Newedge v Manoel Fernando Garcia, Fluxo Comercio and others

In a decision that is likely to be met with the approval of the international arbitration community, the Brazilian Superior Court of Justice ("STJ") has granted an injunction to freeze the assets of a respondent in order to ensure that those assets were preserved for the purposes of enforcement.

The respondents to the application, Mr Garcia and Fluxo-Cane were players in the international sugar market (indeed their previous disputes with market brokers have been the subject of litigation before the English Commercial Court1). In this dispute, Fluxo-Cane and Newedge were parties to a brokerage agreement: Mr Garcia was guarantor and had formerly been the majority shareholder of Fluxo-Cane. Newedge secured an arbitral award against Fluxo-Cane and Mr Garcia for breach of the brokerage agreement, with damages totalling around USD 6 million.

At first the respondents opposed recognition of the award by the STJ on the grounds that it had been handed down without reasons, an application which was ultimately unsuccessful, with the STJ finding that it had no jurisdiction to analyse whether the award contained reasons, and that the arbitration had not infringed the respondents' right to due process.

Recognition of the award was therefore granted in September 2014 but there were concerns that Mr Garcia was dissipating his assets in order to defeat enforcement action in Brazil by Newedge. In particular it was alleged that Mr Garcia was fraudulently transferring assets to his sons and to his ex-wife, on the basis that they formed part of a divorce settlement.

The respondents disputed the allegations of fraud and stated that they would be in a position to meet any demands made on them in future, once the award was finally recognised (the respondents having made an application for "clarification" of the previous STJ judgment, which was pending).

The STJ issued a unanimous decision, granting the freezing order, notwithstanding the application for clarification, deciding that risk of dissipation was sufficient to give rise to a need to protect the claimant against an attempt by the respondent to dissipate his assets. The Court also lifted the corporate veil to prevent Mr Garcia attributing any actions to his company.

Comment

This case is another step in confirming the willingness of the Brazilian courts to act in order to support the use of international arbitration. Effectiveness of enforcement procedures has long been a difficulty in relation to Brazil, with creditors concerned that, notwithstanding the receipt of a favourable award, their efforts to enforce could be frustrated by a recalcitrant respondent and a slow, arbitration hostile court system. Reassuringly, and despite efforts by the respondents to frustrate the process, the STJ showed itself willing to support and safeguard the arbitral process.

Although far from being the final solution to the practical difficulties of securing enforcement in Brazil, this judgment indicates that Brazil is becoming an ever more arbitration friendly jurisdiction.

(Newedge USA LLC v Manoel Fernando Garcia e outros, Medida Cautelar No. 17.411 – DF (2010/0183587-4).)