Introduction

In a decision rendered on April 19 2017 the full bench of the Superior Court of Justice refused the recognition and enforcement of two arbitral awards issued by an arbitral tribunal seated in New York under the International Chamber of Commerce Rules.

The panel of three arbitrators ordered a Brazilian businessman to pay around $100 million in damages for breach of a sugar and alcohol agreement. However, by a majority decision of its collegiate body, the Superior Court of Justice held that the foreign arbitration awards violated Brazilian national public policy legislation.

The US-seated arbitral tribunal's awards granted the indemnification requested by Abengoa Bioenergia (the buyer). According to the conglomerate, the Denini Agro Group, sold by the Brazilian businessman, claimed to have the capacity to grind about 7 million tons of sugarcane per year; however, a production deficit of around 1 million tons was reported thereafter.

Lack of impartiality

In response to Abengoa's request for recognition and enforcement of the awards before the Superior Court of Justice, the seller alleged that the presiding arbitrator had violated the duty of impartiality and independence. The presiding arbitrator was a senior partner in a law firm which had received $6.5 million in fees relating to other services in the United States from an entity that was part of the buyer's international conglomerate during the arbitration proceedings. In fact, the seller argued that his plea in this regard should be sustained on the following grounds:

  • The presiding arbitrator's firm provided legal services to Abengoa, since it was hired to work on projects relating to Abengoa's group (Mojave and Solana). The buyer challenged this argument, claiming that the firm was not hired by Abengoa directly, but rather by the US government.
  • The firm worked in a merger transaction of which Abengoa was part. Nevertheless, the seller argued that the presiding arbitrator's firm had not worked for Abengoa on the transaction.
  • The firm rendered services to another legal entity affiliated with Abengoa.

With regard to the jurisdictional issues, reporting judge João Otávio de Noronha – whose opinion prevailed – recalled that an annulment action for the arbitral award had been filed before the US Federal Court, but was dismissed by the court. However, he stressed out that this ruling, pronounced in light of US legislation, did not prevent the Superior Court of Justice from examining arbitral awards and its potential violations to Brazilian public order.

On the merits of the case, Noronha admitted that the presiding arbitrator had a conflict of interest, which resulted in a violation regarding the arbitrator's lack of impartiality. Further, Noronha highlighted that under Article 14 of the Arbitration Law, arbitrators who are involved in litigations with the parties in the arbitration or who fall within any of the events provided for in Articles 134 and 135 of the Code of Civil Procedure 1973 cannot participate in the proceedings:

"The receipt of a large sum paid by one of the parties in the course of the arbitration by the law firm of the presiding arbitrator, although not due to the direct sponsorship of their interests, but related to them, constitutes an objective event capable of compromising the exemption of the presiding arbitrator and may be included in item II of article 135 of the [Code of Civil Procedure]."

Specifically, based on the seller's main arguments, Noronha decided as follows.

First, regarding the receipt of $6.5 million in fees (these related to services provided for in the structuring of investments, through the US Department of Energy, of two large solar projects for Abengoa (Mojave and Solana)), the fact that such fees did not derive directly from advice to Abengoa's group was irrelevant, since the billion-dollar projects submitted by Abengoa's group to the US government did not necessarily placed it in opposition to the government entity, but rather in collaboration.

Second, it was unquestionable that the presiding arbitrator's firm represented Schneider Electric in the acquisition of shares held by Abengoa in Telvent GIT S/A, valued at about $2 billion.

Finally, the investment fund First Reserve (a regular client of the presiding arbitrator's firm) acquired shares in Abengoa S/A (the parent holding company of the Abengoa's group) in the course of the arbitration. During this acquisition, valued at $400 million, the presiding arbitrator's office also advised the US Department of Energy to approve the transaction, disregarding all resulting implications.

Full compensation

In addition to the offence against Brazilian arbitration legislation, Noronha understood that the $100 million indemnification fee contravened the principle of full compensation, which led to a decision outside the limits of the arbitration agreement:

"Considering that Brazilian law - elected by the parties to regulate the contractual relationship and the arbitration - does not authorize the conviction in the obligation to indemnify in an amount that exceeds the actual losses incurred by the victim, the arbitral award exceeded the limits of the arbitration agreement and therefore the intended recognition and enforcement in this part should be refused, as provided in Article 38, IV, of the Arbitration Law."

Thus, Noronha refused the application for the recognition and enforcement of the arbitration awards.

Comment

This decision is historic and important for arbitration, as it is one of the rare cases in which the Superior Court of Justice failed to recognise a foreign arbitral award. In most cases, these are recognised unless they represent a clear violation to national public policy.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.

For further information please contact Luciano Timm or Marcelo Richter at Carvalho, Machado & Timm Advogados (+55 11 2872 4760) or email (ltimm@cmtlaw.com.br or mrichter@cmtlaw.com.br). The Carvalho, Machado & Timm Advogados website can be accessed at www.cmtlaw.com.br.