Luciano Timm July 21 2016 Court rules arbitration clauses in contracts by adhesion are binding Carvalho, Machado e Timm Advogados | Arbitration & ADR - Brazil Luciano Timm Arbitration & ADR Contracts of adhesion versus contracts by adhesionDecisionCommentIn a recent decision rendered by the Sao Paulo Court of Appeals(1) involving an agricultural partnership and the sale of a sugar cane harvest, the court ruled that an arbitration clause inserted into a contract by adhesion was binding.Contracts of adhesion versus contracts by adhesionA controversial issue in the Arbitration Act relates to the arbitrability of disputes arising from adhesion contracts.On the one hand, pursuant to Article 54 of the Consumer Protection Code, adhesion contracts contain clauses that have been unilaterally established by one party, without giving the other party a chance to negotiate, discuss or substantially modify the content therein. However, by and large, the Consumer Protection Code applies only to consumer relationships, not commercial ones.On the other hand, Articles 423 and 424 of the Civil Code – which apply to commercial disputes – do not define 'contracts of adhesion', although they do acknowledge their existence (allowing, among other things, the nullification of abusive clauses). However, the underpinning philosophy behind these rules resembles that behind the Consumer Protection Code.Moreover, some legal scholars in Brazil have differentiated between contacts of adhesion and contracts by adhesion in order to distinguish between situations where:there is a real threat to the will of one of the parties, which is prevented from negotiating; andthere is a standardised form allowing the party at least to negotiate commercial aspects of the contract.Therefore, contracts of adhesion are not solely classified as those in which only one of the parties is responsible for drafting the text of the contract (standardised form). A contract of adhesion is characterised by the circumstances in which the adhering party is prevented from efficiently negotiating its terms and conditions. In this scenario, the adhering party must execute contracts of adhesion due to a de facto or legal monopoly (or even oligopoly) held by the other party, by which services are rendered or products are supplied through a network of contracts or series of operations that retain the nature of services provided by natural persons. Therefore, a de facto or legal monopoly which seeks to eliminate competition is assumed in contracts of adhesion. If this is not the case, the parties may have entered into a contract by adhesion – but never a contract of adhesion.In contracts by adhesion, the adhering party is free to contract (or not) at its discretion, despite the fact that the clauses are typically unilaterally established by one party. Contracts by adhesion are used to efficiently formulate a contract.Article 4(2) of the Arbitration Act provides that for adhesion contracts which do not involve consumers(2) to be effective, the arbitration clause must be in boldface or attached as a separate, signed document, or the consumer must initiate the arbitration agreement:"Article 4 – An arbitration clause is an agreement by which the parties to a contract undertake to submit to arbitration the disputes which may arise with respect to that contract.§ 1 – The arbitration clause shall be in writing and it can be inserted in the main contract or in a document to which it refers.§ 2 – In adhesion contracts, the arbitration clause will only be valid if the adhering party takes the initiative to initiate arbitration proceedings or if it expressly agrees to arbitration by means of an attached written document, or if it signs or initials the corresponding contractual clause, inserted in boldface type."DecisionThe case at hand did not involve a consumer relationship between the parties. The agreements were entered into in the context of a commercial relationship and related to the business activities of both parties.In its decision, the court established that the requirements contained in Article 4(2) of the Arbitration Act apply to contracts of adhesion and, by implication, not to contracts by adhesion. Thus, an arbitration clause in a contract by adhesion – such as a contract for the sale of a sugar cane harvest – is binding and arbitration is thus compulsory. In the case at hand, given that there were several sugar cane producers in the market, the buyer was able to negotiate commercial aspects of the agreement:"The arbitration clause is mandatory and binding, as highlighted in page 705, not accepting the thesis dealing with [the] contract of adhesion [for] the sale of [the] sugarcane harvest agreement, which may or may not be freely established by the parties (that discretion remove[s] the obligatory adhesion; being at most an agreement per adhesion, that do[es] not remove the compulsory [nature] of the arbitration clause)."CommentThis decision has important implications, as many arbitration proceedings (and potential proceedings) in Brazil involve standardised commercial contracts (eg, financial, banking, franchise, distribution and agency contracts) in which clauses have been unilaterally established by one party without eliminating the bargain power of the accepting party.Consequently, it is important to bear in mind the difference between contracts of adhesion and contracts by adhesion in order to interpret and define the type of contract correctly and avoid any misrepresentation.For further information please contact Luciano Timm or Marcelo Richter at Carvalho, Machado & Timm Advogados (+55 11 2872 4760) or email ([email protected]r or [email protected]). The Carvalho, Machado & Timm Advogados website can be accessed at www.cmtlaw.com.br.Endnotes(1) Aleandro Santana Rodrigues v Raizen Energia S/A, Sao Paulo State Appellate Court, Appeal 0022434-04.2011.8.26.0032, Reporting Judge Soares Levanda, delivered on June 1 2016.(2) According to the Consumers' Protection Code, arbitration clauses in contracts that involve consumers will be considered null. Specifically, Article 51 sets out that, among other things, compulsory arbitration clauses in contracts for the supply of goods and services will be considered void.