 reported by Justice Felix Fischer and published in the Official Journal (DJ) on June 27th, 2006;
STJ, Special Court (CE), Contested Request for Exequatur (SEC) 856, reported by Justice Carlos Alberto
Menezes Direito and published in the Official Journal (DJ) on June 27th, 2005; see in particular STJ, Third
Chamber, Special Recourse 1,569,422 reported by Justice Marco Aurélio Bellizze and published in the Of-
ficial Journal (DJ) on May 20th, 2016.
42. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 611 reported by Justice Joao Otávio de
Noronha and published in the Official Journal on December 11th, 2006.
43. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 11.106 reported by Justice Hermann Ben-
jamin and published in the Official Journal (DJ) on June 21st, 2017.
44. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 6.761 reported by Justice Nancy Andrighi
and published in the Official Journal on October 16th, 2013; STJ, Special Court (CE), Contested Request
for Exequatur (SEC) 4.213 reported by Justice João Otávio de Noronha and published in the Official Jour-
nal on June 26th, 2013.
45. GAILLARD, Emmanuel; BERMANN, George A. Guide on the Convention of the Recognition and En-
forcement of Foreign Awards. New York: Brill/Nijoff, 2017. p. 163.

204
applied than would be required for giving notice under domestic law.46
This statement also applies to Brazil.
Concerning the requirement of notification, it is essential that parties
were given equal opportunity to participate in proceedings.47 However,
whether a party makes use of this opportunity is their own responsibility.
Proof that the defendant was given proper notice of arbitration becomes
obsolete if the defendant participated regularly in proceedings without
contesting proper notification.48 According to consolidated case law of
the STJ, notification by physical mail complies with the requirements set
forth in art. 38 (III) of the BAL and with the due process guarantee.49
Regarding the due process guarantee, in particular for compliance
with the right to be heard in adversarial proceedings, it is crucial that the
tribunal ensured full information flow to parties and granted them equal
opportunity to react. This requirement should be interpreted in the light
of international standards, rather than against the background of the
Brazilian CPC. The predominant criterium should be the procedural law
chosen by parties, irrespectively of whether by means of a choice of law
clause, if admissible for procedural law or, indirectly, by seating arbitration
in a specific country. The benchmark should be the international standard
practice of the due process guarantee.50

46. Ibid., p. 163-171.

47. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 10.702 reported by Justice Laurita Vaz and
published in the Official Journal (DJ) on March 23rd, 2015; STJ, Special Court (CE), Contested Request for
Exequatur (SEC) 3.891 reported by Justice Humberto Martins and published in the Official Journal (DJ) on
October 16th, 2013; STJ, Special Court (CE), Contested Request for Exequatur (SEC) SEC 6.761 reported
by Justice Nancy Andrighi and published in the Official Journal (DJ) on October 16th, 2013; STJ, Special
Court (CE), Contested Request for Exequatur (SEC) 6.753 reported by Justice Maria Thereza Assis Moura
and published in the Official Journal (DJ) on August 19th, 2013.
48. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 4.213 reported by Justice, João Otávio de
Noronha and published in the Official Journal (DJ) on June 26th, 2013.
49. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 12.041 reported by Justice Humberto Mar-
tins and published in the Official Journal (DJ) on December 16th, 2016; STJ, Special Court (CE), Contested
Request for Exequatur (SEC) 9.820 reported by Justice Humberto Martins and published in the Official
Journal (DJ) on October 26th, 2016.
50. GAILLARD, Emmanuel; BERMANN, George A. Guide on the Convention of the Recognition and En-
forcement of Foreign Awards. New York: Brill/Nijoff, 2017. p. 171-179.

205
 It is important to note that infringements of the due process guaran-
tee may violate art. 38 (III) of the the BAL and simultaneously Brazilian
public policy (art. 39 (II) of the BAL), because the right to be heard in
adversarial proceedings and the right to full defence are constitutional
guarantees (art. 5 LIV and LV of the Brazilian Federal Constitution).
This remark is essential because, in case of public policy violations, the
STJ may consider the issue ex officio (art. 39 (II) of BAL).
The STJ interprets the due process guarantee in case of art. 38 (III) of
the BAL rather restrictively, at least compared with its approach applied in
annulment suits. The STJ already rejected the following arguments raised
by defendants against applications for exequatur: the defendant was not
able to contract a counsel51 or the arbitral tribunal rejected the production
of specific evidence.52 The STJ also refused to consider procedural issues
that the respective party had failed to assert at the first opportunity in
arbitral proceedings.53 The defendant carries the burden of proof for the
violation of the due process guarantee and the failure of proper notice.54
Art. 38 (IV) of the BAL is modelled on art. V (1) (c) of the NYC and
corresponds to art. 36 (1) (iii) of the UNCITRAL Model Law. However,
the wording of the NYC is more comprehensive than the Brazilian norm.
According to the convention, exequatur may be denied if:
“[…] the award deals with a difference not contemplated by or not
falling within the terms of the submission to arbitration, or it contains

51. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 10.643 reported by Justice Humberto Mar-
tins and published in the Official Journal on December 11th, 2014.
52. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 611 reported by Justice João Otávio de
Noronha and published in the Official Journal (DJ) on December 11th, 2006; STJ, Special Court (CE), Con-
tested Request for Exequatur (SEC) 12.115 reported by Justice Luis Felipe Salomão and published in the
Official Journal (DJ) on March 3rd, 2016.
53. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 3.709 reported by Justice Teori Albino
Zavascki and published in the Official Journal (DJ) on June 29th, 2012.
54. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 887 reported by Justice João Otávio de
Noronha and published in the Official Journal (DJ) on April 3rd, 2006; STJ, Special Court (CE), Contested
Request for Exequatur (SEC) 3.660 reported by Justice Arnaldo Esteves Lima and published in the Official
Journal (DJ) on June 25th, 2009; STJ, Special Court (CE), Contested Request for Exequatur (SEC) 14,385
reported by Justice Nancy Andrighi and published in the Official Journal (DJ) on August 21st, 2018.

206
decisions on matters beyond the scope of the submission to arbitration,
provided that, if the decision on matters submitted to arbitration can
be separated from those not so submitted, that part of the award which
contains decisions on matters submitted to arbitration may be recognized
and enforced.”
For the application of art. V (1) (c) of NYC, it is crucial to identify
those subject matters that have been submitted to arbitration. According
to Gaillard and Bermann,55 courts have held that the term “submission
to arbitration” may include an arbitration agreement modified, amended,
or supplemented by an arbitral institution’s Terms of Reference agreed to
by the arbitrators and disputing parties. Terms of Reference may indeed
supplement or modify the arbitration agreement. For example, a Ger-
man court of appeal held that the parties had concluded a new arbitra-
tion agreement by signing ICC Terms of Reference. Similarly, a decision
by the English House of Lords stated that “[…] in the present case one
is dealing with an ICC arbitration agreement. In such case the terms of
reference which under art. 18 of the ICC rules are invariably settled may,
of course, amend or supplement the terms of the arbitration agreement”.
This understanding is a direct consequence of the fact that arbitration is
built on party autonomy.
In that respect, the interpretation of art. 38 (IV) of the BAL adopted
by leading Brazilian scholars and arbitration experts is perfectly aligned
with international practice. Arbitral awards extra compromissum and ultra
compromissum fall within the scope of the norm. However, there seems to
be a tendency in Brazil to consider that the norm also provides grounds for
refusing to recognize or enforce an award if the arbitrator’s decision goes
beyond the parties’ pleadings. According to these authors, exequatur for an
award ultra petita shall be refused. In the famous Abengoa case, the STJ

55. GAILLARD, Emmanuel; BERMANN, George A. Guide on the Convention of the Recognition and En-
forcement of Foreign Awards. New York: Brill/Nijoff, 2017. p. 185.

207
held that an award granting indemnification for breach of contract, which
calculates the amount of indemnification based on hypothetical damages,
infringes a core principle of Brazilian Civil Law. Brazilian law was appli-
cable to the respective contract. According to art. 944 of the Civil Code,
indemnification shall not exceed the effective damages. Surprisingly the
STJ classified the arbitral tribunal’s error as a problem of an award ultra
petita.56 I would rather consider this being an issue of substantive public
policy57, if that error really shocks one’s sense of justice from the perspec-
tive of the Brazilian Civil Code.
As a matter of fact, art. 38 (IV) of the BAL does not mention the
pleadings of parties but merely the arbitration agreement. The same is
true for the NYC. Hence, it seems to be more appropriate to follow the
international standard practice of courts applying the NYC. According
to Gaillard and Bermann,58 courts have rejected challenges to recognition
or enforcement under art. V (1) (c) of the NYC based on the fact that
arbitrators had exceeded their authority by deciding on issues or granting
forms of relief beyond those pleaded by parties. That approach seems to
be more appropriate because a comparison between the arbitration agree-
ment and the pleadings (including the underlying legal arguments and
presented facts), on one hand, to the reliefs granted by the award, on the
other hand, seems to be impossible without analysing and interpreting
the merits of the respective award.
Finally, it is important to note that according to art. 38 (IV) of the
BAL the STJ should grant partial exequatur whenever the award can be
separated into two parts. Separation may refer either to the number of

56. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 9.412 decision reported by Justice João
Otávio de Noronha and published in the Official Journal (DJ) on May 30th, 2017.
57. See Comments on art. 32 by SESTER, Peter Christian. International Arbitration: Law and Practice in Brazil.
Oxford: Oxford University Press, 2020. p. 150-161.
58. GAILLARD, Emmanuel; BERMANN, George A. Guide on the Convention of the Recognition and En-
forcement of Foreign Awards. New York: Brill/Nijoff, 2017. p. 185.

208
reliefs or to the parties subject to the reliefs. Gaillard and Bermann59 re-
port a case where a US District Court partially enforced an award that
covered multiple contracts, after finding that one of the contracts was
not within the scope of the arbitration agreement. The court enforced
the part of the award dealing with the contracts that were covered by the
arbitration agreement.
In a challenge to enforcement brought under art. V (1) (c) of the NYC
before the Supreme People’s Court of China, that court found that one
of the respondents named in the award was not a party to the arbitration
agreement. The court recognized only that portion of the award that dealt
specifically and exclusively with the liability of the other respondent, who
was a party to the arbitration agreement.60
The STJ applies the criterion “award divided into different chapters” to
decide whether it is possible to grant a partial exequatur.61 In light of this
criterion, the STJ denied severability of an award that granted a payment
relief in combination with inflation indexation and exchange rate correction.62
In another decision, the STJ granted exequatur although the request
for the constitution of arbitration was only filed after the respective time
frame set forth in the arbitration agreement had already expired. The STJ
held that the defendant should have made that challenge already in the
arbitral proceedings (probably inspired by art. 32 (VII) of the BAL on
applications for annulment of domestic awards).63
Art. 38 (V) of the BAL has a narrower scope of application than its
reference model, art. V (1) (d) of the NYC. According to the latter norm,
not only errors in constituting the arbitral tribunal give grounds for chal-

59. Ibid.
60. Ibid.
61. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 12.781 reported by Justice Joao Otavio de
Noronha and published in the Official Journal (DJ) on August 18th, 2017.
62. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 2.410 reported by Justice Nancy Andrighi
and published in the Official Journal (DJ) on February 19th, 2014.
63. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 10.432 reported by Justice Laurita Vaz and
published in the Official Journal (DJ) on December 19th, 2015.

209
lenging application for exequatur, but also the fact that subsequent arbitral
proceedings were not in accordance with the arbitration agreement. The
Brazilian norm only addresses errors concerning the constitution of the
tribunal (e.g., arbitrators’ nomination process, number of arbitrators, and
qualification criteria set forth in the arbitration agreement). Due to the
most-favourable-norm principle, art. 38 (V) of the BAL prevails as it stands.
The STJ already rejected an exequatur on the grounds that the award
was rendered by a sole arbitrator while the arbitration agreement required
an arbitral tribunal composed of three arbitrators.64
Concerning deviation from the rules on arbitrator qualification, a
precedent from Germany might be inspiring. The German court consid-
ered that because both parties had appointed arbitrators who were not
members of the institution specified in the agreement; they had tacitly
modified their agreement. The court consequently rejected the challenge
to enforcement based on art. V (1) (d) of the NYC. This decision de-
serves applause because it prioritizes party autonomy. Consequently, the
judgment should be different if the arbitral institution in charge of the
case makes a mistake when appointing arbitrators, and thereby violates
a rule established in the arbitration agreement’s wording or applicable
by reference.
If the arbitration agreement does not set forth rules on the composi-
tion of the arbitral tribunal, neither directly nor by reference to the rules
of an arbitration institution, the law of the country where the arbitra-
tion has its seat shall be applied to verify correct composition. Howev-
er, due to the default character of the the arbitration law of the seat an
application for exequatur shall not be rejected on the grounds that the
rules established by the parties diverge from the law, provided that the
agreed rules were respected.

64. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 12.236 reported by Justice Mauro Campbell
Marques and published in the Official Journal (DJ) on December 18th, 2015.

210
 The STJ applies art. 38 (V) of the BAL restrictively. The court rejected
a challenge to application for exequatur based on the alleged violation of
the time frame for the commencement of arbitration set forth by parties
in the arbitration agreement.65 In another decision, the court granted ex-
equatur although the parties had not complied with the pre-arbitration
conciliation provisions set forth in the arbitration agreement.66
Art. 38 (VI) of the BAL is modelled on art. V (1) (e) of the NYC
and corresponds to art. 36 (1) (a) (v) of the UNCITRAL Model Law.
By using the term “obrigatória” (binding),
binding), the Brazilian legislator made
binding
clear that the award does not need to be enforceable in its country of
origin,67 nor does an interested party need to wait until the time frame
for annulment suits expires, before filing an application for exequatur to
the president of the STJ.
However, according to art. 216–D of the RISTJ, the applicant shall
provide proof that the award has already res judicata effect. That norm,
designed for the exequatur of foreign court decisions, may infringe art. V
(1) (e) of the NYC and art. 38 (VI) of the BAL. Therefore, and in light
of norm hierarchy, art. 216–D shall not be applied to the application for
exequatur of a foreign award, or at least be interpreted restrictively. STJ’s
case law can be understood in the latter sense. An award is binding if the
merits are no longer subject to changes, according to the terms of the ar-
bitration agreement and/or the applicable institutional rules.68 This STJ

65. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 10.432 reported by Justice Laurita Vaz and
published in the Official Journal (DJ) on December 5th, 2017.
66. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 16.208 reported by Justice Nancy Andrighi
and published in the Official Journal (DJ) on December 5th, 2017.
67. STJ, Special Court (CE), Contested Request for Exequatur (SEC) reported by Justice Maria Thereza de Assis
Moura and published in the Official Journal (DJ) on May 27th, 2014.
68. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 13.080 reported by Justice João Otávio de
Noronha and published in the Official Journal on December 14th, 2017; STJ, Special Court (CE), Contested
Request for Exequatur (SEC) 6.855 reported by Justice Jorge Mussi and published in the Official Journal (DJ)
on 24 August 2017; STJ, Special Court (CE), Contested Request for Exequatur (SEC) 3.687 reported by
Justice Humberto Martins and published in the Official Journal (DJ) on May 11th, 2017; STJ, Special Court
(CE), Contested Request for Exequatur (SEC) 16.208 reported by Justice Nancy Andrighi and published in
the Official Journal (DJ) on December 5th, 2017.

211
statement is slightly confusing because arbitration is generally designed
as a one-stop dispute resolution mechanism. Hence, parties will hardly
ever include a second instance provision in the arbitration agreement, nor
will arbitration institutions do so. Given the huge practical relevance of
requests for clarification of obscurity, doubt, or contradiction in Brazil,
and the vague borderline between such clarifications and changes of the
merits, it makes sense to qualify an award as binding once the short time
frame of five days expired without a request in the sense of art. 30 of the
BAL, or once the tribunal rendered its decision on such a request.
However, the question about whether or not the time frame for filing
an annulment suit in the country of the award’s origin must have already
expired before an interested party may file an application for exequatur
has little practical relevance because most countries, including Brazil,
have adopted the solution provided for in art. 34 (3) of the UNICTRAL
Model Law: just three months or ninety days.
The STJ does not require that the time frame for filing an annulment
suit had expired. Even annulment proceedings pending in the award’s
country of origin present no obstacle to filing an application for exequa-
tur in Brazil.69 In case the effectiveness of an award is suspended (e.g.,
due to a respective court order in the country of its origin), the STJ may
suspend exequatur proceedings or reject the respective application on
the grounds of art. 38 (VI) of the BAL. In the latter case, the interest-
ed party may file a new application according to art. 40 of BAL, once
the suspensive effect has ended and once the award is (again) binding.
According to art. 29 of the BAL, an award becomes binding once it
has been duly delivered to the parties. This is the predominant solution
of most national arbitration laws. Gaillard and Bermann report that
courts in France, Germany, Italy, the United States, and Switzerland

69. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 894 reported by Justice Nancy Andrighi
and published in the Official Journal (DJ) on October 9th, 2008.

212
refer to the law of the country where the arbitration took place as the
law applicable to determining the binding nature of the award.70 With
regard to partial awards, some courts have looked at whether the partial
or interim award finally settled a discrete claim on the merits, or could
still be revised by the arbitral tribunal at a later stage of arbitration. They
have excluded the possibility of considering the latter of awards being
binding.71
If an award was already effectively set aside by the courts in its country
of origin, the STJ may reject the application for exequatur according to
art. 38 (VI) of the BAL.72 This is consistent with the predominant in-
terpretation of art. V (1) (e) of the NYC.73 It is, however, important to
note that the rejection of exequatur by a court of a third country (where
enforcement is sought) poses no obstacle to applying for exequatur in
Brazil, even if the said court held that the award is invalid.
In case the effectiveness of an award is suspended (e.g., due to a re-
spective court order in the country of its origin), the STJ may suspend
exequatur proceedings or reject its application on the grounds of art. 38
(VI) of the BAL. In the latter case, the interested party may file a new
application according to art. 40, once the suspensive effect has ended
and once the award is (again) binding.
The STJ held that the dismissal of an annulment suit in the country
of the award’s origin has no binding effect on exequatur proceedings in
Brazil. The STJ may well reject exequatur based on arts. 38 or 39 of the

70. GAILLARD, Emmanuel; BERMANN, George A. Guide on the Convention of the Recognition and En-
forcement of Foreign Awards. New York: Brill/Nijoff, 2017. p. 224.
71. Ibid 230.
72. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 611 reported by Justice João Otávio de
Noronha and published in the Official Journal on December 11th 2006; STJ, Special Court (CE), Contes-
ted Request for Exequatur (SEC) 4.837 reported by Justice Francisco Falcão, and published in the Official
Journal (DJ) on August 30th 2012.
73. GAILLARD, Emmanuel; BERMANN, George A. Guide on the Convention of the Recognition and En-
forcement of Foreign Awards. New York: Brill/Nijoff, 2017. p. 236-237.

213
BAL,74 although the application to set the award aside was dismissed
in the country of its origin.
The exequatur granted by a court in the country of the award’s origin
poses no obstacle to exequatur by the STJ.75
According to the STJ, its decision to grant exequatur integrates the
foreign arbitral award (e.g., granting a payment relief) into the Brazilian
legal order with res judicata effect. Hence, an interested party can no lon-
ger file a payment suit to the Brazilian courts that is based on a contrac-
tual claim, which was already subject to arbitration, and if the respective
foreign award granted payment relief.76
The same rule applies to the opposite situation. Once the Brazilian
courts have made a decision with res judicata effect on a certain claim,
an interested party can no longer apply for exequatur of a foreign award
ruling on the same claim.77 Consequently, the decision first enjoying res
judicata effect in Brazil prevails.

4.6 Art. 39

Exequatur for the purpose of recognition or enforcement of a foreign ar-

bitral award will also be refused if the Superior Tribunal of Justice (STJ)
finds that:

I. the subject matter of the dispute is not capable of resolution by

arbitration under Brazilian law;

74. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 9.412 decision reported by Justice João Otá-
vio de Noronha and published in the Official Journal on May 30th, 2017 (“Abengoa” Case).
75. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 3.687 reported by Justice Humberto Martins
and published in the Official Journal (DJ) on May 11th, 2017.
76. STJ, Second Chamber, REsp-AgR 1,316,522 reported by Justice Maria Isabel Gallotti and published in the
Official Journal (DJ) on May 30th, 2016.
77. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 1 reported by Justice Maria Terezza de
Assis Moura, published in the Official Journal (DJ) on February 1st, 2012; accordingly, STJ, Third Chamber,
Special Recourse (REsp) 1.203.430 reported by Justice Paulo de Tarso Sanseverino and published in the Of-
ficial Journal (DJ) on October 1st, 2012.

214
 II. the decision violates national public policy.
Sole paragraph: The fact that a party that is resident or domiciled in
Brazil was summoned to arbitration according to the formal pro-
visions of the arbitration agreement or according to the procedural
law of the country where the arbitration took place, shall not be
considered as a violation of national public policy. It is admissible
to summon a party by means of physical mail with unequivocal
proof of receipt, provided that it is guaranteed that the Brazilian
party has sufficient time to make use of its right to full defence.

4.6.1 General remarks on art. 39

Art. 39 of the BAL is closely modelled on art. V (2) of the NYC and fully
corresponds to art. 36 (1) (b) of UNCITRAL Model Law. Hence, Bra-
zil followed the example of many other arbitration-friendly jurisdictions
around the world, which opted in favor of a concept of minimum control
vis-à-vis foreign awards. In contrast to the defects listed in art. 38 of the
BAL, the two issues addressed by the legislator in art. 39 of the BAL
shall be applied ex officio and, if given, the STJ shall not grant exequatur.
The sole paragraph of art. 39 of the BAL was adopted by the legislator
in order to avoid, right from the outset, the risk of Brazilian courts em-
ploying the CPC’s very formal provisions on the control of notifications
in (international) arbitral proceedings. The STJ held, in 2013, that notifi-
cation of a party that is resident or domiciled in Brazil may be realized in
accordance with the procedural law of the country where the arbitration has
its seat.78 As a matter of fact, art. 39 sole paragraph of the BAL prioritizes
the effectiveness of the notification over its form. This arbitration-friendly
approach should also be applied to interpreting art. 38 (III) of the BAL.

78. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 4.024 reported by Justice Nancy Andrighi
and published in the Official Journal (DJ) on September 13th, 2013.

215
4.6.2 Non-arbitrability

Art. 39 (I) of the BAL addresses the “non-arbitrability” doctrine,79 which

has an objective and a subjective dimension. In sum: under art. 1 of the
BAL, only claims and rights that are subject to party autonomy and dis-
posal by parties may be submitted to arbitration (objective arbitrability).
Furthermore, parties must have legal capacity to conclude binding con-
tracts (subjective arbitrability).80
Art. 39 (I) of the BAL refers directly to art. 1 of the BAL because the
yardstick of art. 39 of the BAL is national arbitration law. The provisions
on the arbitrability that prevail in the award’s country of origin are sub-
ject to art. 38 (II) of BAL. The ultimate aim of art. 39 of the BAL is to
guarantee the effectiveness of the mandatory provisions set forth in art. 1
of BAL on arbitrability in Brazil. Hence, the legislator established in art.
39 (I) of BAL a “firewall” against circumvention (forum shopping) or opt-
out strategies. Parties cannot “force” objective arbitrability by opting-out
of Brazilian arbitration and substantive law.
Regarding legal entities, it is important to note that the STJ held
that decisions of a Brazilian court triggering judicial restructuring pro-
ceedings (art. 6, Law 11.101 of 2015) pose no obstacle to filing an ap-
plication for exequatur.81 Meanwhile, the Brazilian Insolvency Act ad-
dresses the impact of insolvency and recovery proceedings on arbitration
explicitly (see art. 6 §9).82

79. See BORN, Gary. International Arbitration: Law and Practice. 2nd ed. Wolters Kluwer, Alphen aan den
Rijn, 2016. p. 87-90.
80. See Comments on art.1 BAL in SESTER, Peter Christian. International Arbitration: Law and Practice in
Brazil. Oxford: Oxford University Press, 2020. p. 27.
81. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 12.781 decision reported by Justice João
Otávio de Noronha and published in the Official Journal (DJ) on August 18th 2017.
82. SESTER, Peter Christian. Business and Investment in Brazil. Oxford: Oxford University Press, 2022. p. 394.

216
4.6.3 Public policy

The question whether we need to distinguish between national, inter-

national, or transnational public policy is a fancy one, particularly in the
world of international arbitration. However, distinguishing national, in-
ternational, and transnational public policy is unfeasible in practice and,
as a matter of fact, unproductive. I fully agree with a decision of the Su-
preme Court of India, reported by Gaillard and Bermann83, which has held
that providing a transnational definition of the concept of public policy
is unworkable and accepted the principle that public policy in the sense
of art. V (2) (b) of NYC should be taken to mean the public policy of the
enforcement forum.84 The Court of Final Appeal of Hong Kong agreed
with the conclusions reached by the Supreme Court of India.85
The argument that strongly supports the statement of the two courts
is as simple as it is clear. At the end of the day, national courts must ap-
ply the concept of public policy to a specific case. The whole idea of this
concept is to protect the fundamental values of a (specific) legal order.
It is clear from the outset that national courts exist to protect, first and
foremost, the legal order of their country of origin. In a court perspective,
“guaranteeing a legal order” requires, in particular, consistency with its
own case law, because public policy is a very generic or sweeping clause
(a so-called general clause like the provision of the Civil Codes on “good
faith”). The concept may only crystallize by means of the case law devel-
oped by a specific superior court or court system. Of course, sophisticat-
ed national courts will adopt, among others, a comparative approach to

83. GAILLARD, Emmanuel; BERMANN, George A. Guide on the Convention of the Recognition and En-
forcement of Foreign Awards. New York: Brill/Nijoff, 2017. p. 258.
84. Renusagar Power Co Ltd v General Electric Company & anor, Supreme Court, India, October 7th, 1993, 1994
AIR 860. See also SESTER, Peter Christian. Contract Law in International Commercial Arbitration. Al-
phen aan den Rijn: WoltersKluwer, 2023.
85. Hebei Import & Export Corp v Polytek Engineering Co Ltd, Court of Final Appeal, Hong Kong, February
9th, 1999, (1999) 2 HKC 205.

217
the interpretation of public policy and art. V (2) (b) of the NYC. Hence,
they will also analyse the case law of other countries’ courts. They will
not, however, consider these foreign cases a source of law, but merely a
source of inspiration.
The sole exception to the rule is European public policy. In reality, this
is not an exception, but rather confirms my conclusions. European public
policy is workable because the ECJ is its creator and guardian. Over the
last seven decades, the ECJ has made thousands of judgments. The in-
strument of preliminary ruling (art. 267 of the Treaty on the Functioning
of the European Union, hereafter TFEU) guarantees that the national
courts of member states respect the ECJ’s case law. Therefore, European
public policy is a reality rather than merely a dogmatic glass bead game.
According to Gaillard and Berman, the ECJ held that art. 101 of the
TFEU, which renders automatically void certain anti-competitive agree-
ments or decisions, continues “[…] a fundamental provision which is es-
sential for the accomplishment of the tasks entrusted to the (Union) and,
in particular, for the functioning of the internal market”. The ECJ held
that for this reason the essence of European competition law should be
regarded as a matter of public policy within the meaning of art. V (2) (b)
of NYC.86 It thus imposed on the courts of the EU member states the
obligation to refuse recognition and enforcement of awards conflicting
with art. 101 of the TFEU.87
Brazilian authors prioritize constitutional guarantees of due process
when discussing the public policy provision of art. 39 (II) of the BAL.
Against this background, it was a major concern of the Brazilian arbitra-
tion community that the STJ might not grant exequatur in the case of
unreasoned or poorly reasoned foreign awards. However, the STJ’s case

86. Case C-126/97 Eco Swiss China Time Ltd v Benetton International NV, ECJ, June 1st, 1999 (1999) ECR
I-3055, paras 37-39.
87. GAILLARD, Emmanuel; BERMANN, George A. Guide on the Convention of the Recognition and En-
forcement of Foreign Awards. New York: Brill/Nijoff, 2017. p. 259–260 with footnote 1077.

218
law on this issue has meanwhile been consolidated. The quality and depth
of the reasons of an award must comply only with the standards of the
award’s country of origin.88 Put differently, as long as the award contains
some kind of reasons the STJ will not deny exequatur.

4.6.4 STJ case law

The STJ’s case law concerning art. 39 (II) of the BAL and art. V (2) (b)
of the NYC is consistent with the international practice,89 although the
focus in Brazil is on procedural aspects of public policy. However, the
STJ held that while the control of public policy allows the court to con-
sider the merits of the award, it clearly stated that such review is limited
to legal effects or reliefs absolutely incompatible with the domestic legal
order.90 It does not provide the party contesting recognition and enforce-
ment an opportunity to re-argue the merits of the case or to allege that
the case was wrongly decided (erro in judicando) or caused injustice.91
The Brazilian case law, which emerged over the last two decades,
clearly demonstrates that the STJ denies exequatur only in very few and
extreme cases on the basis of an alleged public policy violation.92

88. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 5.692 reported by Justice Ari Pardengler
and published in the Official Journal on September 1st, 2014; STJ, Special Court (CE), Contested Request
for Exequatur (SEC) 4.223 reported by Justice Laurita Vaz and published in the Official Journal (DJ) on Fe-
bruary 16th, 2011; STJ, Special Court (CE), Contested Request for Exequatur (SEC) 769 reported by Justice
Felix Fischer and published in the Official Journal (DJ) on February 28th 2006.
89. See GAILLARD, Emmanuel; BERMANN, George A. Guide on the Convention of the Recognition and
Enforcement of Foreign Awards. New York: Brill/Nijoff, 2017. p. 263–270.
90. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 9.412 decision reported by Justice João
Otávio de Noronha and published in the Official Journal (DJ) on May 30th, 2017; STJ, STJ, Special Court
(CE), Contested Request for Exequatur (SEC) 2.410 reported by Justice Nancy Andrighi in the Official
Journal (DJ) on February 19th, 2014.
91. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 14.930 reported by Justice Og Fernandes
and published in the Official Journal (DJ) on June 27th, 2019; STJ, Special Court (CE), Contested Request
for Exequatur (SEC) 10.643 reported by Justice Humberto Martins and published in the Official Journal (DJ)
on December 11th, 2014; STJ, Special Court (CE), Contested Request for Exequatur (SEC) 9.412 reported
by Justice João Otávio de Noronha and published in the Official Journal (DJ) on May 30th, 2017.
92. SESTER, Peter Christian. Comentários à Lei de Arbitragem e à legislação extravagante. São Paulo: Quar-

219
 Two STJ judgments on violations of substantive public policy stand
out. In 2014, the STJ rejected an application for exequatur because the
award granted a payment relief in combination with inflation indexation
and exchange rate adaptation. This combination violates the STJ’s consol-
idated case law.93 The second judgment referred to an award that grant-
ed an anti-suit injunction according to which the party should waive a
pending court suit in Brazil. The STJ held that such an award violates the
constitutional guarantee of access to Justice (art. 5 XXXV of the Federal
Constitution of Brazil).94 The last case could also be qualified as referring
to procedural public policy.
With regard to issues of procedural public policy, the STJ is slightly
more restrictive. It is therefore not by accident that the most famous case
of denied exequatur, the Abengoa case, basically refers to a procedural is-
sue. The STJ held that the presiding arbitrator did not fully comply with
his disclosure obligations, although a US court had rejected setting aside
the award based on the same facts. Hence, the STJ applied tougher dis-
closure obligations (based on arts. 14 and 32 (II) of BAL).95 In the case in
hand the STJ did not require proof of impact or casuality of the hidden
material fact on the decision of the arbitral tribunal.
In the Abengoa case, the STJ further held that an award granting in-
demnification for breach of contract calculated on the basis of hypothet-
ical damages infringes a core principle of Brazilian Civil Law. Brazilian

tier Latin, 2020. p. 448-450.

93. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 2.410 reported by Justice Nancy Andrighi and
published in the Official Journal (DJ) on February 19th, 2014. STJ, Special Court (CE), Contested Request
for Exequatur (SEC) 854 reported by Justice Sidnei Beneti and published in the Official Journal on November
7th, 2013; recently confirmed by STJ, Special Court (CE), Contested Request for Exequatur (SEC) 12.781
reported by Justice João Otávio de Noronha and published in the Official Journal (DJ) on August 18th, 2017.
94. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 854 reported by Justice Sidnei Beneti and
published in the Official Journal on November 7th, 2013; recently confirmed by STJ, Special Court (CE),
Contested Request for Exequatur (SEC) 12.781 reported by Justice João Otávio de Noronha and published
in the Official Journal (DJ) on August 18th, 2017.
95. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 9.412 decision reported by Justice João
Otávio de Noronha and published in the Official Journal (DJ) on May 30th, 2017.

220
law was applicable to the respective contract. According to art. 944 of
the Civil Code, indemnification shall not exceed the effective damages.
Surprisingly, the STJ classified the arbitral tribunal’s mistake as a prob-
lem of an award ultra petita (art. 38 (IV) of BAL).96 It is actually, at least
in my opinion, rather an issue of substantive public policy, provided that
departing from art. 944 of the Civil Code really shocks the sense of justice
in the light of Brazilian law.

4.7 Art. 40

The dismissal of exequatur for recognition and enforcement of an arbitral

award that is based on formal defects does not prevent the interested party
from renewing its application once the defects are cured.

4.7.1 Misleading wording of art. 40

The wording of art. 40 of the BAL is slightly imprecise or even mislead-

ing. This becomes obvious when comparing the said norm to the wording
of art. 216–E of the RISTJ, according to which the STJ will extinguish the
application for exequatur without deciding on the merits (art. 216–E of the
RISTJ), if the application does not fully comply with all formal requirements.
In contrast, the word “dismissal” (denegação), used by the legislator in art. 40
of the BAL, suggests a different kind of decision than that addressed in art.
261–E of the RISTJ.
In fact, the wording of art. 216–C of the RISTJ (adopted after art. 40
of the BAL came into force), which lists the formal requirements of ex-
equatur application, refers explicitly to art. 216–D (III) of the RISTJ; that
said provision concerns the requirement of res judicata effect. According
to art. 216–E of the RISTJ, the president of the STJ shall extinguish the

96. Ibid.

221
exequatur procedure if the applicant does not cure the defects of its appli-
cation within the time frame set forth by the STJ president. Art. 216–E
of the RISTJ explicitly refers to the preceding articles, that is, arts. 216–C
and 216–D of the RISTJ.
Against this background, a broader interpretation of art. 40 of the
BAL seems to be appropriate, although the wording is misleading and
gives room for a narrow interpretation. Dismissal in the sense of art. 40
of BAL should be understood as encompassing the extinguishment of
the application in terms of art. 216–E of RISTJ. This interpretation cor-
responds to STJ case law.

4.7.2 Case law on art. 40

According to the STJ, the exequatur procedure shall be extinguished if

the applicant fails to supply documents that demonstrate the existence of
the arbitration agreement, as required by art. 37 (II) of the BAL. How-
ever, the interested party may file a new application once the necessary
documents can be supplied to the STJ.97
In 2009, the STJ ruled that the extinguishment of proceedings on the
grounds that the applicant does not qualify as an interested party in the
sense of art. 37 of the BAL has no res judicata effect. Hence, a new appli-
cation may be filed as soon as the defect is eliminated.98

97. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 967 reported by Justice José Delgado and
published in the Official Journal (DJ) on March 20th, 2006.
98. STJ, Special Court (CE), Contested Request for Exequatur (SEC) 3,035 reported by Justice Fernando Gon-
çalves and published in the Official Journal (DJ) on August 31st, 2009.

222
5. CONCLUSION

The Brazilian law and practice on the recognition and enforcement of foreign
arbitral award is consistent with the NYC and its mainstream interpretation in
leading arbitration jurisdictions around the world. According to consolidated
case law, the nationality of an award is defined strictly geographically, hence
by means of the place where the award was rendered, which is not necessarily,
but in practice almost always, identical with the seat of the arbitration. When
negotiating arbitration clauses with Brazilian parties, Chinese counterparties
should carefully analyze what are the differences between annulment and ex-
equatur proceedings in Brazil; or to but it differently: whether to determine
that possible future awards should be rendered inside or outside Brazilian
territory. Notably, Brazilian courts do not set more awards aside as Swiss or
US courts but setting aside proceedings can last very long in Brazil because
very often all three instances of the judiciary will rule on the case.

223
 Brazilian Contracts and Arbitration
Fabiane Verçosa1

1. INTRODUCTION

Since the entry into force of Act no. 9.307, enacted on September 23rd,
1996 (hereinafter, “Brazilian Arbitration Act”), and especially after such
Act has been declared constitutional by Brazilian Federal Supreme Court
(Supremo Tribunal Federal, hereinafter, “STF”), which took place on
December 12th, 20012, arbitration has been widely used in Brazil to solve
disputes arising out of contracts. It is important to mention that not only
international contracts (which worldwide, as a general rule, have their
disputes commonly solved by arbitration), but also Brazilian domestic
agreements have often elected arbitration as means to settle any contro-
versies that may arise therefrom. Brazil has indeed experienced an amazing

1. S.J.D. and master in International Law from University of the State of Rio de Janeiro, Brazil (UERJ). Adjunct
Professor at FGV Direito Rio Law School, in Graduation and in Postgraduation Courses. Visiting Research-
er, in PostDoctoral level, at Max-Planck-Institut für ausländisches und internationales Privatrecht, Hamburg
(2017). Deputy Editor-in Chief of Brazilian Arbitration Journal (Revista Brasileira de Arbitragem – RBA).
Lawyer in Rio de Janeiro.
2. Agravo Regimental em Sentença Estrangeira no. 5206-7 Spain, en banc, rapporter minister Sepúlveda Pertence,
ruled on December 12th, 2001.
increase of arbitration cases in these two last decades and the majority of
such cases has a contractual nature.
In this paper, we will analyze some issues related to arbitration and
contractual aspects under Brazilian Law.

2. ARBITRATION AGREEMENT

Prior to analyzing contracts themselves, it is important to examine how

an arbitration agreement can be entered by and between the parties, in a
proper way, under Brazilian Law.
First of all, it is important to mention that Section 3 of Brazilian Ar-
bitration Act sets forth two types of arbitration agreement: (i) the arbi-
tration clause (cláusula compromissória or cláusula arbitral, in Portuguese),
which relates to potential and future disputes arising out or from a con-
tract3; and (ii) the compromisso arbitral (which may be translated into En-
glish as the “submission agreement”), that is signed when the dispute is
already in place4.
In Brazil, the arbitration clause is incomparably more frequent than
the submission agreement.
It should be noted that for the contracts in general there is no special
formality imposed to the arbitration clause, except for the fact that it must
be in writing. This is what establishes Section 4, paragraph 1 of Brazilian
Arbitration Act5:

3. Article 4. An arbitration clause is an agreement by which the parties to a contract undertake to submit to arbi-
tration any disputes that might arise with respect to that contract.
4. Article 9. The submission agreement is the judicial or extrajudicial agreement by which the parties submit an
existing dispute to arbitration by one or more persons. Paragraph 1. The judicial submission agreement shall
be entered into by a written instrument registered within the dockets of the case before the court where the
suit was filed. Paragraph 2. An extrajudicial arbitration agreement shall be entered into by a private written
instrument signed by two witnesses, or by a public notary.
5. Translation of Brazilian Arbitration Act extracted from the website of Brazilian Arbitration Committee (Comitê
Brasileiro de Arbitragem – CBAr). Available at: http://cbar.org.br/site/legislacao-nacional/lei-9-30796-em-
ingles/. Accessed on: November 28th, 2020.

226
 Art. 4. An arbitration clause is an agreement by which the parties
to a contract undertake to submit to arbitration any disputes that
might arise with respect to that contract.
Paragraph 1. An arbitration clause must be in writing, and it may
be inserted into the contract itself or into a separate document to
which it refers. (emphasis added)

Therefore, arbitration cannot be agreed upon orally.

Furthermore, the arbitration clause may be included in the contract
or may be signed in a separate document in which reference is made to
the contract at hand.
Although no special formality is required for the arbitration clause in
the contracts in general, in some very specific cases it is important to at-
tend to some requisites.

2.1 Adhesion contracts

Adhesion contracts are the ones in which no negotiation between the

parties is possible. The contracting party has the mere choice to adhere/
accept the terms of the contract (which cannot be altered) or not to sign
the contracts.
Although adhesion contracts are also provided in Brazilian Civil Code6,
such form of agreement is usually used in consumer contracts, which are
regulated by Brazilian Consumer Protection Code.

Section 4, paragraph 2 of Brazilian Arbitration Act provides:

Section 4. […]
Paragraph 2. In adhesion contracts, an arbitration clause will only
be valid if the adhering party takes the initiative to initiate an ar-

6. Sections 423 and 424.

227
 bitration proceeding or if it expressly agrees with its initiation, as
long as it is in an attached written document or in boldface type,
with a signature or special approval for that clause.

Therefore, there are two ways in which an arbitration clause insert-

ed in a consumer contract may be valid: (i) if consumer himself/herself
commences arbitration against seller/supplier of the services; (ii) if the
clause was written in boldface type and the arbitration clause itself was
signed by the consumer (irrespective of the signature at the end of the
contract), in order to show that he/she is aware of this clause and agrees
with it. In this case, arbitration can be commenced either by consumer
or by seller/supplier.
As one can note, the second part of paragraph 2 of Section 4 is the
only provision in Brazilian Arbitration Act that stipulates a special form
for the arbitration clause, which is restricted to consumer contracts.
Such provision is very controversial in Brazil, especially because being
written in boldface type and with a signature does not mean that the con-
sumer is really conscious of arbitration and how it works. And it means that
he/she cannot seek judicial courts against the seller/supplier of the services.
In order to better understand the controversy, it is of utmost impor-
tance to mention Section 51, VII of Brazilian Consumer Protection Code
(hereinafter, “CDC”), which was enacted in 19907 (therefore, prior to
Brazilian Arbitration Act):
Art. 51. Any clauses that impose any of the following situations,
among others, will be nullified:
[…]
VII – determine the compulsory use of arbitration; (emphasis added)
The authors of Brazilian Arbitration Act’s Bill were fully aware that a

7. Translation into English extracted from Procon website. Available at: <http://www.procon.rj.gov.br/index.php/
publicacao/listar/5/1>. Accessed on: November 28th, 2020.

228
potential provision in the upcoming Arbitration Act had to be compatible
with the aforementioned provision of CDC (i.e., consumer’s participation
in an arbitration proceeding would have to be voluntary). This is why the
idea of the Bill’s authors was to stipulate that an arbitration clause insert-
ed in a consumer contract would only be valid if the consumer himself/
herself initiated the arbitration or simply agreed upon its commencement
by seller/supplier. The second hypothesis means that if seller/supplier ac-
tually initiated an arbitration against consumer, such proceeding could
only continue if consumer expressly agreed upon that.
It is to note that, in the original text of the Bill’s authors, the provi-
sion of Section 4, paragraph 2 had a slightly different wording. It reads
as the following:

Paragraph 2. In adhesion contracts, an arbitration clause will only

be valid if the adhering party takes the initiative to initiate an arbi-
tration proceeding or if it expressly agrees with its initiation.

It was however in Brazilian Parliament, more specifically in the Cham-

ber of Deputies, that was included the final part of the text, which was
inserted immediately after the word “initiation”:

[…], as long as it is in an attached written document or in boldface

type, with a signature or special approval for that clause.

The rationale of the proposal, which was approved by the majority of

the deputies, was the following: if the arbitration clause was written in
boldface type and if consumer was to sign at the margin of such clause,
it necessarily meant that consumer was fully aware of such provision and
in accordance therewith.
Notwithstanding, this is not what happens in practice. This is why since
enactment of Brazilian Arbitration Act the issue involving arbitration and

229
consumer contracts is very polemical in Brazilian Law. Case-Law is not
unanimous, but there are many decisions deeming invalid the arbitration
clause inserted in consumer contract, event if the formalities of Section
4, paragraph 2 were fully observed.
Therefore, arbitration in consumer contracts is not very common in
Brazil. Another reason for that is that consumer lawsuits in Brazil are
usually filed before Small Claims Courts ((Juizados Especiais Cíveis, in
Portuguese), in which no court fees are due by plaintiff.

2.2. Labor contracts

First of all, it is important to divide labor disputes in two categories: (i)

collective labor disputes; and (ii) individual labor disputes.
The use of arbitration in collective labor disputes is expressly provided
in Section 114, paragraphs 1 and 2 of Brazilian Federal Constitution8:
Section 114. Labor Justice has the power to hear and try:
[…]
Paragraph 1. If collective negotiations are unsuccessful, the parties
may elect arbitrators.
Paragraph 2. If any of the parties refuses collective negotiation or
arbitration, they may file a collective labor suit of an economic na-
ture, by mutual agreement, and Labor Courts may settle the con-
flict, respecting the minimum legal provisions for the protection of
labor, as well as any provisions previously agreed upon.

Diversely of what happens with collective labor disputes, arbitration to

solve individual labor disputes is not set forth in Brazilian Federal Consti-
tution. This is why many labor authors argue that arbitration is prohibited

8. Translation into English extracted from Brazilian Supreme Court website. Available at: http://www.stf.jus.br/
arquivo/cms/legislacaoConstituicao/anexo/brazil_federal_constitution.pdf. Accessed on: November 30th, 2020.
arquivo/cms/legislacaoConstituicao/anexo/brazil_federal_constitution.pdf

230
in Brazil to settle individual labor disputes. Also Brazilian Case-Law is
not unanimous on that matter. For instance, Brazilian Superior Labor
Court (Tribunal Superior do Trabalho – TST), Brazilian highest court
to rule labor disputes, has decided, in a number of cases, that the use of
arbitration to settle labor disputes violates Brazilian Federal Constitution.
It is important to highlight, however, that paragraphs 1 and 2 of Section
114 are the only provisions in the whole Brazilian Federal Constitution
that provide for arbitration. There is no constitutional provision mentioning
arbitration for the settlement of civil or commercial disputes, for instance.
Moreover, some infraconstitutional statutes also have provisions ex-
plicitly authorising the use of arbitration for collective labor disputes.
This is the case of the Strike Act (no. 7.783/89), the former Ports Act (no.
8.630/93), that was revoked by Act no. 12.815/13 (the Ports Act currently
in force), which contains a very similar device in its art. 37, and the Act
that regulates employee participation in the company’s profits and results
(Act no. 10.101/2000).
For many years, the use of arbitration to solve individual labor disputes
has been a highly controversial issue in Brazil. The major concern is that
the employee is not in equality of arms with the employer. In a collective
labor dispute, the employees are together – and stronger – to claim their
rights in opposition to the employer.
On November 11th, 2011 a profound amendment in Brazilian Con-
solidated Labor Laws (Consolidação das Leis do Trabalho – CLT) en-
tered into force. Many sections have been deeply changed in what is called
“CLT’s Reform”.

Section 507-A has also been inserted in CLT’s Reform as it follows:

Section 507-A. In individual labour agreements in which the em-

ployee’s monthly salary is double the cap on social security pensions, an
arbitration clause may be agreed upon by the parties, provided that

231
 such arbitration clause is proposed or expressly agreed by the employee,
according to the Arbitration Act (Act no. 9.307/96). (emphasis added)

Therefore, since November 2017 Brazilian Law expressly provides an

arbitration clause may be included in a labor contract (i.e., to solve an in-
dividual labor dispute), since two requisites have been attended:
(i) the employee has a monthly salary that corresponds to double the
cap on social security pensions9; and (ii) the employee has either proposed
the insertion of the arbitration clause in the labor contract or has expressly
agreed therewith.

It is of utmost importance to note that, although CLT’s Reform en-

tered into force three years ago, Brazilian Superior Labor Court has not
ruled a single case so far, in which the arbitration clause has been signed
after CLT’s Reform entry into force. Therefore, by now it is not possible
to predict whether TST will find that such contractual provision is in ac-
cordance with Brazilian Federal Constitution. Although now there is an
express provision in CLT, it is possible that TST finds it unconstitutional.

3. SOME SPECIFIC AGREEMENTS

In this section, we will analyze some kinds of contracts in which the arbi-
tration agreement itself does not require any special condition. However,
arbitration to solve disputes arising out or from such agreements have
some peculiarities that are worth mentioning.

9. On November 30th, 2020, such amount corresponds approximately to BRL 12,000.00 (USD 2,300.00). Extracted
from BCB website. Available at: https://www.bcb.gov.br/. Accessed on: November 30th, 2020.

232
3.1. Contracts with public entities

Some time after STF has ruled the case in which Brazilian Arbitration
Act was declared constitutional, both private and public entities included
more and more arbitration clauses in their contracts, due to the various
advantages that arbitration has if compared with the judicial means of
settlement of disputes10.

By that time, Brazilian Arbitration Act did not provide expressly for
the possibility of public entities to take part in arbitration. Section 1 of
Brazilian Arbitration Act simply stated:

Art. 1. Those who are capable of entering into contracts may make
use of arbitration to resolve conflicts regarding freely transferable
property rights11.

Therefore, in accordance with Section 1, two requisites are necessary

for arbitration to take place: (i) parties capable of entering into contracts
(subjective arbitrability); and (ii) the dispute must involve freely transfer-
able property rights (objective arbitrability).
Thus, in practice, public entities inserted an arbitration clause in their
contracts, which was/is very attractive for private companies that enter into
contracts by and between them. Notwithstanding, when disputes arose
and the private company initiated an arbitration in the terms set forth in
the contract, the public entity (defendant) used to argue that the rights
involved in public contracts cannot be deemed freely transferable property
rights. The objective arbitrability requisite was allegedly not fulfilled. As
a consequence, the arbitration clause was null and void. In this scenario,

10. Such as the possibility of appointing the arbitrators, the flexibility and celerity, inter alia.
11. Translation of Brazilian Arbitration Act extracted from the website of Brazilian Arbitration Committee. Avail-
able at: http://cbar.org.br/site/legislacao-nacional/lei-9-30796-em-ingles/. Accessed on: November 28th, 2020.

233
arbitration could not take place and the private company would have to
seek Brazilian state courts. It happened several times, in arbitration pro-
ceedings seated in Brazil and also abroad.
Moreover, public entities also used to raise another argument: widely
known professor Luis Roberto Barroso (who, since 2013 is a STF min-
ister) defended that public entities could submit to arbitration only in
cases where a statutory authorization therefor existed. For instance, Acts
no. 9.472/1997 (telecommunications) and 9.478/1997 (oil) expressly pro-
vided, in Sections 93, XV and 43, X, that public entities were to include
arbitration clauses in their contracts. If, in the concrete case, the public
entity at hand did not have statutory provision authorizing arbitration,
the latter could not take place, as Barroso argued. For him, thus, it was a
matter of lack of subjective arbitrability.
For years this theme has been highly controversial in Brazil, which
caused great uncertainty regarding arbitration involving public entities.
State Courts of Appeals also had different positions on such matter12.
This situation started to change on October 25th, 2005, when Brazil-
ian Superior Court of Justice (Superior Tribunal de Justiça, hereinafter
“STJ”) ruled Recurso Especial no. 612.43913. In such case, STJ decided that
public entities of Indirect Public Administration, such as the so-called
mixed-capital companies (sociedades de economia mista), must submit to
arbitration if they have included an arbitration clause in their agreements.
Under Section 173 of Brazilian Federal Constitution, paragraph 1, II14,

12. See, for instance, the COPEL case (Court of Appeals of the State of Paraná, Agravo de Instrumento no. 174.874-
9, rapporter second instance judge Fernando César Zeni, ruled on October 18th, 2005.
13. Recurso Especial no. 612.439, rapporteur minister João Otávio de Noronha, ruled on June 8th, 2017.
14. Section 173. Paragraph 1. The law shall establish the legal system of public companies, jointstock companies
and their subsidiary companies engaged in economic activities connected with the production or trading of
goods, or with the rendering of services, providing upon:
[…]
II – compliance with the specific legal system governing private companies, including civil, commercial, labor, and
tax rights and liabilities; […]
Translation into English extracted from Brazilian Supreme Court website. Available at: http://www.stf.jus.br/ar-
quivo/cms/legislacaoConstituicao/anexo/brazil_federal_constitution.pdf. Accessed on: November 30th, 2020.
quivo/cms/legislacaoConstituicao/anexo/brazil_federal_constitution.pdf

234
the same regime applies either to private companies and public entities of
Indirect Administration as regards civil and commercial liabilities, among
others. Therefore, since private companies are bound by arbitration agree-
ments they agreed upon, there is no reason why public entities (including
mixed-capital companies and public companies are not bound also.
After such leading case, two other appeals were also decided by STJ
in which the same matter was involved (must mixed-capital companies/
public companies submit to arbitration if they included an arbitration
clause in their contracts?). The same answer (yes!) was provided by STJ
in the two cases, as it follows: (i) Agravo Regimental em Mandado de Segu-
rança no. 11.308, rapporteur minister Luis Fux, ruled on June 28th, 2006;
and (ii) Recurso Especial no. 606.345, rapporteur minister João Otávio de
Noronha, ruled on June 8th, 2017.
Some years afterwards, on October 20th, 2011, STJ ruled Recurso Es-
pecial no. 904.813, rapporteur minister Nancy Andrighi. In this case, the
mixed-capital company COMPAGAS (Companhia Paranaense de Gás
Natural) had not included an arbitration clause in the contract that was
part of a bid; arbitration had been agreed upon by means of a compromisso
arbitral (the so-called “submission agreement”). When the dispute arose
and arbitration proceeding was initiated, COMPAGAS argued that the
arbitration agreement could not lead to arbitration, since it was not part
of the agreement presented by the time of the bid. The appeal was denied.
As one may note, STJ case-law is totally favorable to mixed-capital com-
panies and public companies’ submission to arbitration due to the arbitration
agreement entered by and between such companies and private entities.
After so many cases ruled by STJ in favor of arbitration, professor Luis
Roberto Barroso declared publicly that he had changed his mind on the
alleged necessity of statutory authorization for public entities to submit
their disputes to arbitration.
Finally, on May 26th, 2015 Act no. 13.129 was enacted and entered into
force sixty (60) days after its publication in the Official Gazette. Such Act

235
amended Brazilian Arbitration Act. Among other changes, paragraphs 1
and 2 were included in Section 1 of Brazilian Arbitration Act, that since
July 27th, 2015, reads as it follows:

Section 1. […]
Paragraph 1. Direct and Indirect Public Administration may use
arbitration to resolve conflicts regarding transferable public prop-
erty rights.
Paragraph 2. The competent authority or direct public administra-
tion entity that enters into arbitration agreements is the same entity
that enters into agreements or transactions.

Although STJ Case-Law led to the conclusion that mixed-capital com-

panies and public companies were bound to the arbitration agreements they
entered into, there was no case yet involving Direct Administration (the
Federal Union, states and municipalities) and, therefore, such matter was
uncertain. However, after the amendment of Brazilian Arbitration Act by
Act no. 13.129/2015, there is no more doubt: not only public companies
and mixed-capital companies must submit to arbitration under Act no.
9.307/1996 if an arbitration agreement is in place, but also the Federal
Union, the states and municipalities.
Finally, Section 2 of Brazilian Arbitration Act was also amended, in order
to include paragraph 3, that refers to arbitration involving public entities:

Art. 2. At the parties’ discretion, arbitration may be at law or in equity.

Paragraph 1. The parties may freely choose the rules of law that will
be used in the arbitration, as long as their choice does not violate
good morals and public policy.
Paragraph 2. The parties may also agree that the arbitration shall
be conducted under general principles of law, customs, usages and
the rules of international trade.

236
 Paragraph 3. Arbitration that involves public administration will
always be at law and will be subject to the principle of publicity. (em-
phasis added)

3.2. Franchise contracts

On December 26th, 2019, Act no. 13.966 was enacted (hereinafter, the
“New Franchise Act”). Such Act regulates franchise contracts and revokes
Act no. 8.955 of 1994.
Franchising is a very important sector for Brazilian economy. In 2019,
Brazilian Franchising Association (“ABF”) informed that 2,918 franchises
existed in Brazil, which corresponded to 1,358,139 jobs.
The New Franchise Act expressly provides, in Section 7, paragraph
1, the following:

Section 7. […]
Paragraph 1. Parties may choose arbitration for the settlement of
disputes related to the franchise contract.

Such provision may be of utmost importance to encourage parties to a

franchise contract to agree upon arbitration. As a matter of fact, however,
it was not necessary, since the general provision contained in aforemen-
tioned Section of Brazilian Arbitration Act already encompasses contracts
such as the franchise ones. After all, franchisor and franchisee usually are
individuals/companies capable of entering into contracts, which attends
the subjective arbitrability requisite. Further, the rights involved in fran-
chise contracts, as a general rule, consist in freely transferable property
rights (objective arbitrability). Therefore, actually there was no need for the
New Franchise Act to provide for the possibility of choosing arbitration.
It is also worth noting that the New Franchise Act expressly states that
a franchise contract does not consist in a consumer contract (Section 1).

237
Notwithstanding, STJ Case-Law regarding arbitration involving franchise
contracts has been stating that a franchise contract is an adhesion contract15.
And, as a consequence, the requisites provided in Section 4, Paragraph 2
of Brazilian Arbitration Act should be observed. In principle, we do not
really believe that the general provision of Section 7, paragraph 1 is able
to change this scenario. As a consequence, in the cases to be submitted
to STJ under the New Franchise Act, it is possible that STJ still finds it
necessary for the arbitration clause to attend the formal conditions stipu-
lated in Section 4, paragraph 2 of Brazilian Arbitration Act.

4. CONCLUSION

Arbitration in Brazil has been widely used to settle disputes arising out or
from contracts, either domestic or international ones. Actually, although
arbitration is confidential, one may presume that the great majority of
arbitral proceedings seated in Brazil or involving one or more Brazilian
parties involve contracts.
As a general rule, there is no special formality imposed to arbitration
clauses, except for the requisite that is in writing. Only arbitration claus-
es inserted in adhesion contracts have the formal requisites prescribed in
Section 4, paragraph 2 of Brazilian Arbitration Act. Moreover, arbitration
clauses included in labor individual contracts also have some conditions,
such as a minimum employee’s monthly salary and its express consent to
include the arbitration agreement in the contract.
Further, due to their peculiarities and/or importance for Brazilian
economy, some specific types of contracts are also to mention, such as
the ones entered by and between private companies and public entities
and the franchise contracts.

15. See REsp nº 1.602.076/SP, rapporteur minister Nancy Andrighi, ruled on September 15th, 2016.

238
 Chinese Institutional Practice on
Challenges to Arbitrators
Li Hu1

INTRODUCTION

The challenge to an arbitrator may arise in international commercial ar-

bitration where a party has reasonable doubts as to the arbitrator’s inde-
pendence or impartiality. In institutional arbitration, such challenge is
normally raised firstly before an institution or a tribunal, and any decision
the institution or the tribunal makes may be subsequently put forward
for review by a national court, where a final decision is usually made. In
making their decisions, the institution, the tribunal and the court shall
rely on the applicable arbitration rules of the institution and the lex arbitri.

1. Vice chairman, China Maritime Arbitration Commission (CMAC), Former Deputy Secretary-General (July
2010 – July 2020), China International Economic and Trade Arbitration Commission (CIETAC), Board
Member, Arbitration Institute of Stockholm Chamber of Commerce (SCC) Council Member, Asian Institute
of Alternative Dispute Resolution (AIADR), Member, ICC Commission on Arbitration and ADR, Vice
chairman, ICC China Commission on Arbitration and ADR, Member, International Council for Commercial
Arbitration (ICCA). The author would like to acknowledge his thanks to Dr. Chen Bo, the Deputy Secretary
General of CMAC, Ms. Lu Fei, the Deputy Director of the Commission Affairs Division of CIETAC Se-
cretariat and Mr. Brad Wang, the Deputy Secretary-General of CIETAC Hong Kong Arbitration Center,
for their assistance, support and extensive comments on the drafts.
 Undoubtedly, some of the challenges are meritorious, for example, a
challenge to an arbitrator who has failed to disclose a direct financial re-
lationship with the opposing party that, once revealed, gives rise to jus-
tifiable doubts as to the arbitrator’s independence or impartiality. Such
challenges will cause disqualification of the arbitrator accordingly. In some
cases, however, challenges can be made as a tactic to delay the formation
of the tribunal, to remove the whole tribunal or a critical arbitrator who is
considered not likely to put the challenging party in a favorable position.
If both parties agree the challenged arbitrator should resign or, not-
withstanding the parties’ agreement, the challenge is well founded, the
arbitrator shall resign voluntarily or be replaced according to the proce-
dural rules and/or the lex arbitri. Instead, if the challenge appears to be
without merit, the arbitrator may choose or decide to remain.
This paper, by observing the Chinese legal and institutional framework
on challenges to arbitrators as well as the decisions made by CMAC and
CIETAC in their administered cases, attempts to present the practice of
Chinese institutions in this regard.

2. THE CHINESE LEGAL FRAMEWORK

ON CHALLENGE TO AN ARBITRATOR

2.1 Provisions of the Chinese Arbitration Law

Under the Chinese Arbitration Law (the CAL),2 the parties may challenge
the arbitrator and request them to resign from the tribunal. The request
shall either be raised before the first oral hearing with reasons, or not later
than the conclusion of the final oral hearing if the party becomes aware
of the reasons for a challenge after the first oral hearing.3 The decision on

2. The Arbitration Law of the People’s Republic of China was enacted on August 31st, 1994 by the National Peo-
ple’s Congress and came into force on September 1st, 1995.
3. The CAL, art. 35.

242
the challenge shall be made by the chairman of the arbitration institution
with or without stating reasons.4
In accordance with art. 34 of the CAL, the statutory grounds for which
the arbitrator shall resign include:

I. the challenged arbitrator is a party or a close relative of a party or

a party’s representative;
II. the challenged arbitrator has a personal stake in the case;
III. the challenged arbitrator has some other relationship with a party
to the case or with a party’s agent which could possibly affect the
impartiality of the arbitration;
IV. the challenged arbitrator meets a party or their agent in private,
accepts an invitation for dinner by a party or their representative
or accepts gifts presented by any of them.

2.2 Provisions of CIETAC and CMAC Arbitration Rules

Under the currently effective CIETAC Arbitration Rules 2015, an ar-

bitrator nominated by the parties or appointed by CIETAC shall sign a
declaration and disclose any facts or circumstances that are likely to give
rise to justifiable doubts as to their impartiality and independence. The
duty of disclose is ongoing: if the circumstances that need to be disclosed
arise during the arbitral proceedings, the arbitrator shall promptly disclose
such circumstances in writing. The declaration and/or the disclosure of
the arbitrator shall be submitted to CIETAC, and then forwarded to the
parties for comments (or challenge).5

4. Ibid., art. 36.

5. CIETAC Arbitration Rules, art. 31.

243
2.2.1 Challenge arising out of the disclosure

Upon the receipt of the declaration and/or the written disclosure of an

arbitrator, a party wishing to challenge the arbitrator on the grounds of
the disclosed facts or circumstances shall forward the challenge in writ-
ing within ten days from the date of such receipt. If a party fails to file a
challenge within ten days, it may not subsequently challenge the arbitrator
on the basis of the matters disclosed by the arbitrator.

2.2.2 Challenge on other facts and reasons

Alternatively, if a party has justifiable doubts as to the impartiality or inde-

pendence of an arbitrator (arising out of matters not stated in the disclosure),
the party may challenge that arbitrator in writing and shall state the facts
and reasons on which the challenge is based with supporting evidence. Un-
der this circumstance, a party may challenge an arbitrator in writing within
15 days from the date it receives the notice of formation of the tribunal.

2.2.3 On-going right to challenge

When a party becomes aware of a reason for a challenge after such receipt,
the party may challenge the arbitrator in writing within 15 days after such
reason has been acknowledged, but no later than the conclusion of the
last oral hearing; the challenge by one party shall be promptly commu-
nicated to the other party, the arbitrator being challenged and the other
members of the tribunal.

2.2.4 Results of the challenges

When an arbitrator is challenged by one party and: 1) the other party agrees
to the challenge, or 2) the challenged arbitrator voluntarily resigns from

244
their office, such arbitrator shall no longer be a member of the tribunal.
However, in neither circumstance shall it be implied that the grounds for
the challenge are sustained.
In circumstances other than those specified before, the chairman of
CIETAC shall make a final decision on the challenge with or without
stating the reasons. The challenged arbitrator shall continue to serve on
the tribunal until a final decision on the challenge has been made by the
chairman of CIETAC.6

2.2.5 Other reasons for replacement

In the event that an arbitrator is prevented de jure or de facto from ful-

filling their functions, or fails to fulfill their functions in accordance
with the requirements of the CIETAC Arbitration Rules or within the
specified time period, the chairman of CIETAC shall have the power to
replace the arbitrator. Such arbitrator may also voluntarily resign from
their office; the chairman of CIETAC shall make a final decision on
whether or not an arbitrator should be replaced with or without stating
the reasons.7
The similar provisions were also adopted by CIETAC Arbitration
Rules 2012, and the current CMAC Arbitration Rules 2018 and its for-
mer editions.8

2.3. Provisions of CIETAC and CMAC ethical rules

It is worth noting provisions of the CIETAC and CMAC ethical rules

cited below, which carry soft-law functions to its arbitrators respectively.

6. Ibid., art. 32.

7. Ibid., art. 33.
8. CIETAC Arbitration Rules 2012, art. 29, 30 and 31, CMAC Arbitration Rules 2018, art. 35, 36 and 37, and
CMAC Arbitration Rules 2015, art. 35, 36 and 37.

245
 The CIETAC Code of Conduct for Arbitrators 1994 requires that,
if an arbitrator believes that he or she has a stake or other interests in a
case that may prevent the case from being heard in an impartial manner,
the arbitrator shall disclose his or her relations with the party in question,
for instance, immediate family member, debt relationship, property and
monetary relations, and business or commercial cooperation relations, and
shall on his or her own initiative request for resignation.9
CIETAC Rules for Evaluating the Behavior of Arbitrators 2009 list
the circumstances where the arbitrators shall, on his or her own initia-
tivek, reject the nomination or appointment, request to resign or disclose.
An arbitrator shall not accept nomination or appointment if any of
the following circumstances exists:10

I. the arbitrator shall resign according to the law;

II. the arbitrator is unable to participate in an oral hearing within two
months from the date of nomination or appointment;
III. due to his or her heavy workload, the arbitrator cannot ensure
enough time and effort to handle the case with the necessary lev-
el of care;
IV. the arbitrator is unable to participate in the hearing of the case
due to health reasons;
V. the arbitrator is unable to handle the case competently due to his
or her unfamiliarity with the subject matter of the case;
VI. the arbitrator is serving as the chairman or vice-chairman of CI-
ETAC or as a staff member of the Secretariat or its Sub-Commis-
sions or its liaison offices at the time of nomination by the parties;
VII. other such reasons exist that make it inappropriate for the arbi-
trator to accept nomination or appointment.

9. The CIETAC Code of Conduct 1994, art.5.

10. The CIETAC Rules for Behavior Evaluation 2009, art. 6.

246
 If any of the following circumstances exists, the arbitrator shall vol-
untarily disclose in writing to CIETAC:11

I. the arbitrator or his/her employer is related to the case or has pre-

viously had business contact with either of the parties;
II. the arbitrator is a colleague of another arbitrator in the case;
III. the arbitrator and a party or its major managing personnel or agent
have full time positions in the same social organization and fre-
quently come into contact with each other;
IV. the arbitrator’s close relative is employed by a party or its agent;
V. the arbitrator holds an official position in an organization that is
related to the case;
VI. the arbitrator or the arbitrator’s close relative has possible right of
recourse with regard to the winner or loser in the case;
VII. a close personal relationship exists between the arbitrator and a
party or its agent;
VIII. the arbitrator shares collective rights or obligations with a party or
its agent, or has any other kind of business or property relationship
with a party or its agent;
IX. other circumstances exist that give rise to reasonable doubts in
the eyes of the parties as to the impartiality and independence of
the arbitrator.

The duty to disclose is on-going. If an arbitrator becomes aware of a

circumstance that needs to be disclosed after formal acceptance of nomina-
tion or appointment, the arbitrator shall immediately make the disclosure.
On the other hand, if any of the following circumstances exists, an
arbitrator should make a request to CIETAC for resignation on his or
her own initiative. The parties and the other members of the tribunal may

11. Ibid., art. 7.

247
also submit a written petition to the chairman of CIETAC to challenge
the arbitrator, with specific reasons stated therein. The chairman will then
make a decision on the challenge. Such a decision may also be made by
the chairman on his or her own initiative.12

I. the challenged arbitrator is a party or a close relative of a party or

a party’s representative;
II. the challenged arbitrator has a personal stake in the case;
III. the challenged arbitrator has some other relationship with a party
to the case or with a party’s agent which could possibly affect the
impartiality of the arbitration;
IV. the challenged arbitrator meets a party or his agent in private, ac-
cepts an invitation for dinner by a party, or his representative, or
accepts gifts given by any of them.

For the purpose of these rules, the phrase “some other relationship ” in
Item 3 of the preceding paragraph refers to the following circumstances:

I. the arbitrator has previously given advice on the same case to a

party or its agent;
II. the arbitrator is currently a colleague of a party or its agent or used
to be a colleague of the latter within the past two years;
III. the arbitrator is currently the legal adviser or agent of a party or has
acted as the legal adviser or agent of a party within the past two years;
IV. the arbitrator has recommended or introduced an agent to a party;
V. the arbitrator has served as a witness, appraiser, inspector, trial lawyer
or litigation/arbitration agent in the same case or in a related case; and
VI. other circumstances exist that might affect the impartiality of the
arbitration.

12. Ibid., art. 8.

248
 The CMAC Code of Conduct for Arbitrators 1994 and the CMAC
Rules for Evaluating the Behavior of Arbitrators 2009 also contain similar
provisions as the adopted by CIETAC.13

3. THE CMAC AND CIETAC CASES INVOLVING

CHALLENGE TO ARBITRATORS

3.1 CMAC decision on Challenge no. 05214

3.1.1 Introduction

In January 2008, CMAC accepted a dispute arising from a bareboat charter

of Gaohua concluded in September 2003 between the claimant Gaopeng
Shipping and the respondent Changjiang Steamer. The applicable rules
were CMAC Arbitration Rules 2004. The claimant nominated Mr. H,
and the respondent nominated Ms. W as co-arbitrators, and the CMAC
Chairman appointed Mr. S as the presiding arbitrator. The tribunal was
formed to hear the case in February 2008.
In the arbitration proceedings, the respondent challenged Mr. H, and
the claimant challenged Ms. W both in March 2008.

3.1.2 The parties’ positions

The respondent’s challenge to Mr. H was based on the following arguments:

In a pending court litigation concerning the preemptive right of Gao-
hua ship (the Gaohua court case) initiated by the respondent against the
claimant and another company Zhengdong Shipping. Zhengdong Ship-
ping is represented by the law firm with which Mr. H is working as a se-

13. The CMAC Code of Conduct 1994, art. 5; the CMAC Rules for Behavior Evaluation 2009, art. 6, 7 and 8.
14. See CMAC Decision on Challenge to Arbitrator, [(2008) CMACZI No. 052], unreported. The data was kin-
dly provided by the Secretariat of CMAC.

249
nior partner. There is an obvious stake between the present case and the
Gaohua court case.
The claimant did not submit any rebuttal with regard to the respon-
dent’s statement.
The claimant raised its challenge to Ms. W for the reasons below:
Before the present case, there is another CMAC arbitration case
concerning the preemptive right of Gaohua ship (the Gaohua arbitration
case) between the claimant and the respondent, in which the respondent
nominated Ms. W as arbitrator. Following the Gaohua arbitration case,
the respondent once again nominated Ms. W as arbitrator in the present
case. Both the present case and the Gaohua arbitration case are dealing
with the disputes arising from the bareboat charter of Gaohua, and they
are mutually related in both legal facts and the interest of the final award.
It is not appropriate for Ms. W to be appointed again in the present case.
The respondent made its reply to the claimant’s aforementioned chal-
lenge as follows:
Under the CMAC Arbitration Rules 2004, there are no applicable
grounds to this case for Ms. W to resign on her own motion or be re-
quested to resign by one of the parties. As an experienced arbitrator with
fine expertise and ethical discipline, Ms. W has served as arbitrator in
many cases. There is also no legal basis under the CAL for the claimant
to challenge Ms. W. Albeit the relevance, the present case is separated
and distinguished from the Gaohua arbitration case. With her familiarity
with the basic facts of the two cases, Ms. W’s participation in the present
case as arbitrator is appropriate for the case to be examined impartially.

3.1.3 The CMAC decision

The CMAC chairman was of the following opinion:

The pending Gaohua court case at Shanghai Maritime Court is close-
ly related to the present case, and there are indeed close interests between

250
the final award of the present case and the trial of the Gaohua court case.
Mr. H, as the arbitrator chosen by the claimant in the present case, is the
senior partner in the law firm acting for one of the parties in the Gaohua
court case, which does raise justifiable doubts as to Mr. H’s impartiality or
independence in the present case.
Regarding the claimant’s challenge to Ms. W, the chairman of CMAC
holds that an arbitrator appointed by the party shall not represent either
party of a case and shall treat both parties equally, and hear the case impar-
tially. Being nominated as arbitrator by one of the parties in other relevant
cases does not constitute a ground to resign under the CAL.
In accordance with art. 32 of the CMAC Arbitration Rules 2004, in
March 2008 the CMAC chairman decided to sustain the respondent’s
challenge, and that Mr. H would no longer serve as an arbitrator in the
present case, besides dismissing the claimant’s challenge to Ms. W.

3.2 CIETAC decision on Challenge no. 02654715

3.2.1 Introduction

The claimant Guangzhou Technique in January 2015 initiated an arbitra-

tion at CIETAC against the respondent Shanghai ATM with regard to
the dispute arising from a Settlement Agreement. The claimant nominated
Ms. L, and the respondent nominated Mr. T as co-arbitrator respectively,
and CIETAC appointed Mr. Z as the presiding arbitrator. The tribunal
was formed in June 2015 to hear the case.
Mr. T is the managing partner of an international law firm’s Beijing
office. When accepting the nomination of the respondent, Mr. T signed
the declaration disclosing in writing the following circumstance:

15. See CIETAC Decision on Challenge to Arbitrator, [(2015) China CIETAC Jingzi No. 026574], unreported.
The data was kindly provided by the Secretariat of CIETAC.

251
 Please note that an affiliate of the Respondent, ATM SA, is an exist-
ing client of a partner in my law firm Munich office. At the moment, this
partner is not providing any legal services to ATM SA but may be called
upon in the future to represent ATM SA. I am not by myself aware of,
or have participated in or have been responsible for any matters on which
my firm advised ATM (or its affiliates). In addition, I will take no part
in, nor would be in any way responsible for the representation of ATM
(or its affiliates) in the course of the arbitration proceedings.
The claimant raised challenge against Mr. T after receiving the no-
tice on the formation of tribunal and Mr. T’s declaration with disclosure.

3.2.2 The parties’ positions

The claimant challenged Mr. T on three grounds: 1) as disclosed by Mr.

T, an affiliate of the respondent, ATM SA is an existing client of his law
firm’s Munich office; 2) Mr. T is (at material time) the managing partner
of the law firm Beijing office; and 3) as discovered by the claimant on the
law firm’s website, Mr. H, a partner of the law firm who is practicing both
in its Hong Kong office and Beijing office, has conducted due diligence
for ATM Power, which the respondent is part of. Thus, the respondent,
as part of the ATM Power, is an existing client of Mr. H of the law firm
Beijing office managed and led by Mr. T.
Based on the mentioned facts, the claimant argued that ATM and the
law firm have extensive cooperation with each other, and such coopera-
tion has the effect which is so profound that it even goes beyond Mr. T’s
capacity to act independently and impartially in this case as an arbitrator.
The respondent argued by relying on both art. 34 of the CAL, and
art. 8 of the CIETAC Rules for Behavior Evaluation 2009 which have
summarized all the circumstances under which the arbitrator shall resign.
According to the respondent, both the disclosure made by Mr. T and
the allegations by the claimant do not fall in any of those circumstanc-

252
es. Moreover, the allegations that Mr. H is a partner of the law firm and
practicing in both Hong Kong and Beijing office, and the respondent is
an existing client of Mr. H, who is managed and led by Mr. T, are found
false. According to the website of the law firm, Mr. H is called to the Hong
Kong bar and a partner of the Hong Kong office. He is neither a partner
in Beijing office nor a qualified Chinese lawyer. He is not practicing in
Beijing or led by Mr. T. Also, the respondent, a company registered in
Shanghai, is not a client of Mr. H.
The claimant submitted its rebuttal from two aspects. First, the ex-
tensive cooperation between ATM group and Mr. T’s law firm could af-
fect the impartiality of the arbitration. The facts disclosed by Mr. T and
discovered by the claimant unequivocally indicate that ATM group and
the law firm have extensive cooperation with each other, which has fall-
en into the scope of art. 34 (3) of the CAL. The claimant has justifiable
doubts that the relationship between Mr. T, a partner of the law firm, and
the respondent, a member of ATM group, could affect the impartiality
of the arbitration. Second, as disclosed on the law firm’s website, Mr. H
is practicing in both Hong Kong and Beijing. The law firm’s website has
provided Mr. H’s contact information at both the Hong Kong and Bei-
jing offices. In addition, the firm’s website clearly indicates that, though
admitted in Hong Kong, Mr. H is working both in Hong Kong office
and Beijing office.
The respondent submitted its surrebuttal, further stating two points.
First, the so-called “relation” between ATM group and the law firm dis-
closed by Mr. T and the claimant by no means falls within the categories
which might result in resignation of arbitrator in accordance with both the
CAL and the CIETAC Rules. There is no proof that there is a relationship
between Mr. T and the respondent that may affect the impartiality of the
arbitration. Even if there were, the so-called “relation” between Mr. T and
ATM group alleged by the claimant could not have fallen in the scope of
relations listed in art. 8 of the CIETAC Rules for Behavior Evaluation

253
2009, which could affect the impartiality of the arbitration. Second, Mr.
H as a partner admitted in Hong Kong could not, in any case, practice
law in Chinese Mainland. The existence of two pieces of contact infor-
mation of Mr. H on the law firm website should not be over-interpreted
as he is led by Mr. T.

3.2.3 Mr. T’s response

In his response, Mr. T stated:

“I do not think the aforesaid relationship calls for my withdrawal as an
arbitrator to the international arbitration practice, and I do not believe it
will affect me in any way or cast any justifiable doubt as to my impartiality
or independence in acting as an arbitrator in the captioned case.
“Specifically, the disclosed relationship falls under Orange List of the
IBA Guidelines on Conflicts of Interest in International Arbitration16
(Art. 3.1.4 under the Orange List), but does not render it necessary for
disqualifying such arbitrator. For instance, General Standard 3(c), Expla-
nation to General Standard 3(c) and Art. 4 of the Practical Application of
the General Standards under the IBA Guideline have made it clear that
disclosure of a situation set forth in the Orange List does not necessarily
imply the existence of a conflict of interests; nor should it by itself result
either in a disqualification of the arbitrator, or in a presumption regard-
ing disqualification. Instead, the purpose of the disclosure is to inform
the parties of a situation that they may wish to explore further in order to
determine whether objectively – that is, in the view of a reasonable third
person having knowledge of the relevant facts and circumstances – there
are justifiable doubts as to the arbitrator’s impartiality and independence. If
the conclusion is that there are no justifiable doubts, the arbitrator can act.

16. The IBA Guidelines on Conflict of Interest in International Arbitration (the IBA Guidelines) was approved
by the IBA Council in May 2004 and updated in October 2014, and have gained general acceptance as a
non-binding set of principles in international arbitration.

254
 “In the present case, from an objective view there should not be any
justifiable doubts as to my impartiality and independence in acting as an
arbitrator. Although an affiliate of the Respondent is an existing client of
a Partner in the law firm Munich office, the matters on which he advised
were completely irrelevant to this arbitration. I was never involved in any
of those matters, had no awareness of the same and will not participate
in any capacity with respect to the representation of ATM or its affiliates
during the course of the arbitration case proceedings.
“Furthermore, as an international arbitrator having handled over hun-
dred international arbitration cases, I hold myself to the professional dis-
cipline and ethics that I shall never be impacted or act in any unjust way
in any arbitration cases where I sit as an arbitrator.
“Therefore, despite the matters that I disclosed, I consider myself to be
impartial and independent of the parties and intend to remain so through-
out the conduct of this arbitration, and for these reasons, I do not think
I should withdraw from this case.”

3.2.4 The CIETAC decision

The chairman of CIETAC was of the following opinion:

The CIETAC Arbitration Rules 2015 applies to this arbitration.
According to art. 32 of the CIETAC Arbitration Rules 2015, the
challenge, if any, to Mr. T should only be related to his impartiality
or independence.
Art. 34 of the CAL and art. 8.3 of the CIETAC Rules for Be-
havior Evaluation 2009 provide the circumstances where an arbitrator
should resign. The chairman holds the aforementioned circumstances
which do not cover the circumstance of the case at hand, and Mr. T’s
disclosure do not trigger resignation either.
The chairman has also made an emphasis that it is not about wheth-
er an arbitrator “has or had” relationship with a party or its agent, but

255
rather whether the relationship would affect the impartiality or inde-
pendence of the arbitrator. In this case, even though an affiliate of the
respondent is a client of the law firm at which Mr. T is working, Mr.
T is not personally involved with any matter relating to the affiliate.
Mr. T also in his response stated that he would act as a professional
and unbiased arbitrator in this case. There is no justification for Mr.
T to be considered biased due to his partner position in the law firm.
Accordingly, the chairman dismissed the challenge.

3.3 CIETAC decision on Challenge no. 04738217

3.3.1 Introduction

In 2015, the claimant LDV commenced arbitration proceedings at

CIETAC against the respondent ZGQ for the disputes arising out of
a contract for the sale and purchase of shares in an investment com-
pany under CIETAC Arbitration Rules 2015.
The claimant nominated Dr. M and the respondent nominated Mr.
Z as co-arbitrators and both parties jointly nominated Mr. S as pre-
siding arbitrator. After signing the declarations, the aforementioned
arbitrators formed the tribunal in September 2016 to hear the case.
The respondent had requested since October 2016 that Dr. M make
further disclosure to clarify the disclosure in his declaration. In March
2017, the tribunal responded that there was no need for Dr. M to make
further disclosure, but later requested the respondent to comment on
the scope of the disclosed matters for Dr. M to make. The respondent
submitted its opinions in April 2017, and then its application for fur-
ther disclosure was dismissed in June 2017.

17. See CIETAC Decision on Challenge to Arbitrator, [(2017) China CIETAC Jingzi no. 047382], unreported.
The data was kindly provided by the Secretariat of CIETAC.

256
 Subsequently, the respondent officially challenged Dr. M’s indepen-
dence and impartiality as a member of the tribunal. Dr. M submitted there-
after his response and the claimant submitted their responding opinions.

3.3.2 The parties’ positions

The respondent submitted the following opinion:

“During the year of 2013 to 2014, Dr. M was nominated by a com-
pany named AHK as arbitrator in an international arbitration. An affili-
ate of the claimant was the investor of AHK. Including the case at hand,
Dr. M has been appointed twice by the claimant and their related entity,
which should fall into the scope of disclosure as provided in art. 3.1.3 of
Orange List in the IBA Guidelines. In the AHK-related case, the law
firm acting for AHK is the same one for the claimant of the present case.
“Also, Dr. M was a partner of an international law firm before 2003.
Between 1998 and 2014, Mr. B, a legal counsel of the claimant’s above-men-
tioned affiliate, had been working at the same law firm. The fact that Dr.
M and Mr. B once were lawyers of the same law firm falls into the scope
of the disclosed matters under art. 3.3.6 or art. 3.4.2 of Orange List under
the IBA Guidelines. The aforesaid circumstances have not been disclosed
by Dr. M in his declaration.
“Making the disclosure is the duty of Dr. M, and both the claimant
and their lawyers, under the IBA Guidelines, are obliged to draw the
undisclosed matters to the attention of Dr. M. The undisclosed matters
are clearly circumstances that might give rise to justifiable doubts on Dr.
M’s impartiality or independence. By not disclosing the above matters,
Dr. M has erroneously denied his duty of disclosure, which in turn has
reinforced the justifiable doubts over his impartiality and independence.”
The respondents referred to art. 22, art. 29, art. 30.2 of the CIETAC
Arbitration Rules 2015, art. 34 of the CAL, and art. 3.1.3, art. 3.3.6, art.
3.4.2 of the IBA Guidelines in its challenge.

257
 The claimant made their response as the following:

“The entity mentioned by the respondent (the so-called investor of

AHK) was not at any time affiliated with or related to the claim-
ant, and the lawyers of the claimant did not act for AHK in the
AHK-related arbitration. Mr. B and Dr. M worked with the same
international law firm, but Mr. B was the corporate partner of the
firm’s London office from 1998 to 2014, and Dr. M was the partner
of the dispute resolution team of the firm’s greater China region
more than ten years ago.
“Art. 34 of the CAL does not require an arbitrator to make any
disclosure. The CIETAC Arbitration Rules 2015 stipulate that an
arbitrator should ‘[…] disclose any facts or circumstances likely to
give rise to justifiable doubts as to their impartiality or indepen-
dence.’ The present circumstances of the case do not call for Dr. M’s
disclosure, nor constitute a reasonable ground for his resignation.
The IBA Guidelines cited by the respondent are not applicable to
the case.”

3.3.3 The CIETAC decision

In the decision, the chairman of CIETAC stated his opinions as follows:

“The parties agree to the CIETAC arbitration with the seat in

Beijing. The CAL and the CIETAC Arbitration Rules 2015 are
relevant when considering the challenge against Dr. M.
“The respondent has, to back to its claim, relied on the provisions
of the IBA Guidelines and an international arbitration case, which
are not applicable and could not override the lex arbitri or arbitra-
tion rules chosen by the parties.
“For the lack of evidence, it cannot be proved the current situa-

258
tion has fallen into the circumstance provided in art. 34 (3) of
the CAL, that is ‘[…] the challenged arbitrator has some oth-
er relationship with a party to the case or with a party’s agent
which could possibly affect the impartiality of the arbitration’.
In addition, the respondent also fails to prove that there are
other circumstances under which Dr. M should resign under
art. 34 of the CAL.
“Also, according to art. 30.2 of the CIETAC Arbitration Rules
2015, ‘[…] a party having justifiable doubts as to the impartiality
or independence of an arbitrator may challenge that arbitrator in
writing and shall state the facts and reasons on which the chal-
lenge is based with supporting evidence.’ The respondent fails to
prove that Dr. M has already held tendentious opinions which
might affect his impartiality and independence. What have been
raised by the respondent does not fall into the circumstances
under art. 30.2 of the CIETAC Arbitration Rules 2015. There
is no ground that Dr. M should resign under the CAL and the
CIETAC Arbitration Rules 2015.
“Furthermore, after examination of the arbitral award of the
AHK-related case and relevant evidence submitted by the re-
spondent, the chairman has not found any that could prove the
relationship between AHK and the claimant’s affiliate, nor any
that the claimant’s lawyers also acted as the lawyers in AHK-re-
lated arbitration. The claimant and its lawyers have also expressly
denied the aforementioned statement of the respondent. There-
fore, the respondent’s argument cannot rely on art. 3.1.3 of the
IBA Guidelines even if the Guidelines were to apply.
“As to the argument that Dr. M and Mr. B worked in the same
law firm before and shared a personal or professional relation-
ship, it is found that Dr. M and Mr. B worked at different in-
ternational offices of the same law firm 10 years ago, which can

259
 hardly be defined as the relationship stipulated in art. 3.3.6 (close
personal friendship) and art. 3.4.2 (associated with a party, or
an affiliate of one of the parties in a professional capacity) un-
der the IBA Guidelines. It is not necessary for Dr. M to make
disclosure as per the Orange List of the IBA Guidelines even if
the Guidelines were to apply.”

As per art. 30.6 of the CIETAC Arbitration Rules 2015, the chair-
man in December 2017 dismissed the challenge.

4. OBSERVATIONS AND COMMENTS

4.1 The grounds for challenge are diversified

In CMAC and CIETAC practice, the grounds relied on by the parties

to challenge arbitrator are diversified. In general, they may be divided
into four categories.
The first is about the relationship between the presiding arbitrator
and the party-appointed arbitrator, including former colleagues, part-
time positions in the same social organization or universities, alumni,
undisclosed good relationship and co-authors of the same book.
The second is concerned with the relationship between arbitrator and
one of the parties or its agents, including teacher and student, co-arbi-
trators of CIETAC/CMAC Panel, alumni, born and raised in the same
hometown, cooperation between arbitrator’s law firm and the law firm
of a party’s agent, and/or long-time acquaintances.
The third is related to the behavior of an arbitrator in hearing, which
includes not giving sufficient opportunity for a party to present its case
or debate, arbitrarily giving his or her opinion on the substantive issues

260
of the case, and/or making biased statement and unfair arrangement or
decision on the procedural issues.
The last are situations where the present tribunal member had served as
arbitrator in earlier case which is related to the present case. Under such cir-
cumstance, we have seen claims by the challenging party such as the challenged
arbitrator might in the present case hold the predetermined opinion as in the
former case, or that the arbitrator was replaced in the former case, or allega-
tions that the arbitrator did not sign the award of the former case with bias.

4.2 Successful challenge is rare

According to the author’s statistics, at CIETAC there are by average 19

cases annually where a challenge was made to arbitrator, which equals
to 0.75% of CIETAC average annual caseload of 2548 from 2015 to
2019. The corresponding number of CMAC arbitration is four chal-
lenged cases with 0.92% of the total caseload of 433 from 2015 to 2019.
In both CMAC and CIETAC practice, many challenged arbitrators
have chosen to voluntarily withdraw from their offices as they often con-
sider that it is necessary to serve as arbitrator only with the challenging
party’s trust. Before deciding to resign, they usually consult with the
institutions for advice. The institutions may, by usual practice, provide
“precedents” to the challenged arbitrators for their reference.
Exceptionally, the chairman of the institution may decide on their
own initiative to replace the arbitrator in the event that arbitrator is
prevented de jure or de facto from fulfilling his or her functions, or fails
to fulfill his or her functions in accordance with the requirements of
the institutional arbitration rules or within the time period specified in
the rules.18

18. CIETAC Arbitration Rules, art. 33 and CMAC Arbitration Rules 2018, art. 37.

261
 In one case19 accepted by CIETAC in 2013, after formation of the
tribunal, the respondent challenged the arbitrator nominated by the claim-
ant with the supporting evidence that the claimant-nominated arbitrator
and the lawyer of the claimant were university classmates and kept close
personal relationship. The challenged arbitrator did not choose to with-
draw voluntarily. The CIETAC chairman did not sustain the challenge
but decide to replace the challenged arbitrator for the reason that the ar-
bitrator had violated her duty to disclose under the CIETAC Arbitration
Rules. This is the only case experienced by author at CIETAC where the
chairman decided to replace the challenged arbitrator in this way.
In general, the institutions are ready to consider the alternatives be-
fore they sustain the challenge. The rationale is that a successful challenge
is likely to constitute strong reference for subsequent cases, although the
successful challenge has no legal effect as precedent. The institutions wish
to sustain a favorable environment for the arbitrators to fulfill their func-
tions without unnecessary interference.
In practice, successful challenges are rare, and most of the challenges
have been dismissed for reasons that the facts asserted do not exist or lack
supporting evidence, or the claimed grounds are not supported by the lex
arbitri or the arbitration rules.

4.3 The IBA Guidelines serve as a strong

reference in deciding on challenges

As far as the CIETAC or CMAC arbitrations are concerned, unless oth-

erwise agreed by the parties, the applicable instruments shall be the CAL
and the respective institutional rules, which constitute the legal basis for
the institution to determine each challenge. To the author’s best knowl-

19. Unreported. The case was concerned with the dispute arising from equity transfer agreement between one Sin-
gapore company and two Chinese companies.

262
edge, up to now, there is no case where the parties have agreed the IBA
Guidelines shall be applicable in CIETAC or CMAC arbitration when
an arbitrator is under challenge. However, as the above cases indicate, in
practice the parties often rely on the IBA Guidelines as a sidekick to sup-
port their claims or arguments. Although the IBA Guidelines have not
been adopted as the direct basis for the institution to make decision on
these challenges, they have staged to be persuasive reference and played
important role in CIETAC and CMAC arbitration. Both CIETAC and
CMAC are also considering to update their Rules for Behavior Evaluation
2009 with special reference to the IBA Guidelines apart from the latest
practices of international institutions.

4.4 The decision on challenge is final

By the international practice, the tribunal or the arbitration institution

may make decision over the challenge to arbitrator, which is not final
and still subject to the judicial review of the competent court at the seat
of arbitration. The CAL, however, vests the power to the arbitration in-
stitutions (the chairman of each arbitration commission to be exact) to
decide on the challenges, and each institution’s decision on the challenge
is final. Although the chairman of the institution, when making the deci-
sion on challenge, may not state the reasons, most of whose decisions have
been made with reasons. In the setting aside or enforcement procedure,
the Chinese court shall not review the issue of challenge if the decision
has been made by that arbitration institution. On the other hand, if the
court has found that the arbitrator has been involved with corruption in
the arbitration, which is one of the statutory grounds for setting aside or
non-enforcement of the arbitral award, the court shall still rule to set aside
or not to enforce the award made by the challenged arbitrator.

263
5. CONCLUSION

The institutions’ practice shows that Chinese arbitration has adopted a

“justifiable doubt” test when determining on the independence and im-
partiality of arbitrators. Both CIETAC and CMAC arbitration rules have
reflected an objective standard test. A party may raise challenge based on
its subjective doubts on an arbitrator’s biased position, but only when these
doubts are held to be objectively reasonable will the challenged arbitrator
be disqualified. Despite the institution’s decision on challenge is final, the
competent court can still set aside or refuse enforcement of the challenged
arbitrator’s award. The current challenge mechanism works fairly well.
Besides the statutory grounds for removal of an arbitrator, it is de-
sirable the CAL be amended to codify the arbitrator’s duty of disclosure
and recognize the supplementary rules of the institutions as “soft law”.
It is still not crystal clear in practice what specific circumstances are to
be disclosed. It is proposed that the arbitration institutions may consider
to publish the redacted decisions on challenge so as to provide reference
for future arbitrators in an effort to promote uniformity and certainty in
practice. In the meantime, the transparency in challenge practice is called
upon by the parties, which, if is the case, will in turn improve the credi-
bility of the arbitration institutions.

264
 Beyond Litigation: ADR and Dispute
Resolution between Air Carrier and
Passenger – A China’s Perspective
Huaping Qin1

1. INTRODUCTION ON DISPUTES ARISING

FROM CARRIAGE OF PASSENGERS BY AIR

1.1 Carriage of passengers by air

Carriage by air, or air transport, although with a history much short-

er than road and ship transportation, has become a common traveling
choice for people owing to its efficiency, cleanness and safety. As the In-
ternational Air Transport Association (IATA) Annual Review, released
in 2018, revealed, international tourists traveling by air are estimated to
have spent $711 billion in 2017; an increase of almost 6% over 2016. A
lot of countries have enacted laws, regulations and rules to govern the air
transportation industry. A series of international conventions in this area
were also adopted, particularly those under the auspices of International
Civil Aviation Organization (ICAO). The Civil Aviation Law of the

1. Associate professor, International Law School, CUPL; CIETAC arbitrator; visiting scholar of Straus Institute
for Dispute Resolution, Pepperdine University.
People’s Republic of China (hereinafter referred to as “Civil Aviation
Law of PRC”) was enacted in 1995, and came into force in 1996. It is
one of the major sources to regulate the carriage of passenger by air.2
Meanwhile, the Contract Law, the Law of the Protection on Consumer
and the laws with respect to dispute resolution are indispensable sources
to safeguard the orderly development of the carriage of passenger by air.
For the purpose of this paper, “carriage of passengers by air”, including
domestic air passenger transport and international air passenger trans-
port, refers to air service that operated by public air transport enterprises
(also referred to as “airlines” or “air carrier”) by civil aircraft.3 In order to
execute the transportation, the airlines and passengers should conclude
contract, no matter oral or written, to stipulate their rights and obliga-
tions. Usually under such contract, the passengers and luggage shall be
safely delivered to an agreed destination within an agreed or reasonable
period, and passengers burden an obligation of paying for the transpor-
tation of the freight on the other hand.
The past decade have witnessed the steadily increased demand of
air carriage in China. Annual Review 2018 released by IATA indicated
that, in 2017, the domestic China passenger market again provided the
largest incremental increase globally in the number of passenger trips,
adding a massive 59 million journeys compared with 2016, while the
US and India took the second and third places.4 In accordance with the
Statistics Bulletin of Civil Aviation Industry Development 2018, released
in May 2019 by the Civil Aviation Administration of China (CAAC),
in 2018 the whole industry in China had transported 611,737,700 pas-
sengers, creating an increase of 10.9% over the previous year. The num-
ber of passengers on domestic routes was 548,065,000; an increase of

2. Chapter 9 is particularly about the public transportation by air.

3. Art. 106(1) of Civil Aviation Law of PRC: “The provisions in this chapter are applicable to the transport of pas-
sengers, baggage and cargoes by civil aircraft undertaken by airlines, including free transit.”
4. International Air Transport Association (IATA). Annual Review 2018. p. 12.

268
10.5% over the previous year. Among them, there were 11,27 million
journeys completed on the Hong Kong, Macao and Taiwan routes,
adding an increase of 9.8% in comparison with the volume of the last
year. Meanwhile, the number of passengers on international routes was
63,767,700; an increase of 14.8% over the previous year. From the data
in the Statistical Bulletin, we can see that, since 2014, the volume of
passenger transportation of civil aviation has continued to rise (see the
following graph). This upward trend shows, on one hand, the dynamic
development of passenger transportation of civil aviation. On the other
hand, it suggests that the number of civil aviation passenger transpor-
tation disputes increase year by year. In 2018, the Transportation De-
partment of CAAC, the Consumer Affairs Center, and the China Air
Transport Association have received 20,761 complaints from consumers.
Meanwhile, the Consumers Association had accepted 574 complaints
about disputes on air passenger transport in the first quarter of 2019.
Therefore, the dispute resolution of China’s air passenger transportation
must be highly valued.

billions of passengers
%

7,00 passenger transport volume

6.12 20
6,00 increase over the previous year 5.52
4.88
5,00 4.36 15
3.92
4,00 13.0
11.3 11.9 10
10.7 10.9
3,00
2,00 5
1,00
0 0
2014 2015 2016 2017 2018

Figure 1. Civil aviation passenger transport volume (2014-2018)

269
1.2 Dispute arising from carriage of passengers by air

1.2.1 Nature of the dispute arising from carriage of passengers by air

In view of the special status of passenger, the legal relationship between

the air carrier and passenger is also complicated. On one hand, it is un-
doubtful that they have contractual relationship since they conclude the
contract of carriage. The disputes arising therefrom should be treated as
contractual disputes and governed by relevant contract laws and regula-
tions. On the other hand, aiming at the enhancement of the consumer
protection, “services” have been included in the object of consumption.5
People who purchase or use commodities or receive services are not only
a party of a contract, but in possession of legal identity as consumers
and thus entitled to the rights accordingly.6 The concept of consumer,
in accordance with Black’s Law Dictionary (10th edition) is someone
who buys goods or services for personal, family, or household use, with
no intention of resale; a natural person who uses products for personal
rather than business purpose. The Consumer Protection Law also has
restrictive condition that a consumer is a person who purchases com-
modities or receives services out of the consumer needs for daily use. “The
rights and interests of consumers purchasing and using commodities or
receiving services for daily consumption shall be protected by this Law;
or be protected by other applicable laws and regulations if this Law is
silent.”7 Therefore, air passengers met the identity condition of acquir-
ing legal status of consumer since they pay for air tickets and receive

5. Art. 2 of Law of the PRC on the Protection of the Rights and Interests of Consumers stipulates that: “The righ-
ts and interests of consumers purchasing and using commodities or receiving services for daily consumption
shall be protected by this Law; or be protected by other applicable laws and regulations if this Law is silent.”
6. FAQIANG, Yuan. From Contractual to Identity: Evolution of Law of Protection of Rights and Interests of Air
Passengers. Aviation Law Review, 2015. p. 38-50.
7. Art. 2 of the Law of the People’s Republic of China on the Protection of Consumer Rights and Interests (2013
Amendment)

270
services provided by airlines. The 1999 Convention for The Unification
of Certain Rules for International Carriage by Air (hereinafter referred
as “Montreal Convention”), the latest achievement of international avi-
ation legislation, for the first time, formally and explicitly confirms the
legal status of air passengers as consumers in its foreword. Meanwhile,
the protection of the rights and interests of air consumers has been
set as one of the purposes and aims of the Montreal Convention.8 Air
passengers are, as consumers, under protection of legislation and ad-
ministration relevant to protection of rights and interests of consumer.
The 1999 Montreal Convention also ignited the international commu-
nity’s enthusiasm for air consumer protection legislation. In 2004, for
instance, European Union published an Establishing Common Rules
on Compensation and Assistance to Passengers in the Event of Denied
Boarding and of Cancellation or Long Delay of Flights,9 which raised
some new requirements on compensation to air passengers.
In summary, air passenger transportation disputes are not only con-
tract disputes, but also highlight the characteristics of consumer identity
and consumer rights protection under the trend of expansion of identity
rights of modern civil law. In comparison with the consumer rights pro-
tection in general manner, air passengers are not only in a weaker posi-
tion over airlines and airports, but the powerlessness is more prominent
due to the particularity of aviation and transport service. For example,
the passengers’ safety is completely handed over to the carrier during
the flight. Then higher requirements should be placed on the protection
of the rpassengers’ rights and interests.

8. Preface of 1999 Montreal Convention: “Recognizing the importance of ensuring protection of the interests of
consumers in international carriage by air and the need for equitable compensation based on the principle
of restitution.”
9. EC Regulation no. 261/2004, Establishing Common Rules on Compensation and Assistance to Passengers in
the Event of Denied Boarding and of Cancellation or Long Delay of Flights.

271
1.2.2 Classification of the dispute arising from carriage of passengers by air

Once an air carriage contract is concluded, air passengers and airlines shall
fulfill their respective obligations in good faith. Generally speaking, the main
obligations of air passengers are as follows: (i) to pay the ticket according to
the contract; (ii) to carry the valid ticket, although this obligation may be
fulfilled by presenting the valid travel document due to the paperless of the
air ticket; (iii) to board the aircraft in accordance with the schedule; (iv) to
comply with the safety precautions and standards notified by the carrier;
and (v) to carry luggage as required and not to carry dangerous and prohib-
ited items. The main obligations of airlines are as follows: (i) to transport
the passengers promptly and safely in accordance with the publicly avail-
able flight schedule; (ii) to notify the passengers with safety precautions and
keep them well informed regarding the reasons in case of not being able to
execute the flight properly; (iii) to provide the agreed transport equipment,
conditions and meet the agreed service standards; (iv) to take all necessary
means and do the utmost to help the passengers in acute disease, childbirth
and other emergent situations; (v) to properly handle passengers’ checked
and unchecked baggage; and (vi) to take liability or make compensation,
subject to the relevant laws or mutually agreed terms, for passenger’s death
or injury as well as the loss, destruction or delay of passenger’s luggage. Not-
withstanding the aforementioned obligations undertaken by the parties, the
violation of such obligation by both parties occurs from time to time, which
is the direct reason causing the dispute between the passengers and air car-
rier. Based on the judicial practices and for the purpose of this article, the
dispute in question may be categorized into the following types.

1.2.2.1 Denied boarding by the air carrier

In accordance with art. 293 of Contract Law of PRC, a passenger trans-

portation contract is established upon the carrier’s delivery of the passenger

272
ticket to the passenger, except as otherwise agreed upon by the parties or
other transaction practices. When the contract of carriage is established,
the carrier shall undertake the obligation to transport passengers to the
destination within the specified time. However, by considering the public
safety and security under some circumstances, the carrier, as the public
transportation entity, is required to take necessary measures to deal with
the situation which may cause public damages. Denied boarding is one of
such measures to be employed by the carrier. In terms of air transporta-
tion, the air carrier may reject the boarding of the passengers due to such
reasons as invalid travel documents, visa fraud, and other situations which
are likely to cause safety and security concern of the transportation. But
in reality, the decision of denied boarding made by the air carrier is not
always convincing from the perspective of the passengers. Disputes thus
are unavoidable. Fox example, in Zhu Lanying vs. Yunan Airport Service
Co.& Chengdu Airlines,10 Zhu, a passenger with high paraplegia, booked
a flight ticket offered by Chengdu Airlines from Kunming to Chengdu,
without informing of her disability and need of special service for wheel-
chairs in advance. Dispute occurred when she arrived at the boarding
gate, because the staff of Chengdu Airlines denied boarding Zhu on the
ground because she did not inform the airlines in advance of her disabil-
ity, which is required by pertinent administrative rules, and thus did not
satisfy the flight requirements. So, the lawsuit requesting the airline to
assume liability for breach of contract was brought before the court by
Zhu. Chengdu airlines argued that the plaintiff failed to indicate that
she was a paraplegic disabled person when booking tickets. The plaintiff
had intentionally concealed the facts and failed to check in at the termi-
nal in advance according to the relevant provisions of the Civil Aviation
Administration, resulting in rejection by the company, so the company
insisted that its refusal to carry had factual and legal basis and did not

10. See Kunming Guandu District People’s Court (2011) Guan-Min-Yi-Chu-Zi-3207 Judgment.

273
constitute a violation of contract. However, the People’s Court held that
it is the responsibility of the airlines to clearly inform the passengers of the
information which may lead to the boarding denial, rather than requir-
ing the passengers to inform the carrier. Therefore, if the carrier refuses
boarding without explicitly informing the sick and disabled passengers of
the special provisions and requirements, such act constitutes a breach of
contract, and the carrier should thus bear the corresponding civil liability
according to law.

1.2.2.2 Flight delay or cancellation

Although the Convention on International Civil Aviation 1944 defines

the “air service” as “[…] any scheduled air service performed by aircraft
for the public transport of passengers, mail or cargo”,11 it is silent on the
definition of “delay” or “cancellation”. Montreal Convention 1999 stipu-
lates the liability of air carrier in case of delay,12 but no definition of delay
can be found in the text of the Convention. As a matter of fact, there is
no universally accepted definition of “delay”, so it is usually interpreted
subject to domestic laws. The delay or cancellation may be categorized
into different types according to different standard. For example, based on
the time of delay, it may be divided into two situations: “delayed take-off”
and “delayed arrival”. The delayed take-off means that the carrier fails to
leave the terminal according to the departure time specified in the flight
schedule, and the delayed arrival means that the carrier fails to follow
arrival time stated at the timetable. Art. 3(2) of the Provisions on the
Punctuality Management of Flights promulgated by China Ministry of
Transport also specifies that: “Flight delay” means that the actual arrival
on-block time of a flight is more than 15 minutes later than the sched-

11. Art. 96 (a). This Convention is also called as Chicago Convention because of the venue of adoption.
12. Art. 19.

274
uled arrival time. The fourth paragraph of this article further stipulates
the “Cancellation of flight” means that a scheduled flight is called off for
estimated flight delay or a scheduled flight is called off for delay. Mean-
while, China’s legislation provides for carrier liability for flight delays. For
example, art. 126 of Civil Aviation Law stipulates that the carrier should
assume liability for the losses to passengers, baggage or cargoes caused
by delays in the air transport. The Contract Law of PRC also stipulates
that: “[…] the carrier shall carry the passenger according to the time and
the carriage schedule stated on the passenger ticket. Where the carrier
delays in carriage, it shall, upon request by the passenger, either arrange
the passenger to take other flights or refund the ticket-fare.”13 However,
the reasons causing the flight delay or cancellation are various, including,
but not limited to, bad weather condition, traffic control, aircraft mechan-
ical failure, armed conflict and passenger’s reason as well. If we carefully
analyze these reasons, some of them may be attributable to the air carri-
er, some are actually not. But, in practice, the line between liability and
non-liability of the carrier is far from clear. In Abdul Waheed vs. China
Eastern Airlines,14 Abdul with his wife and newborn son was informed by
the carrier China Eastern Airlines that his flight from Shanghai to Hong
Kong, which he and his family would have taken to catch the connecting
flight from Hong Kong to Karachi, Pakistan, had been delayed because
of bad snowy weather. At the Pudong Airport, Shanghai, Abdul and his
family had realized that the first flight would arrive in Hong Kong late
and they would miss the connecting flight to Karachi. So, they went to
the service desk of the defendant Eastern Airlines to inquire about how to
deal with it. The staff of Eastern Airlines asked Abdul to fill out the reg-
istration form and promised that they would help solve the problem after
filling out the form. After Abdul and his family arrived in Hong Kong,

13. Art. 299 (1).

14. See Shanghai no.1 Intermediate People’s Court (2006) Hu-Yi-Zhong-Min-Yi(Min)-Zhong-Zi-609 Judgment.

275
the staff of Eastern Airlines informed Abdul of two treatment plans: one
was to wait at the Hong Kong airport for three days, then take the next
flight to Karachi at their own expense, and the other one was to purchase
tickets of other airlines to Karachi on their own, about 25,000 Hong Kong
dollars. Abdul immediately stated that the first option was unacceptable
because he and his wife were carrying a newborn baby. Eventually, they
purchased tickets of other airline, and took flight to Karachi. Abdul thus
sued Eastern Airlines for compensation for his payment of a second flight
ticket to Karachi. The people’s court held that, though Eastern Airlines
did not have to take responsibility for flight delay due to bad weather
conditions, it was obliged to take all necessary measures to avoid the loss
caused by delay to passengers, namely to clearly notify the passenger at
the origin of the transfer whether to provide the transfer service after ar-
riving at the connecting point, as well as how passengers should handle
travel procedures when the carrier was unable to provide a transfer ser-
vice. Even though the passenger had bought discount ticket, he still had
the right to be informed in time and correctly of information about the
flight he would take. Apparently, Eastern Airline failed to follow the ob-
ligation, leading loss expanded to Abdul and his family due to the delay.
As a result, the court rendered a judgement that Eastern Airlines shall be
liable for compensation.

1.2.2.3 Overbooking flight

Simply speaking the overbooking flight means the airlines book passengers
to more seats on a particular plane than are available. The purpose of such
practice is to maximize profit, calculating that a percentage of people will
not show up for the flight. A seat that has already been sold, but remains
empty, is a missed opportunity for the airline to generate more revenue.
This is a general business practice in the aviation transportation industry and
legally recognized by the states. Most of the time, airlines correctly predict

276
the “no shows” and everything goes smoothly. But sometimes, passengers
are bumped as a result of oversell, without reaching the consensus regard-
ing the remedy entitled to the passengers. In 2014, the Transportation
Department of CAAC issued the “Provisions of Overbooking Disposal
of Public Air Transport Flights”, which clearly states that the concept of
overbooking was “[…] the number of sold tickets exceeding the actual
number of seats available for the flight.” The provisions set requirements
and regulations for the carriers to overbook or oversell the flight, as well as
compensation conditions in case that the flight is oversold.15 Specifically, it
requires airlines to fulfill their notification obligations, formulate priority
boarding rules, and notify in conspicuous position of the venue of check-
in and ticket counters.16 Legally speaking, the bumped passenger suffers
the denied boarding and is entitle to compensation in various manners.

1.2.2.4 Special discount air tickets

Airlines often provide special discount air tickets for the purpose of pro-
moting the sales and keeping the occupation of the market, particularly
in the slack season. However, several constraints are placed on the use of
such air tickets, such as no refund and no reschedule. In other words, the
passenger is not entitled to request the air carrier to change their sched-
ule, or to refund the fare due to their own reason causing them to miss
the flight. But on the other hand, the passenger argues that the carriage
of contract is a sort of standard contract provided by the air carrier and
deprives of the negotiation possibility of the passenger; therefore it should
be interpreted against the air carrier. According to the judicial practices,
the air carriers and passengers are far from reaching the consensus con-

15. See Civil Aviation Administration of China. Disposal Specification of Over-booking Public Air Transport Fli-
ght. Available at: http://www.caac.gov.cn/XXGK/XXGK/BZGF/HYBZ/201705/t20170517_44057.html.
16. LIZHI, Wang; HUI, Yang; JINGJING, Nie. Protection of Rights and Interests of Air Passengers: Problems
and Scheming. Beijing: Law Press, 2013. p. 55.

277
cerning the interpretation of some key issues which cause the disputes,
including how to interpret the constraints clause, what is the legal nature
of such clause, should the air carrier undertake the obligation to inform
the passenger of such constraints; if so, how and when, what is the basis
of compensation if the air carrier fails to do so etc. In Yan Jin vs. Ruili
Airlines,17 Yan, the passenger, booked a special discount ticket for Ruili
Airlines from Mangshi to Kunming through Ctrip Co., Ltd., who served
as an online ticket reservation platform. On the payment site page of
Ctrip platform, it was marked in blue “fuel refund only” under the ticket
price. After payment, Yan then found that she had booked the ticket on
the wrong date, and tried to contact Ctrip to refund the ticket. However,
Ctrip informed her that the special discount ticket could not be refund-
ed or rescheduled, only the fuel charge with amount of 50RMB could be
refunded. Yan therefore sued Ruili Airlines, arguing that the standard
clause which constrained her right to get ticket refund was invalid. The
court held that, although the transport contract in this case is a standard
contract formulated by Ruili Airlines in advance, Ruili Airlines and Ctrip
Company had given the sufficient information about the special clause
concerning refund of discount tickets. As a person with full civil capacity,
Yan could have chosen to buy other tickets that could be fully refunded
or rescheduled, or alternative means of transport. But she still bought the
discount one, indicating that it was on her voluntary basis to accept the
said special standard clause. Secondly, the standard clause concerning
that special discount ticket could not be refunded provided by Ruili did
not violate any laws and regulations, but also conformed to the industry
practices. When Ruili Airlines sold special discount ticket to Yan, Yan
should also bear the corresponding risks when enjoying such low price.
Therefore, the court held that the said standard clause did not violate the
principle of fairness and thus was valid. Similar result occurred in Chen

17. See Kunming Railway Transport Intermediate People’s Court (2016) Yun-71-Min-Zhong-25 Judgment.

278
Feiyi vs. Air China, in which the Shanghai First Intermediate People’s
Court held that the standard clause in the contract not allowing the refund
or reschedule of the ticket was valid, because it was legal for the carrier
to sell its discount ticket on the condition of constraining the buyer from
getting full refund of the ticket, if the buyer had been properly informed
about such condition in advance.

1.2.2.5 Death and injury of passenger – damage to baggage

As the carrier, airlines undertake the obligation to transport the passengers

to the destination safely, without causing death or injury to the passenger
and damage to their baggage as well. In case the passenger suffers death
or injury, or damage of the baggage, the air carrier should take liability
according to the laws governing the situation. At the international level,
Montreal Convention 1999 stipulates the liability of air carrier for the pas-
senger in the event of death, bodily injury and damages to the baggage.18
The Montreal Convention is applied to the international carriage.19 As
for the domestic carriage, the Civil Aviation Law of the PRC states: “The
carrier shall be liable for the death or personal injury of a passenger, if the
accident took place on board the civil aircraft or in the course of any of
the operations of embarking on or disembarking from the civil aircraft.”20
It further specifies: “The carrier should assume liability for the losses to
passengers, baggage or cargoes caused by delays in the air transport.”21
It is recognized that the aircraft is the safest transportation mode bene-
fiting from the greatly improved technologies. Death or serious bodily injury
suffered by passengers occurs only under some rare situations; therefore,
disputes arising from damages to the baggage are the major case sources,

18. Art. 17. Montreal Convention has achieved great success in terms of the number of ratifying states. China is
also a contracting state.
19. Art. 1 defines the scope of the application and explains the “international carriage” in paragraph 2.
20. Art. 124.
21. Art. 126.

279
instead of the death or bodily injury suffered by passengers. Passenger’s
baggage includes carry-on items, self-care baggage and checked baggage.
Among them, loss or destruction of passenger’s carry-on items and self-care
baggage in the cabin, for instance, laptops, watches or other items carried
by passengers been stolen or damaged by others on board the aircraft, or
passengers’ self-taken luggage been wrongfully taken by other passengers,
often occurs. The following cases may be used to demonstrate how often
such disputes occur in practice. In Yu Guiyan vs. Shanghai Airlines Co.,
Ltd., the passenger, Yu Guiyan, claimed to forget the laptop which was
left under her seat at the time when she disembarked the aircraft. She
requested the airline to find the laptop and return it to her, but the latter
replied that no laptop was found on the aircraft. Yu was unsatisfied with
the reply and then she filed the suit against the airline to claim the com-
pensation of the laptop.22 In addition to the possibility of loss or dam-
age during transportation, the checked baggage may arrive at the agreed
destination in delay. In other word, the checked baggage is not properly
transported along with passengers’ flight, causing passengers’ failing to
pick up their luggage at the scheduled time. One of the main reasons for
the failure of the checked baggage to be transported properly is that the
baggage is not attached to the consignment card or the consignment card
is lost. Another reason is that the passenger packs the items not allowed
for transportation and is detained for check. In Yang Ji vs. Lufthansa
Airline, Yang Ji, the passenger, lost two valuable watches totaled about
€70,000 in one of his checked baggage which was forced open for check.
Yang finally sued Lufthansa Airline, the carrier, for the loss of the two
watches and damaged baggage. However, the people’s court barred Yang
from acquiring compensation due to his failure to prove that the watches
had been packed in the checked baggage before lost. As a result, Yang
only gained 1000 yuan in compensation from Lufthansa for the damage

22. See Shanghai Pudong New District People’ s Court (2013) Pu-Min-Yi (Min)-Chu-41780 Judgment.

280
of the checked baggage which was proved to be forced open for check.23
In Zheng Heyuan vs. Guangzhou Representative Office of Malaysian Asian
Airlines & Air Asia & Guangzhou Baiyun International Airport, Zheng
sued the airline for baggage claim of 20,000 MYR (equivalent to about
33,000 RMB) for the checked baggage not been delivered to the agreed
destination. However, the case lasted more than four years from the date
of the dispute to the judgement with the court finally ruling that Asian
Airlines should compensate Zheng Heyuan for a loss of 5,000 RMB.24

1.2.2.6 Leakage of passenger’s information

Out of the management of public safety, passengers are required to pur-

chase tickets in real-name system in air passenger transport. Airlines shall
bear the obligation to protect passengers’ personal information as long as
passengers input personal information as required for purchasing the tick-
et. The Law on Consumer Protection stipulates that “Business operators
shall collect and use the personal information of consumers in a lawful and
proper manner by following the principle that information collection or
use is genuinely necessary. They shall expressly state the purposes, meth-
ods and scope of information collection or use, and obtain the consent of
the consumers whose information is to be collected. To collect or use the
personal information of consumers, business operators shall disclose their
information collection or use rules, and shall not collect or use information
in violation of laws or regulation, or in breach of the agreements between
the parties concerned.”25 In addition, the Guide of Personal Information
Protection upon Public and Business Service Information System with In-
formation Security Technology, which was implemented on Feb 1st, 2013,
made more stringent requirements for personal information protection.

23. See Beijing no.3 Intermediate People’ s Court (2014) San-Zhong-Min-Zhong-14006 Judgment.
24. See Guangzhou Intermediate People’s Court (2017) Yue-01-Min-Zhong-6146 Judgment.
25. Art. 129.

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2. ADR AND AIR PASSENGER
TRANSPORT DISPUTES

2.1 Introduction of ADR

For the purpose of securing the harmonious and stable development of a

society, it requires not only a fair, efficient and authoritative judicial system
to maintain social fairness and justice. Instead, more importance should be
attached to the construction of a dispute resolution system in which the
citizen autonomy, social co-governance, multi-participation, and judicial
safeguard are integral elements.26 In recent years, the world community
has suffered the “litigation explosion” largely due to the more acute so-
cial contradictions.27 In order to alleviate the overburdened courts and
resolve the disputes as efficient as possible, ADR, particularly arbitration
and mediation, has been widely legally recognized and employed in a lot
of countries. Domestic laws and regulations, international conventions,
institutional arbitration and mediation rules as well as some model laws
are under dynamic development. In China, ADR is a non-litigation dis-
pute resolution mechanism, including, but not limited to arbitration and
mediation. It also seeks the coordination with litigation system.28 ADR
is a civil and non-governmental dispute resolution mechanism character-
ized by party autonomy and mutual consensus. Under the background
of encouraging the diversity of dispute resolution mechanism in China,
ADR is a favorable supplement to the judicial settlement mechanism by
employing the non-governmental resources to resolve the disputes. More
importantly, a lot of disputes may be more efficiently resolved before they

26. FEI, Long. Comparison and Learning of Foreign Legislation of Alternative Dispute Resolution Mechanism.
Journal of China University of Political Science and Law, 1, 2019. p. 107-116.
27. QIUGANG, Ou. Alternative Dispute Resolution of the United States. Shanghai Insurance, 9, 2018. p. 107-116.
28. FEI, Long. Comparison and Learning of Foreign Legislation of Alternative Dispute Resolution Mechanism.
Journal of China University of Political Science and Law, 1, 2019. p. 207-208.

282
become escalated owing to the advantages of ADR, such as flexibility,
being friendly, high efficiency and expertise.

2.2 Comparative advantages of ADR applying to

air passenger transportation dispute resolution

Consumer ADR is not a fresh concept in some western countries. For

example, on July 4th, 2012, the German Federal Cabinet (Bundeskabinett)
Bundeskabinett
Bundeskabinett)
adopted draft legislation authorizing the establishment of conciliation
bodies for claims brought by airline passengers. According to the federal
government, claims brought by passengers pursuant to Regulation 261
tend to be of a similar, noncomplex type, with low amounts in dispute. The
same is said to be true for passenger claims regarding damaged baggage.
The federal government thus believes that alternative dispute resolution
(ADR) processes would be appropriate for such claims.”29 As what Ger-
man federal government regarded, that air passenger transport disputes
are usually of non-complexity and also shared by Chinese practice. As
a matter of fact, they have been illustrated by the judicial practices that
it is far from cost-effective to resolve the carriage of passenger disputes
through ligation in terms of the litigation cost and remedy awarded to the
passenger by the court. Based on the cases published by the China Court
Website, the following features concerning the litigation between the air
carrier and passenger may be safely concluded:

I. usually the dispute is simple in terms of the low amount of

compensation and the clear fact. In the aforementioned case,
Abdul Waheed vs. China Eastern Airlines, the plaintiff requested
amount of 5863,6RMB as the compensation against the de-

29. See MEIGEL, Katharina S. Alternative Dispute Resolution of German Air Passenger Claims. Air & Space
Law, 4, 2012. p. 25-34. Available at: https://www.westlaw.com/Document/I57f0df3d69e011e28578f7ccc-
38dcbee/ View/FullText.html?transitionType=Default&contextData=(sc.Default)&VR=3.0&RS=cblt1.0

283
 fendant. In Wang Juan vs. China Eastern Airline Co., Ltd Ltd., due
to overbooking of the defendant, the plaintiff was bumped and
suffered delay. The amount of compensation requested by the
plaintiff was 369RMB.30 In Lou Mengjie vs. Russian Airline, the
plaintiff’s suitcase was severely damaged during the carriage.31
The amount of compensation requested by the plaintiff was
USD 460. Such kind of “small” cases occur very often in real-
ity. Furthermore, as discussed above, since the air carrier and
passenger conclude the contract of carriage, the parties should
fulfill the obligations and be entitled to the rights accordingly.
Should any dispute arise, the Contract Law and Civil Aviation
Law will be the major legal sources to govern the dispute. In
other word, the application of law is also comparatively clear
and straightforward. Another fact may also be used to support
the argument of this paragraph, that is the types of dispute are
usually the same as flight delay, denied boarding, damages to
the baggage, rejection of the re-schedule request under special
discount ticket.
II. The litigation proceedings are usually time-consuming and less
cost-effective. In Lanying vs. Yunnan Airport Ground Service Co.,
Ltd. & Chengdu Airline Co., Ltd
Ltd Ltd., the dispute was arisen from
the refusal of boarding the disabled plaintiff while the defen-
dant airline failed to inform the special rules and requirements
with respect to transportation of sick and disabled passengers.
Such a simple dispute costed nearly five months to be resolved

30. See Shanghai Pudong New District People’s Court (2015) Pu-Min-Yi(Min)-Chu-6762 Judgment. Cases in
disputes of passengers’ failing to board on time or downgrading arising from over-booking include Xu Ling
etc. vs. Air France etc.
31. See Shanghai no. 2 Intermediate People’s Court (2017) Hu-02-Min-Zhong-10786 Judgment. Cases in disputes
of damage of baggages include Zheng Heyuan vs. Guangzhou Representative of Air Asia, Yang Ji vs. Lufthansa,
Duan Bingquan vs. China Express Co., Ltd. etc.

284
 through litigation.32 In Zhang Ying vs. Shanghai Airline Co.,
Ltd., the dispute happened when the passenger was injured by
a cement barrier placed on the non-sidewalk on the way from
the airport terminal to the parking lot. More time was used to
resolve such dispute involving the physical injury of the pas-
senger. Nearly two years had passed before the judgment was
rendered in this case.33 In Lin Nianping vs. Sichuan Airline
Co., Ltd
Ltd., the personal information of the plaintiff was alleged
wrongfully disclosed by the defendant. The plaintiff had been
waiting for almost three years to get the judgment for seek-
ing monetary relief.34 The Civil Procedure Law of the People’s
Republic of China (hereinafter referred to as Civil Procedure
Law) stipulates the time periods for each stage of the proceed-
ing, usually which could not be shortened in accordance with
the parties’ mutual intention. The lack of flexibility and party
autonomy in litigation makes the proceeding more time-con-
suming compared with arbitration or mediation. Therefore, it
is not uncommon to wait for several months, even several years
to get the judgment done, even for some simple disputes from
the perspective of fact and amount of compensation involved.
This situation is even worse for the disputes arising from the
international carriage.35 Meanwhile it seems unjustifiable to

32. See Kunming Guandu People’s Court (2011) Guan-Min-Yi-Chu-3207 Judgment. Cases that proceedings of
which have gone through several months include Yang Yanhui vs. China Southern Airlines Co., Ltd. & Minhui
Co., Yu Quan vs. Chengdu Airlines Co., Ltd., Yu Guiyan vs. Shanghai Airlines Co., Ltd. etc.
33. See Shanghai no.1 Intermediate People’s Court (2017) Hu-01-Min-Zhong-11005 Judgment. Cases that pro-
ceedings of which have gone through beyond one year include Zhang Zhihao vs. China Southern Airlines Co.,
Ltd., Chen Peiyi vs. China Southern Airline Co., Ltd., Tong Xiao vs. Ruili Airlines Co., Ltd., Yang Ji vs. Lufthansa,
Yan Jin vs. Ruili Airlines Co., Ltd., Yan Shuiqing vs. Hong Kong Airlines Co., Ltd. etc.
34. See Chengdu Intermediate People’s Court (2015) Cheng-Min-Zhong-1634 Judgment. Cases that proceedings
of which have gone through several years include Fan Houjun vs. Xiamen Air Co., Ltd., Air France vs. Dong
Binggen., Chen Gang vs. Singapore Airlines Co., Ltd., Deng Hua vs. Cathay Pacific Airways Limited, Lou Mengjie
vs. Aeroflot, Zheng Heyuan vs. Air Asia etc.
35. The Baotou Air Crash case, an accident which occurred in 1999, has not been decided yet by Beijing no.2 Inter-
mediate People’s Court who received the case in 2009 because of complex issues of international jurisdiction,

285
 criticize the overburdened courts for such low efficiency.
III. The litigation cost against the passenger often deters they from
challenging the airline. As a basic rule, the litigation cost shall
be borne by the losing party, which often dissuades the passen-
ger from taking legal action. In Chen Peiyi vs. China Southern
Airline Co., Ltd
Ltd., the court ruled that China Southern Airline
compensate Chen 200RMB, and the litigation cost is 215 yuan
from Chen and 206 yuan shall be paid by the airline.36 In Fan
Houjun vs. Xiamen Airline Co., Ltd
Ltd., the court decided to dismiss
the plaintiff’s claim, and the litigation cost, 1196 yuan overall,
shall be paid by the plaintiff.37 Air passenger transport litiga-
tions are usually brought to courts by passengers, which means
passengers are required to pay legal fees before proceedings. If
lost, or what passengers claim being partly dismissed by courts,
passengers shall bear a certain amount of litigation costs. The
risk of litigation costs hinders passengers, to a certain extent,
from exercising their legitimate litigation rights.
IV. The adversarial court proceeding impedes or prevents the air-
line from “winning back” the unhappy passenger as a future
customer.38 In civil proceedings, the unfriendly debate push-
es plaintiffs and defendants into a severely opposite position,
which may further intensify the contradiction between parties

compensation standards and application of law. Another air accident of the Malaysia Airlines’ missing flight
MH370, which has not been found since its missing in 2014, also meets challenges when most of Chinese
passengers’ relatives are about to look for Malaysia Airlines’ compensation by litigation. After all, there are
five competent courts to the case when Montreal Convention is to apply, which confuses the relatives to make
a choice. Besides, the amount of compensation under Montreal Convention is of divergence and with which
the relatives may not be satisfied.
36. See Guangzhou Intermediate People’s Court (2006) Sui-Zhong-Fa-Min-Er-Zhong-951 Judgment.
37. See Beijing no. 2 Intermediate People’s Court (2010) Er-Zhong-Min-Zhong-8432 Judgment. Cases that liti-
gation costs were borne by air passengers include CHEN Feiyi vs. Air China Co., Ltd., DENG Hua vs. Cathay
Pacific Airways Limited etc.
38. See BOLLWEG, Hans-Georg. Alternative Dispute Resolution (ADR) in the Aviation Sector in Germany.
Zeitschrift fur Luft- und Weltraumrecht – German Journal of Air and Space Law, [s. l.], v. 62, n. 3, p. 398-
409, January 2013. Available at: https://heinonline.org/HOL/P?h=hein.journals/zlw62&i=410.

286
 rather than help them to resolve the disputes in an amicable
manner. As a consequence, it is hard for airlines to retain the-
ses customers in the future.

For the above-analyzed reasons, it is the view of the author, echoed

by the international practice, that non-litigation dispute resolution
may be more conducive to air passengers and may also benefit air-
lines. ADR, which is constructed to resolve such disputes outside
the court, has obvious advantages over litigation in resolution of air
passenger transport disputes: first, owing to the flexibility and party
autonomy inherited in ADR, the disputes may be resolved according
to the procedure tailored according to the desire and intention of the
parties, which may facilitate the dispute resolution process and avoid
the lengthy proceedings often occurring in litigation. Second, since
ADR is usually carried out in a less contentious atmosphere, the par-
ties may feel more relaxed and friendly and thus be easier to reach the
understanding, finally making the disputes resolved in an amicable way.
Third, as detailed discussed below, the application of online dispute
resolution will help the disputants save the time and cost as well. The
cost-effective dispute resolution mechanism will alleviate the passen-
ger’s concern about the litigation cost, including the time spent and
litigation fee paid, which to some extent strengths the protection of
the passenger as a consumer. Last but not least, the airline may offer
different options for the passenger for the purpose of resolving the
dispute, such as giving free mileages, free coupon, upgrade the class,
and so on, instead of only paying the money. Under this settlement,
the airline may win the previously unsatisfied passenger back, limiting
the negative effect of the complaint to the minimum.

287
3. APPLICATION OF ADR TO AIR
PASSENGER TRANSPORT DISPUTES

3.1 Arbitration

3.1.1 Arbitrability of air passenger transport disputes

Arbitration is now the principal method of resolving internation-

al disputes involving states, individuals and corporations. Arbi-
tration is essentially a very simple method of resolving disputes.
Disputants agree to submit their disputes to an individual whose
judgment they are prepared to trust. Each puts its case to this
decision maker, this private individual – in a word, this ‘arbitra-
tor’. In short, arbitration is an effective way of obtaining a final
and binding decision on a dispute, or series of disputes, without
reference to a court of law.39

As a popular dispute resolution mechanism, arbitration is also partly

recognized by the major international aviation convention regulating the
relationship between air carrier and passenger. For example, according to
the Montreal Convention, 1999 “[s]ubject to the provisions of this arti-
cle, the parties to the contract of carriage for cargo may stipulate that any
dispute relating to the liability of the carrier under this Convention shall
be settled by arbitration. Such agreement shall be in writing.”40 Whereas
by considering that it may involve complicated fact finding process and
application of choice of law in the event of serious accident causing the
passenger’s death or bodily injury, the Convention explicitly limits the
dispute concerning the compensation of the bodily injury or death into

39. See REDFERN, A.; Hunter, M. Redfern & Hunter on International Arbitration. 6th ed. [S. l.]: Oxford
Press, 2015. p. 1.
40. Art. 34 (2), Montreal Convention, 1999.

288
the domestic court rooms.41 This is understandable from the perspective
of the application scope of the Convention. Under international carriage
context, passengers and air carriers may have different nationalities, and
departure places and destinations may locate in different countries even
without considering the agreed stopping points involved in the flight.
Such various international factors made the drafters of the convention
believe that it is not easy for the countries to endorse the idea of incor-
poration of the arbitration into the convention as a general dispute res-
olution mode. As a matter of fact, this issue is also about how to define
the arbitrability which is various in different jurisdictions.
Arbitration Law of People’s Republic of China (hereinafter referred
to as “Arbitration Law”) is the basic legislation regulating the arbitration
practice in China, covering such general issues as arbitration agreement,
arbitration proceedings, formation of arbitral tribunal, hearing and award,
setting aside the arbitral award and enforcement. It stipulates the appli-
cation scope using two articles. Art. 2 states: “[d]isputes over contracts
and disputes over property rights and interests between citizens, legal
persons and other organizations as equal subjects of law may be submitted
to arbitration.” Meanwhile, art. 3 excludes the following disputes from
arbitration “1. Disputes over marriage, adoption, guardianship, child
maintenance and inheritance; and 2. Administrative disputes falling
within the jurisdiction of the relevant administrative organs according
to law.” The two provisions may also interpret the issue of arbitrability.
For the purpose of this paper, the legal relationship between the pas-
senger and airline is essentially contractual, and undoubtedly should fall
into the scope of “contract and property rights and interests” regulated
by art. 1. Furthermore, quite obviously that it is not one of the excep-
tional disputes excluded by art. 2. Meanwhile, as illustrated above, the
passenger is the consumer of air transportation service by paying the

41. Art. 34 (1), Montreal Convention, 1999.

289
ticket, so the Consumer Protection Law shall also apply to resolve the
disputes between the air carrier and passenger. The Consumer Protec-
tion Law provides that: “[i]n case of disputes with business operators
over consumer rights and interests, consumers may settle the disputes
through the following approaches: (1) To consult and conciliate with
business operators; (2) To request consumer associations or other du-
ly-established mediation organizations to conduct mediation; (3) To
lodge complaints to relevant administrative departments; (4) To apply
to arbitral organs for arbitration according to the arbitral agreements
with business operators; (5) To institute legal proceedings in the people’s
court.”42 Thus we may safely draw the conclusion that disputes between
air carriers and passengers are arbitrable in China. But surprisingly, the
Aviation Law of China is silent on the dispute resolution mechanism
between the air carrier and passenger.
Subject to the relevant laws and regulations, most arbitration com-
missions in China also include the dispute of air carriage of passenger
into their jurisdiction. For example, China Maritime Arbitration Com-
mission (CMAC) has in its latest revised arbitration rules included “[…]
related disputes arising from aviation, railways, highways, etc.” into its
jurisdiction.43 More strikingly, in June, 2014, Shanghai International
Economic and Trade Arbitration Commission (Shanghai Internation-
al Arbitration Center) (hereinafter referred as “SHIAC”) established
Shanghai International Aviation Court of Arbitration (hereinafter re-
ferred as “SIACA”), which is a working platform under SHIAC to offer
international aviation arbitration services. On August 28th, 2014, IATA,
China Air Transport Association (CATA) and SHIAC jointly held the
ceremony for signing the Strategic Cooperation Agreement among the
three parties at the meeting hall of the Shanghai People’s Municipal

42. Art. 39.

43. Art. 3 (1)(b) of Arbitration Rules of China Maritime Arbitration Commission (2018).

290
Government, and celebrated the inauguration of SIACA. Currently,
SIACA is the only arbitration court which focuses on aviation-relat-
ed dispute resolution in the world. This court deals with various types
of disputes in aviation industry field, including but not limited to air
transportation, aircraft manufacturing, aircraft sales, aircraft financial
leasing, aviation insurance, general aviation trusteeship, ground services
and air ticket agents.44

3.1.2 Challenges faced by air passenger transport arbitration

Generally speaking, the arbitration may be categorized into institu-

tional arbitration and non-institutional arbitration or ad hoc arbitration
according to whether the parties agree to submit their dispute to a spe-
cific arbitration institute for administration. Ad hoc arbitration may fully
highlight the advantages of the arbitration owing to its party autonomy,
procedural flexibility, low cost, expertise and high efficiency. However,
the ad hoc arbitration is not legally recognized by a very small number
of countries, including China. Art. 18 of the Arbitration Law states
that: “[i]f the arbitration matters or the arbitration commission are not
agreed upon by the parties in the arbitration agreement, or, if the rele-
vant provisions are not clear, the parties may supplement the agreement.
If the parties fail to agree upon the supplementary agreement, the arbi-
tration agreement shall be invalid.” Therefore, the arbitration commis-
sion or institute is an indispensable factor for a valid arbitration clause
or agreement. This requirement has not only attracted wide discussion
and debate during the process of potential amendment of Arbitration
Law of China, but is also concerned by the aviation community. At the
signing ceremony of the International Air Arbitration Strategic Coop-
eration Agreement as mentioned above, Jeffrey Shawn indicated: “We

44. Available at: http://www.shiac.org/Aviation/aboutus_E.aspx?page=2. Accessed on: May 31st, 2019.

291
are concerned about the rapid development of China’s aviation industry
and huge market potential therein. The number of international airlines
entering the Chinese market is increasing, while due to some institutional
barriers, international aviation arbitration rules haven’t been introduced
into mainland China yet.”45 What is the most important about the so-
called “institutional barriers” is that the current Arbitration Law does
not recognize ad hoc arbitration, which is different from legislations and
practices in most other countries.
Another situation which may impede the development of arbitration
of disputes concerning the air carriage of passenger is that the awareness
of the protection of the passenger is not as strong as that in European
Union which is always in a leading position in the field of consumer
protection. In China, there is no special dispute resolution mechanism
designed particularly for the consumer, let alone for the aviation pas-
senger. Besides the litigation, the major resort to the air passenger is to
file complaints through the administrative organs regarding lack of re-
sources and impartiality to deal with such a huge number of complaints.
By studying the general dispute resolution mechanism in China, it is of
the author’s view that the employment dispute resolution mechanism
may be a useful reference for the aviation consumer dispute resolution.
When it comes to the resolution of dispute between the employee and
employer, the Law of the People’s Republic of China on Labor-dispute
Mediation and Arbitration (hereinafter referred to as the Labor-dis-
pute Law) will apply. Under the Labor-dispute Law, the arbitration is
a mandatory procedure before the litigation. The arbitral award may be
challenged by the employee in the subsequent litigation proceeding, 46
whereas the employer could only challenge the award subject to limited

45. HONG, Xin. First Introduction of International Aviation Arbitration Mechanism to China, 2014. Available
at: http://legal.people.com.cn/n/2014/0830/c188502-25570232.Html.
46. Art. 48, the Labor-dispute Law.

292
grounds.47 It is quite obvious that the employee is treated as a weaker
party in the employment contract by the legislator and thus provided
more protection. Since there is no such mandatory arbitration procedure
available for the passenger, it is hard, if not impossible, for the passenger
to negotiate with the air carrier to conclude an arbitration agreement,
particularly under the common practice that the contract of carriage is
a standard contract prepared and provided by the air carrier, making the
passenger actually in a position of “take it, or leave it”.
The attention should also be paid to another fact. Although the ar-
bitration commission or institute is basically characterized as civil and
non-profitable organization, it still needs the necessary funds to prop-
erly operate it. But as we discussed, a lot of disputes between the air
carrier and passenger are low compensation requests, so the amount of
motivation the arbitration institute may have to promote the market in
this area is doubtful.

3.2 Mediation

3.2.1 Introduction to mediation of air passenger transport

Mediation may well be the closest thing we have to an effective technique

for dealing with conflicts in the twenty-first century.48 Mediation is a
relatively simple but long-standing dispute resolution method, which is,
regardless of the appellation or accordance of the process, a process that
parties try to resolve their disputes in a friendly manner, with assistance
by one or three persons (“mediators’”), in their absence of the right to
impose a mandatory resolution to parties.
Although there is no general mediation legislation in China, except

47. Id, art. 49.

48. See MACDUFF, Ian. Essays on Mediation: Dealing with Disputes in the 21st Century. Hague: Kluwer Law
International, 2016. p. 1.

293
some special laws such as the aforementioned Labor-dispute Law gov-
erning the mediation procedure concerning some special disputes, medi-
ation has been recognized as a method to resolve the dispute concerning
the air carriage of passenger by the Contract Law: “Where the parties
do not wish to, or are unable to, resolve such dispute through settlement
or mediation, the dispute may be submitted to the relevant arbitration
institution for arbitration in accordance with the arbitration agreement
between the parties. Parties to a foreign-related contract may apply to
a Chinese arbitration institution or another arbitration institution for
arbitration. When the parties did not conclude an arbitration agreement,
or the arbitration agreement is invalid, either party may bring a suit to
the People’s Court.
The parties shall perform the judgments, arbitration awards or me-
diation settlement agreements which have taken legal effect; if a party
refuses to perform, the other party may request the People’s Court for
enforcement.”49 This provision does not only clarify that mediation is
able to apply to disputes arising from contract, but also emphasizes
disputants’ willingness to mediation without requirements on written
agreement what is a necessary condition for arbitration in China. In
addition, the Consumer Protection Law stipulates that “[…] in case
of disputes with business operators over consumer rights and interests,
consumers may settle the dispute through requesting consumer asso-
ciations or other duly-established mediation organizations to conduct
mediation”.50
The mediation of air passenger transportation disputes in China
can be conducted via three channels: judicial mediation, administra-
tive mediation, and civil mediation.

49. Art. 128 (1) (2) of Contract Law.

50. Art. 39 of Consumer Protection Law.

294
3.2.1.1 Judicial mediation

Judicial mediation is the mediation conducted by the people’s court during

the litigation process, but before a judgment being rendered. Such me-
diation is based on the willingness of both parties and presided over by
the judge(s). Should the parties may reach the consensus to resolve the
dispute, the people’s court shall draw up a written mediation settlement
agreement which has legal binding force upon the parties thereof. As a
matter of practice, the judge(s) will usually inquire the parties on whether
they want to resolve the dispute by means of mediation or not. Mediation
plays an active role to resolve the disputes in reality.51

3.2.1.2 Administrative mediation

Administrative mediation refers to the mediation of civil disputes con-

ducted by administrative organs. Presently, CAAC and airlines have set
up complaint handling bodies, which make the contradictions and disputes
between air carriers and passengers would be resolved via negotiation and
communication through this platform.52 The complaint handling agen-
cy of CAAC also accepts mediation of disputes concerning air passen-
ger transportation. The Measures for the Administration of Consumer
Complaints in Public Air Transport Service (hereinafter referred to as the
“Administrative Measures”), issued by CAAC, came into force on January
1st, 2018. The Administrative Measures, aiming at regulating the han-
dling of complaints filed by air consumers against carriers, is formulated
in accordance with the Civil Aviation Law and the Consumer Protection

51. Subject to the statistics indicated by the China Court Website, the following cases were resolved through
mediation: Huang Jiangtao vs. United Airlines, Inc. (See Shanghai no. 2 Intermediate People’s Court (2002)
Hu-Er-Zhong-Min-Wu-(Shang)-Chu-Zi-67 Judgment), Jin Ci vs. China Southern Airline Co., Ltd. (See
Guangzhou Intermidiate People’s Court (2008)Sui-Zhong-Fa-Min-Si-Chu-Zi-93 Judgment).
52. YING, He. Dispute Resolution Mechanism of “One Belt One Road” Air Transportation. Review of Aviation
Law, 2018. p.80-88.

295
Law. The Administrative Measures provide: “The consumer complaints in
public air transport service (hereinafter referred to as ‘complaints’) referred
in this Administrative Measures indicates that air consumers’ activity to
apply for CAAC or its authorized institutions (hereinafter referred to as
‘complaint accepting institution’) to mediate their disputes, which aris-
ing from consumers’ acceptance services to travel or cargo transport from
public air transport enterprises, ground service agents, air sales agents or
airport management agencies.”53 It further specifies: “Complaints accept-
ing institutions include the CAAC, Consumer Affairs Center of CAAC
(hereinafter referred to as the ‘Consumer Affairs Center’) and the China
Air Transport Association.”54 After the issuance of the Administrative
Measures in 2018, the Transportation Department of CAAC, the Con-
sumer Affairs Center and the China Air Transport Association have re-
ceived 20,761 complaints from consumers. Among all complaints, 19,758
cases have been reconciled by consumers and enterprises, and 1,003 cases
have been mediated by Consumer Affairs Center.55

3.2.1.3 Civil mediation

Civil mediation means that the mediation is presided over by a non-gov-

ernmental third-party in comparison with the courts and administrative
organs. Mediation is widely accepted and applied by Chinese arbitration
commissions. The art. 50(1) of The China (Shanghai) Pilot Free Trade
Zone Arbitration Rules, the arbitration rules applied by SHIAC and
Shanghai International Aviation Court of Arbitration, states that: “[a]
ny party may apply for mediation upon the consent of the other party
during the period after an arbitration case has been accepted and before

53. Art. 2 (1) of the Administrative Measures.

54. Id
Id, art. 4.
55. CIVIL Aviation Administration of China. Bulletin on 2018 Complaints from Air Transport Consumers.
Available at: http://www.caac.gov.cn/XXGK/XXGK/TJSJ/201903/t20190308_195081.html.

296
the tribunal is constituted. The chairman of SHIAC shall, within three
days upon the receipt of consent to mediate in writing, appoint a mediator
from the Panel of Mediators.” Art. 2 of CMAC Mediation Rule (2018)
stipulates that: “[a]ll contractual or non-contractual civil and commercial
disputes between natural persons, legal persons and other organizations
may be referred to the China Maritime Arbitration Commission (herein-
after referred to as the “CMAC”) for mediation.” In order to connect the
mediation and arbitration so that to form a systemic alternative dispute
resolution mechanism, arbitration institutions set up mediation centers or
mediation organs, providing for disputants with a platform to resolve dis-
putes in a much less contentious way. In addition, the China Consumers
Association has the power of accepting consumers’ complaints and to in-
vestigate and mediate those complaints. In the first quarter of 2019 alone,
the Consumers Association had accepted 574 complaints.

3.2.3 Obstacles of application of mediation to air passenger transport disputes

Although mediation is highly regarded as an effective mechanism to resolve

the consumer-related disputes, it has an inherit defect when it comes to
the enforceability of the mediation settlement agreement reached by the
parties. Since the mediation is fully based on the mutual consent of the
parties to the dispute, the settlement agreement concluded is legally re-
garded as a contract between them. The “Several Opinions of the Supreme
People’s Court on Establishing a Sound Conflict and Dispute Resolution
Mechanism that Connects Litigation and Non-litigation”, issued by the
Supreme People’s Court in 2009, on one hand clearly states that for an
agreement of a nature of a civil contract reached through mediation by
an administrative organ, a people’s mediation organization, a commer-
cial mediation organization, an industrial mediation organization or any
other organization with the mediation function, the parties may apply to
the people’s court having jurisdiction for confirming the validity of such

297
an agreement after the mediation organization and mediator affix their
signatures or seals to it.56 Therefore, in the scenario of dispute between
the passenger and air carrier, if the later does not voluntarily execute the
concerned settlement agreement, the former has to resort to the people’s
court for remedy, which may minimize the efficiency of mediation.
Internationally speaking, although United Nations Convention on
International Settlement Agreements Resulting from Mediation (herein-
after referred to as Singapore Convention) was adopted in 2018, aiming
at addressing the cross-border implementation of settlement agreements
under international commercial mediation. Regrettably, art. 1(2) of the
Singapore Convention excludes several typical non-commercial settlement
agreements: “[t]his Convention does not apply to settlement agreements:
(a) Concluded to resolve a dispute arising from transactions engaged in
by one of the parties (a consumer) for personal, family or household pur-
poses; (b) Relating to family, inheritance or employment law.” As men-
tioned before, air passengers are also air consumers, thus, international
air passenger transport dispute is explicitly excluded from the scope of the
Singapore Convention.

3.3 Online Dispute Resolution (ODR)

3.3.1 Introduction on ODR

ODR “[…] is a non-litigation dispute resolution system that combines

information processing function of computer with convenience of com-
munication network. It is an alternative dispute resolution method applied
in cyberspace.”57 In accordance with the definition made by Federal Trade

56. Art. 12 of the Several Opinions of the Supreme People’s Court on Establishing a Sound Conflict and Dispute
Resolution Mechanism that Connects Litigation and Non-litigation
57. XIAOJING, Fan. Online Dispute Resolution Mechanism in E-Commerce: Perspective of Information Tech-
nology and Protection of Consumers. Science Technology and Law 4, 2017. p. 7-11.

298
Commission of the US, European Union, OECD and Global E-Com-
merce Forum, ODR refers to all modes of resolutions to solve disputes, by
a non-court third party in cyberspace, between enterprises and consum-
ers arising from e-commerce contracts.58 Generally speaking, ODR has
characteristics as follows: (1) contracts between enterprises and consum-
ers are made in the form of “electronic contract”; (2) using information
technology to solve disputes in cyberspace; (3) ODR is a non-litigation
alternative dispute resolution. These years, most air consumers purchase
their air tickets on the internet, which means that air consumers have the
right to bring their disputes with air carriers to ODR platforms for reso-
lutions. ODR for air passenger transportation disputes has been applied
in European Union. Air consumers may seek remedies through: (1) log-
ging on the EU ODR website and making a complaint by filling out a
uniform form with relevant supporting materials attached; (2) disputants
reaching an agreement on the dispute resolution institution (The European
Union’s ODR website has a list of dispute resolution bodies of EU coun-
tries for disputants to choose); (3) ADR agencies terminate procedures
in accordance with the deadline specified in art. 8 of Consumer ADR
Directive, and pass the end date and results of ADR procedures to the
ODR platform without delay. Under the country’s support for “internet
plus” strategy in China, the e-commerce has gained rapid development.
Although e-commerce started late in aviation industry, air e-commerce
through internet platform has also steadily developed in recent years.59 It
may suggest that the application of ODR has great potential in China to
resolve the disputes between air carrier and passenger.

58. MANDA, Liu. Online Resolution of Disputes. Law Science, 2002.

59. WEIHUA, Chen. Legal Challenges Faced by Aviation E-Commerce Development. Review of Aviation
Law, 6, 2017. p. 42-49.

299
3.3.2 Application and obstacles of ODR

ODR program includes online negotiation, online mediation, online

arbitration and online appeal, within which the most representative one
is online arbitration. As for the definition of online arbitration, art. 2 of
Online Arbitration Rules of China Guangzhou Arbitration Commission
specifies that: “[o]nline arbitration is an ODR method that provides ar-
bitration services by applying network technology resources such as the
Internet.” In comparison with offline arbitration, application of online
arbitration to air passenger transportation disputes has two major ad-
vantages: First, online arbitration is costless for parties, regarding the
small amount of most air passenger transport disputes. Second, online
arbitration has cross-border nature, because online arbitration procedures
are carried out through network, including filing, identity authentica-
tion, evidence exchange and investigation, debate and interrogation etc.,
which facilitates the dispute resolution process.
Arbitration institutions in China also have online arbitration plat-
forms. China International Economic and Trade Arbitration Commis-
sion (CIETAC) has implemented Online Arbitration Rules in 2009
and revised in 2014. Art. 1(2) of the Online Arbitration Rules specifies
the acceptance scope of CIETAC online arbitration: “[t]hese Rules
shall apply to the resolution of electronic commerce disputes and may
also be applied to the resolution of other economic and trade disputes
upon the agreement of the parties.” Air passengers are allowed to apply
for online arbitration through the CIETAC online arbitration system
after the disputes arising. In accordance with CIETAC Online Arbi-
tration Rules, the procedures are as follows: (1) disputants logging in
to the CIETAC online arbitration system to fill out an arbitration ap-
plication form with personal information, arbitration request, fact etc.,
as well as attaching the arbitration agreement on which the arbitration
is based; (2) CIETAC shall notify the parties after accepting the case

300
that meets the conditions for acceptance; (3) defendants shall submit a
statement of defense in accordance with the “arbitral defense statement
format” and the “guide to submission of arbitration answers” within a
certain period of time; (4) consisting of one or three arbitrators to form
an arbitral tribunal; (5) unless the parties agree to hold oral hearings, or
the arbitral tribunal decides it is necessary to do so, the arbitral tribunal
shall hear the case on a documents-only basis in accordance with the
written materials and evidence submitted by the parties; (6) making an
arbitral award. In addition to doing certain arbitration activities online,
CIETAC goes even further to simplify the arbitration procedures. Cases
of simple facts and legal relationships, like air passenger transport cas-
es, are not subject to trials unless necessary, further saving the time and
cost of online arbitration.
“Arbitration agreement” of both parties to disputes is regarded as a
mandatory condition for both online arbitration and offline arbitration.
When air passenger transport contract is concluded on an e-commerce
platform, the contract is often submitted in the form of a standard con-
tract drafted by the airline. Airlines are required to publish the General
Conditions of Transport, which is generally considered to be of a con-
tractual nature and is part of the format contract between passengers and
airlines, on their official websites. However, the General Conditions of
Transport of major airlines has no clause relating to resolution of dis-
putes between passengers and airlines, that is, no arbitration agreement
between airlines and passengers would be set before disputes occur.
While it is also difficult to reach an arbitration agreement afterwards,
due to trust relationship not fully established for the small number of
transactions, as well as airlines’ failure to keep trust relationship with
passengers since the dispute occurs. The requirement of the arbitration
agreement has become one of the important causes for the extremely
small number of cases involving air passenger transport disputes been
brought to arbitration, whether online or offline.

301
 In this view, China’s major airlines may take it into account that on-
line arbitration is a way of resolving disputes between passengers and air-
lines other than litigation. An arbitration agreement may be reached to
settle disputes between passengers and airlines under online arbitration
while airlines entering into a contract of carriage with the passenger, and
the arbitration agreements shall be incorporated into transport standard
contract in a conspicuous manner. Standard contract, on one hand, is
good at improving commercial efficiency and promoting the application
of online arbitration in air passenger disputes, on the other hand, in prac-
tice, passengers seldom carefully read dispute resolution clauses in format
contract, leading them to an unfavorable circumstance for insufficient con-
sultation, which may result in defect in party autonomy and annulment of
the arbitration agreement. Therefore, it may be an alternative method for
airlines to provide a pre-established online arbitration agreement, other
than an attached arbitration clause in the principal contract, and remind
passengers to choose. In addition, airlines can cooperate with arbitration
institutions, which provide online arbitration service, to promote the ap-
plication of online arbitration in the field of air passenger transportation
disputes. For example, airlines can have websites of arbitration institu-
tion that provide online arbitration services on their official websites and
General Conditions of Transport.

4. CONCLUSION

In view of the fact that air passenger transportation cases are often with
simple fact and a small amount in dispute, the application of ADR to
these cases have obvious advantages over litigation, such as more effi-
cient procedures, relatively low cost, confidentiality and professionalism.
However, ADR is not widely used in China, for reasons as follows: (1) Ad
hoc arbitration has not been recognized by China’s legislation; (2) China
has not yet established an ODR mechanism for air passengers. Although

302
mediation of air consumers’ complaint conducted by CAAC works well,
providing air passengers with a convenient and efficient method for dis-
pute resolution, a comprehensive ODR system, including online negoti-
ation, online mediation and online arbitration, in utilization of network
technology, has not been established yet, failing to provide a more conve-
nient dispute resolution channel for disputants; (3) the way to resolve air
passenger transport disputes through online arbitration has not received
much attention. On one hand, airlines and passengers generally do not
enter into an online arbitration clause before disputes occur, and it is un-
likely that parties reaching an arbitration agreement after disputes arise,
resulting in a lack of arbitration agreement which is the premise of an ar-
bitration. On the other hand, the application of online arbitration in air
passenger transport disputes has not been well publicized and promoted.
Few parties choose to bring their cases to online arbitration.
Regarding the obstacles faced by ADR in the application of air pas-
senger transport disputes in China, the following suggestions are put
forward in this paper: (1) incorporating the multiple dispute resolution
mechanism into the Civil Aviation Law. That means giving the legal
place of arbitration and mediation in the basic legislation governing the
civil aviation transportation industry; (2) legitimizing ad hoc arbitration
in China by modifying the Arbitration Law, making the arbitration more
efficient and highly autonomous; (3) promoting the application of ODR
platform among the air carriers and passengers; (4) when the time is ma-
ture, the passenger may be given the right to choose the dispute resolution
method. In other word, if the passenger is willing to resolve the dispute
through arbitration, the air carrier has no other choice but to follow. This
arrangement is more pro-passenger, which is accepted by some leading
countries in the consumer protection area. It is suggested by this paper
that a hybrid dispute resolution clause may be introduced by air carriers
in their air tickets, saying that “[…] any dispute arising from or in con-
nection with the carriage contract may be resolved by friendly negotiation

303
before submitted to mediation. If the parties could not reach a consensus
within two months from the date on which such dispute is submitted,
the dispute should be submitted to arbitration or litigation subject to the
choice of the passenger.”

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 Financial Dispute Resolution in China
Xiuming Tao1

1. A GLIMPSE OF THE DEVELOPMENT

OF CHINESE FINANCIAL MARKET

1.1 From mono-bank system to a modern

and comprehensive financial market

1.1.1 Mono-bank system

Before the introduction of the reform and opening up policy in the end
of the 1970s, the whole Chinese economy was a centrally planned econ-
omy, and the financial system in China was then simply a mono-bank
system. There was only one bank, i.e. the People’s Bank of China (the
“PBOC”, the central bank then and now); it was then really a universal
bank, or exactly a universal financial organization, taking all the bank-
ing/financial business roles (including roles of central bank, policy bank,
commercial bank and even securities or investment bank, trust, securities
investment fund etc.). At that time, there were no such financial busi-
nesses like futures, financial leasing, auto-financing or fund manage-

1. Mr. Xiuming Tao is the founding partner and managing partner of JunZeJun Law Offices headquartered in Beijing.
ment. There were no stock market, neither futures exchange, interbank
market trading systems etc.2

1.1.2 Establishing of various financial institutions (“FIs”)

With the adoption of reform and opening up policy, since 1979, four
national banks were established one by one in a short period, which are
nowadays the four biggest banks in China.3 In the same time and later
on, more and more banks (including policy banks and commercial banks)
and various non-bank financial institutions were set up, such as insurance
companies, trust companies4, securities companies, finance companies,
financial leasing companies, fund management companies etc. Up to
now, there are over 40,000 various types of FIs in China. During this pe-
riod, the Shanghai Stock Exchange (“SSE”), Shenzhen Stock Exchange
(“SZSE”)5 and a number of futures exchanges for a variety of bulk com-
modities were established.

1.2 Adoption of segregation principle in financial regulation

With the restart of financial market, a number of basic laws such as the
Commercial Bank Law (1995), the Insurance Law (1995), the Securities
Law (1998), the Trust Law (2001) and various regulations in relation to the
financial market, particularly different types of financial institutions and their
respective business operation have been promulgated. Based on these laws

2. But before 1949, with the establishment of the PRC, China did have an active financial market, including stock
market, insurance market etc.
3. Agriculture Bank of China (“ABC”, restored in 1979), China Construction Bank (“CCB”, separated from Ministry
of Finance in 1979), Bank of China (“BOC”, separated from PBOC for foreign exchange business in 1979)
and Industrial and Commerce Bank of China (“ICBC”, set up in 1984 taking over the lending business for
commercial and industrial entities from PBOC, so that the latter could focus on playing the central bank role).
4. With the motion of PBOC and approval of State Council, People’s Insurance Company of China (“PICC”),
the first insurance company, was set up in 1980. The first trust company CITIC was also set up in 1980.
5. SSE and SZSE were set up on December 19th, 1990, and July 3rd, 1991, respectively.

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and regulations, China has gradually established the segregation principle of
regulation for the financial market. Each type of FIs is only allowed to carry
out business within their business scope set forth by the relevant law and regu-
lations, which is (in term of their main business in particular) largely different
and separate from that of other type of FIs: i.e. the commercial banks, trust
companies, securities companies and insurance companies are only permit-
ted to do banking, trust, securities (brokerage and proprietary trading) and
insurance business respectively, while mixture of business behavior is strictly
prohibited. There were three main reasons why this segregation regulation
principle was so adopted. Firstly, it was derived from the legacy of the cen-
trally planned economy, which implied a government administration based on
nature of industry; the second reason was the happening of South-East Asia
financial crisis in 1997, which to some extent displayed that systemic risk at
financial market might be partially caused by mixture of financial businesses.
Lastly, the influence of China’s following of the regulatory doctrine as first
introduced by the Glass-Steagall Act (Banking Act of 1933) of the US in
the wake of the Great Depression happened in 1930s. However, the Chinese
market ignored that such segregation doctrine has been abolished by the US
Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley Act)
and therefore continues such principle up to now.

1.3 From strict segregation principle to mixture

and integration of financial businesses

In October 2001, the Trust Law was enacted, which provides a formal legal
foundation for trust business.6 With the Trust Law and the relevant regu-
lations regarding trust companies and their business, the trust companies

6. It is provided for in art. 2 of the Trust Law that “Trust in this Law refers to the act in which the trustor, on the
basis of confidence on the trustee, entrusts certain property rights it owns to the trustee and the trustee ma-
nages or disposes of the property rights in its own name in accordance with the intentions of the trustor and
for the benefit of the beneficiary or for specific purposes.”

311
which were previously engaging de facto mini-bank business are formally
required to shift their business focus back to their primary business on a
legally trust basis for the first time and strictly separate their proprietary
investing business (with use of their own assets) and trust business, i.e.
providing asset management (“AM”) service for investors and meanwhile
rendering fund raising service for various businesses at market. It brings
great flexibility and advantage for trust companies in carrying out their
trust business operation, since there is no limitation on their business
scope. In other words, compared with the business limitation of the oth-
er types of FIs, the trust companies have the capacity to do full range of
investment business, such as investing in both debt and equity securities
in the public market and privately placed equity and debt investments
in various industries. On the other hand, banks, insurance companies,
securities companies etc. are only allowed to engage in their traditional
business as stipulated in the relevant laws and regulations. Since the other
types of FIs are largely permitted to buy trust products/schemes as eligible
financial assets, very soon, the other types of FIs would find it feasible to
expand their business by cooperating with a trust company, mainly by way
of buying trust products, so as to circumvent the regulatory limitation on
their respective business operation. Such cooperation was initially widely
employed by the commercial banks for their wealth management products
linked to A-share investments (banks being not allowed to invest in equity
securities in their own capacity)7. Later on, AM business was gradually
introduced in the insurance and securities sectors, and such cooperation
with trust companies business model was copied by insurance companies,
securities companies etc.8. In the end, with the trust companies or trust

7. Since 2005, banks have hugely increased the size of their off-balance sheet assets through their bank-trust busi-
ness cooperation.
8. Due to the segregation principle, banking sector (covering banks and trust companies etc..) was then so do-
minant at the financial market, while securities sector and insurance sector were relatively so small or even
marginal in terms of business and asset scale. AM business was regarded as the unique market opportunity
for the non-banking financial sectors to compete with the banking sector. Therefore, the financial regulators,

312
vehicle being used as a channel (license renting in nature), the strict seg-
regation principle was much undermined and the business boundary and
segregation among the different types of FIs was penetrated, regulatory
policy arbitrage became a common practice at market, and eventually a
mixture of business or similar business being operated by different types
of FIs appeared at the financial market.9

1.4 Financial innovation and deregulation

To tackle the drastic impact of the financial crisis occurred in late 2008,
China swiftly changed its then monetary tightening policy and moved on
a large scale quantitative easing at the financial market. In the meantime,
Chinese government also noticed that the crisis then happened in the US
was much due to the excessive financial innovation with inadequate or
improper regulation at market, while in China the financial market was
in different situation, which was actually a lack of development and in-
novation. Therefore, in the immediate wake of the 2008 financial crisis,
in order to hedge the impact of the global crisis and keep the economic
growth, the Chinese government and the financial regulators decided to
promote various financial innovations and then issued a number of de-
regulation measures to further liberalize the financial market. And soon
different financial regulators were actually in a mood of competing with
each other in such deregulating efforts. AM became the major area of
business deregulation. Various financial innovations, such as internet fi-

i.e. China Banking Regulatory Commission (“CBRC”), China Securities Regulatory Commission (“CSRC”)
and China Insurance Regulatory Commission (“CIRC”) were competing with each other in issuing regu-
lations and rules regarding AM business and providing an AM-friendly regulatory framework for the FIs
under their respective supervision.
9. Since 2012, with the strong promotion of AM business in the securities sector by the regulator, CSRC, fund
management companies (engaging in common fund management business) permitted to set up a subsidiary to
engage in those businesses which are in nature no different from those of a trust company. Such subsidiaries
were called mini-trust companies at the market, and therefore they can compete directly with trust companies
in managing and channeling in particular various AM businesses.

313
nancing activities including P2P lending business, were permitted and
supported by government. In the meantime, informal financial business-
es, including those in the name of AM, conducted by non-FIs, were also
tolerated (previously, they were strictly prohibited) or even encouraged
by many local governments.

1.5 Booming of AM/Shadow banking business

As previously described, with the use of trust vehicle, different FIs have
widely engaged in AM business. But economically, the booming of such
AM business is because of the following three reasons:

I. huge demand for financing at market with the fast economic

growth and development;
II. low efficiency in traditional allocation of the financial resourc-
es. Traditional financial business cannot satisfy the fast growing
need of the market. Lending mainly by banks is subject to various
regulatory and business requirements, such as the strict capital
adequacy requirement – as also required under Basel Accord II
(2004) – for the banks; the financial status, such as credit rating,
assets scale and debt ratios of the borrowing entities, so that many
entities, particularly those small and medium size private ones,
have much difficulty in getting loans from banks; and then there
was a strong call for financial reform and innovation to deal with
such long existing problem;
III. a growing number of wealthy individuals need diversified invest-
ment. With decades of constant economic development, there
is a great number of wealthy individuals (in addition to entities)
with surplus of fund who would like to invest their money in some
products with a yield higher than traditional deposit and a risk
lower than direct equity investments (and, in fact, most individ-

314
 uals are not good at private equity investment). Apparently, AM
products were such products, and they were deemed as the most
suitable and attractive investments, for such wealthy individuals.

These are the major economic factors leading to the development of

the AM business, while the friendly change of legal and regulatory envi-
ronment over the time also facilitated a great deal to the booming of AM
business. Besides the banks and trust companies, other FIs, including in-
surance asset management institutions, securities and futures companies,
and fund management companies and their subsidiaries, have all engaged
in the AM business. At the same time, there is a large number of third-par-
ty AM institutions that emerged in the market, which in the initial stage
acted as agents for the sale of different AM products, and later on went
on to develop and sell their own AM products.10 Eventually, a Pan-AM
industry also appeared in the Chinese financial market. According to the
market statistics, by the end of 2018, the total outstanding volume of AM
at the market was roughly at the volume of 100 trillion (and 60 trillion
less the overlapping business statistics).
As the AM business is functionally similar to the lending business of
banks, though it is frequently structured and with higher cost, it is also
called shadow banking business. Such kind of business has tremendously
eased the huge demand for financing at market which is far from being
satisfied by the traditional and formal lending business and private equity
investment as well.

10. But there were no clear rules or regulations for such third party AM institutions.

315
1.6 Problems of AM business

1.6.1 Issue of implied guarantee for repayment

Theoretically, AM is off-balance business. In such business, FIs only act

as intermediary in financing, i.e. brokerage role between fund providers/
investors and fund raisers/users, not like the traditional banks’ taking de-
posit and providing lending business or investments on proprietary basis,
which are all recorded as debts/credits on balance sheet of the FIs. In other
words, in case there is a loss in an AM product/investment, the relevant
FI is not legally obliged to compensate the investors for such loss because
the FI only acts as a manager other than guarantor or deposit taker, rather
the investors should bear the risk and loss of the product by themselves.
But in reality, it is not so simply a case, AM businesses are not exactly
treated as off-balance assets. FIs always provide a de facto guarantee for the
repayment/return of investment of such AM products. The reason is that
AM business is generally a very profitable business where FIs can receive
a remarkable amount of management fees, which may constitute the ma-
jor revenue of such FIs, particularly at a time when traditional financing
is difficult at market. Therefore, it is of great interest for FIs to keep their
AM businesses going on smoothly and even to expand as much as possible.
In such situation, once there is a failure in a particular AM product, the
FIs would tend to honour the repayment to the investors by using their
own profits/assets or even embezzle the assets of other AM products, so
as to avoid a real default; otherwise, the FIs would lose their reputation
and confidence towards their client investors and then have difficulty in
selling new AM products at market. In addition, in early stage of such
AM business involving a large number of individuals, FIs were also fre-
quently under great pressure to ensure the repayment to the individual
investors. If not, individual investors might come to the government and
exert great pressure for help and solution.

316
 Being afraid of any chaos incurred by such event which may affect
the social stability, the financial authorities and local governments as well
would naturally press the FIs and require the same to honour the repay-
ment of the investment even including the anticipated profit as described
in the product prospectus. And if there were any non-compliance in their
business operation, the FIs would then have no choice but to make the
full payment, otherwise they would be subject to regulatory punishment
which may include a fine and suspension of relevant business permit. In
the end, such off-balance business with much higher expected return and
higher associated risk turned out to be on balance sheet business with
implied guarantee for repayment. With this practice, there seems to be
no need for the AM products to be evaluated and managed in a strict-
ly independent and separate manner. And eventually, some of FIs and
particularly many of those non-FI AM service providers conducted their
AM businesses in a capital pool business model, with different products
(with different terms, different estimated return and different investors)
being co-mingled, mixed up other than separated from each other. There
is no independent calculation and allocation of loss and profits on each
product basis. This makes the AM businesses no different of the tradi-
tional banking business, i.e. taking deposit (and lending business) on a
balance sheet basis. In the end, some AM business, particularly those
conducted by non-FIs entities turned out to be a Ponzi Scheme. In fact,
there are already a number of such scandals occurring from time to time
in the market, with quite some cases involving huge amounts and causing
tremendous loss to investors and even triggering social chaos.

1.6.2 Other problems and risk in AM business

In addition to the aforementioned problem, there are many other issues

in such business. For example, the lack of a relatively mature business
culture, lack of investment management skill and risk control ability, lack

317
of proper legal and regulatory framework, lack of self-regulation concept
and spirit, multiple layers of business participants, excessive length of the
transaction chain and over-complication of the deal structure, insufficient
due diligence on base assets, lack of information and transparency of the
investors’ background, mal-using of the fund etc. All these lead to the
associated risk being accumulated to an astonishing level at the market.

1.7 Change of regulation: from deregulation to re-regulation

Since the traditional pattern of development is unsustainable, the Chinese

economy has slowed down in the past several years, and further econom-
ic transformation and upgrading are necessary. The task of eliminating
backward production capacity, reducing overall debt ratio and lowering
financing costs has become a priority. At the same time, with the notice
of the huge risk being amounted at the financial market, particularly such
risk in relation to the extraordinary scale of AM business and the infor-
mal financial activities by non-FIs, Chinese government has listed the
preventing of systematic financial risk as one of the top three national
policies (with targeting subsidies for the poor and improving the environ-
ment being the other two). So since late 2016, a series of rigid regulatory
measures were issued to tighten the financial market and control the risk.
Therefore, from 2012 to 2018, Chinese financial market has witnessed a
swift change from the regulatory liberalization, encouraging of financial
innovation and booming of various new products, explosive expansion of
AM business, remarkable increase of leverage, to the widespread of market
defaults, restriction on complex financial product and innovation, sharp
reducing in leverage.
With respect to the AM business where lies the major financial risk,
after a year- long discussion and drafting work, the Guiding Opinions on
Regulating the Asset Management Business of Financial Institutions (the
“New AM Rules”) were officially issued on April 27th, 2018, with an aim

318
at restricting those high leverage ratio AM businesses, limiting the poli-
cy arbitraging or channel businesses, limiting non-standard and complex
products, encouraging standard and relatively simple AM products trad-
able at financial markets. Meanwhile, go down through the different layers
of transactions to check the base/bottom assets and go up to identify the
ultimate investors/fund users to check and prevent related business and
various interest diverting behavior and other malpractices.

2. CHALLENGES FACING FINANCIAL

DISPUTE RESOLUTION IN CHINA

2.1 Widespread defaults at financial market and

heavy workload in dispute resolution

Mainly due to the following reasons, there is a really widespread of finan-

cial business defaults and disputes at the current Chinese financial market:

I. Huge size of financial market. In the past 10-15 years, financial

market has greatly developed and become the core part of the
whole Chinese economy. It is generally the case that more busi-
ness activities imply more disputes.
II. Slowdown of the economy. Needless to say, the slowdown of the
whole economy means the increase of difficulty in doing business
and high probability of business default.
III. High leverage and high cost of financial business. High leverage
and high cost are not sustainable and easy to incur business fail-
ure and default.
IV. Rampant and immature financial innovation. In the last several
years, there was really an extraordinary booming of various finan-
cial innovations which were lack of proper legal and regulatory
framework, lack of sound risk control, lack of quality base asset,

319
 and lack of well-defined documentation etc. Therefore, defaults
and disputes are inevitable.
V. Improper regulation. The Chinese government is a strong govern-
ment in terms of managing the economy, and, to a much extent,
interfering the economic activities. This is particularly the case in
the financial market. Nevertheless, in recent years, the government
and relevant financial authorities were much criticized by the market
for their improper regulatory behavior and the inappropriateness
of the regulations issued which have caused a lot of troubles and
even severe damages to the market. Specifically, the first blame
was the inconsistency and discontinuance of regulation and too
quick and too frequent changes of the regulatory policies. As a
matter of fact, many transaction failures were directly caused by
such change of regulation. Sometimes the regulatory authorities
do not even have enough time to put a new regulatory policy into
writing; they may simply pick up the phone and call the relevant
FIs to ask them to suspend, stop or terminate the business oper-
ation immediately, without giving a reasonable period of time for
the market to follow and adjust accordingly. This is the so-called
“window instruction”. Secondly, some of new regulations were
issued in such a hurry, failing to address the problems properly
and some are very immature and even irrational. The collapse and
drastic disruption of stock market respectively in June of 2015 and
January of 2016 were largely caused by the improper CSRC regu-
lations on the lowering of financial leverage of investment at stock
market, which, in the end, led to the burst of defaults and disputes
of various transactions relating to the stock market products. Now,
with the implementing of the stringent New AM Rules in the first
half of 2018, the financial market quickly dwindled into a stagnant
and freezing situation, which has further triggered a widespread
of defaults in the market. Actually, there is almost a consensus

320
 that the severe financial problem and risk at the market in the first
half of 2018 was, to a largely extent, attributable to the improper
regulation of the government. Having noticed the systemic risk
problem and great panic at market, in the last quarter of 2018, the
central government altered its tightening policies introduced since
2016 up to the first half of 2018, and meanwhile some moderate
and easing measures were put into place to improve the liquidity
at the financial market.

With all these factors being together, it is of no surprise to see the

widespread happening of financial disputes at the market. And, in fact,
the financial disputes increase sharply year by year and account for an in-
creasingly large portion of the whole dispute cases (also in terms of dis-
puting amounts) at market.11
So one of the challenges in financial dispute resolution is the heavy
workload in contrast with the limited professional resources.

2.2 Insufficient legal framework

Financial transactions are not only trading of cash flows and risks associ-
ated with base assets, but also legally speaking trading of legally defined
and permitted rights and obligations in relation to such cash-flow and
risks. Not like physical products, financial products are per se legal crea-
tures based on laws and regulations and contractual arrangements. Again,
financial business is subject to strict regulations. Therefore, a proper legal

11. According to the market statistics, in 2017, there was a total of 25,677 financial cases initiated by all the arbi-
tration institutions (251), accounting for 10.73% of such cases at market, while the total disputing amount is
155,8 billion accounting for 29.18% of the market total. In 2018, 120,358 financial cases were received by all
the arbitration institutions in China, accounting for 22.1% of such cases at market, while the total disputing
amount is 233,4 billion accounting for 33.58% of the total market. For China International Economic and
Trade Arbitration Commission (“CIETAC”), from 2013-2018, the annual financial case number increased
from 236 to 879; total disputing amount was from RMB 4,7 billion to RMB 59,7 billion, respectively, ac-
counting for 19.43% to 58.82% of the total disputing amount.

321
and regulatory system is crucial for the smooth and sustainable develop-
ment of the financial market and transaction performance. And definitely,
such legal and regulatory framework is also very much fundamental to the
financial dispute resolution work.
Needless to say, China has already formulated a quite comprehensive
system consisting of various laws and regulations regarding the financial
market. However, there are still lack of legislation in certain aspects in
the financial market; for instance, there is lack of law to give a clear legal
definition on the nature of AM products by various FIs.
The Trust Law system provides the trust concept for the trust busi-
ness by trust companies, with trust vehicle, asset of a trustor is remote
from the bankruptcy of the trust company, and assets of different trustors
in different trust arrangements are also separated from each other. Trust
vehicle is generally considered as a very good legal foundation and frame-
work for AM businesses. But in China, due to the segregation principle
in financial regulation which is still in place (though there is much devel-
opment of mixture of financial businesses recently), those non-trust FIs
are not supposed to carry out any trust business.12 Thus, there is a lack of
such legal foundation for similar AM products managed by various non-
trust institutions. Only trust products and securities investment products
(common funds) are expressly characterized by the law as trust products,
while other similar AM products by other FIs, including banks, securities
companies, insurance (asset management) companies etc., are not defined
or treated exactly as trust product. Although most of the AM products
are actually designed or contracted in a trust-similar structure, the rele-
vant regulations governing the AM business by non-trust-company FIs
are all, for the sake of avoiding the violating of segregation principle,
silent or deliberately vague on the legal nature of such AM business by

12. It is arguable that difference shall be made between trust business and trust vehicle; in other words, employment
of a trust vehicle in a financial business does not necessary constitute the conducting of trust business which
only trust companies are permitted to engage.

322
non-trust-company FIs. Therefore such non-trust-company-managed AM
business can only be regulated and arranged on a contractual basis other
than being supported by the clear and well-formulated legal and regula-
tory framework regarding trust business. The problem in practice is that
the responsibility of those non-trust-company FIs as asset managers are
not well defined on the trustee’s fiduciary duty basis but on a more or less
loose, vague and non-standard style contractual term basis. And very fre-
quently, when there was a default under such AM investment due to the
improper management performance by the FI, the FI could easily shake
off its responsibility as the product documentations are simply based on
the formats provided by the FI where the FI was well-protected from any
liability. If the trust law were the applicable law for such AM business,
the fiduciary duty concept under the trust law could then be fully referred
to in dispute adjudication.
In addition to the issue of how to identify the responsibility/obliga-
tion of a fund manager in AM business, a clear trust vehicle would also
be a great help to the protection of the assets under the AM business, as
with the trust concept such assets are legally separated from the assets of
the manager and assets under other AM schemes as well, and then such
would provide a great help to rectify many of the current malpractices such
as capital pool business, implied guarantee for repayment etc.
Actually, during the drafting of the New AM Rules, there was a call
for clarifying the trust nature of AM business, but it did not succeeded,
partially because the New AM Rules are only regulations by the ministerial
financial authorities other than a law which is to be formulated by higher
legislative authority. Therefore, to deal with the AM problem in reality, i.e.
so-called “having the trust substance, not bearing a trust name, nor being
subject to trust law”, there is a discussion on revising the PRC Trust Law
so as to change the law as that only for trust companies (a narrow concept
trust law) into a law for all trust business regardless whether such (AM)
business is conducted by a trust company or not (broad concept trust law).

323
 The above is just an example of such need and call for further legis-
lation for financial business in China. There are a number of other legal
issues. For instance, in the financial innovation practice at market, there
are various credit support or enhancement arrangements such as obliga-
tion to make up the shortage of cash flow or investment return, obligation
to repurchase, and upfront title transfer of collateral etc. These are eco-
nomically credit supports but legally not those typical security arrange-
ments such as guarantee, pledge and mortgage under the PRC security
law regime. Without a proper legal stipulation to define and ascertain
such practices, the legal validity and enforceability of such arrangements
may be challenged in case adjudication. For instance, the title transfer
arrangement is very likely to be questioned on its legal validity as it is in-
trinsically a conflict against the prohibition of foreclosure concept under
the PRC Security Law13.
In conclusion, with the development of the financial industry, there
is a call for further and constant legislation efforts to endorse the newly
appeared practices and clarify the related legal issues. A sound financial
legal system is indispensable, and a guarantee, for the smooth develop-
ment of financial market and dispute resolution as well. In fact, the lack
of sound legal framework for the current financial market constitutes a
big challenge for the financial dispute resolution in China.

2.3 Impact of improper financial

regulations on dispute resolution

Since financial market is a regulated market, FIs are subject to various

regulatory rules. Such rules are often referred to in dispute resolution. But
as a general legal principle, regulatory rules are not treated as the criteria

13. Article 66 of the PRC Security Law stipulates that a pledgor and a pledgee may not stipulate in the contract
that ownership of the pledged property shall be transferred to the pledgee if the obligation is not discharged
at its maturity.

324
to determine the nature and validity issues in dispute resolution; only the
law (in narrow sense refers to those promulgated by the National People’s
Congress and/or its Standing Committee) and administrative regulations
(being issued by the State Council) can be such criteria. But in practice in
China, due to the strong government tradition and habitual behavior of
administrative organs, it is often the situation that the governments may
excessively exert the administrative power in their business without paying
enough respect to the basic legal rights of the individuals and entities, and,
as a result, regulations issued by the various governments could sometimes
be more powerful and enjoy a priority in their implementations.
For instance, since late 2016, when the prevention of systemic finan-
cial risk has been listed as one of the priority policies at national level,
we have seen some very strongly-worded regulations including quite a
number of restrictive and compulsory requirements which are not exactly
in compliance or even in direct conflict with the existing legal principles.
To some extent, some regulations, which by their content or specific pro-
visions go much beyond the regulatory regime or boundary, and impose
restrictions on the exercise of private rights which actually infringe the
parties’ autonomy. For example, under the New AM Rules (which are
not administrative regulations but regulations at ministerial level), there
are a number of restrictive and compulsory requirements being imposed
on the specific contractual arrangement regarding risk allocation among
the transacting parties, which are apparently a matter of parties’ autonomy
and the private rights of the parties.
Now the question is, in case the parties fail to follow such regulatory
requirements (though FIs should follow) and reach an agreement not in
conformity with the regulations, will such a contractual arrangement be
valid, or invalid, or voidable? Previously, there was an established legal
principle embodied in art. 52 of the PRC Contract Law that violation
of regulations (at ministerial level) does not lead to the invalidation of a

325
contract.14 But in current practice, we have already seen some cases where
the courts held that such contracts or transactional arrangements are in-
valid due to violation of such “strongly-worded” regulations at financial
market. In some cases, the reasoning given by the court is that violation
of such regulations constitute a violation of public interest. This is really
a very serious legal issue then. Giving the financial regulation is per se to
some extent compulsory, and the financial regulation as a whole in general
can be treated as a matter relating to public interest, if such a logic were
explained so excessively, there would be a tremendous uncertainty with the
validity of financial innovative practices, and as a result such innovation
would be frustrated, as financial market always looks for certainty, and legal
uncertainty itself is a great risk for financial activities. This is the challenge
of regulation facing the financial dispute resolution currently in China.

2.4 Change of court attitude towards the financial innovation

business with the change of financial regulations

Although it is always officially stressed that the courts have the right to
adjudicate cases with independence, giving the characteristics of Chinese
politics and society, such judicial independence sometimes depends or
might be influenced by different local interests, various local governments.
In addition, the change of macro-economic policies may have influence on
court adjudication in certain situation. To some extent, the PRC courts are
“politically” required to treat the adjudication work as a tool to facilitate
the implementing of the macro-economic policies. And this is frequently
the case in the judicial work regarding financial dispute resolution when
there is a major change in substantial financial policy.

14. Article 52 Invalidating Circumstances. A contract is invalid in any of the following circumstances: (i) One party
induced conclusion of the contract through fraud or duress, thereby harming the interests of the state; (ii) The
parties colluded in bad faith, thereby harming the interests of the state, the collective or any third party; (iii)
The parties intended to conceal an illegal purpose under the guise of a legitimate transaction; (iv) The contract
harms public interests; (v) The contract violates a mandatory provision of any law or administrative regulation.

326
 For instance, in dealing with innovative financial business disputes, the
courts have adjusted their adjudication principle or philosophy with the
change of financial regulations, and this is exactly reflected in two Opin-
ions released by the Supreme People’s Court (the “SPC”) in 2012 and
2017 respectively, i.e. the Guiding Opinions on Providing Judicial Safeguard
by People’s Courts to Avoid and Mitigate Financial Risks and to Promote Fi-
nancial Reform and Development (“2012 Opinion”, February 10th, 2012)
and the Several Opinions on Further Strengthening the Judicial Work in the
Finance Sector (“2017 Opinion”, August 9th, 2017). With respect to the dis-
pute resolution relating to financial innovative business, the 2012 Opinion
(when financial innovation was being much encouraged) stipulates that:

“[…] in examining the legitimacy of financial innovative products,

when there is no corresponding provision in laws and administrative
regulations or the provision is not clear, the people’s courts shall
comply with the features, concepts and general practices of com-
mercial transactions, firmly adhere to the principle of protecting
public interest, pay sufficient attention to the opinions of financial
supervision departments, and shall not simply deny the legitimacy of
financial innovative products for the reason that there is no clear provi-
sion in the existing laws and regulations in order to provide necessary
growth space for financial innovation.”

As to the 2017 Opinion (when innovation was being much restrict-

ed), it stipulates that:

“[…] for illegal financial behaviors performed to obscure financial

risks, evade financial regulation and seek institutional arbitrage under
the cover of financial innovations, their effects and the rights and
obligations of all parties involved shall be determined pursuant to
the actual legal relations formed by such behaviors. Any party that

327
 illegally takes deposits from the public or solicits funds for fraudulent
purposes in the name of financial innovation shall be investigated for
its criminal liability if its conduct constitutes a crime.”

If separately reading of the two Opinions, both are perfectly correct.

But the real issue is that the financial (innovative) business in concern
may remain the same with no change; the only change is with the regu-
lation. And obviously the court altitude is totally different in treating or
interpreting the financial innovation. Once being encouraged and legally
blessed, a financial (innovative) business might be denied with its legal
validity and even categorized as illegal transaction due to the change of
economic policy.
Obviously such change of adjudication principle as discussed before in
relation to some of the dispute resolution regarding innovative financial
transactions would inevitably cause much trouble or chaos in adjudication
practice, and in particular with the fact that the 2012 Opinion is still legally
effective. With the two different doctrines adopted in the two Opinions, the
same types of financial disputes may be treated differently or even opposite
by different courts. And currently there are already some adjudications that
transactions in violation of some financial regulation be denied their validity.

3. HOW TO ACHIEVE A BETTER ADJUDICATION

IN FINANCIAL DISPUTE RESOLUTION

3.1 Major aspects in financial dispute resolution15

For disputes relating to those traditional or plain vanilla financial products,

there is no much difficulty in getting a proper and correct judgment, as

15. This part is partially cited from the Annual Review on Financial Dispute Resolution in China (2017), by Mr.
Tao Xiuming, in the Annual Report on Commercial Dispute Resolution as published by Beijing Arbitration
Commission/Beijing International Arbitration Center in 2018.

328
it is normally crystal clear which party is the defaulting and losing party.
However, for disputes involving complex and innovative financial trans-
actions, it might not be an easy work. Rather, to the observation of the
author, it is often necessary to make efforts or pay great attention in the
following aspects so that a good adjudication can be achieved:

3.1.1 Appropriate characterization of financial transactions in dispute

Defining the nature of a dispute is the key to all resolutions. It is a mat-

ter of interpretation of real intent of the trading parties and is the ba-
sis and precondition for achieving a good judgement. It has two basic
aspects: defining the nature of a transaction and defining the nature of
the legal relationship in the transaction. As regards to simple financial
transactions such as lending and borrowing, the business nature is clear.
A judgement on performance default and loss and damages can be easily
worked out. As regards to complex financial transactions, for instance
the structured AM business and products, it is sometimes not easy to
category the business nature concerned due to the numerous elements
and composite transaction structures and some special deal designing for
compliance consideration. In practice, a transaction which is an equity
investment in substance may appear as a debt transaction in a contract
(or vice versa), or a simple transaction is structured to become a com-
plicated composite or arrangement. To determine the nature of the dis-
pute in such transaction, the background, arrangements and intentions
of the whole transaction must be considered. Attention must also be
paid to the specific transactional arrangements amongst the parties in
the dispute and the role of such arrangements in the entire transaction.
There may be times where the wording is not clear such that it does not
express the genuine intentions. Here, substance (objective of and pur-
pose sought in a transaction) should override form (name and wordings
of terms of a contract).

329
 In other words, determining the nature of a dispute in complex fi-
nancial product requires the determination of the business nature of the
transaction on its own, followed by the nature of the legal relationship in
a dispute. Determination is made in respect of the entire as well as part
of the transaction. In addition, in making such determination, consisten-
cy must be maintained between transactional logic and legal logic. Only
then can an appropriate determination and fair adjudication be achieved.
Furthermore, in practice when losses are incurred or a dispute arises
from a composite transaction, the parties in the dispute may split the case
by either initiating several cases at the same time or initiating different cases
at different times to take advantage of the lack of coordination amongst
the tribunals so as to maximise their own interests. In these circumstances,
since there is no mechanism to effectively avoid inconsistency or conflict
in terms of reasoning or contrary holdings amongst the adjudications of
different cases. In particular, where the adjudication of a previous case
(with res judicata) technically obstructs the adjudication of the subsequent
cases or when the subsequent cases arise due to improper adjudication or
failure to resolve the actual dispute in the previous case, then more weight
should be placed on the analysis of the overall reasoning and objectives
(i.e. the expression of genuine intentions of the relevant parties) of the
transaction as to how to consider the whole case and achieve fair justice
of the dispute. Where necessary, the relevant matters in a previous case
should be incorporated into subsequent cases for consolidated adjudication.

3.1.2 Appropriate quantitative analysis

The aim of any type of financial investment is to obtain monetary gains, typi-
cally in the form of a cash settlement. Specific performance is generally not an
alternative default remedy. As such, the resolution of a financial dispute, i.e.,
adjudication, usually sets forth the exact monetary amounts payable by the rel-
evant parties. Furthermore, as in complex products that may involve multiple

330
parties and different arrangements among multiple parties, the transaction doc-
uments usually stipulate the exact formula for calculating the amount in respect
of each party’s interests thereunder. Once the business nature and liabilities
of a transaction are determined, on one hand, the calculation of the monetary
amount for interest distribution, losses and liquidated damages will normally
not be the focus of adjudication. On the other hand, the amounts payable will
be adjudicated based on the calculations rather than “discretionary” decisions.
However, in practice, it is sometimes necessary to examine the rea-
sonableness of the agreed calculation formula (e.g. whether there is any
restriction on the reasonable scope to apply the calculation formula or
limit on the amount), the claims of the relevant parties as a whole, the
reasonableness of the amounts derived from such calculation (e.g. whether
there is any conflict or overlap of claims or in calculations) based on the
business nature of the relevant transactions, and make the necessary ad-
justments. It is unwise just to rely on calculations agreed by the parties.
Such issue can often be found in disputes concerning compensation for
poor performance (so-called value adjustment mechanism) and equity
buybacks in private equity investments.

3.1.3 Proper consideration of compliance

The financial market is highly regulated and relies upon regulatory com-
pliance by the financial institutions and investors. Any non-compliance
by a financial institution will not only be subject to the sanctions imposed
by the regulatory authorities but also lead to liability on the part of the
financial institution for damages incurred by the counterparties as a result
of non-compliance operations.
It is a generally accepted adjudication principle that non-compliance
would not necessarily lead to the invalidation of a financial transaction.
This principle still stands and will stand, though some judgments have
appeared to the contrary at market. Nevertheless, non-compliance is fre-

331
quently used by the investors in their claims against the FIs, and it is an
important factor in establishing the default of the FIs, as to some extent,
compliance could be treated as a kind of implied contractual obligation
of the FIs in financial business.
Compliance documents tend to be very lengthy and detailed covering
products, operations, risk disclosure and proper management, to name a
few. Therefore, assessing compliance is usually complicated and highly
technical, requiring the application of fundamental compliance principles
and the consideration of specific details.
In practice, it should be assessed whether there is a direct causal relation-
ship between the non-compliance of a financial institution and the losses
claimed by the counterparty, as well as any link in the calculation of losses.
Losses incurred on any investment during the normal course of business
cannot be attributed to non-compliance by FIs such as asset managers.

3.1.4 Causation of losses

In adjudicating a financial dispute, it is very important to identify the

causation between the default or failure in performance of the FI in a
transaction concerned and the losses actually suffered by investors of the
transaction. When losses can be solely attributed to the market or other
external factors other than the failure of the FI in performing its obliga-
tion, the FI shall not be held responsible for the loss of the investors. There
should be a direct and accurate causation in determining the damages.
Taking AM as example, giving the characteristics of the AM business,
it is not a buyer-seller relationship between an investor and an asset man-
ager, but a relationship whereby an investor entrusts its money and assets
to its asset manager for management under a trust or entrustment contract.
Therefore, in case there is a failure in performing its management obligation
and occurrence of loss in the product, it is necessary to determine whether
the losses suffered by the investors are directly caused, and to what extent,

332
by the FI’s failure in performing its duty of proper management and oper-
ation. And it is noteworthy that such professional duty of FIs shall be un-
derstood in a relatively broad sense, which does not only refer to the man-
ager’s obligations specified in the relevant contract, but also the fiduciary
duty as generally required in such business. In fact, imposing general and
commercial duties to proper management on an AM has practicality in re-
solving disputes, especially in a market where regulatory rules are generally
incomplete and lack specific details.

3.2 Proper value orientation: with respect to market

innovation/practices and protection of acts in good faith

The financial market is a market with continuous innovations. Apart from

changes in market infrastructure, change has also occurred in the legal
system as well as the reform of regulations. Financial innovation often
evades or by-passes existing regulations as if it were navigating through
the regulatory grey areas.
In adjudicating complex and particularly innovative financial transac-
tion disputes, an adjudicator’s judgement should consider both compliance
with existing regulatory rules and the protection of dealings in good faith,
such that there needs to be a balance between regulation and innovation.
In a market that is continuously developing, whether legislatively or in-
novatively, a proper attitude for adjudicators to adopt is to recognise those
innovations that benefit the society. Adjudicators should respect trans-
actional arrangements and interests allocation falling within the domain
of private rights and interests of participants acting in good faith and fair
dealing, to recognise market practices which have been adopted at market
with a view to maintaining the stability of transactions and ensuring the
foreseeability of bona fide transactions, and not simply determine a trans-
action to be in breach of regulation by looking at the matter merely from
the standpoint of regulatory authorities.

333
 There are many such examples in practice, one of which is crowdfund-
ing in the Internet-based financial industry. If judged strictly from the
perspective of the existing regulatory scheme, crowdfunding is similar in
nature to public placement which is subject to regulatory approval or even,
in terms of its form, is no different from illegal fundraising. However, the
proper approach is to treat such business activities with lenience and rec-
ognise that such activities conducted in good faith help enhance the allo-
cation and efficient use of social resources and promote economic growth
and creation of value.
It is obvious that proper regulatory supervision does not fundamentally
contradict with judicial adjudication. Their common objective is to provide
financial innovations with reasonable space for growth and to achieve a dy-
namic and optimal balance between the promotion of financial market inno-
vations and the maintenance of stability and order of the financial market.

4. FINANCIAL DISPUTE RESOLUTION

BY ARBITRATION IN CHINA

4.1 Litigation vs. arbitration in financial dispute

resolution: which is preferred by financial institutions

4.1.1 International arbitration practice for financial dispute resolution

From international perspective, litigation is generally preferred by banks

for dispute resolution in respect of international financial or cross-border
financial business, while arbitration has been historically a favored means of
resolving disputes in certain traditional commercial sectors, such as shipping,
commodities trading and to some extent investment as well, but it is not the
case for financial sector. Even up to today, quite some financial institutions
do not believe that arbitration practitioners have proper understanding of
the financial business.

334
 Nevertheless, according to some market research, there is a broad con-
sensus that arbitration is being used more and more by financial industry at
international market16. This is because arbitration has a number of advantages
in international dispute resolution, such as recognition and enforceability,
neutrality, finality, confidentiality, flexibility and, to some extent, economy
of time and cost. Among which, the recognition and enforcement advantage
is the most important factor in choice of arbitration. With the 1958 New
York Convention, which has a total number of over 150 member states,
enforcement of arbitration award across the border is possible. Essentially,
the courts of contracting states are required to recognise and enforce arbitral
awards upon the presentation just of the arbitral award and the arbitration
agreement and without review on the merits of the dispute, and the na-
tional courts could only refuse the enforcement in a very specific and limit-
ed circumstances in relation to certain procedural matters or public policy.
In particular, there is an increase in use of arbitration for disputes regard-
ing complex and innovative transactions. For example, arbitration clause is
increasingly adopted in derivatives documents. Traditionally, most deriv-
atives transactions are executed under a form of the ISDA Master Agree-
ment, i.e. the 1992 and 2002 ISDA Master Agreements which provide in
Section 13(b) only for the jurisdiction of the English or New York courts.
However, in recent years, in January 2011, the International Swap and De-
rivative Association (‘ISDA”) launched a consultation on the issue of use of
arbitration, and eventually resulted in the publication of the “2013 ISDA
Arbitration Guide” (the “Guide”). In total, the Guide contains 11 model
clauses, which largely reflect the relevant information of those most popu-
lar international arbitration institutions, and therefore gives a great conve-
nience to the market participants in drafting a proper arbitration clause to
be incorporated in their documentations.

16. According to ICC Report Financial Institutions and International Arbitration (2016), in recent years inter-
nationally there is an increase in use of arbitration or promotion for use of arbitration for complex financial
transaction disputes.

335
 In addition, PRIME Finance, i.e. Panel of Recognised International
Market Experts in Finance, is new arbitration organization, founded in early
2012 by a number of experts in financial market, specializing in the dispute
resolution regarding complex financial market.

4.1.2 Arbitration practice in Mainland China

First of all, despite court jurisdiction is still overwhelming for all types of
commercial cases, for financial dispute resolution, not like that in some
countries with a developed financial market, litigation does not necessary
have any obvious advantages in financial dispute resolution in China.
Rather, arbitration is generally considered as having certain advantages in
handling financial disputes such as its efficiency, confidentiality and profes-
sionalism which are all important considerations for financial institutions.
With the constant promotion of arbitration by arbitration institu-
tions and very supportive altitude of the SPC towards arbitration over the
time,17 arbitration has increasingly becoming popular and acceptable as an
alternative dispute resolution method for commercial disputes in China.
Again, giving the ever-growing heavy workload of courts in recent
years, courts are happy to see that more and more cases are diverting from
courts to the arbitration and mediation institutions.
As a matter of fact, except for the efficiency and confidentiality (FIs
are generally very much concerned about the publicity of court judgments
particularly for those cases not in their favor or involving some malprac-
tice), professionalism or professional resource is one of the key elements
for FIs to select arbitration. With respect to the fast evolving financial

17. The SPC has so far issued a number of judicial opinions to support the arbitration work in many aspects. And
in particular, for claims being raised to court for revocation or non-enforcement of arbitration awards, the
SPC always takes (including requiring the relevant lower courts to take) a very pro-arbitration in dealing with
such claims, and would be very prudent in giving an order to overrule an arbitration award. Again in practi-
ce, more and more retired senior judges sit as arbitrators in various arbitration institutions, which could also
facilitate the informal communication between court and arbitration circle.

336
market, the courts are short of judges with sufficient professional knowl-
edge and expertise for adjudicating those disputes involving innovative/
complex financial transactions, while for arbitration institutions, they have
the flexibility to make use of the competent professionals from the mar-
ket. So that the arbitration institutions, particularly those major ones, can
generally be expected to deliver a predictable and high-quality award. In
fact, arbitration has provided a very valuable support to the development
of financial market by properly resolving the disputes involving complex
and innovative financial transactions in recent years.
Nevertheless, it is still worth mentioning that many of those big FIs
at market are not yet in a ready position to shift their cases from court
to arbitration, in other words, they are still not the regular clients of the
arbitration institutions. Those big FIs always seek for a high certainty
in dispute resolutions where they believe they have not committed any
wrongdoing or are not the default party, so they could not bet on the ar-
bitration by which the award is once for all and not subject to any appel-
lant procedures. In a court, however, they could have a second (or even
further) chance for remedy by appealing against the judgement in the first
(or even the second) instance. And definitely, they have financial resource
and even influence to fight to the end to achieve the best result. There-
fore, there are still more time and more efforts for those big FIs to build
their confidence in arbitration and select arbitration as the alternative for
their various business dispute resolution. Nevertheless, it is already very
common for those middle and small-sized FIs to choose arbitration in
their dispute resolution, which is reflected in the remarkable increase of
financial cases accepted by all those major arbitration institutions in China.

337
 Rethinking Some Issues of
Arbitration in China
Xuehua Wang1

1. INTRODUCTION

On September 7th, 2018, the legislative plan of the 13th National People’s
Congress Standing Committee was promulgated, in which the revision
of the Arbitration Law has been listed into “[…] draft laws that will be
reviewed and submitted for deliberation once conditions are ripe”2. It is
expected that the new Arbitration Law can provide institutional guarantee
for the internalization of Chinese arbitration by absorbing the advanced
international experiences and practices on the basis of retaining useful
Chinese elements.
For scholars and practitioners, the revision of the Chinese Arbitration
Law offers a good opportunity to rethink the important issues of arbi-
tration in China. The author tries to discuss some of them in this paper,
including the appointment of the presiding arbitrator, the remedy for the

1. Chief Partner of Beijing Huanzhong & Partners.

2. Available at: http://www.npc.gov.cn/npc/xinwen/2018-09/10/content_2061041.htm. Accessed on: July 3rd, 2019.
ruling made in judicial review process of arbitration, the request of par-
ties to Hong Kong arbitration proceedings for property preservation or
enforcement of interim measures in Mainland China, and the new de-
velopment of arbitration in the context of the Belt and Road Initiative.

2. SEVERAL ISSUES ON THE APPOINTMENT

OF THE PRESIDING ARBITRATOR3

The presiding arbitrator is the cornerstone of the arbitral tribunal and the
key to achieve justice in arbitration4, since the presiding arbitrator is not
only the organizer of the arbitral proceedings, the coordinator between
the parties and the arbitrators, but also the decision maker of the arbitra-
tion case on the merits5. It is precisely because of the significance of the
presiding arbitrator in the arbitration proceedings that their appointment
should fully respect the autonomy of the parties to ensure equality and
fairness6. In this regard, appointment of the presiding arbitrator is crucial
not only for the achievement of justice, but also for the sound develop-
ment of the arbitration7.

2.1 Application of the “name list” method

in the appointment of arbitrator

Art. 31 of the Arbitration Law of the People’s Republic of China stip-

ulates “[i]f the parties agree to form an arbitration tribunal comprising
three arbitrators, each party shall select or authorize the chairmen of the

3. Generally, the presiding arbitrator is a notion under the three-arbitrator tribunal; however, for the sake of dis-
cussion below, when referring the appointment of presiding arbitrator, it also includes the appointment of
a sole arbitrator.
4. LI, Q. L. J. The Composition of the Arbitral Tribunal and the Value of the Arbitration, 10 Arbitration Study 17.
5. Ibid.
6. Ibid.
7. GUOFENG, W. The Reflection of the System of Arbitrators in China, 6 Administration and Law 103, 2004.

340
arbitration commission to appoint one arbitrator. The third arbitrator
shall be selected jointly by the parties or be nominated by the chairman
of the arbitration commission in accordance with a joint mandate given
by the parties. The third arbitrator shall be the presiding arbitrator. If the
parties agree to have one arbitrator to form an arbitration tribunal, the
arbitrator shall be selected jointly by the parties or be nominated by the
chairman of the arbitration commission in accordance with a joint man-
date given by the parties.”
In practice, it is very difficult for the parties to reach consensus on the
appointment of the presiding arbitrator. More commonly, parties do not
consult each other on this issue at all and directly authorize the Chair-
man of the arbitration commission to designate the presiding arbitrator.
In order to change this situation, some arbitration institutions have ad-
opted the “name list” method by reference to international practices (such
as UNCITRAL Rules).
Taking the arbitration rules of the China International Economic and
Trade Arbitration Commission (hereinafter referred to as the “CIETAC
Rules”) as an example, art. 27 (3) of 2015 CIETAC Arbitration Rules
stipulates that “[t]he parties may each recommend one to five arbitrators
as candidates for the presiding arbitrator and shall each submit a list of
recommended candidates within the time period specified in the preced-
ing paragraph 2. Where there is only one common candidate on the lists,
such candidate shall be the presiding arbitrator jointly nominated by the
parties. Where there is more than one common candidate on the lists, the
Chairman of CIETAC shall choose the presiding arbitrator from among
the common candidates having regard to the circumstances of the case,
and he/she shall act as the presiding arbitrator jointly nominated by the
parties. Where there is no common candidate on the lists, the presiding
arbitrator shall be appointed by the Chairman of CIETAC.”
The purpose of the “name list” method is to increase the probability
of success for the joint appointment of presiding arbitrator by the parties.

341
The difference between the “name list” method in CIETAC Rules and
that in the UNCITRAL rules are as follows: 1. The “name list” method in
CIETAC Rules is used when the parties appoint the presiding arbitrator
while the “name list” method in UNCITRAL rules is applicable when
the appointing authority appoints the presiding arbitrator (in case that the
arbitrators appointed by both parties cannot reach an agreement on the
appointment of the presiding arbitrator within the agreed time limit). 2.
The “name list” method in UNCITRAL Rules is applied on an “opt out”
basis, that is, unless the parties agree not to use the list or the appoint-
ing authority finds in its discretion that it is not appropriate to apply this
method in the case, the list shall be applied.
The “name list” method now has been commonly used in some other
leading institutions in China. The BAC, Shenzhen Court of International
Arbitration (SCIA), Shanghai International Arbitration Center (SHIAC),
Zhuhai International Arbitration Commission, etc. have adopted the “name
list” method in their arbitration rules but there are also some differences,
such as the way the list is produced, the number of arbitrators on the list,
and the number of arbitrators that the parties may choose from the list.
The “name list” method (including the “party-provided name list” meth-
od and the “commission-provided name list” method), as a compromised
method, helps to increase the possibility of success for the joint appointment
of presiding arbitrator without undermining the efficiency of the arbitration.

2.2 Relaxation of the panel of arbitrators

Under Chinese law, the panel of arbitrators is crucial for the appointment
of arbitrators8.
Art. 13 of the Arbitration Law stipulates that “[a]n arbitration com-
mission shall have a Panel of Arbitrators in different specializations.”

8. YANGYANG, Z.; YATIAN, P. The Pros and Cons of the Panel of Arbitrators and Its Improvement. 4 Chi-
nese Journal of Law 53, 2015.

342
Besides, art. 25 stipulates that “[a]fter an arbitration commission accepts
an application for arbitration, it shall, within the time limit specified in
the rules of arbitration, deliver a copy of the rules of arbitration and the
Panel of Arbitrators to the claimant, and serve one copy of the applica-
tion for arbitration together with the rules of arbitration and the Panel of
Arbitrators on the respondent”.
Although the Arbitration Law neither explicitly provides that the ap-
pointment of the arbitrator shall be strictly on the basis of the panel of ar-
bitrators nor stipulates that parties may not choose arbitrators from outside
the panel of arbitrators9, however, according to the arbitration rules of the
arbitration commissions and common practices in China, only those who
are in the panel of arbitrators may be appointed as arbitrators10. All the
arbitrators listed in the panel are carefully selected by the arbitration com-
mission and generally they are professional and of high-quality. Adopting
the panel of arbitrators can guarantee the high quality of arbitrators and
further protect the justice in arbitration11, but, in recent years, the panel
of arbitrators has been criticized for undermining the party autonomy and
the vitality of the arbitration due to its oversimplification and slow update.
Therefore, some arbitration institutions have relaxed the panel of ar-
bitrators. The arbitration institutions like CIETAC and BAC have al-
lowed the parties to nominate arbitrators outside the panel of arbitrators,
but the nomination is subject to the final confirmation of the chairman of
the arbitration institution. For example, art. 26 of the Arbitration Rules
of the CIETAC (2015) stipulates that where the parties have agreed to
nominate arbitrators from outside CIETAC’s Panel of Arbitrators, an
arbitrator so nominated by the parties or nominated according to the
agreement of the parties may act as arbitrator subject to the confirmation
by the chairman of CIETAC.

9. Ibid.
10. Ibid.
11. Ibid.

343
 The Arbitration Rules for China (Shanghai) Pilot Free Trade Zone
goes further on the relaxation of the panel of arbitrators. Although the
appointment of the presiding arbitrator outside the panel of arbitrators
should, in accordance with the arbitration rules, be confirmed by the Ar-
bitration Commission, the rules does not stipulate that the appointment of
the other two arbitrators are also subject to confirmation of Arbitration Com-
mission12. It seems that the arbitration rules of the Pilot Free Trade Zone
leaves more room to the parties.
Art. 64 of the BAC Arbitration Rules (2015) stipulates that in the in-
ternational commercial arbitration, arbitrators may be selected by the parties
from the panel of arbitrators maintained by the BAC or from amongst
arbitrators who are not on the panel of arbitrators. The purpose of this
provision is mainly to provide more choices for parties in international
arbitration cases. It is notable that the party must provide the resume and
contact details of the arbitrator outside the panel of arbitrators for the fi-
nal confirmation of BAC.
It is widely recognized that the panel of arbitrators is aimed at assisting
the parties to appoint arbitrators, rather than restricting and constraining
the autonomy of the parties13. The parties ought to be free to choose the
arbitrators to resolve their disputes14. The relaxation of the panel of arbi-
trators can better respect the autonomy of the parties in appointment of
arbitrators and diversify the source of arbitrators; also it can make the ar-
bitration keep up with the social development15. Of course, this does not
mean that the parties can choose the arbitrators recklessly. The arbitrator
appointed outside the panel of arbitrators must meet the requirements set
off in art. 13 of the Arbitration Law. That is why the confirmation by the
chairman of the arbitration commission is necessary. However, as a matter

12. LIYUAN, C. The Status Quo and the Regulation of the Identity Conflicts of the Arbitrators in the Commercial
Arbitration. 17 Journal of Jiangsu University of Science and Technology, (Social Science Edition) 52, 2017.
13. YANGYANG; YATIAN, supra note 6.
14. Ibid.
15. Ibid.

344
of fact, confirmation by the chairman of arbitration commission may not
be the best approach, because the professionalism of the arbitrator selected
outside the panel of arbitrators do not go through the rounds of selection
including the training and examinations of the arbitration commission.
Even though some arbitration institutes have accepted the relaxation
of the panel of arbitrators, it is generally believed that the arbitrator des-
ignated by the chairman of the Arbitration Commission should still be
selected from the panel of arbitrators. In a case [(2018) Lu 14 Minte no.
2], the Dezhou Intermediate People’s Court of Shandong ruled in its rul-
ing of July 2018 that “[t]he presiding arbitrator appointed by the Dezhou
Arbitration Commission is not from the Panel of Arbitrators served on the
parties, depriving the parties of the right to challenge the arbitrator in the
composition of the arbitral tribunal, and thus violating the due process”,
and finally set the arbitral award aside.

2.3 Transparency in the process of

appointment of presiding arbitrator

According to the 2015 International Arbitration Survey – Improvement

and Innovation of International Arbitration, published by the International
Arbitration Institute of Queen Mary University of London, together with
WHITE & CASE Law Firm, 55% of the informants expect the arbitral
institution to “[…] improve the transparency in how the arbitration in-
stitution appoints arbitrators”.
This concern of the parties is not unreasonable. Taking ICC as an
example, its Note to Parties and Arbitral Tribunals on the Conduct of The
Arbitration Under the ICC Rules of Arbitration stipulates that although the
parties may request ICC to explain the reasons for some decisions under
certain conditions, the decision of the ICC Court to designate, appoint or con-

345
firm an arbitrator or presiding arbitrator are excluded16. The ICC Court still
has the right to consider and appoint arbitrators without disclosing the
process and reasons for such appointment17. In China, the parties are also
not clear about how the presiding arbitrator is appointed by the chairman
of the arbitration institute.
In practice, it is very difficult for the parties to reach consensus on the
appointment of the presiding arbitrator. Thus, it is very common for the
presiding arbitrator to be appointed by the arbitration commission. There
must be some internal procedures in the arbitration commission. When
selecting arbitrators, the arbitration commission may consider many fac-
tors such as the arbitrator’s professionalism, nationality, educational back-
ground, areas of practice, experience in arbitration, availability and so on.
However, the appointment process is not open to the parties.
Some scholars find that the disclosure of the reasons for the appoint-
ment of an arbitrator will increase the workload of the arbitral institution
and may delay the arbitral proceedings. Moreover, the appointment of
an arbitrator is neither a legal issue in a strict sense, nor a simple “right-
or-wrong” question. Considering that the appointment of the arbitrators
may be a result from a complex procedure, the disclosure of the reasons
for appointment of arbitrators is less necessary. Sometimes, such disclo-
sure may even cause dissatisfaction of the parties. Furthermore, the de-
cision of the appointment of arbitrator is final and there is no remedy in
the current system, unless the parties have sufficient grounds to challenge
the appointed arbitrator. Thus, the disclosure of reason for appointing the
arbitrator is meaningless.
However, the curiosity and suspicion of the party about the arbitral
institution’s internal procedure for appointing arbitrator is an objective

16. Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rule of Arbitration.
Available at: https://iccwbo.org/publication/note-parties-arbitral-tribunals-conduct-arbitration/. Accessed
on: July 3rd, 2019.
17. Ibid.

346
reality. In some sense, this concern may affect the willingness of the par-
ties to choose arbitration to resolve their dispute. After all, the appoint-
ment of arbitrator is one of the most important rights of the parties in
the arbitration proceedings, and “arbitration is as good as the arbitrators”.
At present, some international arbitration institutions have started
taking measures to increase the transparency of the arbitration proceed-
ing. In February 2018, the London International Court of Arbitration has
publicized an online database containing 32 decisions from year 2010 to
2017 on the challenge to arbitrator. The database contains the background
introduction of the challenges, along with the reasons for the decisions.
In any event, the arbitral institution should strive to increase the
transparency of arbitral proceeding, since transparency can increase the
party’s confidence in the arbitral proceeding and prevent arbitration from
being criticized as an inaccurate and uncertain way of dispute resolution.
Regardless of the ways in which the presiding arbitrator is appointed, in
order to help the parties to make a better choice, the transparency and
due process shall be guaranteed. Only the open and transparent system
can minimize the suspicion and doubt of the parties on the arbitration,
and thus the arbitration may have a stronger life and greater credibility.

3. THE REMEDY FOR THE RULING MADE

IN JUDICIAL REVIEW OF ARBITRATION

Before 2018, some judicial interpretations have involved the issues relat-
ing to the judicial review of arbitration awards, such as when the ruling of
the judicial review comes to effect, and the right to file an appeal and to
apply for reconsideration or a retrial. However, these interpretations are
not systematic and comprehensive. For instance, regarding the permissi-
bility of lodging an appeal against the court’s ruling on the validity of the
arbitration agreement, the different courts have different attitudes on this
issue due to the lack of clear provisions provided by the laws and judicial

347
interpretations. Regarding the remedies for the court rulings on setting
aside the arbitral award, rejecting the application of setting aside the arbi-
tral award and refusal to enforcement of the arbitral award, the Supreme
People’s Court has clarified, by issuing a number of official “Replies”, that
such rulings cannot resort to any appeal, retrial (including retiral applied
by the parties) or protest by the prosecution. But these stipulations are
relatively scattered and thus need to be unified.
On December 26th, 2017, the Supreme People’s Court promulgated
the Provisions on Several Issues Relating to the Conduct of Judicial Review
of Arbitration Cases (Fa-Shi [2017] no. 22, hereinafter referred to as the
“Provisions of Judicial Review”), which is a comprehensive judicial inter-
pretation promulgated by the Supreme People’s Court focused on issues
regarding judicial review of arbitration cases. Arts. 7(3), 8(3), and 10 of
the Provisions of Judicial Review stipulate respectively that the parties can
appeal against judicial rulings of inadmissibility and dismissal of application,
or rulings on objection to jurisdiction [emphasis added]. Meanwhile, art. 20
of the Provisions of Judicial Review stipulates that
[T]he rulings made by the people’s courts in conduct of judicial re-
view of arbitration cases shall come into effect once it is served, except
for the rulings of inadmissibility and dismissal of application, and rulings
on objections to jurisdiction. If the party concerned applies for reconsid-
eration, lodges an appeal, or applies for a retrial, the people’s court shall
not accept the application, unless otherwise provided by laws and judicial
interpretations.
It follows that except for the three types of ruling mentioned in this
provision – rulings of inadmissibility, dismissal of application, and rul-
ings on objections to jurisdiction, the parties concerned are not allowed
to apply for a reconsideration, lodge an appeal, or apply for a retrial as to
other rulings made in judicial review cases.
Such stipulations are mainly based on the reason as the following. First,
art. 154 of the Civil Procedure Law of China clearly stipulates that there

348
are only three types of rulings which can be appealed by the parties: rul-
ings of inadmissibility, dismissal of application, and rulings on objections
to jurisdiction18. Second, previous judicial interpretations and replies also
demonstrated such principle referring to the rulings of refusal to enforce-
ment of arbitral award and setting aside of arbitral award, neither the par-
ties’ application for retrial nor the prosecution’s protest will be accepted19.
Third, efficiency, a typical feature of arbitration, is an important reason
why the parties resort to arbitration for dispute-resolving. However, the
arbitral award will be in a lasting status of uncertainty if excessive proce-
dures for reconsideration, appeal, retrial are set up in the process of judicial
review of arbitration, deviating from the finality of arbitration stipulation
in art. 9 of Arbitration Law of China, and undermining the efficiency of
arbitration. Meanwhile, the Provisions of Judicial Review further states
that “[…] unless otherwise provided by law and judicial interpretation”,
in order to avoid conflicts with subsequent laws or judicial interpretations
in the future20.
It is worth noting that art. 20 of the Provision of Judicial Review
only stipulates that “[…] if the party applies for reconsideration, appeals
or applies for retrial, the people’s court will not accept it”, but it is still
not clear whether the people’s court can initiate retrial ex officio (includ-
ing the circumstances that the president of the people’s court at all levels
finds that the ruling made by such court is wrong, and the president of
the Supreme People’s Court or of a higher level finds the ruling of a low-
er court is wrong) pursuant to art. 198 of Civil Procedure Law of China.
As aforementioned, regarding the ruling of the Supreme People’s Court
on application for setting aside an arbitral award
award, the replies of the Supreme
People’s Court have clearly stated that neither the retrial initiated by the

18. XUEFENG, R. The Interpretation of the Provisions on Several Issues Relating to the Conduct of Judicial Re-
view of Arbitration Cases, People-Rule of Law, 1st Issue, 2018.
19. Ibid.
20. Ibid.

349
court’s president by means of supervisory procedure nor the protest filed
by the prosecution is applicable. The purpose of the replies apparently is
to eliminate the retrial procedure of setting aside an arbitral award. How-
ever, the replies of the Supreme Court overlooked a situation that retrial
initiated by a superior court on its own motion, and the Provision of Ju-
dicial Review leave this omission without further clarification. For other
cases except setting aside of arbitral awards, whether the people’s courts
can initiate retrials ex officio is still not clear.
It is worth mentioning that in 2017, the Supreme People’s Court first
initiated the trial supervision procedure for a case referring to the validi-
ty of an arbitration agreement in accordance with art. 198 (2) of the Civil
Procedure Law, and ordered a retrial of the case by the lower court as
the Supreme People’s Court found the ruling is indeed of mistake. On
November 20th, 2015, the Henan Anyang intermediate people’s court, in
the (2015) Anzhong Minyichuzi no. 97 ruling, held that the arbitration
clause of the “Beijing Arbitration Commission” was invalid. The Supreme
Court issued the (2016) Zuigaofa Jianzi no.106 ruling on March 13th,
2017, Civil Administrative Trial Professional Committee of the Supreme
Court Judicial Committee discussed that the aforementioned ruling of the
Anyang intermediate people’s court was wrong and should be retried. It
can be seen, from this judicial practice, that in the case of application for
confirmation of the validity of the arbitration agreement, the people’s court
has the right to initiate the retrial procedure ex officio. In other types of
arbitration judicial review cases, whether the court has the power to ini-
tiate the retrial procedure ex officio remains to be further clarified by the
Supreme People’s Court.

350
4. THE ARRANGEMENT FOR COURT-
ORDERED INTERIM MEASURES IN
ARBITRATION SIGNED BETWEEN THE
MAINLAND CHINA AND HONG KONG

On April 2nd, 2019, the Government of the Hong Kong Special Ad-
ministrative Region (“HKSAR”) and the Supreme People’s Court of
the People’s Republic of China (“Supreme People’s Court”) signed an
Arrangement Concerning Mutual Assistance in Court-ordered Interim
Measures in Aid of Arbitral Proceedings by the Courts of the Mainland
and of the HKSAR (hereinafter referred to as “the Arrangement”)21.
Although the Arrangement has not yet come into force, its signing is
a milestone for both sides. Under the Arrangement, Hong Kong be-
comes the first and only jurisdiction outside Mainland China where
the Mainland courts can grant interim measures in aid of an arbitration
outside Mainland China. Reciprocally, this Arrangement again confirms
the Section 4522 of the Hong Kong Arbitration Ordinance (Cap. 609),
that is, on the application of any party to arbitral proceedings seated in
the Mainland, the Hong Kong Courts may grant an interim measure.

4.1 Overview of the arrangement

4.1.1 Scope of application

As mentioned before, the Arrangement allows any party to “arbitral pro-

ceedings in Hong Kong” to make formal requests to relevant Mainland
courts to grant interim measures. Art. 2 of the Arrangement provides
that “[a]rbitral proceedings in Hong Kong” referred to in this Arrange-

21. Available at: http://jszx.court.gov.cn/main/ExecuteStandard/201435.jhtml. Accessed on: July 4th, 2019.

22. Section 45 of the Arbitration Ordinance: “On the application of any party, the Court may, in relation to any arbitral
proceedings which have been or are to be commenced in or outside Hong Kong, grant an interim measure”.

351
ment shall be seated in the HKSAR and be administered by an arbitral
institution included in an exhaustive list. Although the list is yet to be
published, it is likely to include, among others, institutions such as ICC
Hong Kong, HKIAC and CIETAC23. As a result, the Arrangement
cannot extend to the ad hoc arbitral proceedings and arbitrations seat-
ed outside of Hong Kong, even if administered by a listed institution,
or not administered by institutions mentioned in the list, are excluded.

4.1.2 The types of the interim measures and the application procedures

In general, the Arrangement allows both jurisdictions to maintain their

existing interim measures and the application procedures unchanged
in a cross-border application.
In terms of the interim measures, the definition of the interim mea-
sures in art. 124 of Arrangement is divided into two parts. Three forms
of interim measures are available from the Mainland courts: property
preservation, evidence preservation and conduct preservation, which are
consistent with the Chinese Arbitration Law and Chinese Civil Pro-
cedure Law. Similarly, injunctions and other interim measures under
common law, such as Mareva Injunction, Anton Pillar Order and Pro-
hibitory Injunction, are likely to be granted by the Hong Kong courts.
In addition, based on arts. 3 to 7 of the Arrangement, it seems
that in a cross-border application for the interim measures, the re-
quirements of the procedures and the materials to be submitted by

23. Available at: https://www.ukpandi.com/knowledge-publications/article/legal-update-china-and-hong-kong-

-mutual-assistance-in-court-ordered-interim-measures-in-aid-of-arbitration-proceedings-149109/. Acces-
sed on: July 4th, 2019.
24. Article 1: “Interim measure” referred to in this Arrangement includes, in the case of the Mainland, property
preservation, evidence preservation and conduct preservation; and, in the case of the HKSAR, injunction and
other interim measure for the purpose of maintaining or restoring the status quo pending determination of
the dispute; taking action that would prevent, or refraining from taking action that is likely to cause, current
or imminent harm or prejudice to the arbitral proceedings; preserving assets; or preserving evidence that may
be relevant and material to the resolution of the dispute.

352
parties are also similar to those in a domestic application for the in-
terim measures.

4.2 The implications of the Arrangement

In June 1999 and January 2019, the SPC and the HKSAR Government
signed two important arrangements: the Arrangement on Mutual Enforce-
ment of Arbitral Awards and the Arrangement on Reciprocal Recogni-
tion and Enforcement of Judgments in Civil and Commercial Matters.
The two arrangements, however, cannot be applied to a ruling concerning
preservation measures or an order for interim relief25. In other words, for
investors in both jurisdictions, if they choose to resolve disputes in the
Hong Kong courts or arbitration institutions, they cannot be granted the
assistance in the preservation measures by the Mainland courts.
But this Arrangement finally addresses one of the most important con-
cerns in the dispute resolution between the Mainland and Hong Kong,
that is, the preservation of assets. Additionally, as the PRC has no equiv-
alent arrangement in place with any other jurisdiction, the Arrangement
might enhance Hong Kong’s attractiveness and competitiveness as a seat
for China-related international arbitrations and even further strengthen
Hong Kong’s already existing status as one of the centers for international
legal and dispute resolution services in the Asia-Pacific Region.

4.3 The problems yet to be addressed

Although this Arrangement is remarkable in many respects, the following

problems still exist and need to be addressed.

25. For instance, art. 4 of the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil
and Commercial Matters provides that a “judgment” referred to in this Arrangement includes, in the case
of the Mainland, any judgment, ruling, conciliatory statement and order of payment, but does not include a
ruling concerning preservation measures; in the case of the HKSAR, includes any judgment, order, decree
and allocator, but does not include an anti-suit injunction or an order for interim relief.

353
 Firstly, the Arrangement keeps silent on whether a party to arbitral
proceedings administered by a qualified arbitral institution can apply for
interim measures in the process of recognition and enforcement of the
arbitral award26, although arts. 3 and 6 of the Arrangement provides that
before the arbitral award is made, a party has the right to apply for such
interim measures. No doubt, under the Arrangement, it is wise to make
an application for interim measures before the arbitral award is made.
However, it is likely that the parties find the clues of the properties after
the award is made, or that the interim measures applied before the award
is made have been invalid at the stage of recognition and recognition of
the arbitral award since the time limit of the interim measures has lapsed.
Thus, if the parties are not entitled to apply for the interim measures after
the award is made, the original intention of the Arrangement may not
be realised.
Secondly, art. 8 of the Arrangement just provides that “[…] a requested
court shall examine a party’s application for interim measure expeditiously
[emphasis added]”, but this provision does not clearly give the time limit
for examining such an application27. It is speculated that since either in the
Mainland or in Hong Kong, there are mature and effective regulations on
this issue, the Arrangement does not provide for additional requirements.
Thirdly, there is no remedy for the wrongful application for the inter-
im measures under the current Arrangement28. Provided that a party to
arbitral proceedings in Hong Kong wrongfully applies for interim mea-
sures, it is very likely for the other party to sue for compensation for the
loss incurred from the wrongful interim measures. However, since the
Arrangement on Reciprocal Recognition and Enforcement of Judgments
in Civil and Commercial Matters has not come into force yet, it will be

26. Available at: https://www.chinalawinsight.com/2019/07/articles/arbitration/%E5%AF%B9%E3%80%8A%E4

%BB%B2%E8%A3%81%E4%BF%9D%E5%85%A8%E5%AE%89%E6%8E%92%E3%80%8B%E7%9A%
84%E5%86%8D%E8%A7%A3%E8%AF%BB/. Accessed on: July 5th, 2019.
27. Ibid.
28. Ibid.

354
difficult for the respondent to seek the compensation incurred by the
wrongful application for the interim measures.

5. THE AMENDMENT TO THE

CHINESE ARBITRATION LAW

China has long been considering making amendment to Chinese Arbi-

tration Law. The necessity to build a more transparent and uniform sys-
tem for arbitration in China has never been more urgent. In the context
of “One Belt One Road” initiative, wider use of arbitration as a means of
resolving commercial disputes calls for the increase of fairness and confi-
dence in Chinese Arbitration System29. As aforementioned, in the latest
legislative plan of the Standing Committee of NPC, the amendment to
the Arbitration Law has been listed into “[…] draft laws that will be re-
viewed and submitted for deliberation once conditions are ripe”30.
But how to amend the Arbitration Law is still a hot-debated issue. It
seems that an increasing number of experts support to introduce the UN-
CITRAL Model Law on International Commercial Arbitration (herein-
after referred to as “Model Law”) as the blue print for amendment. For
instance, Mr. Sibao Shen, the chairman of SCIA Council points out the
irreplaceable role of Model Law in directing the ordered development of
commercial arbitration and its possible enlightenment on the amendment
to Chinese Arbitration Law.
To incorporate the Model Law into the Chinese Arbitration Law, the
gaps between them should be considered. The major differences between
the Chinese Arbitration Law and the Model Law are as follows.

29. THORP, P. The PRC Arbitration Law: Problems and Prospects for Amendment. 24 Journal of Internatio-
nal Arbitration 607, 2007.
30. Available at: http://www.npc.gov.cn/npc/xinwen/2018-09/10/content_2061041.htm. Accessed on: July 3rd, 2019.

355
5.1 Formal requirements of Arbitration Agreement

Art. 16 of Chinese Arbitration Law sets forth that an arbitration agree-

ment shall be concluded in one of the three forms: (1) an arbitration clause
in the underlying contract; or (2) a separate arbitration agreement; or (3)
other forms of agreement requesting arbitration. Art. 7 of Model Law
offers two optional texts for the form requirement of arbitration agree-
ment, the second of which no longer requires arbitration agreement to
be in written form.
In fact, in the international arbitration practice, even though a written
arbitration agreement is required, the wording of “written form” is defined
more broadly and interpreted more flexibly.

5.2 Interim measures

In China, it is the Civil Procedure Law and Arbitration Law that mainly
deal with the interim measures. Compared with the Model Law, Chi-
nese arbitral tribunals have no power to issue interim measures. Even in
the cases involving foreign elements, the role of the arbitral institutions is
only to transfer the application for interim measures to relevant courts31.
Also, parties of arbitration cases are not allowed to apply to the courts for
interim measures directly.
Art. 17 of Model Law creates a feasible system for interim measures.32
Art. 17(A) sets forth the definition of interim measures and conditions for
granting interim measures. Both the arbitral tribunals and courts are en-
titled to issue interim measures. In the same time, art. 17(J) provides that

31. Art.272 of the Civil Procedure Law provides that “Where a party applies for a preservation measure, the in-
ternational arbitral institution of the People’s Republic of China shall submit the party’s application to the
intermediate people’s court at the place of domicile of the respondent or at the place where the respondent’s
property is located.”
32. MANJIAO, C. Is It Time For Change? A Comparative Study Of Chinese Arbitration Law And The 2006
Revision Of UNCITRAL Model Law. 5 Asian International Arbitration Journal 142, 2009.

356
the court has the same power of issuing interim measures.33 The Model
Law goes further in stipulating the recognition and enforcement of in-
terim measures. As provided in art. 17(D) of the Model Law, the interim
measures are binding and may be enforced directly by the court, which
makes sure that the interim measures may be enforced directly by the court.
There remains other areas such as the establishment of Compe-
tence-Competence Doctrine, the annulment of arbitral awards, the cred-
ibility and impartiality of arbitration institutions where the Chinese arbi-
tration Law and the Model Law bear differences. Thus, it is not an easy
task for the Chinese Arbitration Law to completely incorporate the Mod-
el Law. However, to keep pace with international arbitration practice, it
is expected that the new Arbitration Law will take in some widely used
international practices from the Model Law while remaining the useful
Chinese elements.

6. THE NEW DEVELOPMENT OF

ARBITRATION IN THE CONTEXT OF
THE BELT AND ROAD INITIATIVE

6.1 Influence of the Belt and Road Initiative

Since the launch of the “Belt and Road Initiative” in 2013, China’s out-
bound investment has grown rapidly, with a total planned investment of
approximately $900 billion in infrastructure projects. Under the back-
ground of the comprehensive implementation of the “Belt and Road”,
Chinese enterprises, including Chinese-funded enterprises registered
abroad, will become the main investment entities, construction entities
and business-operation entities in countries along the “Belt and Road”.

33. Art. 17(J) provides that “A court shall have the same power of issuing an interim measure in relation to arbi-
tration proceedings, irrespective of whether their place is in the territory of this State, as it has in relation to
proceedings in courts.”

357
 The cross-border commercial disputes relating to international trade,
international engineering contracts and international logistics have been
increasing. The risks faced by Chinese companies are also increasing in
investment projects. According to the data from the People’s Supreme
Court, from 2013 to 2017, the people’s courts at all levels have tried more
than 200,000 foreign-related civil and commercial cases, which is double
of the total amount of foreign-related cases from 2007 to 201234. Accord-
ingly, it is foreseeable that investment and commercial activities in “Belt
and Road” countries will inevitably lead to various disputes.

6.2 The necessity of “Belt and Road”

dispute resolution mechanism

It is known that the most famous international arbitration institution for

investment disputes is the International Investment Dispute Resolution
Center (ICSID), and World Trade Organization (WTO) can also deal
with investment treaty cases. For commercial disputes, the internation-
al arbitration institutions in common law system are also of an absolute
advantage in the international market. Back to Asia, in the long-term
foreseeable future, from countries along the “Belt and Road” route, only
Singapore has a relatively sound legal system and a mature market. Sin-
gapore also hopes to actively promote the improvement and development
of its dispute resolution mechanism and strive to occupy a more important
position in Asia and in the world.
Regarding the “Belt and Road” Initiative, the advantages of China’s di-
versified dispute resolution mechanism have not been fully exploited in the
field of international commercial disputes. The level of foreign-related legal

34. The SPC Answered the Questions on the “Opinions on Establishing the ‘Belt and Road’ International
Commercial Dispute Resolution Mechanism and Institution”. Available at: http://www.xinhuanet.com/
2018-06/28/c_1123046444.htm.. Accessed on: July 4th, 2019.

358
services fails to keep its pace with the speed of China’s economic and society
openness and development. Therefore, China is expected to build a special
“Belt and Road” dispute resolution mechanism, which is fair, just and rea-
sonable, and can provide more efficient, convenient, fast and low-cost solu-
tions for the resolution of international commercial and investment disputes.

6.3 A series of measures to promote the “Belt

and Road” dispute resolution mechanism

On January 23rd, 2018, the second session of the Central Leading Group
for Comprehensively Deepening Reforms deliberated on and adopted
the Opinions on Establishing the Belt and Road Dispute Resolution Mecha-
nism and Institutions, stating that the SPC will establish an international
commercial court to facilitate the establishment of a diversified dispute
settlement mechanism that effectively connects litigation, mediation,
and arbitration.35 After that, on June 25th, 2018, the Judicial Commit-
tee of SPC adopted the Provisions on Several Issues Concerning the Es-
tablishment of the China International Commercial Court (Fa Shi [2018]
no. 11, hereinafter referred to as the “Provisions on the Establishment
of an International Commercial Court”),36 setting out various rules for
the international commercial court for the first time.
In accordance with the Provisions on the Establishment of an Inter-
national Commercial Court, the International Commercial Court has
followed the experiences of foreign international commercial courts,
closely centering on the needs of international commercial exchanges
and reflecting a number of innovations.37 Among them, the innovation

35. The General Office of the CPC Central Committee and the General Office of the State Council Print and
Distribute the Opinions on Establishing the Belt and Road Dispute Resolution Mechanism and Institutions.
Available at: http://cicc.court.gov.cn/html/1/218/149/192/602.html. Accessed on: July 3rd, 2019.
36. Provisions on Several Issues Concerning the Establishment of the China International Commercial Court.
Available at: http://cicc.court.gov.cn/html/1/218/149/192/810.html. Accessed on: July 2nd, 2019.
37. YONGJIAN, Z. The Practice and Improvement of the Mechanism for the Settlement of International

359
measure related to arbitration is the establishment of a “one-stop” di-
versified dispute resolution platform. Art. 1138 of the Provisions on the
Establishment of an International Commercial Court stipulates that the
SPC will select qualified international commercial mediation institutions
and international commercial arbitration institutions to cooperate with
international commercial courts in building a dispute resolution platform
that organically connects mediation, arbitration and litigation and sup-
ports the parties concerned to select the appropriate method to resolve
international commercial disputes. Art. 1439 stipulates that where the
parties concerned agree to select an international commercial arbitration
institution for arbitration in accordance with the first paragraph of art. 11
thereof, they may, prior to the filing of the application for arbitration or
after the arbitration procedures have commenced, apply to the Interna-
tional Commercial Court for preservation of relevant evidence, property
or behaviors. Where the parties appeal to the International Commercial
Court to set aside or enforcement of an award rendered by an international
commercial arbitration institution, the court shall conduct a review in
accordance with the Civil Procedure Law and applicable legal provisions.

Commercial Disputes. Available at: http://cicc.court.gov.cn/html/1/218/62/164/1074.html. Accessed on:

July 4th, 2019.
38. Article 11 of the Provisions on the Establishment of an International Commercial Court provides that: “The
Supreme People’s Court will establish an international commercial expert committee and select qualified inter-
national commercial mediation institutions and international commercial arbitration institutions to cooperate
with international commercial court in building a dispute resolution platform that organically connects the
mediation, arbitration and litigation and forms a one-stop mechanism for resolving international commer-
cial disputes. International commercial courts support the parties concerned in opting for a way they think
is appropriate through the dispute resolution platform that organically connects mediation, arbitration and
litigation, to settle international commercial disputes.”
39. Article 14 of the Provisions on the Establishment of an International Commercial Court provides that: “Where
the parties concerned agree to select an international commercial arbitration institution for arbitration in ac-
cordance with the first paragraph of Article 11 hereof, they may, prior to that the application for arbitration
is filed or after the arbitration procedures have commenced, apply to the international commercial court for
preservation of relevant evidence, property or acts. Where the parties concerned apply to an international
commercial court for cancelation or enforcement of the arbitral award rendered by the international commer-
cial arbitration institution prescribed in the first paragraph of Article 11 hereof, the international commercial
court shall conduct a review in accordance with the Civil Procedure Law and applicable legal provisions.”

360
 After the promulgation of the Provisions on the Establishment of an
International Commercial Court, on June 29th, 2018, the First and the
Second International Commercial Court of the SPC were unveiled in
Shenzhen and Xi’an, respectively.40 On July 3rd, 2018, SPC appointed
eight judges to the International Commercial Court.41 On December
7th, 2018, with an increasing workload, SPC appointed another sev-
en judges to the International Commercial Court.42 On August 24th,
2018, SPC issued the Decision of the Supreme People’s Court on Engaging
the First Batch of Expert Members of the International Commercial Expert
Committee (Fa [2018] no. 225), engaging 32 Chinese and foreign experts
as the first group of expert members of the international commercial
expert committee.43
On December 5th, 2018, SPC officially issued three normative doc-
uments, namely, the Circular of the General Office of the Supreme People’s
Court on the Determination of the First Batch of International Commercial
Arbitration and Mediation Institutions Included in the “One-stop” Mech-
anism for the Diversified Resolution of International Commercial Disputes
(the “Circular on the Determination of Arbitration and Mediation In-
stitutions”), the Rules of the Supreme People’s Court for the Procedure of
International Commercial Courts (Trial) (the “Procedure Rules”), and
the Work Rules of the International Commercial Expert Committee of the
Supreme People’s Court (Trial).44 So far, the International Commercial

40. The First International Commercial Court and the Second International Commercial Court of the Supre-
me People’s Court are Unveiled in Shenzhen and Xi’an Respectively. Available at: http://cicc.court.gov.cn/
html/1/218/149/156/813.html. Accessed on: July 4th, 2019.
41. Appointment of Judges for the International Commercial Court by the Supreme People’s Court. Available at:
http://cicc.court.gov.cn/html/1/218/149/192/820.html. Accessed on: July 4th, 2019.
42. The Supreme People’s Court Appointed the Second Batch of Judges for International Commercial Court. Avai-
lable at: http://cicc.court.gov.cn/html/1/218/149/192/1130.html. Accessed on: July 4th, 2019.
43. Decision of the Supreme People’s Court on Engaging the First Batch of Members of the International
Commercial Expert Committee of the Supreme People’s Court. Available at: http://cicc.court.gov.cn/
html/1/218/149/192/949.html. Accessed on: July 4th, 2019.
44. The Supreme People’s Court Publishes the Supporting Documents on the International Commercial Dis-
pute Settlement Mechanism for the Belt and Road Initiative. Available at: http://cicc.court.gov.cn/
html/1/218/149/156/1128.html. Accessed on: July 4th, 2019.

361
Court has officially accepted a number of international commercial
dispute cases.45
It is notable that the Circular on Determining the Arbitration and Me-
diation Institutions specifies that the China International Economic and
Trade Arbitration Commission (hereinafter referred to as “CIETAC”; the
Shanghai International Economic and Trade Arbitration Commission;
the Shenzhen Court of International Arbitration (hereinafter referred to
as “SCIA”); the Beijing Arbitration Commission/Beijing International Ar-
bitration Center (hereinafter referred to as “BAC”); the China Maritime
Arbitration Commission; the China Council for the Promotion of Inter-
national Trade Mediation Center; and the Shanghai Economic, Trade and
Commercial Mediation Center are the first group of arbitration and me-
diation institutions included in the “one-stop” approach for the diversified
settlement of international commercial disputes. Here also, the parties may
apply to the International Commercial Court for preservation of evidence,
property or behaviors in accordance with the provisions on the establishment
of an International Commercial Court and Rules of Procedure; or apply for
the setting aside or enforcement of arbitral awards.
According to arts. 34 and 35 of the Rules of Procedure, an application
may be made to the International Commercial Court for preservation, re-
vocation or enforcement of “[…] an international commercial case with
the amount of subject matter of not less than RMB 300 million or other
international business cases with significant influence “.
An effective infrastructure to resolve international commercial disputes
is the key to the smooth operation of international trade and commerce and
is also essential to the smooth development of the Belt and Road Initiative.
Therefore, it is the appropriate and favorable time for China to establish
the International Commercial Court. Creation of the “one-stop” diversified

45. The International Commercial Court of the Supreme People’s Court Has Accepted a Batch of International
Commercial Dispute Cases. Available at: http://cicc.court.gov.cn/html/1/218/149/192/1150.html. Acces-
sed on: July 4th, 2019.

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dispute resolution platform will provide Chinese and foreign parties with
fair, efficient, convenient, fast, and cost-effective dispute resolution services.

6.4 New Trends in the world regarding

the “Belt and Road” Arbitration

Some foreign arbitration institutions have also seen great opportunity

in “Belt and Road” arbitration and begun to make some preparation. In
view of the fact that the “Belt and Road” Initiative involves more than 70
countries and regions and has significant influence in Asia, the Middle
East, Africa and Europe, as well as the Indian Ocean region, the Interna-
tional Chamber of Commerce (ICC) Court of Arbitration has established
a Belt and Road Committee to deal with infrastructure and construction
disputes based on the ICC’s experience, and intends to develop its ex-
isting arbitration rules and dispute resolution mechanisms to meet the
needs of the Belt and Road dispute resolution. Members of the ICC’s Belt
and Road Commission will also provide more localized support for the
“Belt and Road” disputes in their respective jurisdictions. The Singapore
International Arbitration Center also signed the Memorandum of Un-
derstanding with the Shenzhen International Arbitration Court and the
Xi’an Arbitration Commission in August and September of 2018 respec-
tively, with the intention of promoting the development of international
arbitration by strengthening the cooperation with each other. It can be
seen that, in view of the extensive influence of the Belt and Road Initia-
tive, arbitration institutions in the countries along the route have begun
to take measures, in order to meet new demands in the new situation and
promote healthy competition of the arbitration market. Certainly, these
changes also brought various competitive pressures to the local arbitration
institutions of China.

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 Settlement of E-commerce
Disputes in China
Hong Xue1

1. INTRODUCTION

On August 31st, 2018, the Electronic Commerce Law of the People’s Republic
of China (hereafter “E-Commerce Law”) was enacted. The “E-Commerce
Law” entered into force in January 1st, 2019. Unlike any other e-commerce
laws in the world, the “E-Commerce Law” is not limited to legalizing
electronic transactions, per se, but sets out a comprehensive legal structure
addressing the issues of e-payment, logistics and express delivery, e-com-
merce operators, consumer protection, data protection, intellectual property
protection, governmental supervision and regulation, market competition
and cross-border e-commerce. Among others, settlement of e-commerce
disputes is one of the chapters in the Law and becomes an essential com-
ponent of the Chinese e-commerce legal system.

1. Prof. Dr. Hong Xue is the director of Beijing Normal University (BNU) Institute for Internet Policy & Law;
the co-director of United Nations Commission on International Trade Law (UNCITRAL) and BNU Joint
Certificate Program on International E-Commerce Law; the National E-Commerce expert appointed by
the Chinese Ministry of Commerce; the chief expert of the Chinese National People’s Congress E-Com-
merce Lawmaking Expert Panel; the member of the Advisory Committee of the United Nations Network
of Experts for Paperless Trade and Transport in Asia and the Pacific (UNNExT); and the chair of Legal
Panel of UNNExT.
2. OVERVIEW OF E-COMMERCE
DISPUTE RESOLUTION

The “E-commerce Law” accommodates both traditional and innovative

types of dispute resolution methods and establishes a diversified and effec-
tive resolution system in which e-commerce operators (especially platform
operators) play the important roles. Under the “E-commerce Law”, the
traditional dispute resolution mechanisms in the forms of negotiation and
settlement, mediation, administrative complaints, arbitration and litigation
are still the ways to resolve e-commerce disputes. But the e-commerce dis-
pute resolution system has its own unique characteristics.

2.1 Diversified dispute resolution system

The “E-commerce Law” particularly emphasizes the importance of non-liti-

gation dispute resolution methods. The Chinese Supreme People’s Court sets
out in the policy documents that the parties of disputes should be guided to
choose appropriate dispute resolution methods and non-litigation methods
(such as reconciliation, mediation, arbitration and administrative complaints)
that are in lower cost, weaker confrontation and helpful to repair the rela-
tionship. Those shall be prioritized to resolve disputes. A modern dispute
resolution concept of “national leadership, judicial promotion, social par-
ticipation, pluralism, and rule of law” shall be established to create a social
atmosphere of honesty, friendship, rationality, harmony, and innovation.
Diversified dispute resolution mechanisms are especially important for
a variety of e-commerce disputes, which include the B2C disputes (be-
tween business operators and consumers), B2B disputes (between business
operators) and cross-border disputes. Due to the diversity of e-commerce
disputes, each dispute resolution method stipulated in the “E-commerce
Law” has an important and unique value. Arbitration and other methods
that are less used in consumer trade have gained new development space in

366
e-commerce dispute resolution. More cross-border e-commerce disputes
tend to resort to arbitration, through which the parties may choose the ar-
bitration venues, institutions, rules and applicable laws.

2.2 Dispute resolution digitalized and going online

The traditional dispute resolution methods, such as negotiation, mediation,

arbitration, litigation etc., stipulated in the “E-commerce Law” include both
online and offline applications. Within the scope permitted by law, tradi-
tional dispute resolution methods are able to run online and better serve the
need of e-commerce dispute resolution. Although the Chinese Arbitration
Law requires that the parties’ arbitral agreements, arbitration institutions’
notifications in the proceedings and the arbitral awards be in written form2,
the legal effects of the functionally-equivalent electronic form has already
been recognized. Electronic arbitral agreements, online arbitral proceedings
and the awards rendered thereof have been in practices for years.3
The “E-commerce Law” also enables the e-commerce operators (par-
ticularly platform operators) to establish the online mechanisms and create
innovative dispute resolution methods specifically for e-commerce.
The Chinese Supreme People’s Court promotes and supports the appli-
cation of modern information technology in the diversified dispute resolution
mechanisms, and the establishment of an online mediation, case filing and
acceptance, hearings and trials, electronic delivery and other information
platforms for dispute resolution, such as case pre-judgment, information
sharing, resource integration, data analysis etc.

2. See Chinese Arbitration Law, arts. 16, 24, 33, 42 and 54. The arbitral awards, under the Law, shall be signed by
the arbitrators and sealed by the arbitration institutions.
3. See CIETAC Online Arbitration Rules. Available at: http://www.ccpit.org/Contents/Chan-
nel_3535/2014/0519/403778/content_403778.htm.

367
2.3 Internationalization of dispute resolution

The Chinese Supreme People’s Court promotes the international de-

velopment of the diversified dispute resolution mechanism, respects
the diversity of the legal tradition and culture of Chinese and foreign
parties, and supports the parties’ voluntary choice of mediation, ar-
bitration and other non-litigation methods to resolve the disputes.
To meet the diversified needs of disputes resolution, China commits
to further strengthen the exchanges and cooperation with the other
countries and regions in judicial institutions, arbitration institutions,
and mediation organizations, to enhance the international competi-
tiveness and credibility of China’s dispute resolution mechanisms, to
recognize the legal effects of various dispute resolution methods, and
to provide dispute resolution services for the implementation of the
“One Belt, One Road” initiative.4

3. INTERNET COURTS

Under the “E-commerce Law”, litigation is an important way and

ultimate guarantee for e-commerce dispute resolution.5 China’s judi-
ciary attaches considerable importance to the application of informa-
tion technology in the judicial proceedings and resolution of e-com-
merce disputes. According to the Chinese Supreme People’s Court,
the Judgment Documents and Judicial process can be publicized and

4. The “One Belt One Road” (OBOR) initiative, first announced in 2013 by Chinese president Xi Jinping, is an
extremely ambitious and far-reaching initiative with significant potential to improve the social and economic
structure in Asia, Europe, and northeastern Africa, where more than half of the world’s population lives.
The OBOR initiative proposes to improve the transportation infrastructure to give rise to closer and larger
economic, social, cultural, and political ties. This win-win initiative should benefit more than 50% of the
world’s population living in that region and contribute to political stability and peace in the world. In April
2019, the Heads of the States and high-level officials from more than 200 countries participated in the 2nd
OBOR Forum in Beijing.
5. See art. 60 of the E-Commerce Law.

368
disseminated through a special information system to effectively im-
prove the transparency of the judicial system and accept the supervi-
sion of the public.6
Establishment of the Internet courts is an important measure for judi-
cial reform and development of e-commerce dispute resolution. On Au-
gust 18th, 2017, China’s first Internet court, “Hangzhou Internet Court”,
was formally established. Since then, two more Internet courts have been
established in Beijing and Guangzhou.
According to the regulations promulgated by the Chinese Supreme
People’s Court, the Internet courts conduct on the Internet the whole trial
process, such as acceptance of cases, services of documents, mediation,
exchange and cross-examination of evidence, pre-trial preparation, hear-
ings and render of decisions. Depending on the requests of the parties or
the need for the trials, the Internet court may decide to complete online
only some parts of the proceeding (e.g. hearings).
The Internet courts in Beijing, Guangzhou and Hangzhou have the
jurisdiction over the following first-instance cases7:

I. disputes arising from online shopping contracts signed or per-

formed through e-commerce platforms;
II. disputes of network service contract signed and performed on the
Internet;
III. disputes of financial loan contracts and small loan contracts signed
and performed on the Internet;
IV. disputes of copyright or neighboring rights of the works first pub-
lished on the Internet;
V. disputes of infringements of copyright or neighboring rights of

6. See Chinese Supreme People’s Court’s “Regulations on the People’s Courts Public Display of Judgment Do-
cuments on the Internet”, promulgated on October 1st, 2016, and the “Regulations on the People’s Courts’
Publicity of Judicial Process Information through the Internet”, promulgated on September 1st, 2018.
7. See Chinese Supreme People’s Court’s Provisions on Several Issues Concerning the Trial of Internet Court Ca-
ses, effective from September 7th, 2018.

369
 online works by means of publication or communication on the
Internet;
VI. disputes regarding Internet domain name ownership, infringe-
ments and contracts;
VII. disputes arising from torts against personal rights or property
rights on the Internet;
VIII. disputes regarding defects of the products purchased via e-com-
merce platforms;
IX. litigations on Internet public interest filed by the public prosecution;
X. appeals against the administrative decisions regarding Internet in-
formation service, Internet commodity trading and related services;
XI. other Internet civil and administrative cases that the higher peo-
ple’s court designates the jurisdiction.

The parties may, within the aforementioned scope, agree upon the
Internet courts that have actual connection to file the disputes. If an
e-commerce operator or network service provider concludes the jurisdic-
tion agreements through the standard clauses with the users, the relevant
legal requirements and Supreme People’s Court’s judicial interpretations
regarding the standard clause shall be complied with.8
An Internet court should establish an online litigation platform as a
special means for the court to handle cases and for the parties and other
litigants to conduct litigation. The litigation actions conducted via litiga-
tion platform are legally effective. Where the parties and other litigants
use the litigation platform to conduct litigation, they shall complete the
identity authentication through certificate verification, biometric identi-
fication or national identity card system, and obtain a special access ac-

8. Under art. 39 of the Chinese Contract Law, where a contract is concluded by way of standard terms, the party
supplying the standard terms shall abide by the principle of fairness in prescribing the rights and obligations of
the parties and shall, in a reasonable manner, call the other party’s attention to the provision(s) whereby such
party’s liabilities are excluded or limited, and shall explain such provision(s) upon request by the other party.

370
count to the platform. The electronic evidence generated and stored on
the platform by the Internet court should be imported in the proceedings
by one-click. Non-electronic evidence should be converted into electron-
ic evidence through scanning, photographing etc. For the evidence that
has been uploaded to the Internet court platform, the parties may directly
submit the cross-examination opinions.
The Internet court receives the complaint materials submitted by the
plaintiff online, exchanges the evidence online, services the documents
electronically, conducts hearings online, uses voice recognition and other
technologies to simultaneously generate electronic transcripts, and uses
the litigation platform to generate electronic files simultaneously. To meet
the needs of e-commerce dispute resolution, the Internet court enables
the whole judicial proceeding to be moved online.

4. ONLINE MEDIATION

Mediation is one of the important ways to resolve e-commerce disputes,

particularly for consumer disputes. In business to consumer (B2C) e-com-
merce, mediation by consumer organizations, especially online mediation
mechanisms, plays an increasingly important role.

4.1 Mediation organizations

According to art. 60 of the “E-commerce Law”, consumer organizations, in-

dustrial associations or other mediation organizations established according
to law can mediate e-commerce disputes. According to art. 39 of the Law
on the Protection of Consumer Rights and Interests, if consumers and op-
erators have disputes over consumer rights, they may request the Consumer
Association or other mediation organizations established by law to mediate.

371
 Apart from consumer organizations, e-commerce industry organizations
that carry out industrial self-discipline may mediate e-commerce disputes.
The qualified chambers of commerce, other associations etc. can also set
up commercial mediation organizations, to provide mediation services in
specialized fields such as intellectual property.
Other legally established mediation organizations, including online
mediation organizations stipulated in the “E-commerce Law”, are very
broad. The online automatic mediation process breaks the boundaries
between geography and time. Netizens can apply for online mediation
to resolve the disputes. With the consent of the parties, the mediation
process and the case information can be disclosed online for transparency
and enforcement.
The people’s mediation system established under the Mediation Law
of 2011 (the “People’s Mediation Law”) is playing an increasingly im-
portant role in solving e-commerce disputes. People’s mediation refers to
the people’s mediation committees, on the basis of the parties’ voluntary
mediation agreements, which resolve the civil disputes through persua-
sion and guidance.
In March 2014, the Sina Corporation established the first mediation
organization in the Internet sector, i.e. “Sina People’s Mediation Com-
mittee”. The Sina People’s Mediation Committee is an autonomous orga-
nization to mediate Sina Weibo disputes and accepts the work guidance
of the Beijing Municipal Bureau of Justice.9 It promotes laws and regu-
lations through mediation work, and resolves the disputes through per-
suasion, facilitation, and other reasonable methods. The parties involved
in disputes shall be guided by law and facts, and act in an objective and
rational manner, and pursue to voluntarily reach a mediation agreement

9. Sina Weibo is a Chinese microblogging services launched by Sina Corporation on August 14th, 2009. It is one
of the biggest social media platforms in China, with over 445 million monthly active users as of Q3 2018.
The platform has been a huge financial success, with surging stocks, lucrative advertising sales and high re-
venue and total earnings per quarter. At the start of 2018, it surpassed the US$30 billion market valuation
mark for the first time.

372
on the basis of equal consultation. As an independent third party, the Sina
People’s Mediation Committee participates in the mediation of network
contradictions and disputes, and accepts the disputes arising between
the parties on the Sina Weibo platform. The Sina People’s Mediation
Committee accepts 20,000 cases per week, involving the disputes such as
defamation, copyrights or trademark infringements. It has realized the
automation of dispute handling, the autonomy of operating mechanisms,
and the openness of processing results.

4.2 Legal effects of mediation agreements

Where the parties reach the legally binding settlement agreement through
mediation, either party may apply to confirm the validity of the agreement
in the people’s court at the locality of the mediation organization. In the case
of mediation agreements in which money or securities are paid as content,
the people’s courts with jurisdiction shall issue payment orders in accor-
dance with the “Civil Procedure Law” and relevant judicial interpretations
according to the creditor’s application. If the debtor fails to file a written
objection within the statutory time limit and fails to perform the payment
order within the time limit, the order may be enforced by the people’s court.
If the parties reach the agreement through the mediation of an admin-
istrative organ, a people’s mediation organization, a commercial mediation
organization, an industry mediation organization, or other organizations
that can mediate disputes arising out of civil disputes, either party may ap-
ply to the public notary office in accordance with the Notary Law to make
the agreement with the enforceable effective according to law. If the debtor
fails to perform or improperly performs the notarized document with en-
forceable effect, the creditor may apply to the people’s court with jurisdic-
tion for enforcement.
With the development and improvement of the mediation system, the
mechanisms to record the undisputed facts and to recognize the non-ob-

373
jection mediation plans are being explored. At the end of the mediation
procedure, even if the parties have not reached a mediation agreement,
the mediator may, based on the consent of the parties, record in writing
the facts that the parties have no disputes during the mediation process,
and the parties shall sign and confirm the record. In the subsequent pro-
ceedings, the parties do not need to prove the uncontested facts confirmed
in the mediation process, except for the issues involving national inter-
ests, social public interests and the others’ legitimate rights and interests.
Where the parties fail to reach a mediation agreement, but have no major
difference in the facts of the dispute, the mediator may, based on the con-
sent of the parties, submit a mediation plan and serve it in writing to both
parties. If the parties fail to file a written objection within seven days, the
mediation plan shall be deemed to be a mediation agreement voluntarily
reached by both parties; if a written objection is filed, the agreement shall
not be deemed to be established. Where a party applies for judicial con-
firmation of a mediation agreement, it shall be confirmed in accordance
with relevant regulations.
The effectiveness of people’s mediation is clearly recognized by law. Ac-
cording to the “People’s Mediation Law”, the mediation agreement reached
through mediation by the People’s Mediation Committee is legally binding,
and the parties shall perform in accordance with the agreement. After the
mediation agreement is reached through mediation by the People’s Medi-
ation Committee, the parties may, if they deem it necessary, jointly apply
to the people’s court for judicial confirmation within 30 days from the ef-
fective date of the agreement. The people’s court shall promptly review the
mediation agreement and confirm its validity according to law. Once the
people’s court confirms that the mediation agreement is valid, either party
may apply to the people’s court for enforcement against the other party that
refuses to perform or fails to perform fully.
However, after the mediation agreement is reached through medi-
ation by the People’s Mediation Committee, if the parties dispute the

374
performance or the content of the mediation agreement, either party may
file a lawsuit with the people’s court. If the people’s court confirms that
the mediation agreement is invalid, the parties may change the original
mediation agreement or reach a new mediation agreement, or they may
alternatively file a lawsuit with the people’s court.
In the following circumstances, the people’s court shall not confirm
the validity of the mediation agreement:

I. violation of the mandatory provisions of laws and administrative

regulations;
II. infringement of national interests and social public interests;
III. infringement of the lawful rights and interests of the outsiders;
IV. the criminal responsibility of the parties is being investigated;
V. the content of the agreement is unclear and cannot be confirmed
and enforced;
VI. the mediation organization and/or the mediator violates the prin-
ciple of voluntariness or other professional ethics;
VII. other circumstances should not be confirmed.

If the parties sign a mediation agreement in violation of the true mean-

ing, or if the mediation organization or the mediator has any conflict of
interest in the case, or the mediation is unfair, the people’s court will not
confirm the validity of enforceable effect. The parties may file a lawsuit to
the people’s court instead.
The judicial system is strengthening the cooperation with the people’s
mediation organizations, promoting the institutionalization and stan-
dardization of the people’s mediation organizations, further expanding
the scope and scale of the people’s mediation organizations to assist the
people’s courts in resolving disputes, and especially supporting the opera-
tion of people’s mediation organizations in dispute-prone and multi-dis-
ciplinary areas. Sina People’s Mediation Committee, established in 2014,

375
showcases the potential of moving mediation organizations on the Internet
and resolving the disputes directly online.

5. EVIDENCE SYSTEM IN E-COMMERCE

DISPUTE RESOLUTION

In e-commerce dispute resolution, almost all the evidence is electronic.

Admissibility of electronic evidence has become a critical issue for litiga-
tion and other dispute resolution processes.

5.1 E-commerce operators’ obligation to provide evidence

E-commerce operators play the vital role in evidence provision. Almost all
e-commerce contracts are concluded or fulfilled by the automatic informa-
tion systems set up by the operators. The original contract and transaction
information (in the form of texts, data, live videos, social media conversa-
tions etc.) is only retained in the operators’ systems. For the purpose of dis-
pute resolution, the “E-commerce Law” obliges e-commerce operators to
provide the necessary evidence and assist investigation in the proceedings.
The “E-commerce Law” stipulates that e-commerce operators shall
provide original contracts and transaction records in the process of han-
dling e-commerce disputes.10 Since the original contracts and transaction
records are in the control of e-commerce operators, they should provide
such information in all kinds of dispute resolution processes, including
litigation, arbitration, administrative procedures, settlement, mediation,
and online dispute resolution mechanisms, even though they are not the
parties to the disputes.
The evidence-provision obligation applies to all types of e-commerce
operators. According to the “E-Commerce Law”, e-commerce operators

10. See art. 62 of the “E-Commerce Law”.

376
are the natural persons, legal persons and unincorporated organizations
that engage in business activities of selling goods or providing services
via internet or other information networks, including platform operators,
on-platform operators and operators that sell goods or provide services through
self-owned websites or other network services.11

5.2 Original contracts and transaction records

The “E-commerce Law” sets out a clear requirement for the authenticity of
the evidence that e-commerce operators should provide, that is, the originality
of e-commerce contracts and transaction records.12 Although no electronic
data is technically original, there can be legally-defined original standard.
According to the “Electronic Signature Law”, where a data message
can effectively represent the contents, be available for subsequent use, and
reliably guarantee its intactness since the time of its final formation, it shall
meet the requirements of originality required by laws and regulations. In
accordance with the “E-commerce Law”, when the goods and services infor-
mation and transaction information published on the platform are recorded
and stored, their integrity, confidentiality and availability shall be ensured.
These statutory requirements should be considered as the criteria for judging
the authenticity of e-commerce contracts and transaction records.13
According to the judicial interpretations of the Supreme People’s Court,
in the trial of a case, if the parties object to the authenticity of the electronic
data, they shall, in conjunction with the cross-examination, review and judge
the authenticity of the electronic data’s generation, collection, storage and
transmission process, and take into account the following circumstances:

11. See “E-Commerce Law”, art. 9.

12. According to the Civil Procedure Law, electronic data, along with statements, documentary evidence, physical
evidence, audio-visual materials, witness testimony, appraisal opinions, and transcripts of the parties, is one
of legally admissible types of evidence.
13. See “E-Commerce Law”, art. 31.

377
 I. whether the hardware and software environment, such as the com-
puter system on which electronic data is generated, collected, stored
and transmitted are safe and reliable;
II. whether the main body and time of electronic data generation are
clear, whether the content is clear, objective and accurate;
III. whether the storage methods, means and medium for data gener-
ation and storage are appropriate;
IV. whether the electronic data extraction and fixed subjects, tools and
methods are reliable;
V. whether the extraction process can be reproduced;
VI. whether the contents of the electronic data are added, deleted,
modified or incomplete;
VII. whether the data can be verified in a specific form.

Where e-commerce contracts and transaction records provided by e-com-

merce operators are verified by electronic signatures, trusted time stamps,
hash value verification, blockchain and other tamper-proof technical means
or through the People’s Court electronic forensics certification platform, the
evidence’s authenticity can be proved. The parties may apply for verifica-
tion of the electronic data by the persons or institutions with the expertise.
The courts may, according to the party’s application or ex officio, entrust the
identification of the authenticity of the electronic data or obtain other rel-
evant evidence for verification.

5.3 The legal consequences

E-commerce operators who violate the obligation to provide evidence

are subject to different legal consequences depending on their status
in the dispute resolution processes.

378
5.3.1 Parties’ burden of proof

If an e-commerce operator is a party of the dispute, refusal to provide the

evidence of the e-commerce contract and transaction record shall, ac-
cording to the Civil Procedure Law, result in unfavorable consequences
and legal sanctions.
According to the judicial interpretations of the Supreme People’s
Court, where the parties who are responsible for providing the evidence
to prove the facts on which their claims are based or the facts against
which the other party’s claims are based fail to fulfill the burden of proof
without the due reason, they shall bear unfavorable consequences, i.e. if
the other party claims that the content of the evidence is not conducive to
the evidence holder, its claim can be presumed to have been established.
For example, if an e-commerce operator refuses to provide the original
contract and transaction records, the amount of compensation or the ob-
ligation of payment claimed by the other party shall be recognized in the
litigation, arbitration or administrative procedures.
E-commerce operators may fail the burden of proof intentionally or
negligently. If the e-commerce operators commit the intentional acts of
concealment, refusal to provide, forgery, falsification, and destruction of
the evidence, such as the original contract and transaction records, their
acts constitute nuisance of civil lawsuits stipulated by the Civil Procedure
Law and shall be subject to fines and detentions according to the serious-
ness of the case; where a crime (e.g. forgery of evidence) is committed, the
operator shall be investigated for criminality according to law.
If the e-commerce operators lose important evidence in violation of
laws and administrative regulations, they shall be responsible for neglect-
ing the custody duty of the e-commerce information system and data.
Although not specifically stipulated in the “Civil Procedure Law”, these
operators should still be admonished in litigation, arbitration, or admin-
istrative procedures.

379
5.3.2 Assistance of investigation

E-commerce operators, even though not the parties to the disputes,

are still obliged to provide the relevant evidence in accordance with the
“E-Commerce Law”. The “Civil Procedure Law” stipulates that the peo-
ple’s courts have the right to investigate and collect evidence from relevant
entities and individuals, and the relevant entities and individuals may not
refuse; if the entity that is obliged to assist in the investigation and exe-
cution refuses or obstructs the people’s court’s investigation and evidence
collection, the people’s court shall order it to perform its assistance and
may impose a fine on it.
In the administrative process, the relevant administrative agency may
require e-commerce operators to assist in the investigation and provide
relevant original contracts and transaction records. In other dispute reso-
lution procedures, if the parties request an e-commerce operator holding
relevant important evidence to assist in the investigation and provide the
original contract or transaction record, they shall request the court or the
competent authority to issue an order for the evidence to be obtained so
that the e-commerce operator must comply with it.
The “E-Commerce Law” stipulates that when consumers purchase goods
or accept services on e-commerce platforms and dispute with the on-platform
operators, the platform operators should actively assist consumers in safeguard-
ing their legitimate rights and interests.14 Therefore, in any dispute resolution
process, platform operators should assist consumers in safeguarding their
rights and provide consumers with necessary evidence for rights protection.
Under the “E-commerce Law”, if an e-commerce operator loses, con-
ceals, refuses to provide, forges, falsifies or destroys the original evidence

14. See art. 61 of the “E-Commerce Law”. “E-commerce platform operators” means legal persons or unincorpo-
rated organizations which, in e-commerce, provide two or more parties to an e-commerce transaction with
services (such as online business premises, deal-making, and information releasing) to enable these parties to
engage in transactional activities independently. “On-platform business operators” means the e-commerce
business operators which sell goods or provide services on an e-commerce platform.

380
such as the original contract and transaction records, causing the people’s
court, arbitration institution or relevant authorities to fail to ascertain the
facts, it shall bear the damage suffered by the parties to the dispute.
E-commerce platform operators’ obligation to assist in investigations
and provision of evidence for resolving disputes should be consistent with
their data retention obligations. According to the “E-commerce Law”, the
platform operators shall record and maintain the information on goods
and services published on the platform within three years from the date
of completion of the transaction, except as stipulated by laws and admin-
istrative regulations otherwise.15 If the platform operator fails to provide
or refuse to provide the original contract and transaction records within
the three-year legal retention period, it violates the information storage
obligation and shall be subject to corresponding administrative penalties.
However, if the original contract and transaction records involved in the
relevant e-commerce dispute exceed the retention period of three years, the
platform operator’s obligation of provision of evidence shall be discharged.

5.4 Internet courts’ electronic evidence systems

According to the Supreme People’s Court, the Internet courts should es-
tablish the online mechanisms for the submission, exchange, cross-exam-
ination and certification of electronic evidence. The Internet courts handle
the cases via Internet litigation platforms through which the parties and
other litigants participate in the litigation effectively. The data involved in
the trial of the case by the Internet courts shall be provided by the e-com-
merce platform operators, network service providers, and relevant state
agencies, accessed in an orderly manner, verified online by the Internet
courts, fixed in real time, and securely managed. If the Internet courts
organize online evidence exchange, the parties shall upload and import

15. See art. 31 of the “E-Commerce Law”.

381
the online electronic data into the litigation platforms, or electronically
digitize the offline evidence through scanning, remapping, transcription,
etc., and upload it to the litigation platforms for proof. The parties and
other participants in the litigation shall submit the litigation materials such
as the identity certificate, the copy of the business license, the power of
attorney, the legal representative’s identity certificate, appraisal opinions
and other documentary evidence in electronic means. After being approved
by the Internet courts, the evidence on the platforms is deemed to meet
the requirements of the original form. If the other party objects to the
authenticity of the above materials and has reasonable grounds, the Inter-
net courts shall require the parties to provide the original. The litigation
platforms shall store and use the data involved in the case in accordance
with the “Network Security Law” and other laws and regulations.

6. E-COMMERCE OPERATORS’ COMPLAINING

AND WHISTLEBLOWING MECHANISMS

According to the “E-commerce Law”, e-commerce operators should es-

tablish the mechanisms for accepting complaints and whistleblowing.16
This is a mandatory legal requirement and e-commerce operators are
obliged to establish this mechanism.
It is a new legal system for e-commerce operators to directly accept
complaining and whistleblowing. Previously, business operators, when
having disputes with the counterparty (such as consumers), were usually
in the position of being reported. For example, arts. 37 and 39 of the
Law on the Protection of Consumer Rights and Interests stipulate that
consumers may complain to the consumer association or the relevant
administrative department, instead of the operators.
The stipulation of the “E-commerce Law”, however, promotes e-com-

16. See art. 59 of the “E-Commerce Law”.

382
merce operators to understand the disputed information from users (in-
cluding consumers) in a timely manner, and timely resolve e-commerce
disputes by means of negotiation. Furthermore, given the e-commerce
platform operators’ capacity of improving dispute resolution efficiency
and reducing dispute resolution costs, most disputes among the on-plat-
form operators and consumers should be able to be resolved internally
through complaining and whistleblowing, rather than resorting to the
traditional dispute resolution methods such as litigation, arbitration,
mediation, and administrative processing.

6.1 E-commerce operators who accept

complaining and whistleblowing

Although all e-commerce operators are obligated to accept complaining

and whistleblowing, due to different types of operators, they also accept
complaining and whistleblowing.
With respect to the operators who conduct businesses through the
independent websites or other online services (such as social media
accounts or real-time video services), they shall enable their users to
directly complain and report the relevant issues, such as the quality de-
fects of negotiated goods or services or other violations. These operators
shall accept the complaints and whistleblowing from the users and deal
with them in a timely manner to improve customer service and quality
of goods and services, avoid relevant disputes, accept public supervision
and upgrade the operational level. The operator shall never revenge or
punish the users who complain or whistleblow.

E-commerce platform operators and operators within the platform

should also establish complaint and whistleblowing mechanisms, both of
which are mutually interconnected but relatively independent. The on-plat-
form operators’ complaints and whistleblowing mechanisms function like

383
that of the operators who conduct businesses through the independent
websites or other online services.
The situation for e-commerce platform operators is more compli-
cated. A platform operator accepts the complaints and whistleblowing
concerning the on-platform operators, which is an integral part of the
platform governance and one of the means to supervise and manage
the on-platform operators. The platform operators shall, in accordance
with the “E-commerce Law”, establish the rules on accepting com-
plaints and whistleblowing on the basis of the consensus with the rel-
evant parties inside and outside the platform, set up and publish the
relevant information systems and procedures for receiving complaints
and whistleblowing, and handle complaints and whistleblowing re-
ceived according to the rules.
Platform operators should also accept the complaints and whis-
tleblowing against the platform services, business methods and gov-
ernance behaviors from on-platform operators, consumers, intellectual
property owners or other public organizations outside the platform. In
these cases, the platform operators are the subject of the complaints
and whistleblowing and should make self-correction accordingly, if
appropriate.

6.2 Legal requirements for complaining

and whistleblowing mechanisms

According to the “E-commerce Law”, the complaining and whistleblow-

ing mechanisms of e-commerce operators should be convenient and
effective, acceptance and handling of complaints and whistleblowing
should be timely, and the complaining and whistleblowing methods
should be made public.
Art. 59 of the “E-commerce Law” does not stipulate the specific
implementation methods of complaints and whistleblowing, but in

384
e-commerce, complaining and whistleblowing mechanisms are gener-
ally operated by automatic information systems set up by the operators,
according to the operators’ rules and procedures.
E-commerce operators can publicize the information of complain-
ing and whistleblowing to users through the system announcements and
e-mails, and enable the users to easily track the status of the complaints
or whistleblowing. The relevant automatic information system can be em-
bedded in the user interface or in email system, whichever is convenient
and effective. It is not allowed to set up false and invalid complaining and
whistleblowing mechanisms to deceive users and the public.
After receiving complaints and whistleblowing, e-commerce oper-
ators should not only accept them in a timely manner, but also handle
them within a reasonable time. The operators shall promptly inform the
complainant or whistleblower the acceptance of case or provide the corre-
sponding inquiry systems. Currently, most mature e-commerce operators,
especially e-commerce platform operators, have all established consum-
er complaining and whistleblowing mechanisms. Normally, consumers,
through platform operators’ automatic information systems, should be
able to find the relevant methods and information, initiate the complaints,
track the acceptance status and query the processing results conveniently.
Since complaints and whistleblowing may involve confidential infor-
mation protected by law, the “E-commerce Law” does not stipulate that
e-commerce operators must publicize the results of complaints and whis-
tleblowing to the public.

385
6.3 Different treatments of complaints and whistleblowing

Complaints and whistleblowing that e-commerce operators should accept

are not the same in legal nature.
Where consumers complain about the quality of products or services
offered by the operators, or have other disputes with the operators in terms
of payment, after-sale services, and information disclosure, the operators
can handle the complaints through negotiation and dialogue, so as to settle
the disputes timely and prevent the disputes from deteriorating into serious
confrontations that have to be resolved through formal processes. For exam-
ple, according to the “E-commerce Law”, consumers may, through com-
plaining to the platform operators, request the platform operators to assume
the first payment responsibility for the quality defects of the on-platform
operators, on the basis of the platforms’ goods and service quality guarantee
mechanisms. The platform operators should negotiate with the consumers
promptly and notify the consumers the processing results.
Where an e-commerce operator is unable to handle the complaint
through its internal procedures, it shall promptly inform the complainant
of other dispute resolution methods, such as litigation, arbitration, medi-
ation etc. in accordance with the “E-Commerce Law”.
In the cases of whistleblowing, the whistleblowers indicate that the
crimes are suspected to be committed by e-commerce operators or other
people in the e-commerce system. In this regard, e-commerce operators
should not only promptly stop the suspected crimes and offences in their
capabilities, but also report to relevant law enforcement agencies in a
timely manner, and inform the whistleblowers to report to law enforce-
ment agencies.
E-commerce operators shall immediately stop and correct the sale of
prohibited or unlicensed goods or services revealed by whistleblowing,
notify the results to the whistleblowers, and report to the relevant com-
petent department, if needed.

386
 Upon receiving the whistleblowing regarding cybercrime or cyberse-
curity incidents (such as hacking, leaking etc.) occurring in their systems,
e-commerce platform operators shall immediately take technical mea-
sures or other necessary measures (such as suspension of transactions,
fixed evidence etc.), timely report to relevant authorities, transfer the rel-
evant information, clues and evidence to the authorities and assist in law
enforcement activities. All measures and results adopted by the platform
operators regarding cybersecurity incidents shall be promptly announced to
the users. If the users’ personal information is leaked or suffers from other
damages, the platform operators shall notify the relevant users one by one.

7. E-COMMERCE PLATFORM ONLINE

DISPUTE RESOLUTION MECHANISMS

Art. 63 of the “E-commerce Law” stipulates that e-commerce platform

operators can establish the online dispute resolution mechanism, formu-
late and publicize dispute resolution rules, and resolve the disputes fairly
and adherent to the principle of voluntariness.
This provision is an important institutional innovation. Although it
is not mandatory and platform operators are not legally obliged to estab-
lish the mechanism, this provision opens up a new space for e-commerce
dispute resolution and supplements an important component of platform
governance. The wording of this provision, although brief, contains im-
portant institutional sprouts and lays down the foundation for a new type
of dispute resolution mechanism.

7.1 Characteristics

According to art. 63 of the “E-Commerce Law”, platforms’ online dispute

resolution mechanism has several outstanding characteristics that impact
its nature, operational principles and legal effects.

387
7.1.1 No finality

Art. 63 of the “E-commerce Law” provides a broad space for platform

operators to construct the dispute resolution mechanisms in the means of
negotiation or blind-bidding via automatic information systems.17 Plat-
form operators can also provide online mediation services to facilitate
parties to reach settlement agreements to resolve disputes. For example,
Sina People’s Mediation Committee on the Internet, through the work
of the people’s mediators, allows the on-platform parties to the dispute
to recognize the right and wrong and reach an agreement.
Where a platform operator resolves the disputes through decision-mak-
ing, it should be consistent with the relevant legal provisions. In China’s
legal system, only litigation and arbitration are the means of dispute res-
olution through making decisions. According to the “Arbitration Law”,
arbitral awards are final and effective from rendering. Although the par-
ties may apply for a court of competent jurisdiction to revoke the arbitral
award in the circumstances stipulated by law, the court does not re-examine
the facts of the case and the reasons for the decision, and only examines
whether the legal arbitral conditions are met or whether any suspected
crime is committed in the arbitral process. The law respects the finality
of arbitration on the basis of the authority of arbitration process and the
autonomy of the parties to the dispute. Platform online dispute resolution
mechanism is still being experimented. Its relevant system construction
and process design are yet to be improved and can hardly fit into the ar-
bitration with finality stipulated by the “Arbitration Law”.
However, so-called arbitration without finality may be more suitable
for the needs of e-commerce dispute resolution. Arbitration without fi-

17. Blind bidding is enabled on an item, and the number of winners will be determined by the number of “Available
Quantity”. When placing a bid, the bidder will be notified if that bid is in the top winning position. If not,
they will need to enter a higher bid. In the dispute resolution process, the parties to the monetary payment
dispute may individually set their own acceptable prices through the automatic program; once the parties’
submitted prices match, the settlement agreement will be automatically reached.

388
nality, or quasi-arbitration, has been applied in the Chinese legal system.
The “Labor Dispute Mediation and Arbitration Law” and “The Law on
Rural Land Contract Management Dispute Mediation and Arbitration”
clearly stipulate the process for arbitration without finality, in which the
party who refuses to accept the arbitral award may sue in the people’s court
in accordance with the procedures and time limit prescribed by the laws;
during the judicial proceedings, the dispute between the parties shall be
retried by the people’s court.
Arbitration without finality and final arbitration may co-exist and be
complementary. For example, the Labor Dispute Mediation and Arbitra-
tion Law provides for both final arbitration and arbitration without finality
but applies to the different situations and parties. It shows the diversity
and flexibility of the arbitration processes that meet the needs of different
disputes. With the development of the platform online dispute resolution
mechanism and the establishment of the specialized arbitration organiza-
tions, the relevant e-commerce dispute resolution may be developed into
a final arbitration under the “Arbitration Law” in the future.
Arbitral procedures (with or without finality) have the advantage of
exceeding the geography and jurisdiction limits and adapt to the character-
istics of the civil and commercial disputes on the borderless and globalized
Internet. Since the introduction of the “Uniform Domain Name Dispute
Resolution Policy” in the Internet Domain Name System in 199818, most
Internet domain name management agencies have adopted quasi-arbitra-
tion procedures as a way to resolve conflicts between domain names and
trademarks; the parties who are dissatisfied with the domain name dispute
decisions can still bring lawsuit in the court of competent jurisdiction.19

18. Under the Uniform Domain-Name Dispute-Resolution Policy, the mandatory administrative proceeding re-
quirements shall not prevent either domain name holder or the complainant from submitting the dispute to a
court of competent jurisdiction for independent resolution before such mandatory administrative proceeding
is commenced or after such proceeding is concluded.
19. There are few domain name dispute resolution procedures in the form of final arbitration, such as “.HK” domain
name dispute resolution policy. Under the policy, if an arbitration panel decides that the registrant’s domain

389
E-commerce platform operators can learn from the successful experience
of non-final arbitration applied in the Internet domain name system, es-
tablish the relevant dispute resolution rules, improve the dispute resolu-
tion procedures, and meet the needs of e-commerce dispute resolution.

7.1.2 Voluntariness

According to the “E-commerce Law”, platform dispute resolution mecha-

nism shall follow the principle of voluntariness, i.e. the platform operator
voluntarily establishes an online dispute resolution mechanism, and the
parties voluntarily adopt the mechanism to resolve the dispute.
Dispute resolution mechanism constitutes an integral part of the platform
governance measures to maintain a normal trading order. However, considering
that platform operators have insufficient experience and ability in dispute resolu-
tion, the “E-commerce Law” does not require the platform operators to establish
relevant dispute resolution mechanisms. In the future, platform operators may
have to establish dispute resolution mechanisms for platform governance purpose.
The parties may voluntarily choose to use the platform dispute reso-
lution mechanism to resolve the dispute. Platform operators shall never
impose the platform dispute resolution rules and/or the process on the
on-platform operators or other parties to the disputes. In any case, if the
parties choose not to use the platform dispute resolution mechanisms, the
platform operators shall not object or obstruct. The parties have the freedom
to choose other dispute resolution methods such as mediation, adminis-
trative complaints, or litigation as stipulated in the “E-commerce Law”.
Platform dispute resolution rules and platform transactional rules have
both similarities and differences. If the platform operator voluntarily es-

name registration should be cancelled or transferred, the registrar will wait 10 business days after the registrar
and HKIRC are informed by the applicable provider of the arbitration panel’s decision before implementing
that decision; where the registrar does not execute the decision without giving a reason acceptable to HKIRC
in its reasonable discretion, HKIRC shall execute the decision of the dispute.

390
tablishes an online dispute resolution mechanism, it shall formulate, revise
and publicize the relevant dispute resolution rules in accordance with the
requirements on platform transactional rules stipulated by the “E-com-
merce Law”. However, unlike transactional rules, dispute resolution rules
are only applicable on the basis of the parties’ choice.

7.1.3 Neutrality

The “E-Commerce Law” does not explicitly require the neutrality of the
platform dispute resolution mechanism. Instead, platform operators are
required to “fairly and justifiably resolve the parties’ disputes”, which de-
fines the operation of the platform dispute resolution mechanism.
The disputes that can be resolved by the e-commerce platform dispute
resolution mechanisms include the disputes between the on-platform
operators, between on-platform operators and consumers, and between
on-platform operators and other entities (such as intellectual property own-
ers). However, platform dispute resolution mechanisms should never be
applied to the disputes involving the platform operators. “No one should
be a judge in his own case” is the basic principle of dispute resolution.
Once the platform operators became a party to the disputes, the platform
dispute resolution mechanisms would lose the credibility and neutrality
irrespective of whether the disputes are resolved in a “fair and just” man-
ner. Therefore, platform dispute resolution mechanisms must be neutral,
ensuring that the platform operators are not the party to any dispute. The
disputes involving platform operators (e.g. complained by the on-platform
operators for platform sanction measures or other implementation of the
platform rules) can be resolved by means of mediation, arbitration, litiga-
tion and other means stipulated in the “E-commerce Law”.
According to art. 61 of the “E-commerce Law”, when consumers pur-
chase goods or accept services on the e-commerce platforms and dispute
with the on-platform operators, the platform operators should actively assist

391
consumers in safeguarding their legitimate rights and interests. However,
with respect to the platform dispute resolution mechanisms, the platform
operators’ foregoing assistant duty should not be applied; otherwise, the
platform operators would clearly violate the principle of neutrality by “ac-
tively assisting consumers” in the proceeding.

7.1.4 Independence

According to the “E-commerce Law”, platform operators can not only

establish dispute resolution mechanisms and formulate dispute resolu-
tion rules, but directly run the dispute resolution mechanisms to resolve
the disputes between the parties. As such, the platform dispute resolu-
tion mechanisms are not independent but associated with or built into
the platforms.
Like neutrality, independence is another basic guarantee for fair and
equitable dispute resolution. Although not being the parties to the dis-
putes, the platform operators, once receiving payment from or having
contractual relationship with the parties of the disputes, may still have the
potential conflict of interests. If the platform dispute resolution mech-
anisms are directly run by the platform operators or associated with the
platforms, neutrality of the platform dispute resolution mechanisms may
be doubted and challenged.
The lesson from the Internet domain name dispute resolution can be
learned. Although the domain name authorities establish the domain name
dispute resolution system and formulate the dispute resolution rules and
procedures, they do not directly operate the dispute resolution mechanisms.
Instead, they authorize professional dispute resolution agencies (such as
arbitration organizations) to independently resolve the disputes between
the complainants and the domain name holders in accordance with the
rules and procedures. The independence of the operating organizations
guarantees the fair and just resolution of the domain name disputes.

392
 Therefore, after the platform operators establish the dispute resolu-
tion mechanisms and formulate dispute resolution rules and procedures
(including appropriate measures for disclosure of conflict of interests), it
is advisable to delegate the operation to the independent organizations
and supervise the operation.

7.1.5 Proceedings operating online

According to the “E-Commerce Law”, platform operators may establish

the “online settlement mechanisms.” Therefore, platform dispute reso-
lution mechanisms, if established, should only operate online, although
the traditional offline methods may be supplementary in the proceedings.
China’s e-commerce platform operators have established and operat-
ed online dispute resolution mechanisms. Alibaba Group has established
a public review mechanism on the Internet platform. Since its launch in
2012, it has resolved more than 100 million disputes, and nearly 5 million
users have actively participated in the improvement of platform rules and
dispute resolution. In 2012, Sina.com implemented the “microblogging
community convention” and established the Sina Weibo Community
Committee online, in which a netizen committee was delegated to decide
disputes in Sina Weibo. The committee participates in the judgment of
violations online, and decides whether the specific behavior is in violation
through online voting. If the violations are found and confirmed by the
committee, penalties (such as suspension of the accounts) will be imposed
on the parties in accordance with the convention and management rules.

393
8. CROSS-BORDER E-COMMERCE
DISPUTE RESOLUTION

According to art. 73 of the “E-commerce Law”, the State promotes the estab-
lishment of a cross-border e-commerce dispute resolution mechanisms with
different countries and regions. This legal provision shows that the importance
of dispute resolution mechanisms is in cross-border e-commerce. Non-litigation
dispute resolution methods (such as mediation and arbitration) that avoid the
complicated legal issues on conflicts of laws and jurisdiction have the obvious
advantages and the considerable potential for cross-border e-commerce. If these
dispute resolution mechanisms could develop into online modes, they would
be even more suitable for resolving the disputes of cross-border e-commerce.
The establishment of a dispute resolution mechanism for cross-border
e-commerce between different countries and regions needs the internation-
al treaties and agreements as the international legal support. China and the
“One Belt One Road” partner countries have negotiated the cross-border
e-commerce (online) dispute resolution mechanisms in the bilateral trade or
investment agreements. China also actively participates in the development of
the United Nations Commission on International Trade Law (UNCITRAL)
Technical Notes on Online Dispute Resolution. The document, although merely
descriptive and not binding, intends to assist UN member states in develop-
ing relevant online dispute resolution mechanisms and resolving, particularly,
cross-border small-scale e-commerce contractual disputes.
When the international legal system is still being developed, cross-border
e-commerce online dispute resolution mechanisms will not be fully established
overnight. The “E-commerce Law”, however, provides new ideas and possi-
bilities. When the relevant international legal system has not been established,
cross-border e-commerce platforms can establish the online dispute resolu-
tion mechanisms for the parties from different countries or regions. When the
parties to the dispute voluntarily adopt the platform online dispute resolution
mechanisms, the cross-border e-commerce disputes can be resolved efficiently.

394
 Navigation for Third-Party Funding
in Arbitration of Mainland China
Yao Yu1

1. INTRODUCTION

While the arbitration community keeps striving to provide the users of

international arbitration with tools to save time and costs, these efforts for
procedural reform have their natural limits. Parties must recognize that
good arbitration costs a good deal of money.2

Money, so they say

Is the root of all evil today
But if you ask for a rise, it’s no surprise
That they’re giving none away
(Pink Floyd, “Money”, The Dark Side of the Moon – 1973)

1.Case Manager, Business Development Division of CIETAC Arbitration Court.

2. VON GOELER, J. Third-Party Funding in International Arbitration and its Impact on Procedure. [S. l.]:
Wolters Kluwer Press, 2016. p. 1.
2. COSTS AND FUNDS OF DISPUTE
RESOLUTION IN CHINA

2.1 Rationales of litigation and arbitration costs

Litigation, a fundamental right of citizens, has emerged in human civ-

ilization for centuries. However, given that peace and harmony were
main values in ancient China, lawsuits were not encouraged at that age.
Confucius, well-known for his pursuit of harmony, once said: “I don’t
understand how to better judge cases, but I understand the significance
of eliminating suits.”
Due to the limited capacity of the ancient government on dealing with
lawsuits, the litigation costs aimed to restrain the amount of suits. In his-
tory, the cost of litigation has been first recorded by a prose3 in Western
Zhou4 (Dynasty), which defined its nature as discouragement from ancient
suits. According to the litigation regulations of China, parties shall pay
litigation costs to participate civil or administrative litigation with certain
exceptions5. Apart from preventing frivolous claims, the establishment of
litigation costs also enhances the efficiency of judicial system and reduces
unnecessary expenses of the government.
With the rapid development of cross-border commercial activities
and the increasing pressure for judiciary to resolve disputes, arbitration
has become well-received and played a major role in alternative dispute
resolution mechanisms to relieve the judicial pressure. In respect to the
arbitration costs, art. 26 of Measures on Arbitration Fees to be Charged by

3. The Criminal Justice, Zhou Li (周礼▪秋官司寇▪大司寇), by Mr. Zhou Gongdan, a litterateur of Western
Zhou Dynasty.
4. 1046-771 BCE.
5. Art. 2 of Measures on the Payment of Litigation Costs: “[…] the litigation costs which need not be paid or which
are exempted from payment under the present Measures shall be an exception.”
6. When making an application for arbitration, the parties shall pay arbitration fees to the arbitration commission
in accordance with the provisions of these Measures. Arbitration fees shall include fees for accepting a case
and for processing a case.

398
Arbitration Commissions (Measures) requires parties to pay arbitration fees
to the arbitration commission when applying for arbitration, and art. 767
of Arbitration Law of the People’s Republic of China (PRC Arbitration
Law) also touches upon the arbitration costs.
As non-profit organizations, Chinese arbitral institutions are not al-
lowed to profit by the arbitration fees, whose composition has been clearly
regulated by laws. According to Measures, arbitration fees shall include fees
for accepting a case and for processing a case.8 In practice, the institution-
al arbitration rules usually categorize the arbitration fees as Acceptance/
Registration Fee and Handling Fee like CIETAC9, while it is noted that
those two categories only apply to Chinese domestic cases but not to for-
eign-related cases in accordance with the said rules. Moreover, the latest
developments of arbitral institutions have breached through the tradition-
al categories of arbitration fees. For example, following the international
arbitration practice, BAC10 has categorized them as Arbitrator’s Fees and
Administration Fees in their latest arbitration rules11.
For Chinese domestic cases, arbitration fees usually cover the remu-
neration for arbitrators and case managers, as well as cost of facilities, like
hearing rooms and administrative expenses like transcripts. However, in
international arbitration practice, most of the above mentioned expens-
es are commonly charged separately in addition to the arbitration fees.
Thus, the compositions of arbitration fees in international arbitration and
Chinese domestic arbitration have different bases, which makes a typical
feature on the costs of Chinese arbitration.

7. Parties shall pay arbitration fees according to regulations. Measures for charging arbitration fees shall be submi-
tted to the price control authorities for examination and approval.
8. Arts. 2, 3 and 7 of Measures on Arbitration Fees to be Charged by Arbitration Commissions.
9. China International Economic and Trade Arbitration Commission.
10. Beijing Arbitration Commission or Beijing International Arbitration Center.
11. See Annex I: Beijing Arbitration Commission Schedule of Arbitration Fees of Beijing Arbitration Commission
Arbitration Rules, effective as of September 1st, 2019.

399
2.2 To face the costs with funding

International arbitration proceedings are expensive. Some parties may be

willing to pay these costs, but are unable to. Other parties are able to pay
them, but may be unwilling to.12 When commercial elements kick into the
dispute resolution process, the cost of arbitration and litigation is endowed
with a new function to attract capitals. And funds arise in where capital
needs. The parties now are not always necessary to fund their claims and
bear the costs of the proceedings alone.
The availability of alternative funding options in dispute resolution pro-
ceedings is one of the main characters of Chinese funding market, which
includes lawyer funding, insurance and claim assignment.13 Accordingly,
those funding options are regulated by corresponding rules and common
to see in practice.
Contingency fee arrangement or “Risk Agency” is a regular charging
method adopted by Chinese lawyers in dispute resolution, of which the
aggregate amount may take up to more than 90% of the total legal fees
charged by the lawyer in a case. Under this arrangement, counsel invests
the value of its own legal services in the case, with remuneration depending
on the case’s outcome.14 In general, Chinese lawyers consider risk agency
as a charging method rather than a funding tool due to the restriction on
law firms’ business to “legal service”.15 However, even if a law firm does not
advance any specific amounts for costs, they are effectively contributing
something of material value – legal services – in exchange for an interest
in the final award.16 And this business model demonstrates the feature of

12. VON GOELER, J. Third-Party Funding in International Arbitration and its Impact on Procedure. [S. l.]:
Wolters Kluwer Press, 2016. p. 2.
13. ZHANG, B; HU, M. A Snapshot of the Chinese Third-Party Funding Market, 2017.
14. Kantor, 24 ICSID Rev. (2009) 65, 65; Molot, 99 Geo. L.J. (2010) 65, 90.
15. Art. 27 of Lawyers Law of the People’s Republic of China: “[…] a law firm shall not be engaged in business
operations other than legal services.”
16. Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration (2018). p. 46.

400
third-party funding, a financing method in which an entity that is not
a party to a particular dispute funds another party’s legal fees or pays an
order, award, or judgment rendered against that party, or both.17

3. THIRD PARTY FUNDING

Show me your case and I’ll show you the money.

Report of the ICCA-Queen Mary Task Force on Third-Party Funding

in International Arbitration (ICCA-Queen Mary Report) has adopted a
broad definition of third-party funding to consider a full range of funding
models, including the aforementioned alternative funding options in China.
However, the focus of this paper is on the purely commercial third-party
funding (TPF) which has not yet been regulated by Chinese legislation
and is beyond the traditional funding options in Chinese funding market.
In practice, TPF has been promoted by Chinese third-party funders as a
non-recourse funding option with the nature of investment. Professional
Chinese funders try to separate themselves from lawyers and other tradi-
tional investors to develop the unique features of TPF.18
The doctrines of maintenance and champerty in common law jurisdic-
tions contradict with the idea of TPF. They originated from concerns in
medieval times that unless laws were put in place to prevent the legal sys-
tem from being abused by feudal lords, their “[…] power might (be used
to) convert (a weak claim) into a strong one”.19 This was at a time when
noblemen were powerful and the judiciary was not always independent.20

17. NIEUWVELD, L. B.; SAHANI, V. S. Third-Party Funding in International Arbitration. 2nd ed. [S. l.]:
Kluwer Law International, 2017, p. 1. Quoted from: Maya Steinitz. Whose Claim Is This Anyway? Third-
-Party Litigation Funding, 2011. 95 Minn. L. Rev. p. 1275-1276.
18. ZHANG, B; HU, M. A Snapshot of the Chinese Third-Party Funding Market, 2017.
19. BENTHAM, J. The Works of Jeremy Bentham. Edinburgh: William Tait, 1843. v. 3 letter XII.
20. BAO, C. Third Party Funding in Singapore and Hong Kong: The Next Chapter. [S. l.]: International Arbi-
tration, Kluwer Law International, 2017, v. 34, issue 3, p. 389.

401
Whatsoever, the recent legislation of arbitration-friendly jurisdictions, such
as Hong Kong21 and Singapore, has started to clear their path to establish
arbitration hub and eliminate the negative effects of the champerty doc-
trine or legitimate TPF in international arbitrations. On the other hand,
as a civil law jurisdiction, Mainland China has no such rooted doctrines
to hinder the path of TPF in arbitration.

3.1 Approaching TPF in different jurisdictions

The evolution of TPF varies by countries. In general, TPF stepped into

litigation ahead of arbitration in most jurisdictions while the regulations
follow the same order. Funders who invested in litigation were also the
main players in arbitration. Therefore, TPF in arbitration is usually regu-
lated in accordance with the same or similar rules as in litigation.22

3.1.1 UK

In November 2011, the Civil Justice Council under the UK Department

of Justice issued the Code of Conduct for litigation funders to appoint
the Association of Litigation Funders of England & Wales (ALF) to
conduct self-regulation of TPF industry. And the latest version of the
Code of Conduct for Litigation Funders (2018 Code)23, released by ALF
in January 2018, is binding to all ALF members.
The 2018 Code regulates TPF by imposing the requirements of con-
fidentiality and capital adequacy, the restriction of unilateral agreement
termination and the control of proceedings by funders. However, this

21. The Hong Kong Special Administrative Region of the People’s Republic of China.
22. The Law Reform Commission of Hong Kong, Third Party Funding For Arbitration Sub-Committee, Consul-
tation Paper Third Party Funding For Arbitration, October 2015. Available at: https://www.hkreform.gov.
hk/en/docs/tpf_e.pdf. Accessed on: June 30th, 2019.
hk/en/docs/tpf_e.pdf
23. Code of Conduct for Litigation Funders, January 2018. Available at: http://associationoflitigationfunders.com/
wp-content/uploads/2018/03/Code-Of-Conduct-for-Litigation-Funders-at-Jan-2018-FINAL.pdf. Acces-
wp-content/uploads/2018/03/Code-Of-Conduct-for-Litigation-Funders-at-Jan-2018-FINAL.pdf
sed on: June 27th, 2019.

402
self-regulatory model mainly depends on the voluntary compliance of
funders. To further regulate, the Parliament of UK indicated it shall amend
legislation in due course when TPF is further expanded.24

3.1.2 Australia

Australia recognizes the legality of TPF and believes it is no longer sub-

ject to the doctrines of maintenance and champerty. Its judicial practice
demonstrates the domestic litigation procedures are sufficient to prevent
the abuse of TPF.25 Since 2006, the Australian courts have established
their views towards TPF by a series of cases. In 2006, the High Court of
Australia recognized the validity of TPF agreements due to the positive
role of funds in promoting the group litigations by the Fostif case26. From
then on, the discussion of litigation funding in Australia gradually shifted
from whether it should be allowed to how it would be regulated. In 2009,
the High Court of Australia decided the funder was not required to com-
pensate the opposite party on the costs, and considered the court to have
discretion ordering costs against non-party by the SST case27.
However, the laissez-faire attitude towards TPF by Australia has been
questioned. And the calling for regulation to TPF is getting increased,
including the funders.28 In summary, Australia has not formed a system-
atic regulatory model for TPF, and only explicitly sets out the rules on
conflicts of interest to demand for self-regulation.

24. Parliamentary Debates, United Kingdom House of Lords, February 1st, 2012, Column 1596 (Lord Davies of
Stamford).
25. Campbells Cash and Carry Pty Limited v Fostif Pty Limited [2006] HCA 41.
26. Id.
27. Jeffery & Katauskas Pty Limited v. SST Consulting Pty Ltd [2009] HCA 43.
28. BALL, J. Clear regulation needed for litigation funding. Australian Financial Review, 25 October 2013. Avai-
lable at: http://www.afr.com/p/national/legal_affairs/clear_regulation_needed_for_litigation_phBlSxTNE-
CIUD1L1IVB7DK. Accessed on: June 30th, 2019.

403
3.1.3 USA

In the US, the consistent trend across the country is toward limiting, not
expanding, champerty’s reach.29 Courts in a number of states, including
Arizona, California, Connecticut, New Jersey, New Hampshire, New
Mexico and Texas, have determined that those states never incorporat-
ed those torts from English law.30 Other states, such as Massachusetts,
have expressly abolished the doctrines. As of June 2014, seven states have
clearly defined the legality of TPF by state legislation, and twelve other
states have completed or are in the process of state-level legislation on
TPF regulatory issues.31 American scholars describe the status of state
legislation on this issue as “piecemeal”.32 On the level of federal legisla-
tion, there have been proposals to amend Rule 26 of the Federal Rules of
Civil Procedure requiring disclosure of TPF at the beginning of all civil
cases, all of which were rejected by the legislature.33 It is hard to uniform
legislation on the federal level while the state legislation of TPF is differ-
ent from one another.
To make up for the inadequacy of legislation on TPF, the professional
ethical guidelines of several states bar associations have incorporated the
conflict of interests rules to attorneys when they refer funders to the client.34

29. Del Webb Communities, Inc. v. Partington, 652 F.3d 1145, 1156 (9th Cir. 2011).
30. Ethics Committee of the Commercial and Federal Litigation Section of the New York State Bar Association,
Report on the Ethical Implications of Third-Party Litigation Funding (2013).
31. SHANNON. V. A. Third-Party Litigation Funding and the Dodd-Frank Act. The Tennessee Journal of
Business Law, 2014.
32. SHANNON. V. A. Harmonizing Third-Party Litigation Funding Regulation. 36 Cardozo Law Review,
2014-2015, p. 877.
33. HARRISON, M. D.; PAI, P. G. California Court Gets Automatic Funding Disclosure Right. Available at:
https://www.benthamimf.com/docs/default-source/default-document-library/law360-calif-court-gets-auto-
matic-funding-disclosure-right-mh-pp-feb-2017.pdf?sfvrsn=2. Accessed on: June 30th, 2019.
34. The Ethics Committee of the Commercial and Federal Litigation Section of the New York State Bar Associa-
tion, Report on the Ethical Implications of Third-Party Litigation Funding, April 16th, 2013:6. Available
at: http://www.nysba.org/workarea/DownloadAsset. aspx?id=25665, Accessed on: May 27th, 2018.

404
3.1.4 Asia

As the rising popular international arbitration hubs, both Singapore and

Hong Kong have inherited the doctrines of maintenance and champerty.
Yet, it is only very recently (and in order to “clear the way” for the intro-
duction of TPF in international arbitration) that Singapore and Hong
Kong have taken steps to abolish the relevant offences.35 Hong Kong’s
approach differs from Singapore’s because it merely carves arbitration out
of the doctrines of maintenance and champerty, while Singapore abolishes
the doctrines altogether.36

3.1.5 Singapore

In 2011, the Singapore Ministry of Law consulted on the revision of its

International Arbitration Act and officially raised the issue of legalizing
TPF in international arbitration for the first time.37 By Civil Law (Amend-
ment) Act 2017, Singapore confirms the legality of TPF to the international
arbitration procedures, related court procedures and mediation process.38
Legislation of Singapore reflects its amity to TPF in international arbi-
tration practice and commitment to establish Singapore as international
arbitration hub. From the regulatory perspective, Singapore has adopted
a clear regulatory model by the government.39

35. BAO, C. Third Party Funding in Singapore and Hong Kong: The Next Chapter. [S. l.]: International Arbi-
tration, Kluwer Law International, 2017, v. 34, issue 3, p. 390.
36. THOMSON, D. Third-party funding gets all clear in Hong Kong, 14 June 2017. Available at: https://globalarbitrationre-
view.com/article/1142879/third-party-funding-gets-all-clear-in-hong-kong. Accessed on: June 30th, 2019.
37. Singapore Ministry of Law, Review of the International Arbitration Act：Proposals for Public Consultation,
2011, para.32. Available at: https://www.mlaw.gov.sg/content/dam/minlaw/corp/assets/documents/linkcli-
ckf651.pdf. Accessed on: June 30th, 2019.
ckf651.pdf
38. Regulation 3 of the Singapore Civil Law (Third-Party Funding) Regulations 2017.
39. HUAPING, Q. Third Party Funding of International Arbitration: Issues and Regulation. Journal of CUPL,
n. 1, 2018, p. 63-64.

405
3.1.6 Hong Kong

On June 14th, 2017, Hong Kong approved TPF of arbitration by adopting

the legislation ordinance40 which clarifies that the 700-year-old common
law doctrines of maintenance and champerty do not prohibit TPF of ar-
bitration and mediation seated in Hong Kong.41
As the Court of Final Appeal decision in Unruh v. Seeberger42 express-
ly left open to the question of whether the doctrines of maintenance and
champerty apply to TPF for arbitration taking place in Hong Kong, the
Chief Justice and the Secretary for Justice asked the Law Reform Com-
mission (LRC) of Hong Kong to review this subject in June 2013.43 And
the Hong Kong Department of Justice submitted a motion to the Leg-
islative Council to amend the Arbitration Ordinance and the Mediation
Ordinance, which was passed in June 2017 to permit TPF. Being an
early stage of developing TPF in Hong Kong, the LRC has finally rec-
ommended the “light touch” regulatory principle for the first three years
towards TPF industry.44

4. TPF IN MAINLAND CHINA

Despite TPF is rather new to Mainland China, the idea of funding liti-
gation and arbitration has already existed in practice for years. Although
no further statement has been announced by relevant legislative entities

40. Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017, Ord. no. 6 of
2017 (Third Party Funding Ordinance).
41. THOMSON, D. Third-party funding gets all clear in Hong Kong, 14 June 2017. Available at: https://glo-
balarbitrationreview.com/article/1142879/third-party-funding-gets-all-clear-in-hong-kong. Accessed on:
30th, June 2019.
42. (2007) 10 HKCFAR 31, at para 123.
43. The Law Reform Commission of Hong Kong, Third Party Funding For Arbitration Sub-Committee, Consul-
tation Paper Third Party Funding For Arbitration, October 2015. Available at: https://www.hkreform.gov.
hk/en/docs/tpf_e.pdf. Accessed on: June 30th, 2019.
hk/en/docs/tpf_e.pdf
44. The Law Reform Commission of Hong Kong, Report-Third Party Funding for Arbitration. October 2010, para
2.10. Available at: http://www.hkreform.gov.hk/en/docs/rtpf_e.pdf
http://www.hkreform.gov.hk/en/docs/rtpf_e.pdf. Accessed on: June 30th, 2019.

406
or governing authority at this stage, it is fair to conclude TPF has no legal
barrier under the current Chinese law. However, as aforementioned, the
comparatively low cost of domestic arbitration provides low incentive to
the funding market.

4.1 Plain ground to develop

Though China has been the second largest economic body in the world,
the performance of professional legal services are relatively lagging be-
hind,45 especially for the cross-border legal practice such as international
arbitration. Corresponding to the international arbitration practice of
mainland, the legislation has not touched upon TPF in arbitration though
there is general agreement that the arbitration mechanism under Chinese
law is harmonious on TPF.46 Furthermore, given the expanding arbitra-
tion market in Mainland China, the potential participation of TPF in
arbitration is expectable.
According to China’s Annual Report on International Commercial
Arbitration (2018) released by CIETAC, the nationwide 255 arbitration
commissions have accepted 544,536 cases with the total dispute amount
of RMB 695 billion. Among them, 56 commissions have accepted 3,673
cases involving foreign states (1,570 cases) and regions as well as Hong
Kong (1,501 cases), Macao (321 cases) and Taiwan (281 cases). From
above, the international cases (and Hong Kong, Macao, Taiwan cases)
only take 0.67% of the total caseload, which were accepted by 21.96% of
the mainland arbitral institutions. And most of these international cases
were unevenly distributed to several major institutions. Take CIETAC
for example, it managed 522 international cases, of which 79 cases used

45. HUAPING, Q. Third Party Funding of International Arbitration: Issues and Regulation. Journal of CUPL,
n. 1, 2018, p. 64.
46. XUEHUA, W.; XING, Y.; ZHI, Z.; XIAN, H. Annual Review on Commercial Arbitration in China (2018).
Commercial Dispute Resolution in China: An Annual Review and Preview (2018), Kluwer Law International,
Wolters Kluwer Law & Business, 2018. p. 39.

407
English, Germany or Chinese-English (bilingual) as the arbitration lan-
guage in 2018.
Generally speaking, domestic arbitration cases cost lower than for-
eign-related cases, and take the majority of the total caseload in China.
And this characteristic of Chinese arbitration may contribute to the rel-
atively slower growth of TPF in China.47 Nevertheless, in the absence of
deep-rooted obstacle of champerty doctrine, Chinese TPF does possess
the potential to cross its path. And Chinese arbitral community is also
getting ready to meet this controversial funding mechanism.

4.2 Breakthroughs

Since 2015, CIETAC HKAC48 has worked on addressing the concerns

relating to TPF in arbitration with the assistance of a working group com-
posed of 10 experienced arbitration practitioners to draft the Guidelines
for Third Party Funding for Arbitration (Guidelines). The Guidelines were
released by CIETAC HKAC, on September 1st, 2017, which were for-
mulated to set out “[…] certain principles of practice and conduct which
CIETAC HKAC encourages parties and arbitrators to observe in respect
of actual or anticipated arbitration proceedings in which there is or may be
an element of third party funding.”49 And it is comprised by three parts:
the first sets out general principles, the second applies to parties seeking
funding and the third applies to arbitrators in affected cases.50

47. XUEHUA, W.; XING, Y.; ZHI, Z.; XIAN, H. Annual Review on Commercial Arbitration in China (2018).
Commercial Dispute Resolution in China: An Annual Review and Preview (2018), Kluwer Law International,
Wolters Kluwer Law & Business, 2018. p. 37.
48. China International Economic and Trade Arbitration Commission Hong Kong Arbitration Center, the first
overseas branch of CIETAC, established in 2012.
49. Art. 1.1 of the Guidelines.
50. ROGERS, J.; TOWNSEND, M. CIETAC Hong Kong consults on draft guidelines on Third Party Funding.
Kluwer Arbitration Blog, 2016. Available at: http://arbitrationblog.kluwerarbitration.com/author/matthew-
-townsend. Accessed on: June 27th, 2019.

408
 In addition to the Guidelines, CIETAC also published its Interna-
tional Investment Arbitration Rules (“Rules”) in October 2017, which was
the first set of investment arbitration related rules to be introduced by an
arbitration institution in China, addressing the issue of disclosure and the
potential conflicts of interests faced by arbitrators due to the involvement
of TPF. Both the Guidelines and the Rules have been featured in the 2018
ICCA-Queen Mary Report.
Besides the efforts of CIETAC, the research and breakthrough on
TPF has also emerged one after another recently. The Shenzhen Court of
International Arbitration’s Rules of Facilitating Negotiations, implemented
on December 1st, 2016, has adopted a clause facilitated by a third-party
funder in art. 1851. The China Internet Arbitration Alliance published its
new Rules for Bridging Ad hoc Arbitration and Institutional Arbitration on
September 19th, 2017, in which the recoverability of TPF premium and
relevant conditions are governed in art. 2652 of the said rules. In February
11th, 2019, BAC released its trial version of Rules for International Invest-
ment Arbitration, which touches upon the definition, disclosure and fees
of TPF.53 Furthermore, active Chinese funder DS Legal Capital54 also
contributed by submitting its Snapshot of the Chinese Third-Party Funding
Market to the ICCA-Queen Mary Report Task Force in 2017, and pub-
lished the Code of Practice for Third Party Funders in China (draft version),
in 2018, to seek for public consultation.55

51. Art. 18 regards the negotiation promote procedure of TPF.

52. In TPF cases, the arbitral tribunal may decide the losing party to bear the expenses of the third-party funder,
according to the funding agreement and payment evidence provided by the funder, in consideration of the
necessity of the funds and the reasonableness of the amount received by party.
53. Art. 39 of the said rules.
54. Introduction of DS Legal Capital. Available at: http://www.dslegalcapital.com/list-13-1.html. Accessed on:
June 27th, 2019.
55. Code of Practice for Third Party Funders in China (draft version). Available at: https://mp.weixin.qq.com/s/
B3HGD69qBZRPh6d1Qs7pxQ. Accessed on: June 27th, 2019.
B3HGD69qBZRPh6d1Qs7pxQ

409
4.3 Performances of funders and academics

In the past years, there has been a significant increase on the funding ac-
tivities in China. In 2018, DS Legal Capital funded 448 cases with the
total disputed amount of RMB 2,98743 billion56, making a growth by
43 cases compared to 2017. It also indicates that DS Legal Capital has
started the investment on a portfolio case and received comparable prof-
its. Headquartered in Shenzhen, DS Legal Capital has set up branches
in Beijing, Hong Kong and Changsha. And it is expected the Shanghai
and Chongqing office to be set up next.57 Bangying Legal58, another ma-
jor funder in China, invested 57 cases in 2018, accounting for 28.43% of
total cases reviewed. The disputed amount of cases it invested has reached
RMB 928 million in 2018, and this amount has already been surpassed
by the amount of the first quarter solely in 2019.59
Besides practitioners, academic researches and publications on TPF
have also been notable recently. As per the statistics issued by Chinese
National Knowledge Infrastructure (CNKI), under a growing trend, there
are over 30 publications (not including publications in languages other
than Chinese) with regard to TPF from 2015 to 2018. The publications
are categorized by journal articles (73%) and doctoral or master’s thesis
(27%). For the occupation of authors, 86% of them are professors and stu-
dents, 11% of them are lawyers and in-house counsels, 3% are academic
researchers.60 Thus, TPF has not only gained its popularity among prac-
titioners, but also drew much attention from academics.

56. Statistics from The Year 2018 of DS. Available at: http://www.dslegalcapital.com/show-15-195-1.html. Ac-
cessed on: June 27th, 2019.
57. News by DS Legal Capital. Available at: http://www.dslegalcapital.com/show-15-198-1.html. Accessed on:
June 27th, 2019.
58. Introduction of Bangying Legal. Available at: https://www.bangying.org/aboutus.html. Accessed on: June
27th, 2019.
59. Sources from a staff of Bangying Legal.
60. CHANGLIN, S. Report of the Research on Domestic TPF-related Academic Achievements, 2018. Available
at: https://mp.weixin.qq.com/s/YdoQjW10CFX5UTjmn0HVJA. Accessed on: June 27th, 2019.

410
5. CONCERNS OF TPF REGULATIONS

Due to the involvement of non-parties in arbitration, the expansion of

TPF brought up concerns by arbitration practitioners, including but not
limited to the concerns of frivolous claims, the ethical considerations and
the capital adequacy of funders. To the extent TPF does raise intricate
procedural issues, these issues can be addressed using a scalpel rather than
a hatchet.61

5.1 Frivolous claims

Actually, the first concern regarding frivolous claims has been frequently
contradicted by opposite opinions in practice. The rationale behind this
concern is a party may rashly initiate the arbitration process due to the aid
of funding. In addition, since the funding may be shared among several
funders in a single case, each funder may also lack the motivation to assess
the case.62 All of which may lead to the potential frivolous claims. However,
advocates holding this view may be able to find out another story in practice.
The doctrines of maintenance and champerty originated in history
when it is necessary for the imperfect judicial system to prevent frivolous
claims and to restrict the number of disputes given its limited capacity
of trial. But the inherited doctrines from common law have gradually
been abandoned by modern judicial practice. As mentioned above, sev-
eral jurisdictions have already abandoned the application of this doc-
trines in arbitration.

61. VON GOELER, J. Third-Party Funding in International Arbitration and its Impact on Procedure. [S. l.]:
Wolters Kluwer Press, 2016. p. 438.
62. DEFFAINS, B.; Desrieux, C. Litigation Financing: A Comparative Analysis. p. 11. Available at: http://cite-
seerx.ist.psu.edu/viewdoc/download?doi=10.1.1.348.5724&rep=rep1&type=pdf. Accessed on: June 30th, 2019.
seerx.ist.psu.edu/viewdoc/download?doi=10.1.1.348.5724&rep=rep1&type=pdf

411
 To funders, in terms of investment logic, the ultimate goal is to win
the case and share the proceeds from the award. They are unlikely to fund
frivolous or speculative claims and always engage in a rigorous assessment
of the claimant’s likelihood of success on the merits before deciding to fund
a case.63 Generally, there has been a degree of standardisation, for example
in the methodology of economic terms that many funders adopt.64 Equally
notable, however, is that there has been some specialisation, with certain
funders establishing criteria for the types of cases they are looking to fund,
whether in terms of the minimum damages claim, or sector or industry
focus65. In other words, an unjustifiable application for arbitration does
not attract the funder to make the most rational and prudent investment
decision. On the contrary: when a funder decides not to fund a case, the
parties would carefully consider the opinions of the funder and decide
whether to proceed with arbitration, which to some extent has prevent-
ed frivolous claims. In practice, the ratio of the funded cases to the cases
reviewed by funders is always low.66

6. ETHICAL CONSIDERATIONS

The regions of the world have approached various ethical concerns from
different perspectives. In contrast to common law, the civil law based ju-
risdictions appear to be free from antiquated doctrines of maintenance
and champerty. Instead, professional attorney ethics rules and ownership
of claim constraints take center role.67 This section discusses the indepen-

63. LANGFORD, M.; BEHN, D.; LÉTOURNEAU-TREMBLAY, L. Empirical Perspectives On Investment

Arbitration: What Do We Know? Does It Matter? 2019, p. 14.
64. COOKE, U. Market Trends And Legal Issues In Third-Party Funding. Available at: https://www.wither-
sworldwide.com/en-gb/insight/international-arbitration-market-trends-and-legal-issues-in-third-party-fun-
ding. Accessed on: June 27th, 2019.
65. Id.
66. In 2018, Burford Capital, a legal finance firm listed on London Stock Exchange since October 2009, reviewed
1,470 cases and only closed investments to 87 cases.
67. NIEUWVELD, L. B.; SAHANI, V. S. Third-Party Funding in International Arbitration. 2nd ed. [S. l.]:

412
dence of parties, the disclosure and its contradiction with privilege and
confidentiality of TPF.

6.1 The independence of parties

The parties shall enjoy the rights on choice of both the procedural and
the substantive issues of arbitral proceedings.68 However, when funding
steps into the case, any decision of the arbitral proceedings will be jointly
made by the funded party and the funders. The extent of funder’s control
to arbitration, particularly for any compromise by the funded party in the
proceedings, is another area that can be fraught with difficulty.
Generally speaking, the funder and the funded party have autonomy to
agree on the extent of control to be exercised by the funder.69 In practice,
the funder is willing to control the arbitral proceeding, thereby reducing
the costs and maximizing the return on investment.70 In the scenario of
joint-decision making by the funded party and its funder, the appoint-
ment of counsel and arbitrator as well as decisions relating to settlement
are situations that immediately spring to mind71.
Mostly, funder’s interest is consistent with the funded party except
when it comes to the settlement. Unlike the funded party, the funder may
not consider the potential long-term cooperation between the funded
party and the opponent party, for the purpose of maximizing the return
of the funded case investment. Accordingly, the settlement may possibly
reduce the amount of monetary compensation received by the funded
party, which consequently results in a reduction of the funder’s profit. In

Kluwer Law International, 2017, p. 43.

68. BLACKABY, N.; PARTASIDES, C.; REDFERN, A.; HUNTER, M. Redfern and Hunter on Internatio-
nal Arbitration. 6th ed. [S. l.]: Oxford University Press, 2015, p. 187.
69. BAO, C. Third Party Funding in Singapore and Hong Kong: The Next Chapter. [S. l.]: International Arbi-
tration, Kluwer Law International, 2017, v. 34, issue 3, p. 399.
70. VON GOELER, J. Third-Party Funding in International Arbitration and Its Impact on Procedure. Interna-
tional Arbitration Law Library, Kluwer Law International, v. 35, 2016, p. 41.
71. Id at p. 35.

413
practice, the funded party usually follows the arrangement in the funding
agreement regarding the acceptance on settlement. Otherwise, it may lead
to the termination of the funding agreement.72
In this regard, there are various views and debates over whether the
funder should have the right to interfere with the parties’ decisions in ar-
bitration.73 Once the funder is on board, it will obviously wish to monitor
the progress of, and developments in, the proceedings.74 It is undeniable
that the funder would objectively impact the decisions of the funded party
in the arbitration proceedings.

6.2 The disclosure and its contradiction

with privilege and confidentiality

Disclosure may be necessary in limited circumstances, such as to avoid

potential conflict of interests with arbitrators.75 The conflict of interests
originally refers to the factors affecting the independence, impartiality and
neutrality of the arbitrator. As stated in the ICCA-Queen Mary Report,
“[…] avoiding conflict of interests is in the best interest of all parties and
arbitrators, and is important for the legitimacy of international arbitration
and the assured enforceability of arbitral awards”.
With the introduction of TPF, the concept of the conflict of inter-
est has become even more diverse and complicated. This is not simply to
make the funder determine whether there is a conflict of interest with
the tribunal, but to regard the funder as a third party, who is able to indi-

72. SCHERER, M.; GOLDSMITH, A. Third-Party Funding in International Arbitration in Europe: Part 1:
Funder’s Perspectives (RDAI/IBLJ Roundtable 2012), p. 12-13. Available at: http://www.transnational-dis-
pute-management.com/news/20120312.pdf. Accessed on: June 30th, 2019.
pute-management.com/news/20120312.pdf
73. VON GOELER, J. Third-Party Funding in International Arbitration and Its Impact on Procedure. Interna-
tional Arbitration Law Library, Kluwer Law International, v. 35, 2016, p. 41-47.
74. BAO, C. Third Party Funding in Singapore and Hong Kong: The Next Chapter. [S. l.]: International Arbi-
tration, Kluwer Law International, 2017, v. 34, issue 3, p. 400.
75. SCHERER, M.; GOLDSMITH, A. Third-Party Funding in International Arbitration in Europe: Part 1:
Funder’s Perspectives (RDAI/IBLJ Roundtable 2012), p. 13-14. Available at: http://www.transnational-dis-
pute-management.com/news/20120312.pdf. Accessed on: June 30th, 2019
pute-management.com/news/20120312.pdf

414
rectly affect the arbitral proceedings. In addition, the latent intervention
of funder in the proceedings conceals its relation with arbitrators even
deeper, which leads to the uncertainty of the arbitrator’s independence
and impartiality.76 If this conflict of interest is only discovered after the
issuance of arbitral award, then this may endanger the validity of the ar-
bitral award.77 To avoid conflict of interests, disclosure rules varied by
jurisdictions. The approach adopted in the IBA Guidelines on Conflicts of
Interest in International Arbitration, in accordance with which a duty to
disclose applies where a third party has a controlling influence on a par-
ty or direct economic interest in an award, appears sensible and provides
lawyers with a necessary degree of flexibility.78
In consideration of the fussy rules in the world of arbitration, the topic
on disclosure under privilege and confidentiality would remain its con-
troversy as TPF proceeds. Naturally, TPF does not leave the traditional
players in the world of arbitration indifferent.79 Particularly prevalent in
the discourse is the attorney-client relationship.80 Even the disclosure
shall subject to the protection of a privilege; however, it is possible that
such privilege could be waived. The question is: how far will such a waiv-
er extend only to the funder’s presence or to all communications between
the client and lawyer with the funder? This question, although varying
amongst jurisdictions, appears unanswered.81 On the other hand, of course
the funder must be provided with sufficient information to evaluate the

76. MINQI, L. Transparency in International Commercial Arbitration. Hebei Law Science, v. 33, n. 6, p. 118, 2015.
77. ALTENKIRCH, M.; JOHN, B. Should A Party Be Obliged To Disclose Details About Receiving Third Party
Funding In International Arbitration?, Global Arbitration News, Feb. 2016.
78. COOKE, U. Market Trends And Legal Issues In Third-Party Funding. Available at: https://www.wither-
sworldwide.com/en-gb/insight/international-arbitration-market-trends-and-legal-issues-in-third-party-fun-
ding. Accessed on: June 27th, 2019.
79. VON GOELER, J. Third-Party Funding in International Arbitration and Its Impact on Procedure. Interna-
tional Arbitration Law Library, Kluwer Law International, v. 35, 2016, p. xxiv.
80. Id.
81. NIEUWVELD, L. B.; SAHANI, V. S. Third-Party Funding in International Arbitration. 2nd ed. [S. l.]:
Kluwer Law International, 2017, p. 71.

415
claim before it will enter into a funding agreement.82 When the informa-
tion involves with the confidentiality of arbitration, the disclosure by the
funder’s request may lead the funded party to a dilemma. The rejection
to disclose may lead to the loss of funding.

7. CAPITAL ADEQUACY

Obviously, steps should be taken to ensure that funded parties are not left
high and dry as a result of a funder becoming unable to meet its obliga-
tions during the course of an arbitration.83 In practice, the funder’s own
financial problem may objectively jeopardize the entire arbitration process
to deadlock, which result in the funded party being unable to achieve its
possible legitimate interests. However, it is surprising to see how rarely
funders are asked to verify availability of funds and what the funding covers
(particularly adverse costs).84 Due to the non-transparency of information,
the funded party has no way to check the financial situation of the funder’s
businesses, which makes the funded parties lack the objective judgment
on the funder. Therefore, the funder’s capital adequacy is crucial in TPF.85
In England, the ALF Code requires members to maintain the ca-
pacity to pay all debts when they became due and payable, and to cover
aggregate funding liabilities under all of their funding agreements for a
minimum period of 36 months. Members also have continuous disclo-
sure obligations regarding their capital adequacy.86 The LRC of Hong
Kong also believes the necessity to establish a minimum capital adequacy

82. BAO, C. Third Party Funding in Singapore and Hong Kong: The Next Chapter. [S. l.]: International Arbi-
tration, Kluwer Law International, 2017, v. 34, issue 3, p. 400.
83. Id at p. 298.
84. COOKE, U. Market Trends And Legal Issues In Third-Party Funding. Available at: <https://www.wither-
sworldwide.com/en-gb/insight/international-arbitration-market-trends-and-legal-issues-in-third-party-fun-
ding>. Accessed on: June 27th, 2019.
85. Lord Justice Jackson, Review of Civil Litigation Costs, Final Report, 2009, p. 121.
86. Association of Litigation Funders of England & Wales, Code of Conduct for Litigation Funders, Nov. 2016,
Code 9.4.1., 9.4.3 and 9.4.4.

416
requirement, as it not only ensures the funding business of funders but
also enables the funded parties to rely on the funders for their sufficient
support to the costs.87 In this regard, by Section 2.6 of the Code of Practice
for Third-Party Funding of Arbitration, the Department of Justice of Hong
Kong requires funders to have available capital of not less than HKD 20
million.88 Singapore also imposes capital adequacy requirement for the
funder, who must have a paid-up share capital or managed assets of not
less than USD 5 million (or the equivalent amount in foreign currency).

8. METHODS OF DEVELOPING TPF IN CHINA

Since the implementation of 1995 PRC Arbitration Law, Chinese arbi-

tration commissions keep exploring arbitration market by an average 30%
annual increase on both caseloads and disputed amounts.89 The expand-
ing arbitration market in China attracts not only more capitals to where
Chinese funders have already emerged for years, but also the interest and
confidence of foreign funders. On the other hand, TPF shall benefit Chi-
nese parties with greater participation in international arbitration under
the Belt and Road Initiative. With that in mind, the next step of Chinese
arbitration community towards TPF is how to face it rather than avoid it.
Usually, how and to what extent TPF develops in a country or region
often depends on the stance of legislation in the jurisdiction.90 Free from
the legal obstacle and judicial regulation in China, TPF related industries
and arbitration practitioners shall take a step prior to legislation. The most
practical methods to regulate and instruct China’s TPF shall rely on both

87. Hong Kong Law Reform Commission-Third Party Funding Arbitration Subcommittee, Third Party Funding
Arbitration Consultation Document, 2015, p. 114-130.
88. Hong Kong Department of Justice, Legislative Council Brief, Draft Arbitration and Mediation Legislation
(Third Party Funding) (Amendment) Bill 2016 (no.: LP 19 /00 /16C), Annex C.
89. Statistics by the annual report on national arbitration cases released by Public Legal Services Administration
Bureau of PRC Ministry of Justice.
90. YUAN, T. The Impact and Regulation Advice of TPF to International Arbitration Procedure, CUPL, 2017, p. 43.

417
legal and financial industries, plus self-regulation of the professional prac-
tice by lawyers and funders. What’s more, all of these shall be originated
and orientated by mainland arbitral institutions.

8.1 Regulation of legal and financial industries

The nature of TPF demands the regulation from both financial and legal
industries. TPF’s revenue model is somewhat similar to lawyer’s contin-
gency fee. Funders are required to bear the legal costs, and their capital
recovery relies on the proceeds of cases. For the contingency fee, the
Lawyers Law does not clarify the specific charging methods for lawyers’
fee, but empowers the judicial administrative authority to determine it.91
Thus, the regulation on TPF revenue may refer to the regulatory model
of the lawyers’ fee, which is unnecessary to be regulated by legislation but
subject to the guidance and regulation of judicial administrative authority.
In terms of the financial industry, the object of TPF investment is the
claims supported by the arbitral tribunal, which is not a regular financial
derivative product and lacks the corresponding financial regulation. In this
regard, it is similar to the assets disposal of banks on trading the pend-
ing credits in China.92 Currently, the investment by TPF has not been
counted into the scope of assets management by financial institutes, and
it is not allowed to raise capitals as asset management scheme. However,
the financial nature of TPF demands the funder’s ability on raising and
profiting from capitals. Thus, TPF should also be subjected to financial
regulation in addition to legal regulation.

91. Art. 59 of Lawyer’s Law, the specific measures for charging lawyers’ fees shall be made by the competent price
authority of the State Council in conjunction with the justice administrative authority of the State Council.
92. PENG, H. Influence and Regulation on Third-Party Funding in Arbitration. International Law Research,
[s. l.], n. 5, p. 100, 2018.

418
9. SELF-REGULATION OF THE PROFESSIONAL
PRACTICE BY LAWYERS AND FUNDERS

Beside the outside-in legislature regulation, it is significant to impose the

inside-out self-regulation by the main players of TPF, which consists of
two professional groups – lawyers and funders.
Lawyers shall be subject to the regulations of their associations, and
they shall abide by the rules of disclosure and conflicts of interest. Such
as the Legal Professional Act and Professional Conduct Rules in Singapore,
which require lawyers to avoid conflicts of interest in TPF by not collecting
referral fees when referring funders to clients, and not holding equity of
the recommended funders etc. Such practice is not unique to Singapore.
As aforementioned, the professional ethics guidelines of lawyers in many
states of the US also incorporate potential conflicts of interest between
lawyers and funders into the scope of regulation. The requirements by
professional ethics of lawyers, whether from the statutes or the self-regu-
lation of the lawyers association, are of comparatively high binding effect.
In addition, funders shall join the funders associations voluntarily to
share the same value among their group and comply with the code of as-
sociation as self-regulation. Taking into account the legal and financial
nature of TPF, the funders associations are encouraged to be supervised
by both judicial and financial administrative authorities, and regulated
by professional guidelines in consultation with the arbitral community.

10. ARBITRAL INSTITUTIONAL GUIDELINE

Meanwhile, although TPF in arbitration has not yet attracted enough

attention from Chinese legislation, its flourished practice in recent years
cannot be underestimated by arbitration practitioners. In the absence of
legislative framework for TPF, it leaves us with the role arbitral institutions
can play. Institutional arbitration rules have a broader applicability than

419
domestic laws and are more specifically designed for the arbitral process93,
which may be more effective in this context.
On the other hand, arbitral institutions shall be the frontier of TPF
practice to suffer the consequences and enjoy the fruits of it, either causes
the statutory violations to endanger the validity of the arbitral award or
promote a funding option to attract more arbitration cases. Whatsoever,
this is a historical age when major Chinese arbitral institutions must take
their responsibilities toward TPF. Appropriate arbitral institutional reg-
ulations not only lead to the sound development of TPF but also explore
arbitration market further for Chinese arbitral institutions.
Firstly, this shall be a market behavior of Chinese arbitral institutions to
actively regulate TPF in order to explore the international arbitration mar-
ket. Frankly speaking, the soil of China’s international arbitration market
is fertile. Currently, the amount of international arbitration cases received
by Chinese institutions is relatively low compared to major internation-
al arbitral institutions. However, under the initiative of Belt and Road,
Chinese parties will inevitably involve more businesses and investments
with various jurisdictions and industries. Disputes among multinational
parties are unavoidable. To pursue a fair and objective ruling, parties shall
always choose the arbitral institutions with established reputation for case
management and arbitrators with professional ethics and expertise, which
are the key factors for any arbitral institution to make efforts in.
As arbitration service provider, Chinese arbitral institutions shall not
only focus on their ability to resolve disputes from the traditional approach,
but also enhance the capacity to manage cases involving distinct financial
feature with funding. The foreseeable rising cross-border disputes would
trigger the incentive of more parties to seek for financing their cases. The
passivity of Chinese arbitral community in accepting TPF may drive some

93. KRESTIN, M.; MULDER, R. Third-Party Funding In International Arbitration: To Regulate Or Not To Re-
gulate? Kluwer Arbitration Blog, 2017. Available at: http://arbitrationblog.kluwerarbitration.com/2017/12/12/
third-party-funding-international-arbitration-regulate-not-regulate/. Accessed on: June 28th, 2019.

420
China-related parties, especially whom dispute with large amount and
expect to receive funding, to TPF proactive jurisdictions of Asia-Pacific
as Hong Kong and Singapore. Therefore, to establish Mainland China
as an international arbitration hub, it is a necessary market behavior for
mainland institutes to actively regulate TPF.
Secondly, the increasing complexity of cases with larger disputed
amount brings up the institutional expenses on management, labor and
hardware etc. It is inevitable to see the growth in arbitration fees. There-
fore, establishing the regulation on TPF provides party with possibility to
pursue justice even under a heavier financial burden on arbitration costs,
and to ensure the efficiency and professionalism in dispute resolutions
under diverse capital structures of cases.
Although Chinese funders monopolize the current mainland market
of TPF, the global market is dominated by several European and Ameri-
can funders, who have targeted China and Asia as their next step.94 When
these funders with rich experiences on funding meet with Chinese insti-
tutions, it could be doubted whether such institutions could still settle the
funded disputes in an efficient and impartial manner in consideration of
their limited experience on TPF. However, beyond the above analysis,
performance of mainland institutions has indicated they are ready to get
alone with this controversial method. The breakthroughs of the major in-
stitutions, like CIETAC and BAC, have also proved they are taking the
lead to guide the TPF practice.
Last but not least, the arbitral institutional regulation on TPF may
achieve similar impact as legislation. According to the PRC Arbitration
Law and Civil Procedure Law, the violation to arbitration procedures is one
of the limited grounds to challenge the validity or refuse the enforcement

94. On & Beyond Third Party Funding-a 360°interview with a funder, CIETAC Hong Kong Insight. Available
at: http://www.cietachk.org/cms/fileDownloadServlet/attachmentDownload?contentID=13463&type=cen-
ter. Accessed on: June 27th, 2019.

421
of an award.95 If the non-disclosure of TPF endangers the impartiality of
proceedings, it may arise to the level of statutory violation to arbitral pro-
cedures. In this scenario, the potential judicial review process could step in
and examine the related facts regarding TPF when one party applies to set
aside or assert defenses in the enforcement to the arbitral award derived
from the defected procedures, all of which form an alternative method of
legislative regulation to TPF. In other words, the judicial review on ar-
bitral awards is a practical test to arbitral institutional regulation of TPF.
The feedback from the review process of TPF cases indicates the judicial
opinions on this mechanism, and instructs arbitral institutions on further
regulation of TPF. Even in the absence of TPF legislation, the interaction
between the arbitral institution and the judicial department is expected
to constitute the sustainable development of TPF for arbitration, and to
lay down the necessary foundation for potential legislation in the future.

11. CONCLUSION

TPF has already emerged in Mainland China for a while and keeps ex-
ploring its practice in both litigation and arbitration. In contrast to the
existing TPF experience in common law jurisdictions, China shall discover
its featured path to encounter TPF as a civil law jurisdiction. With pru-
dence and moderation, TPF is laying its foundation in China and ready
for further construction, while leaving the integrity of arbitration process
intact. What’s more, besides cleaning up the dust of legal concerns, the
incentive of capital raising is a big tree to be felled and used to build up
the wood house for TPF.

95. Art. 58 of Arbitration Law of the PRC and art. 237 of Civil Procedure Law of the PRC set the circumstances
for setting aside an award and refusing to comply with an award respectively.

422
 For the moment, a preferred regulatory model of TPF is industrial
regulation under the guidelines of arbitral institutions when there is no
legal framework for employing TPF in arbitration. This is not a challenge
to Chinese arbitration community on how to handle TPF, but a precious
opportunity for mainland China as a competitive jurisdiction of the in-
ternational arbitration community.

423
 Research on the Combination
of Mediation with Arbitration
and its Latest Development
Zhan Ling1

1. INNTRODUCTION: HISTORY AND

DEVELOPMENT OF THE COMBINATION
OF MEDIATION WITH ARBITRATION

The last decades have witnessed the fast development of mediation

worldwide as well as the hot discussion on integrating mediation and
other alternative dispute resolutions (ADR) into arbitration, in order
to further achieve higher efficiency and lower cost in commercial dis-
pute resolution. The mechanism of mediation has quite a long history
in China, which has existed in practice for more than 2500 years, since
the Western Zhou Dynasty. The combinations of mediation with litiga-
tion and arbitration have also been practiced in China for a long time.

1.Executive of International Affairs of Bangladesh International Arbitration Centre (BIAC)

1.1 Cultural and legal basis

Mediation was rooted in the ancient culture of China, where harmony

has been endowed with the highest importance in people’s daily life.
Much attention is paid to inner mediation and the achievement of har-
mony in life. During the long development in several thousand years,
people have been educated to be tolerant and to avoid any dispute with
their neighbors or business partners. Based on the cultural background,
mediation had been widely used in Chinese society. According to Con-
fucius, the best solution to resolving the disputes is resorting to morality
rather than to the law. Confucianism had been widely used and highly
respected by Chinese rulers in the feudal society and has become the
dominant idea of Chinese society. Under such cultural influence, it be-
comes much easier for people to reconcile the interpersonal and legal
disputes, especially for third-party mediator and judge-mediator’s inter-
vention. Thus, mediation afforded people a socially acceptable method
of resolving disputes under the guideline of Confucianism, and it there-
fore became the main method of dispute resolution in ancient China.2
On the other hand, we have to consider the legal basis of mediation.
In ancient China, the trail of civil cases and criminal cases were mixed
together and conducted by the same people. What’s more, because of
the broadly discretionary judicial process, the fear of judicial decisions
and the existence of corruption in legal enforcement, people were more
inclined to use non-litigation methods to resolve their civil disputes.3 To
some extent, mediation has become an indispensable part of the ancient
Chinese legal system, not simply an alternative to dispute settlement.
Although China’s legal system and economic system have undergone
earth-shaking changes in the new century, the traditional mediation
culture still permeates all aspects of contemporary Chinese society.

2. KAUFMANN-KOHLER, G.; KUN, F. Integrating Mediation into Arbitration: Why It Works in China.
Journal of International Arbitration, [s. l.], n. 25, v. 4, p. 480-481, 2008.
3. KAUFMANN-KOHLER, G.; KUN, F. Integrating Mediation into Arbitration: Why It Works in China.
Journal of International Arbitration, [s. l.], n. 25, v. 4, p. 481, 2008.

426
1.2 The creation by CIETAC

1.2.1 Early practice of arb-med by CIETAC

Mediation has played quite an important role in all kinds of disputes res-
olution in Chinese society. The mediation mechanism can be used alone
or in an adversarial legal procedure, such as litigation and arbitration.
In general, the following categories of mediation are most commonly
used in China, and they are: (a) people’s mediation, i.e. mediation under
the auspices of the People’s Mediation Committees; (b) administrative
mediation, i.e. mediation in the process of law enforcement hosted by
the local people’s governments or other administrative authorities; (c)
institutional mediation, that is, mediation conducted by some profes-
sional standing mediation centers; (d) mediation conducted by judges in
the process of litigations; and (e) mediation in arbitration proceedings.
However, the combination of conciliation with arbitration was firstly
put into practice by CIETAC4 in 1950s in its arbitration cases. To some
extent, such combination was enlightened by the mediation practice
of people’s courts in China at the very beginning when both the rele-
vant practice and legislation were blank. While the very early versions
of CIETAC’s Arbitration Rules did not explicitly stipulate mediation
or conciliation, but since the beginning of its establishment, CIETAC
had applied conciliation into the arbitration proceedings to better re-
solve disputes.
In general, the conciliation in arbitration is conducted before the
end of the oral hearing when the basic facts and merits of the case
have been clear and all the evidences and witnesses of both parties have
been presented and cross-examined, after seeking the opinions of the

4. Fullname: China International Economic and Trade Arbitration Commission (CIETAC) , one of the major per-
manent arbitration institutions in the world. Formerly known as the Foreign Trade Arbitration Commission,
CIETAC was set up in 1956 under the China Council for the Promotion of International Trade (CCPIT).
Headquartered in Beijing, CIETAC has set up 11 sub-commissions in the major cities of China as well as Hong
Kong, Vancouver and Vienna. Throughout the past 63 years, CIETAC has made prominent contributions
to the legislation of the Chinese Arbitration Law and the development of the arbitration practice in China.

427
claimant and the respondent. If the consent of both parties is obtained,
then the arbitral tribunal, either the sole arbitrator or the presiding
arbitrator will host the conciliation proceeding among the parties.
Thus, such conciliation would not happen in the occasion of default
or if either party has no such wish to conciliate with the counterparty.
According to the statistics of CIETAC, from the 1950s to 1980s, the
vast majority of cases accepted by CIETAC had been settled through
conciliation in the arbitration proceedings and, until the 1990s, the
settlement rate was still kept at quite high level under the practice of
combination of conciliation with arbitration. 5 What’s to be pointed out
is that some of the conciliations were conducted in the name of arbi-
trators, while some were in the name of the arbitration commission.6

1.2.2 Arbitration rules

Since the Opening and Reform of China in 1979, more and more
economic and trade activities between China and the world inevitably
brought more commercial disputes and more cases to CIETAC. In
order to meet the new requirements of market, CIETAC amended its
arbitration rules in 1988, which was effective as of January 1st, 1989.
After decades of practice, CIETAC firstly wrote conciliation into its
Arbitration Rules (1989 Version). Art. 37 of the Rules stipulates that:
The Arbitration Commission and the Arbitral Tribunal may con-
ciliate the disputes they accepted. Where the parties have reached a
settlement agreement, the Arbitral Tribunal may render an arbitral
award in accordance with the terms of the settlement agreement.

5. WANG, S. Research on the Mechanism of Combination of Conciliation with Arbitration. 2000.

6. According to the provisions of the 1956 Arbitration Rules of CIETAC, some of the functions of the members of
the Arbitration Commission and the arbitrators are confusing. This situation did not change until CIETAC
amended its arbitration rules in 1989.

428
1.2.3 Provisions of Chinese Arbitration Law

Under the influence of CIETAC practice, the Arbitration Law of the

People’s Republic of China promulgated, in 1995, explicitly permitted
and even encouraged the use of conciliation in arbitration proceedings.
Art. 51 of the Arbitration Law clearly stipulates that the arbitral tribu-
nal may conciliate the case before rendering the award. If the parties
wish to conciliate, the tribunal may host the conciliation.7
The year 1995 also marked the birth of many domestic arbitration
commissions in China. Since then, as a typical “Oriental Experience”,
various arbitration institutions of China have widely adopted the mech-
anism of combining conciliation with arbitration. They have made great
progress in dealing with commercial disputes and accumulated huge
amount of practical experience. The practice has shown that the com-
bination can greatly contribute to the realization of dispute resolution8.
Moreover, the major arbitration institutions in China, such as Beijing
Arbitration Commission and Wuhan Arbitration Commission, have
also absorbed the provisions of conciliation into their arbitration rules.
In recent years, there have been hot discussions on the need of re-
vising Chinese Arbitration Law. However, the status of conciliation
in arbitration proceedings has never been challenged, and as is shown
by practice, it has become more and more welcomed by the arbitration
users, including both Chinese parties and foreign parties.

1.3 Sixty years of growth and development

1.3.1 Development in arbitration rules

With the development of Chinese market economy, in order to improve

the practicability and certainty of the Arbitration Rules, CIETAC further

7. See art. 51 of Arbitration Law of the P.R.C.

8. ZHANG, J. Comments on Mediation and Conciliation in Arbitration. Academic Forum of Nandu (Journal of
the Humanities and Social Sciences), [s. l.], v. 37, n. 1, 2017.

429
amended its rules in 1994. This amendment substantially revised the provi-
sions of 1989 rules, with quite a few important articles added to the com-
bination of conciliation with arbitration. For example, the preconditions,
methods and termination of mediation in the arbitration proceedings were
more specifically stipulated in the new rules. This amendment also further
improved the mechanism of combining conciliation with arbitration in
foreign-related arbitration cases. The related articles are as the following:9

Art. 46: Where both parties wish to conciliate, or where one party
wishes to conciliate and the other party’s consent has been obtained
by the arbitral tribunal, the arbitral tribunal may conciliate the dis-
pute during the arbitral proceedings.
Art. 47: The arbitral tribunal may conciliate the case in a manner it
considers appropriate.
Art.d 48: During the process of conciliation, the arbitral tribunal
shall terminate the conciliation proceedings and resume the arbi-
tral proceedings if either party so requests or if the arbitral tribunal
considers that further conciliation efforts will be futile.
Art. 49: During the process of conciliation by the arbitral tribunal,
where the parties have reached settlement through conciliation by
themselves, such settlement shall be regarded as reached under the
arbitral tribunal’s conciliation.
Art. 50 Where the parties have reached settlement through concil-
iation by the arbitral tribunal, they shall sign a written settlement
agreement; unless otherwise agreed by the parties, the arbitral tri-
bunal shall render an arbitral award in accordance with the terms of
the written settlement agreement to conclude the case.
Art. 51 Where conciliation is not successful, neither party may in-
voke any opinion, view or statement, and any proposal or proposition
expressing acceptance or opposition by either party or by the arbitral
tribunal in the process of conciliation as grounds for any claim, de-

9. See CIETAC Arbitration Rules (as effective from June 1st, 1994).

430
 fense or counterclaim in the subsequent arbitral proceedings, judicial
proceedings, or any other proceedings.

Two later versions of CIETAC Arbitration Rules, amended respec-

tively in 1995 and 1998, both maintained the previous provisions on con-
ciliation in arbitration proceedings. Until the autumn of 2000, CIETAC
published its 6th version of Arbitration Rules, which further developed
the mechanism of combining conciliation with arbitration. In order to
encourage settlement among the parties and endow the results of concil-
iation with legal enforcement in an expedited procedure, the 2000 rules
stipulated the situation of how settlement before the commencement of
arbitration proceedings can be combined with arbitration. The detailed
stipulation is as follows:
Where the parties have reached a settlement agreement by themselves
through negotiation or conciliation before the commencement of an ar-
bitration, either party may, based on an arbitration agreement concluded
between them that provides for arbitration by CIETAC and the settlement
agreement, request CIETAC to appoint a sole-arbitrator to render an ar-
bitral award in accordance with the terms of the settlement agreement.10
In practice, before the rendering of the settlement award, the arbitra-
tor may hold oral hearings in accordance with the arbitration rules, and
make sure whether it is practical and legal to render an arbitral award
based on the terms of the parties’ settlement agreement. The settlement
award has the same legal effect with traditional arbitral awards, and can
be enforced at home and abroad in accordance with the laws and the New
York Convention.
In the following revisions of CIETAC Rules, respectively happened
in 2005, 2012 and 2015, more detailed provisions have been made on the
combination of conciliation with arbitration to facilitate conciliation in
practice, and, on the other hand, to meet the diversified requirements and
needs of users to solve their disputes effectively. For instance, in the 2012

10. See art. 44 of CIETAC Arbitration Rules (effective as of October 1st, 2000).

431
Arbitration Rules of CIETAC, the following items have been added to
the previous provisions:

Where the parties wish to conciliate their dispute but do not wish
to have conciliation conducted by the arbitral tribunal, CIETAC
may, with the consents of both parties, assist the parties to conciliate
the dispute in a manner and procedure it considers appropriate.11

Where the parties have reached a settlement agreement by themselves

through negotiation or conciliation before the commencement of
an arbitration, either party may, based on an arbitration agreement
concluded between them that provides for arbitration by CIETAC
and the settlement agreement, request CIETAC to constitute an
arbitral tribunal to render an arbitral award in accordance with the
terms of the settlement agreement. Unless otherwise agreed by the
parties, the Chairman of CIETAC shall appoint a sole arbitrator
to form such an arbitral tribunal, which shall examine the case in
a procedure it considers appropriate and render an award in due
course. The specific procedure and time period for rendering the
award shall not be subject to other provisions of these Rules.12

And in 2015 amendment of the rules, the provisions on conciliation in

arbitration proceedings in the 2012 version of CIETAC Rules have been
kept unchanged and continued to be used until now.

1.3.2 Appearance of mediation rules and mediation centers

In recent years, with the fast development of economy in China and around
the world, in order to meet the increasing market need for ADR in commercial

11. See art. 47 (8) of CIETAC Aritration Rules (effective as of May 1st, 2012).
12. See art. 47 (10) of CIETAC Aritration Rules (effective as of May 1st, 2012).

432
dispute resolution, many institutions have launched their special mediation
rules, or even some mediation centers have been established accordingly.
The Beijing Arbitration Commission Mediation Center is an example. It
was established in August, 2011, aiming at promoting the use of mediation
to settle commercial disputes and the harmonious industrial development.13
The scope of jurisdiction of the Center includes contract disputes and other
disputes over property rights between natural persons, legal persons, and
other organizations with equal status. Soon after the announcement of the
establishment of Mediation Center, the Beijing Arbitration Commission
also formulated and published its Mediation Rules.
In May 2018, to meet the increasing need of market, CIETAC also
established its Mediation Center to provide parties with more efficient and
diversified dispute resolution service. In the same year, China International
Economic and Trade Arbitration Commission Mediation Center Media-
tion Rules took effect.
International institutions represented by the International ADR Center
of the International Chamber of Commerce (ICC) have begun to try in-
dependent and specialized mediation mechanism, that is, to have separate
mediations that are not affiliated with arbitration proceedings, and to for-
mulate relevant mediation rules, such as the 2014 International Chamber
of Commerce Mediation Rules.
In November of the same year, the Singapore International Mediation
Centre (SIMC) was launched by the Singapore Chief Justice and the Minister
of Law, to provide mediation services for parties in cross-border commer-
cial disputes. By collaborating with the Singapore International Arbitration
Centre, the SIMC pioneered the unique Arbitration-Mediation-Arbitra-
tion protocol, where parties can effectively benefit from the time and cost
savings of mediation and the enforceability of a consent arbitral award.14
In general, the increase of demand for mediation shall be attributed
to the mechanism of combining arbitration with conciliation implement-

13. Available at: http://www.bjac.org.cn/english/page/tj/mediation.html

14. Available at: http://www.chinagoabroad.com/en/contributor/singapore-international-mediation-centre-simc

433
ed and promoted by CIETAC. In addition, the independent mediation
mechanism respects the autonomy of the parties and focuses more on the
flexibility of mediation.

2. PRACTICE IN CHINA

2.1 Who can propose Arb-med?

During the course of the arbitration proceedings of each case, either the
claimant or respondent may propose to conciliate or mediate their dis-
putes, respectively or simultaneously. And, under the most circumstances
in commercial arbitration, it is the parties who propose the initiative to
mediate their disputes relying on the help of an independent third party,
i.e. the arbitral tribunal.
In addition, depending on the actual circumstances of the case, the
arbitral tribunal may also put forward the proposal for mediation at the
appropriate time during the arbitration proceedings. Since mediation must
be based on the voluntariness of both parties, the tribunal must seek the
opinions of both parties at the very beginning. Generally, it is more com-
mon for one or both parties to take the initiative to the arbitral tribunal; in
another case, only when the case is very tricky in handling or when both
parties have insufficient evidence to support their claims or where there is
some kind of special relationship between the parties and they will con-
tinue the cooperation in the future, the arbitral tribunal may consider that
mediation or reconciliation is the most suitable route for both parties. If
both sides express their willingness to conciliate or to mediate by the tribu-
nal and can come up with some practical solutions or plans in settling the
dispute, then the tribunal may try the possibility of mediating, or in some
cases, may grant the parties another period of time outside the tribunal to
negotiate by themselves.

434
2.2 When to conduce Arb-med?

The combination of arbitration and conciliation or mediation (Arb-med)

can take place in the whole process of the arbitration proceedings. Gener-
ally speaking, the following situations are most commonly used:

I. the first stage, before an arbitration case is filed, the parties may
firstly apply to the arbitration institution for mediation. For exam-
ple, both CIETAC and the Beijing Arbitration Commission, as
well as some international arbitration institutions have established
their mediation rules in recent years to run parallel with the tra-
ditional arbitration rules. Thus, the parties may choose to mediate
their dispute first by the mediator. If mediation fails, then the case
can be transferred to arbitration.
II. the second stage, when the case has been officially accepted, after
the arbitral tribunal has been formed and before the first oral hear-
ing, upon the request of one or both parties, after obtaining the
consent of both parties, the arbitrator may preside over the medi-
ation; where the mediation fails, the arbitration proceedings shall
continue and the oral hearing shall be arranged in time and an ar-
bitral award shall be made to conclude the case. However, during
this stage, the parties may also settle the case on their own. If the
settlement succeeds, the claimant may apply to withdraw the case,
or the parties may request the arbitral tribunal, based on the terms
of the settlement agreement, to make a Settlement Statement or
Consent Award to conclude the case.
III. the third stage, during the oral hearing, usually near the end of the
oral hearing when the tribunal has finished almost the whole pro-
ceedings, such as oral statement and defense, cross-examination,
evidence production and closing statement etc. Then the tribunal
will consult the opinions of both parties and, if unanimously agreed,
the tribunal will preside over mediation between the parties.

435
 According to a survey conducted by an experienced arbitrator of CI-
ETAC15, the majority of the arbitrators been interviewed in China made
mediation proposals for the first time after the round of factual statement
by the parties in the oral hearing. They believe that, with further exchange
of written evidence and verbal statements between the parties, the parties
will gradually recognize their own weaknesses and the advantages of the
other party, so it is easier for them to consider mediation. In addition, they
also believe that after the exchange of evidence between the parties and
cross-examination, the substance and main issue of the dispute will be much
clearer. Thus, the mediation process that follows could concentrate on the
core issues of the dispute between the two parties and be more effective.

IV. the fourth stage is after the oral hearing and before the issue of an
arbitral award. In general, it happens upon the request of one or
both parties; taking into account the specific circumstances of the
case, the arbitral tribunal may agree to organize the parties to have a
meeting for mediation. All the parties or their representatives need
to attend the meeting to discuss the possible settlement solutions,
and the tribunal presides over the meeting, or, if possible, helps to
mediate between the parties.

In summary, that is to say, mediation proposals can be made at any

stage prior to the arbitral award and can be put forward multiple times
without a clear distinction between the so-called “arbitration phase” and
“mediation phase”.16

15. KAUFMANN-KOHLER, G.; KUN, F. Integrating Mediation into Arbitration: Why It Works in China.
Journal of International Arbitration, [s. l.], n. 25, v. 4, p. 110-111, 2008.
16. KAUFMANN-KOHLER, G.; KUN, F. Integrating Mediation into Arbitration: Why It Works in China.
Journal of International Arbitration, [s. l.], n. 25, v. 4, p. 111, 2008.

436
2.3 How to conduct Arb-med?

2.3.1 Arb-med in general

Arb-med is a compound dispute resolution mechanism. The arbitrator in

the arbitration proceedings acts as the mediator in mediation. There are
three commonly used forms in Arb-med, i.e. face-to-face, back-to-back
and supervisory mediation, among which the first one is the most effective,
while the second is the most commonly used.

2.3.2 Arb-med in practice

If the parties choose “back-to-back” mediation, which is also the most

common case in practice, the mediator needs to meet the parties separately.
And this has been taken as the most effective way to clarify the respective
positions of the two parties and to promote reconciliation. During this
stage, the mediator will separately explore the bottom line of each party
to clarify the substantive differences between the two parties. If the dif-
ference between the two parties is too large and there is no possibility of
reconciliation, they will end the mediation process, resume the arbitration
and make an arbitral award; if the difference between the two parties is
negligible, the mediator will assist the parties to narrow their differences
and thus facilitate reconciliation.
As for the opinions on the outcome of the case, the mediator will not
usually disclose it to the parties during mediation. It is inevitable for the
mediator to evaluate the outcome of the case more or less in the process of
mediation, sometimes they even need to imply the parties’ strengths and
weaknesses in order to help narrow the differences. However, such impli-
cation is only limited to an analysis of the parties’ possible weaknesses, and
does not imply or reflect their opinion on the arbitral award.
Regarding the settlement agreement, the mediator will not give any
direct advice or opinions until the parties have basically reached consensus,

437
and the difference has been reduced to the minimum17. So, the mediator
only gives specific advice on the settlement agreement at the very end of
mediation process for the parties’ reference.

2.4 Post conciliation

2.4.1 Legislation and arbitration rules

The Chinese Arbitration Law also encourages the use of mediation in

arbitration proceedings by providing the possible situations of concilia-
tion during arbitration and the respective treatment for post conciliation
as well as the legal effect of settlement statement. Art. 49 of Arbitration
Law writes that:
The parties may reach a settlement by themselves after they have
requested arbitration. If a settlement agreement has been reached, the
parties may request that the arbitration tribunal make an award in accor-
dance with the content of the settlement, and they may also withdraw
their arbitration claims.
Art. 51 provides the situations of mediation carried out by the arbitral
tribunal in arbitration procedure:
The arbitral tribunal may carry out mediation before the issue of award.
The arbitration tribunal shall mediate when the parties agree to have me-
diation. If the mediation fails, an arbitral award shall be made promptly.
Where an agreement has been concluded through mediation, the arbi-
tration tribunal shall produce a settlement statement or make an award in
accordance with the content of the agreement. The settlement statement
has the same legal effect with the arbitral award.18
Art. 52 provides the elements of a settlement statement and its legal
effect:

17. TANG, H. Combination of Arbitration with Conciliation – Arb-Med. In: BERG, A. J. van den. (ed.), New
Horizons in International Commercial Arbitration and Beyond, ICCA Congress Series, v. 12 (© Kluwer
Law International; Kluwer Law International 2005), p. 555.
18. See art. 51 of the Arbitration Law of the People’s Republic of China.

438
 The settlement statement shall state the arbitration claims and
the agreed items of the parties. The settlement statement, after being
signed by the arbitrator (or arbitrators) and sealed by the arbitration
commission, shall be served to the parties.
The settlement statement becomes legally valid upon receipt by
the parties.
If either party backs out prior to the receipt of the settlement state-
ment, the arbitral tribunal shall issue the award promptly.
Then turning our attention to the provisions of the CIETAC Ar-
bitration Rules: where the parties succeed in conciliation during the
arbitration proceedings, whether by themselves or under the help of
the arbitral tribunal, there are three possible choices for the parties19:

I. firstly, the claimant may choose to withdraw its arbitration

claims, or if there are counterclaims in the same case, the re-
spondent may withdraw its counterclaims. The withdrawal of
claims terminates the arbitration proceedings accordingly.
II. secondly, the parties may also request the tribunal to make an
arbitral award in accordance with the terms of the settlement
agreement. In general, the parties need to write such request into
their settlement agreement with the parties’ signature or stamp.
III. thirdly, similar with the second condition, the parties may
also request the tribunal to make a conciliation statement in
accordance with the terms of the settlement agreement signed
by the parties.

However, where conciliation fails, according to art. 47, “[…] the

arbitral tribunal shall resume the arbitral proceedings and render an
arbitral award” and “[…] neither party may invoke any opinion, view
or statement, and any proposal or proposition expressing acceptance
or opposition by either party or by the arbitral tribunal in the process

19. See art. 47 (5) of CIETAC Aritration Rules (effective as of May 1st, 2012).

439
of conciliation as grounds for any claim, defense or counterclaim in
the subsequent arbitral proceedings, judicial proceedings, or any other
proceedings.”
In practice, there is another condition where the parties have reached
a settlement agreement by themselves by means of negotiation or concil-
iation before filing an arbitration case. The CIETAC Arbitration Rules
provides that:
[…] either party may, based on an arbitration agreement concluded
between them that provides for arbitration by CIETAC and the settle-
ment agreement, request CIETAC to constitute an arbitral tribunal to
render an arbitral award in accordance with the terms of the settlement
agreement20.
Under such situation, the rules have also taken into account the special
demand of the parties in time and cost, such as the composition of the tri-
bunal, the manner of examining the case, the specific procedure and time
period for rendering the award etc. to truly help the parties, using the ad-
vantages of arbitration, to resolve their disputes efficiently and effectively.

2.4.2 Difference between conciliation statement and consent award

As it is known, both conciliation statement and consent award are as im-

portant as the traditional arbitral award in concluding a case in commer-
cial arbitration, and they also share many points in common in arbitration
practice. For instance, both conciliation statement and consent award rely
on the same basis. According to the provisions of the Chinese Arbitra-
tion Law and the Arbitration Rules and practice of CIETAC, the parties
to the arbitration case may freely choose to apply to the arbitral tribunal
for a conciliation statement or a consent award based on the settlement
agreement reached through self-reconciliation or the agreement reached
through mediation between the parties. On the other hand, they have the
same legal effect. According to art. 51.2 of the Chinese Arbitration Law,

20. See art. 47 (10) of CIETAC Aritration Rules (effective as of May 1st, 2012).

440
conciliation statement and consent award have been endowed with the
same legal effect in China, and can be used as the basis for applying for
enforcement by the people’s court.
However, there are also some differences between conciliation state-
ment and consent award. Firstly, the time for coming into force is dif-
ferent. According to art. 57 of the Chinese Arbitration Law, the arbitral
award (including consent award) comes into force from the date of its
issue. While the conciliation statement does not take effect until it has
been signed by both parties21. Therefore, if any party repents before sign-
ing the document, according to paragraph 3 of art. 52, the conciliation
statement will not have legal effect, so the arbitral tribunal shall resume
the arbitral proceedings and make an award in time. In other words, the
legal effect of conciliation statement is unstable and uncertain before be-
ing signed by the parties.
Secondly, the legal effect in enforcing beyond China is different. As
for the consent award made by the arbitration institutions of China, as one
kind of arbitral award, the parties may apply for enforcement to the courts
outside China, in accordance with the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (“New York Convention”), the
“Arrangement of the Supreme People’s Court on Mutual Enforcement
of Arbitration Awards between the Mainland and the Hong Kong Spe-
cial Administrative Region” (“Hong Kong Enforcement Arrangement”),
and the “Arrangement of the Supreme People’s Court on Mutual En-
forcement of Arbitration Awards between the Mainland and the Macao
Special Administrative Region” (“Macao Enforcement Arrangement”).
As for the conciliation statement, the Macao Enforcement Arrange-
ment clearly stipulates that the instruments for mutual recognition and
enforcement between the Mainland and Macao SAR include the con-
ciliation statement. Therefore, both the consent award and conciliation
statement made by the arbitration institutions in Mainland China can be
recognized and enforced in Macao SAR.

21. See paragraph 2 of art. 52 of the Chinesse Arbitration Law.

441
 However, the situation is different in Hong Kong and other juris-
dictions. According to the New York Convention and the Hong Kong
Enforcement Arrangement, the instruments for mutual recognition and
enforcement are arbitration awards only. Neither mentions that the con-
ciliation statement made in Mainland China can be enforced in the same
manner with arbitral awards.

3. CHARACTERISTICS AND ADVANTAGES

3.1 Fundamental principles

First of all, in the arbitration process, mediation is not an independent

procedure, nor it is indispensable. It is entirely based on the will of the
parties. In contrast to the arbitration proceedings, the mediation process
must be agreed upon by the parties, and at any time during the mediation
process, either party may choose to suspend or terminate the mediation.22
Second, mediation must be a voluntary choice of both parties. The un-
derstanding and compromise between the parties are actually the discre-
tion of the parties to dispose of their own civil rights and property rights.
Therefore, the parties’ willingness to mediate must be clearly and unam-
biguously expressed to the arbitral tribunal.
Third, the mediation in the arbitration procedure usually begins after
the tribunal has found out the basic facts and distinguished the merits of
the parties. The arbitral tribunal helps to promote mutual understanding
and mutual compromise to reach a settlement agreement and settle the
dispute amicably. Thus, identifying facts and distinguishing merits between
the parties is a very crucial precondition for mediation.
Last but not least, the settlement agreement must be unanimously
agreed by both parties. The settlement agreement is a written expression
of the parties to solve the dispute in a sincere and friendly manner. As the
settlement is a product of compromise, the parties can freely agree on the

22. WANG, S. Research on the Mechanism of Combination of Conciliation with Arbitration. 2000. p. 63-65.

442
manner and amount of compensation, regardless of the rights and respon-
sibilities of each in the dispute. The settlement agreement agreed upon by
both parties shall be stamped or signed by the authorized representative
of both parties.

3.2 Advantages and value

3.2.1 Maintaining cooperation relationship

In practice, there is often a long-term economic and trade cooperation re-

lationship between the parties, and, in the trade process, there is inevitably
some controversies in investment and trade. Among these disputes, some
may not fall within the contract for arbitration. Due to the limited jurisdic-
tion scope of the arbitral tribunal, if the parties wish to resolve all of their
previous disputes through arbitration, the mediation in arbitration may
be the best solution. On one hand, it does not break the limits of existing
laws and arbitration rules, broadening the jurisdiction of the tribunal by the
autonomy of parties23. As long as the parties authorize the arbitral tribunal
to deal with both the disputes submitted to arbitration and the property
rights disputes that are relevant, the arbitrator(s) will mediate the disputes
of the parties in the capacity of the mediator. On the other hand, where a
settlement agreement is reached eventually through mediation, upon the
parties’ request, the arbitral tribunal can make an award in accordance with
the terms of the settlement agreement, even if the scope of the settlement
agreement exceeds that of the arbitration claims.
To this extent, the combination of mediation with arbitration, taking
into account the cooperation history and background of the parties, can
truly help solve the dispute and problem between the parties and maintain
good relationship in the future without the atmosphere of direct confron-
tation. Moreover, such combination gives more respect for the autonomy
of the parties, pushing them to self-solving of their disputes and avoiding

23. YUE, L. Comments on the Function of Mediation in Arbitration. Beijing Arbitration, [s. l.], v. 65, p. 65-66.

443
the intensification of conflicts of interest, and achieves harmony between
the commercial and social subjects.

3.2.2 Advantages of consent awards

Once the mediation in the arbitration gets successful and settlement agree-
ment is signed, the parties to the dispute may request the arbitral tribunal
to make an award based on the terms of their settlement agreement. In the
event that one party abandons the settlement agreement, the other party
may apply for enforcement with the arbitral award, thus conferring great
business certainty by adding the strength of the New York Convention to
their settlement agreement, giving it automatic full force and effect in all
the member states24. As the most important international convention on
the recognition and enforcement of arbitral awards, as of 2018, the New
York Convention has 159 member states already.

3.2.3 Efficiency and economy

Another obvious advantage of combining mediation with arbitration is its

efficiency. Usually, the mediation in arbitral proceedings can help resolve
disputes as quickly as possible, greatly saving the time, money and ener-
gy of the parties involved in the dispute, so that the parties are no longer
entangled in the dispute with no need to further seek evidence or prepare
documents for the dispute. Thus, they can devote themselves to new pro-
duction and management activities as soon as possible to promote the de-
velopment of their own business.25

4. LATEST DEVELOPMENT WORLDWIDE

24. LACK, J. Chapter 17: Appropriate Dispute Resolution (ADR): The Spectrum of Hybrid Techniques Available
to the Parties. In: INGENHOUSZ, A. (ed.). ADR in Business: Practice and Issues across Countries and
Cultures II, (© Kluwer Law International; Kluwer Law International 2010), p. 362-363.
25. KANG, M. Several Problems in the Combination of Commercial Arbitration and Mediation. Beijing Arbi-
tration, [s. l.], v. 61, p. 96.

444
4.1 Some concerns and challenges

Some people in the international arbitration community believe that the

combination of arbitration and mediation is an infringement of the principle
of natural justice or due process. Where the mediation fails, the mediator
will turn back to an arbitrator to continue the arbitration proceedings, which
may constitute an offense of the principle of natural justice, because, in the
process of mediation, the arbitrator is obliged to listen to the parties’ addi-
tional and secret statements about the dispute, but the information obtained
cannot be cross-examined by the other party. Therefore, such information
may bring adverse effect to the subsequent arbitration proceedings.26
Some other people worry that the same person who mediates decides
the same case may affect the effectiveness of mediation as well as the in-
dependence of arbitral decisions. They say it is not justified to let the per-
son who has known everything of the case make an arbitral award on the
case.27 In case that the arbitrator receives additional material provided by
the party unilaterally during the mediation process or finds the bottom line
of the party’s bid, the arbitrator may inevitably have emotional or actual
partiality in the following decision.

4.2 Latest development and change

The mechanism of combining conciliation with arbitration originated in

China and is rooted in China’s unique cultural soil. It has not been accept-
ed by other countries for a long period of time, even with many voices of
challenge and criticism in the past. However, in recent years, both the ar-
bitration legislation and arbitration rules in many Asian countries, such as
India, Japan and Singapore, as well as other western countries, like Australia
and Canada, have begun to allow arbitrators to mediate disputes with the

26. WANG, X. On Mediation in International Commercial Arbitration. 2009.

27. TANG, H. Combination of Arbitration with Conciliation – Arb-Med. In: BERG, A. J. van den. (ed.), New
Horizons in International Commercial Arbitration and Beyond, ICCA Congress Series, v. 12 (© Kluwer
Law International; Kluwer Law International 2005), p. 554-555.

445
consent of the parties. Even the United States, which was originally very
conservative on this issue, has begun to change its attitude. Such change
has to some extent forced the arbitration community to recognize the broad
influence and advantage of the combination on an international scale.

4.2.1 Legislation and practice in Asia

In 2014, the Singapore International Mediation Centre (hereinafter re-

ferred to as “SIMC”) was established to provide professional mediation
service for parties coming from different countries. Then in order to meet
the evolving needs of business entities, for instance, there are many cases
where parties who have signed an arbitration agreement and/or commenced
the arbitration proceedings may wish to turn to conciliation or mediation,
either before they commence the arbitration or during the arbitration. In
2018, the Singapore International Arbitration Centre (hereinafter referred
to as “SIAC”) and SIMC signed a protocol, called the “Arb-med-arb” Pro-
tocol (hereinafter referred to as “AMA Protocol”). With the arrangement
of AMA Protocol, the parties can make use of the two independent plat-
forms, SIAC and SIMC, to achieve smooth switching and convergence
of arbitration and mediation procedures. It is a flexible and efficient form
of alternative dispute resolution, combining the advantages of confiden-
tiality and neutrality with enforceability and finality. 28The combination
of arbitration with mediation is well achieved through the Protocol and
is being gradually promoted not only in Singapore but also in Asia and
other jurisdictions.
Another example of Asia is India. In India, an act has been enacted
to consolidate and amend the law relating to domestic and international
commercial arbitration, the enforcement of foreign arbitral awards, as well
as to define the law relating to conciliation, i.e. the Arbitration and Con-
ciliation Act 1996. In this act, as many as 21 articles are especially made
for conciliation. We can find quite a quantity of familiar and similar pro-

28. See: http://simc.com.sg/dispute-resolution/arb-med-arb/

446
visions with Chinese arbitration practice, such as the provisions in appli-
cation and scope, settlement agreement, confidentiality and non-admissi-
bility of evidence in other proceedings etc. Art. 74 of the Arbitration and
Conciliation Act even stipulates that the settlement agreement made via
conciliation “[…] shall have the same status and effect as if it is an arbitral
award”. Obviously, conciliation has been attached with quite importance
in arbitration in India.

4.2.2 Legislation and practice in other countries

According to the International Arbitration Act 1974 of Australia, concil-

iation played an important role in the settlement of investment disputes
between states and nationals of other states. An International Centre for
Settlement of Investment Disputes had been established accordingly,
with the purpose of providing facilities for conciliation and arbitration
of investment disputes.29
Then since the Commercial Arbitration Act 2006, we can find the
provision in Australian arbitration that allows the parties to the arbitra-
tion agreement to resolve the disputes between them via conciliation,
mediation or other similar means; and the parties may also authorize
the arbitrator to act as the mediator or other non-arbitral intermediary
between them.
While in the United States, according to the prevailing Commer-
cial Arbitration Rules and Mediation Procedures (amended and effec-
tive October 1st, 2013) of American Arbitration Association (AAA),
mediation could take place concurrently with the arbitration. And the
parties can also agree to mediate their disputes in accordance with the
Mediation Procedures under AAA’s administration. The advantage is
that it combines the advantages of pure mediation and arbitration, and
connects the two procedures together. And the same neutral third per-

29. See Article One of Schedule 3 Convention on the Settlement of Investment Disputes Between States and Na-
tionals of Other States, International Arbitration Act 1974 of Australia.

447
son can act both as a mediator and an arbitrator. Even if the mediation
fails, the dispute can be finally resolved by the arbitrator.

5. CONCLUSION

With the fast development of commercial arbitration around the world in

this century, especially in Singapore, Hong Kong and Mainland China,
we are very happy to see that more and more countries, both Asian coun-
tries and other western countries, have begun to realize and acknowledge
the many advantages of the mechanism of combining conciliation with
arbitration in commercial dispute resolution.
The combination of conciliation with arbitration has received widespread
attention in recent years. Such combination may take different forms in
different countries under different rules, but the essence is the same, that
is to combine the strengths of two procedures. The result of such combi-
nation is the saving of a separate mediation process and the saving of time
and costs for the parties. In addition, it can also help maintain good trade
relations between the parties and ensure the performance of the settlement
agreement in turn.30 What’s more, incorporating conciliation into arbitra-
tion proceedings can also bring benefits that are not available in a separate
mediation process, such as efficiency, certainty and enforceability.

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