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:
Bernardo de Freitas Ramos, Dispute Resolution Specialist Counsel at Eneva
Livia de Souza Correia, Regulatory Affairs Specialist Counsel at Eneva
Certainly, the most accurate definition of any legal concept is the one provided by the law. As a fundamental aspect of legal positivism, Brazilian laws not only describe typical facts and their legal consequences but also offer explicit definitions of certain expressions found in the normative text. In essence, when a legal concept is crucial to the legal system and its interpretation may raise uncertainties, the legislator can ensure that society has access to its intended definition.
This holds true for the term “res judicata” even though it is inherently clear. This clarity arises either due to its composition of common words familiar to Portuguese speakers (which translates to “judged thing” or “judged matter” in English), or because there are no semantic ambiguities, even for non-lawyers.
The Brazilian Civil Procedure Code (CPC) defines res judicata as the authority that renders a decision immutable and indisputable on its merits, with no possibility of appeal. This power finds its base in the Brazilian Constitution, specifically in the section on Fundamental Rights and Guarantees, where it is unequivocally stated that the law will not impact vested rights, legally valid acts, and res judicata (Article 5, Section XXXVI).
If the law itself, the appropriate means to create, modify, and eliminate rights, duties, and obligations, cannot infringe upon res judicata, it is unreasonable to expect a judicial decision to do so. In fact, res judicata also holds the same weight as the law, according to Article 503 of the CPC. This article states that any decision that fully or partially determines the merits of the case possesses the force of law within the explicitly stated scope of the main issue.
And it could not be otherwise. Without the authority of res judicata and the legal force derived from it, which presupposes the irreversible judgment of a previously contentious legal relationship, disputes would remain unsolved (SILVA, De Placito e, Vocabulário Jurídico, 12ª ed., Rio de Janeiro, Editora Forense, 1997). Repetition of identical claims would become commonplace. Rights would become fluid, lacking defined limits or stability. This scenario would be disastrous for the foundation of the rule of law.
However, like any other right or guarantee, res judicata is not absolute and must be carefully balanced with other equally relevant constitutional principles. Meeting a few exceptional and restricted conditions, all of which are strictly provided for and regulated by law, is necessary. In the context of arbitration awards in Brazil, which hold the same legal weight and nature as judgments rendered by the judiciary (as per Item VII of Article 515 of the CPC, in addition to Article 31 of Law No. 9.307/96), these exceptions are outlined in Article 32 of Law No. 9.307/96, which addresses the grounds for a Declaratory Action for Nullity.
An arbitral award can be declared null and void in Brazil if:
- The arbitration clause is null;
- It is issued by someone who could not act as an arbitrator;
- It does not meet the requirements of Article 26 of the same Law;
- It is rendered outside the limits of the arbitration clause;
- It does not resolve the entire dispute submitted to arbitration;
- It is proven to have been rendered through prevarication, concussion, or passive corruption;
- It is rendered beyond the specified time limits, according to the provisions of Article 12, III of the Law;
- The principles referred to in Article 21, paragraph 2, of the same Law are disregarded.
If none of those hypotheses materialize, the authority of res judicata, revered by the law, ensures that the arbitration award is indisputable and immutable, backed by the force of law. Problems arise when the losing party refuses to accept the unfavorable outcome and attempts to challenge the arbitration award through clumsy methods, masking their mere non-compliance. This issue significantly impacts arbitral awards, given that they are typically final and unappealable decisions (though in rare cases, the arbitration clause and the terms of reference may allow an appeal to another arbitral tribunal or the judiciary after the award, although this is not customary or recommended).
Following a defeat in the case, the dissatisfied party may mistakenly believe (and be misguided) that they have the right to appeal to judicial courts. This belief persists even when there is no provision in the arbitration clause or the terms of reference that could authorize such an appeal phase, and without fulfilling any of the criteria for the arbitration award to be considered null and void, as outlined in Article 32 of Law 9.307/96. This action is, in most cases, motivated by a mere desire for revenge.
The support gained by the losing party’s claim and its impact on the Judiciary is indeed concerning, as it can compromise the rationality of legal practitioners. Even in the absence of compliance with the requirements of Article 32 of Law No. 9.307/96, some judges take the risk of altering the non-negotiable content of the final and binding award, risking violation Article 5, Item XXXVI, of the Constitution of the Republic of Brazil.
A vivid illustration of this challenge occurred in a dispute involving a Power Purchase Agreement (PPA) between an energy trader and a final customer. Once the jurisdiction of the Arbitral Tribunal had ended and the res judicata had been established, the winning party initiated the enforcement of the award to demand payment of the historical amount of approximately 45 million BRL (equivalent to more than 110 million BRL in current values – this Information was extracted from case file nº 0011041-48.2022.8.19.0014, in progress at the 3rd Civil Court of Campos dos Goytacazes, in the state of Rio de Janeiro, Brazil).
The losing party, dissatisfied with the arbitration proceeding outcome, contested the validity of the award by claiming that the total amount awarded was excessive (i.e., essentially challenging the merits of a judgment already deemed immutable and indisputable). This challenge was made under Article 413 of the Brazilian Civil Code, a provision not included among the grounds for invalidating arbitration awards outlined in Article 32 of Law No. 9,307/96 as mentioned earlier.
In other words, the losing party is seeking a review of an issue that has already been thoroughly examined by arbitrators appointed by both parties – a matter falling under the exclusive jurisdiction of these arbitrators. This action is solely motivated by the party’s disappointment with the arbitration’s outcome.
It seems that challenging an arbitration award under the terms of Article 413 of the Brazilian Civil Code is not possible for several reasons, mainly because it is not one of the cases listed in Article 32 of Law 9.307/96. Furthermore, such a challenge requires the re-examination of contractual clauses and the rights of the parties on the already settled issue determined by the arbitration award, which is protected by res judicata.
Surprisingly, in the mentioned case, the judge accepted the losing party’s illegal claim and recognized their challenge to the award. This decision led to a reduction of the total sentence amount to 7 million BRL, ultimately diminishing the merit of the award by approximately 38 million BRL in historical values (equivalent to over 87 million BRL in current values), highlighting the absurdity of the situation.
Cases such as this one, arising solely from the losing party’s nonconformity and revanchism, which are wrongly endorsed by some legal practitioners, undermine the credibility of the Brazilian legal system, institutions, and institutes. This situation can ultimately discourage both domestic and foreign entities from engaging in business in Brazil, in order to avoid the so-called “Brazil Risk”, which leads to a lose-lose scenario.
ABOUT THE AUTHORS
Bernardo de Freitas Ramos is a Dispute Resolution Specialist Counsel at Eneva. He specializes in complex dispute resolution and has extensive experience in judicial and extrajudicial litigation, domestic and international arbitration. He has a strong activity with private, corporate, infrastructure, and administrative law, including regulatory issues and disputes related to energy transactions, oil and gas exploration and production, EPC/turnkey contracts, and M&A operations.
Livia de Souza Correia is a Regulatory Affairs Specialist Counsel at Eneva. Livia obtained her Bachelor of Laws from the Federal University of Rio de Janeiro and has experience with the electrical energy sector (in regard to the generation, transmission, distribution, and commercialisation), in the natural gas sector, and working in regulatory and governmental bodies. She is currently pursuing a postgraduate degree in Regulatory and Economic Law at PUC-Rio.
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