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:
Alessandra Lobo, Senior Associate at MAMG
Caiã Caramori, Mid-Level Associate at MAMG
Ariela Kessler, Junior Associate at MAMG
According to the most recent ICC Dispute Resolution Statistics, Brazil ranks second in the world in terms of the volume of arbitration proceedings, with a significant portion of these cases originating from disputes arising from construction contracts. The 2022 Research “Arbitration in Numbers” confirmed that, in 2021, disputes involving construction contracts were among the most common types submitted to arbitration in Brazil, making up to 79% of the cases administered by the Chamber FGV of Mediation and Arbitration, and 35% of those administered by ICC International Court of Arbitration.
The growing prominence of construction arbitration in Brazil stems primarily from the continuous expansion of the civil construction industry, encompassing projects in both the private and governmental sectors. The Economic Bulletin of the Brazilian Chamber of the Construction Industry highlights that the Brazilian civil construction sector grew by 6,9% in 2022, with even higher growth projected for 2023. As the industry continues to grow, the occurrence of disputes among stakeholders, including contractors, subcontractors, suppliers, and owners, also increases.
Traditionally, disputes connected to construction contracts have been commonly associated with claims relating to contractual liability for design defects, variations in the price of materials and equipment, loss of productivity, and changes in construction schedules. In recent years, however, there has also been a notable rise in claims for economic-financial rebalancing in construction contracts.
Civil construction agreements are generally characterized by their long-term nature, making them highly susceptible to various risks, including market and price fluctuations, environmental hazards, insufficient predicted work or materials, and other unforeseen events. The materialization of these risks often leads to the emergence of disproportionate liabilities to one of the parties. In this context, “contractual rebalancing” refers to restoring the economic-financial equation of the project as if the risk had never materialized.
Parties often try to identify and categorize potential project risks, incorporating remedies to offset unpredictable events and contractual provisions to restore the balance in the event of such occurrences during the execution of the contract. However, it is common for the repercussions of such events to be inadequately addressed in the contract, causing an economic-financial imbalance and an uncalculated loss for one party. Discussions regarding economic-financial rebalancing have been growing in Brazil, largely, but not exclusively, due to the Covid-19 pandemic. This trend is particularly notable in the context of public-private partnerships and other long-term contracts involving public entities.
In this sort of contracts, the Brazilian legal system mandates the maintenance of contractual balance, presenting different legal solutions depending on whether one of the parties involved is a public entity or not. The legal framework in Brazil imposes an obligation on the Public Administration to rectify any imbalances that may arise during the execution of a contract whenever any of the risks foreseen in the contract’s risk matrix is made manifest.
The restoration of the economic-financial balance is considered a fundamental principle, especially in long-term and complex public-private partnerships established for infrastructure projects. In such contracts, arbitration has emerged as the preferred method for dispute resolution, with many agreements explicitly granting the arbitral tribunal jurisdiction to decide claims related to economic-financial rebalancing.
Arbitration has been presenting very positive results in settling complex disputes involving public entities, as arbitral tribunals are increasingly gaining confidence in handling matters concerning the public administration. In construction arbitrations involving public entities, it has become common practice for arbitral tribunals to appoint a technical expert to assist the tribunal in determining the technical aspects of the disputes, even when the parties have submitted robust technical assessments from their respective experts. However, in recent cases, tribunals have rendered awards recognizing the public entity’s duty to rebalance the contractual equilibrium following unforeseen events based solely on the reports provided by the parties’ technical experts, without designating its own expert.
Although the preservation of the economic-financial balance of the contract is a fundamental principle in agreements involving public entities, in contracts involving private parties exclusively, there is no legal provision imposing the parties a similar duty. Parties in private construction contracts impacted by the occurrence of unforeseen events generally invoke the pacta sunt servanda principle to support their claims for the economic-financial rebalance of the contract. The application of this principle, which embodies the binding nature of contracts, has been subject to reinterpretation and qualification in recent construction arbitration proceedings.
Many arbitral tribunals have rather adopted the rebus sic stantibus principle and other legal theories that enable the revision of a contract in the event of unforeseeable changes, particularly when one party is excessively burdened in fulfilling its contractual obligations. In this sense, the Brazilian Civil Code encompasses provisions such as Articles 478 and 317, which grant the debtor the right to terminate a contract when it becomes excessively onerous due to an extraordinary event and enables jurisdictional review to reestablish fair terms in an unbalanced agreement.
There is an optimistic perspective within the Brazilian arbitration community concerning contract rebalancing claims in construction arbitrations. While there is still more progress to be made in the field of construction arbitration in Brazil, significant advancements have already been achieved, especially in addressing claims related to economic-financial rebalancing in contracts involving public entities.
ABOUT THE AUTHORS:
Alessandra Lobo is a Senior Associate in MAMG’s Arbitration and Innovation practices. Alessandra specializes in complex commercial, construction, and contract arbitrations, as well as innovation contracts and matters related to personal data protection. She is dual qualified both in Brazil and New York, and her experience includes working at a London-based international arbitration firm, and as legal advisor for a Brazilian State Government entity.
Caiã Caramori is a Mid-Level Associate in MAMG’s Arbitration and Public Law practices. Caiã assists clients in infrastructure and construction arbitrations and advises in public budgeting issues, biddings, administrative contracts, PPP, and contract management in various regulated areas. Caiã is a specialist in biddings and public contracts and is currently pursuing a Master’s Degree in Public Finance and Economic Law at the University of São Paulo.
Ariela Kessler is a Junior Associate in MAMG’s Arbitration practice. She represents clients in international and domestic arbitration proceedings related to infrastructure and construction disputes. Ariela is a specialist in Business Law and her practice also encompasses contractual consultancy and negotiation to prevent litigation. She won the 2019 National Monograph Contest by CBAr.
Find more data-backed insights in our 2023 Construction Arbitration Report
