This article was featured in our 2023 Energy Arbitration Report, which is part of a series of industry-focused arbitration reports edited by Jus Connect and Jus Mundi.
This issue explores the energy industry, encompassing information on electricity & renewables, based on data available on Jus Mundi and Jus Connect as of September 2023. Discover updated insights into energy arbitration and exclusive statistics & rankings, as well as in-depth global and regional perspectives on energy projects, disputes, & arbitration from leading lawyers, arbitrators, experts, arbitral institutions, and in-house counsel.
THE AUTHORS:
Lauro Gama Jr., Founding Partner at Lauro Gama Advogados Associados
João Vicente Pereira de Assis, Partner at Mattos Filho
Brazil stands as one of the world’s foremost energy producers and possesses one of the most diversified energy matrices globally. This achievement is the result of a historical process that gained considerable momentum after World War II. The significant increase in industrialization and the rapid expansion of urban areas demanded a substantial development of the nation’s energy generation capacity to meet flourishing demand.
Today, the Brazilian energy matrix exhibits remarkable diversity, encompassing not only oil, gas, and nuclear energy, but also many renewable energy sources such as hydropower, biofuels, wind, and solar.
The expansion of energy generation has required substantial investments and prompted a succession of disputes involving governmental entities, infrastructure corporations, and regulatory agencies. These disputes persist to this day and are poised to continue emerging within the Brazilian landscape.
However, in contrast to previous disputes, which were frequently submitted to State courts, there has been a noticeable increase in the use of arbitration to address this type of dispute. From the mid-2000’s onwards, arbitration has gained wide recognition and reliability in Brazil.
In this context, we examine below some landmark cases that represent the past, present, and future of energy dispute arbitrations in Brazil.
Past
The following cases have set important precedents concerning arbitrations regarding energy disputes in Brazil or Brazilian parties:
The Brasoil case was one of the first oil and gas arbitrations involving Brazilian entities. In summary, Brasoil had signed a contract with the GMRA, an entity within the Government of Libya to drill a number of wells in that country. Brasoil started an ICC arbitration seated in Paris after the GMRA terminated the contract.
In 1995, the Arbitral Tribunal rendered a partial award declaring that malfunctions detected in the wells were attributable to Brasoil. Afterwards, GMRA submitted certain documents, which Brasoil considered to have been fraudulently omitted and that should have been presented before the partial award was rendered. Consequently, Brasoil requested the Arbitral Tribunal to review the partial award. The Arbitral Tribunal rendered an “order” rejecting Claimant ‘s request. Brasoil attacked the “order” before the French courts. In 1998, the Paris Court of Appeal found that (1) the appeal was admissible; (2) the “order” was, in fact, an award; and (3) annulled it.
COPEL – a hydroelectric energy producer based in Paraná, signed with UEGA a contract for the operation and maintenance of a combined cycle gas turbine power plant. A dispute arose between the parties and UEGA started an ICC arbitration in 2003. COPEL then raised the non-arbitrability of the dispute before the ICC Court, which ordered the continuation of the proceedings. Shortly thereafter, the Curitiba Treasury Court declared the arbitration clause to be null and void and granted COPEL an interim measure of protection. UEGA filed, without success, an appeal before the State of Paraná Court of Appeal.
In 2004, a hearing on the jurisdictional issue took place. COPEL argued that the arbitral tribunal lacked jurisdiction since public companies under state control required express legislative authorization to arbitrate their disputes, which was not the case at hand. The arbitral tribunal found that it had jurisdiction over the dispute since the case was an international dispute and, under Brazilian law, State-controlled public companies should be treated in the same manner as private ones.
AES URUGUAIANA CASE (STJ, 2005)
The case involved a contract for the sale of electrical energy between CEEE, a company owned by the State of Rio Grande do Sul, and AES Uruguaiana, a private company operating a natural gas power plant in the same state.
After a dispute arose between the parties, CEEE filed a lawsuit against AES Uruguaiana before a court of the State of Rio Grande do Sul, despite a pre-existing arbitration clause.
The State court invalidated the arbitration clause, based on the understanding that State-owned companies form part of the public administration and, as such, required prior legal authorization to submit disputes to arbitration.
However, the Superior Court of Justice (STJ) overturned this decision, establishing a significant precedent for energy arbitrations. The STJ ruled that disputes regarding contracts with state-controlled companies, specifically those related to strict economic activities like industrial public services, the production of goods and their trading, with the purpose of generating profits, could submit disputes to arbitration regardless of previous legislative authorization, due to their commercial nature. As a result, the parties were ordered to commence the agreed arbitration procedure.
COMPAGÁS CASE (STJ, 2011)
This dispute involved a natural gas distribution contract between Compagás, a company controlled by the State of Paraná, and the Carioca-Passareli Consortium, a construction joint venture.
After the tender process and the formalization of the construction agreement, disputes arose between the parties concerning the economic and financial balance of the contract.
Despite the absence of an arbitration agreement in the contract or in the bidding request for proposals, the parties agreed to submit their dispute to arbitration.
Following the production of evidence during the arbitral proceedings, Compagás then initiated a lawsuit in Paraná to invalidate the arbitration on the grounds of the absence of explicit arbitration provisions in the contract or in the tender documents.
The case reached the STJ, which established another crucial precedent in energy disputes. The STJ validated the arbitration agreement, emphasizing that both parties had voluntarily chosen arbitration instead of state courts. Therefore, it determined that arbitration proceedings involving state entities can validly take place based on an arbitration agreement, even without specific provisions on arbitration in the tender documents or in the contract.
Present
Over the past few decades, the wave of globalization intensified the quest for legal harmonization worldwide. The energy sector has become global and incorporated legal models and institutions previously foreign to Brazilian practice.
The case below illustrates the situation where three Brazilian-based oil & gas companies have regulated their dealings based on an international contract model of a joint operating agreement, which contained a forfeiture clause until then not discussed before arbitral tribunals or state courts.
DOMMO ENERGIA V. ENAUTA ENERGIA AND BARRA ENERGIA (LCIA, 2018)
These companies obtained a concession from the Brazilian National Petroleum Agency (ANP) and, as a result, entered into a consortium and, subsequently, a joint operating agreement (JOA) to explore oil reserves in the region.
The JOA included a forfeiture clause, allowing a non-defaulting party to request the withdrawal of a party in default with its financial obligations. In the case at hand, Dommo defaulted on some cash calls and, sub-sequently, received a withdrawal notice from Barra, which obliged the former to leave the JOA without compensation.
Dommo initiated an LCIA arbitration in Paris against Barra and Enauta seeking, among other claims, the invalidation of the forfeiture clause governed by Brazilian law. In Brazil, the principle of party autonomy and freedom to enter into contracts are central in contract law. These principles stand out in the petroleum industry where contracts are long-term, relational, and capital-intensive.
The 2002 Brazilian civil code, in line with international norms and practices, values the sanctity of contracts freely agreed upon by the parties. Especially where the parties are experienced and well-informed. For this reason, the arbitral tribunal, constituted of French, Brazilian and English nationals, found that, despite not being expressly provided for in Brazilian law, the forfeiture clause was valid. Subsequently, the ANP enforced the forfeiture and other JOA clauses in administrative proceedings that aimed at transferring the participating interests of Dommo to the non-defaulting parties.
Future
In recent years, Brazil has emerged as a prime destination for energy investments, driven by a combination that includes the discovery of significant oil and gas reserves (at the pre-salt layer and in the mouth of the Amazon River basin), as well as its vast potential for sustainable and renewable sources and stronger commitments to ESG principles.
This transformative shift will inevitably usher in a new wave of arbitrations involving the supply of crucial equipment, including wind turbines and solar panels, further amplifying the complexity and significance of these cases in the Brazilian energy arena. Also, there will be disputes dealing with new and previously uncharted issues not encountered in prior proceedings, including ESG matters, which are currently being dealt with in an ongoing arbitration involving Petra and the ANP.
The dispute between Petra and the ANP involves the use of fracking in the São Francisco River Basin. Petra sought authorization from ANP to employ fracking in its natural gas exploration activities. ANP denied the request due to environmental concerns and regulatory restrictions. Notwithstanding, ANP continued to request Petra to comply with the obligations set forth by the concession agreement and eventually terminated the concession agreement due to non-compliance with such obligations.
In early 2021, Petra initiated an ICC arbitration based on the concession agreement, seeking a declaration that ANP’s refusal to authorize fracking rendered the concession agreement unworkable and equivalent to indirect expropriation, as well as compensation for associated damages.
A similar issue was dealt with in two other recently concluded CBMA arbitrations initiated by Petra, Copel, Bayar and Tucuman against ANP. In these cases, the respective arbitral tribunals granted claimants’ requests to terminate the concession agreements after federal courts ruled against the use of fracking in two class actions. The claimants argued that such prohibition rendered the performance of the concession agreements impossible.
ABOUT THE AUTHORS
Lauro Gama Jr. is a Founding Partner at Lauro Gama Advogados Associados. He graduated from the State University of Rio de Janeiro (UERJ) in 1987 and was admitted in 1988 to the Brazilian Bar. He holds a Master’s in International Relations (PUC-Rio, 1992), a LL.M degree in Comparative Law (McGill, 1999), and a Doctorate degree in International Law (Univ. São Paulo, 2004). He has been Adjunct Professor at the Pontifical Catholic University of Rio de Janeiro (PUC-Rio) since 1991. To this date Lauro has acted as counsel and arbitrator in more than 100 cases, under the rules of ICC, LCIA, UNCITRAL and Brazilian arbitral institutions.
João Vicente Pereira de Assis is a Partner at Mattos Filho. He graduated from the Pontifical Catholic University of Rio de Janeiro (PUC-Rio) in 2011 and was admitted to the Brazilian Bar in the same year. He holds a master’s degree in Litigation, Arbitration and Alternative Dispute Resolution from the Université Paris II, Panthéon-Assas, France, where he also specialized in Private International Law. Prior to joining Mattos Filho, João Vicente worked at an international law firm in Paris as part of its international arbitration team and took internships at the ICC International Court of Arbitration and at the Permanent Mission of Brazil to the World Trade Organization.
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