This article was featured in our 2023 Construction Arbitration Report, which is part of a series of industry-focused arbitration reports edited by Jus Connect and Jus Mundi.
This issue explores the construction industry and presents a goldmine of information based on data available on Jus Mundi and Jus Connect as of May 2023. Discover updated insights into construction arbitration and exclusive statistics & rankings, as well as in-depth global and regional perspectives on construction projects, disputes, & arbitration from leading lawyers, arbitrators, experts, arbitral institutions, and in-house counsel.
THE AUTHORS:
Erika Donin, Senior Associate at Souto Correa Advogados
Guilherme Amaral, CEO & Founding Partner at Souto Correa Advogados
Luis Alberto Salton Peretti, Partner at Souto Correa Advogados
Arbitration stands out as one of the tools available to enhance the legal certainty for investors in Brazil. Since Brazil never acceded to the Washington Convention nor did bilateral investment treaties or other instruments providing for binding arbitration, commercial arbitration foots the bill for this purpose. Even before a law explicitly regulating arbitration practices, the Brazilian legislator provided for arbitration in several statutes to increase the legal foreseeability of large infrastructure projects. Brazil, however, has been adopting similar tools to investment arbitration practices. Ever since the Caso Lage (a case judged in 1974 by the Superior Court of Justice), the Brazilian legal system has been establishing a lengthy path towards the employment of arbitration in cases involving the Brazilian State. Amongst the most important economic areas for alternative dispute resolution mechanisms in the public sector in Brazil are the commercialization of oil & gas (L9,478/1997), distribution of power (L10,848/2004), and the consolidation of Public-Private Partnerships- PPP (L11,079/2004).
Arbitration has also become commonplace in large construction and infrastructure projects in Brazil as the preferable method for solving disputes. Still, public and private players are increasingly attempting to resolve their disputes more efficiently using other bespoken tools, referring to arbitration as a last-resort mechanism to save time and costs.
Considering the toolset of alternative dispute resolution mechanisms for large construction disputes, Parties are leaning towards adopting Dispute Resolution Boards. There have been cases where Brazilian municipalities and federative States have adopted dispute boards in infrastructure projects. For instance, that was the case of Belo Horizonte (See, Law no. 11.241, June 19th, 2020 – Municipality of Belo Horizonte, Minas Gerais), the capital city of the State of Minas Gerais, and Rio Grande do Sul (See, Law no. 15.812, March 17th, 2o22 – State of Rio Grande do Sul), a federative State in the south of Brazil. Besides, the recent Law of Public Bids and Administrative Contracts (which passed through reform in 2021) also recognizes dispute boards as a valid conflict resolution mechanism. In contracts governed by Article 151 of the Law no. 14,133, April 1st, 2021 (Lei de Licitações e Contratos Administrativos), alternative means of preventing and resolving disputes may be used, notably conciliation, mediation, dispute resolution boards, and arbitration. The provisions of this article will be applied to controversies related to vacant property rights, such as issues related to the restoration of the economic and financial balance of the contract, the breach of contractual obligations by any of the parties, and the calculation of indemnities.
Dating back to the 1970s, the adoption of dispute boards came late to Brazil. One of the first reported cases in the country relates to the construction of one of the subway lines of São Paulo, which faced a deadlock in 2018 due to the contamination of the soil extracted while digging the subway lines.
Even though dispute boards have spread throughout Brazilian legislation, the practice is still limited to its application in matters related to infrastructure and civil construction, especially involving the public sector. This experience has shown that dispute boards would be conducive to better controlling costs and delays in large-scale infrastructure projects nationwide.
The issue of construction delays became widespread as an alarming number of infrastructure projects in Brazil struggled to meet completion dates as programmed. The statistics gathered by the Federal Court of Accounts (the Tribunal de Contas da União, “TCU”, contributes to budgetary affairs of the public administration in the country whilst monitoring the expenditures of the Brazilian public bodies), estimate that more than 14,000 among 38,000 projects faced complications in their construction and that almost 20% of the projects initiated remained unfinished.
Considering that the House of Representatives instituted in April 2023 the External Commission on Interrupted and Unfinished Public Constructions (the Comissão Externa Sobre Obras Públicas Paralisadas e Inacabadas no País, “CEOPI”, was created by the Chamber of Deputies by means of a Presidential Act with the goal to inspect the ongoing public construction works and identify the issues impeding its full completion) to usher essential projects for the country’s infrastructure. In the same context, the National Council of Justice (the Conselho Nacional de Justiça, “CNJ” is a public institution that promotes the development of the judiciary by means of innovative policies and guidance of new steps to be taken by the bodies which compose the judiciary branch) established a new structure: the Committee for the Resolution of Conflicts in Infrastructure (the Comitê de Resolução de Disputas Judiciais de Infraestrutura, “CRD-Infra”, was created by Ordinance No. 142 of the National Council of Justice on April 29th, 2022. Their main goal is to establish dispute resolution boards to solve the remaining issues of ongoing infrastructure projects. See full text). The main goal of CRD-Infra is to solve the severe and common issue of prolonged delays in public construction projects in Brazil.
The application of both tools first appeared in connection with the BR-163 highway. As one of Brazil’s longest highways, BR-163 is a long-term project now expanding to facilitate the transport of goods across different regions. Its pathway connects the South to the North Region of Brazil, so it became a complex case to be handled in other federation States. In the South, there is a dispute in Paraná, and in the Midwest, a more complicated dispute involving environmental issues impacting indigenous reservations nearing the construction sites.
In Paraná, there have been many controversies regarding the interruption of the expansion and the deterioration of the existing highway segments. According to local politicians, the delays are causing significant economic losses to Paraná and its neighboring State Santa Catarina as the current structure of the highway cannot absorb the traffic volume. Furthermore, the drivers’ situation is so critical that some truck drivers transporting substantial amounts of grains to other parts of Brazil remain stuck in traffic jams for hours. It is also estimated that an additional R$ 40 million have been spent just for the construction site maintenance ever since the works were stopped.
The situation involving the State of Mato Grosso and Pará has similarities regarding the economic impacts of the lack of infrastructure on the highway. In addition, national environmental laws mandate the preservation of large forest areas, and the life of various indigenous tribes suffers interference from the works.
In this sense, there are many agents and players engaged in this dispute. Among them is the Ministry of Infrastructure, the National Indian Foundation (“FUNAI”), and the Brazilian Institute of Environment and Renewable Natural Resources (“Ibama”). This is one of the first challenges to be taken by CRD-Infra: governmental agencies and private agents address their conflict from different perspectives, which encumbers the resolution of their qualms and, thus, the project’s completion.
In July 2022, CDR-Infra instituted a board of members to start negotiations with all parties involved. The ongoing talks foster communication between all public agents involved and facilitate the development of legal solutions for those issues. Of course, that does not ensure the resolution of the controversy among parties nor guarantees that the project will not face stalemates. Still, establishing a communication forum for all the parties involved is a significant beginning to understanding all the issues behind this costly deadlock.
The BR-163 case illustrates the CRD-Infra’s potential and that of other dispute boards in the public sector. At this point, there is no conclusion about the actual effectiveness of the Committee nor the innovation that the letter of the law will produce. However, as is shown in the BR-163 case and the Brazilian legislation, it is safe to say that dispute boards are paving their way to solving conflicts quicker and more cost-effectively way than State lawsuits or even arbitration proceedings.
Furthermore, despite its application not broadly seen in the purely private sector – such as M&A and other contractual types of disputes, the dispute boards have the potential to pervade the country’s private sector in the future.
ABOUT THE AUTHORS
Erika Donin holds a master’s degree in civil liability and works with commercial, national, and international contracts, including projects in civil construction and infrastructure, oil and gas, energy (solar, wind, thermoelectric, and hydroelectric), in addition to licensing, distribution, supply, and investment contracts. In the litigation area she conducts national and international arbitration proceedings involving highly complex business disputes, particularly those involving civil construction contracts in general.
Guilherme Amaral, Ph.D., is the current CEO and one of the founding partners of Souto Correa Advogados. He practices as a lawyer and an arbitrator in local and international arbitrations and strategic litigation. From 2018 to 2022, he served as a member of the commission established by the International Court of Arbitration of the International Chamber of Commerce for the Belt and Road project (Chinese investment program), and he has been devoting his time and expertise to assist Chinese clients in Brazil.
Luis Alberto Salton Peretti holds master’s degrees in economic globalization law and comparative law. He helps Brazilian and international clients resolve disputes relating to corporate contracts, mergers and acquisitions, supply of equipment, construction projects and intellectual property through arbitration, mediation, litigation and other alternative dispute resolution mechanisms. He also focuses on dispute prevention, drafting contracts and designing efficient strategies to manage potential conflicts. Luis was also secretary-general of one of the largest arbitration institutions in Latin America and is currently a member of the arbitration roster of several institutions in Brazil and abroad, including the China International Economic and Trade Arbitration Commission (CIETAC) and the China Maritime Arbitration Commission (CMAC).
Find more data-backed insights in our 2023 Construction Arbitration Report
