Brazil’s Superior Court of Justice Ruling on Party Autonomy in the Taking of Evidence in ICC Case No. 20055

THE AUTHORS:
José Augusto Bitencourt Machado Filho, Partner at MRTC Advogados
Luis Felipe Baquedano, Senior Associate at MRTC Advogados

On August 20^th, 2024, the Third Panel of Brazil’s Superior Court of Justice (“STJ”), the highest court on issues of Federal Law, rendered a unanimous decision in the Citic Construções do Brasil v. Usimec Soluções em Engenharia, Judgment of the Superior Court of Justice of Brazil No.1851324, 21 August 2024 (“Citic v. Usimec”) to reject the non-application of procedural rules on the taking of evidence set forth in the Civil Procedure Code (“CPC”) as a ground to set aside an arbitral award, since the Parties had agreed upon different procedural rules.

Case Summary

Facts: A representative of Citic translated two depositions from Mandarin to Portuguese. Usimec, after remaining silent until the termination of the arbitration despite having been given the opportunity to object, sought to set aside the award based on the violation of the allegedly mandatory rule of art. 139, IV, Brazilian Civil Procedure Code of 1973 (CPC/1973) – currently art. 148 CPC/2015 – which imposes to translators the same standards of impartiality and independence required from judges and arbitrators (as per art. 135 CPC/1973, currently art. 144 CPC/2015).

Issues:

Can the parties agree upon rules of procedure determined by the arbitrator that differ from statutory provisions?
Can the non-application of the CPC be a ground for setting aside the award?
Is it admissible that the request to set aside the award is inconsistent with the party’s previous behavior in the arbitration?

Reasoning:

The parties are allowed to agree upon the rules of procedure which they deem to be more adequate, even if they contradict the CPC, as far as they do not violate due process.
The fact that the arbitrator did not apply the CPC cannot be a ground for setting aside the award.
It is not admissible that a party’s request to set aside an award is inconsistent with its previous behavior in the arbitration.

Holding: The arbitral award is valid since the arbitrator safeguarded due process based on party autonomy. The STJ granted the special appeal to reverse the decision of the Appellate Court that had granted the request to set aside.

Considerations on the Court’s Reasoning

The jurisdictions that based their arbitration statutes on the UNCITRAL Model Law, as is the Brazilian case, recurrently face issues of procedure that are intentionally omitted in the arbitration law to allow parties to convene on the rules that are more suitable to their purposes. Thus, the STJ’s ruling on both the inapplicability of the procedural technique of the CPC to arbitration, and the possibility to resort to theoretical principles of procedural law to fill the arbitration law gaps, is relevant to practitioners in other jurisdictions when seeking for guidance in the application of a similar legislation.

In the case at hand, Usimec sought to set aside the arbitral award due to an alleged conflict of interest of the translator of a deposition. Usimec’s argument was grounded on the applicability of art. 138, IV, CPC/1973, which imposes to translators the same standards of impartiality and independence required from judges and arbitrators.

During the hearing, the arbitrator authorized that a representative of Citic acted as a translator to Portuguese of the depositions of two witnesses who spoke Mandarin. Although Usimec’s attorneys immediately raised a potential issue of conflict of interest – which the arbitrator preliminarily dismissed in light of the opportunity the parties would have to present corrections to the transcript –, they did not object to the validity of the witness evidence when specifically called upon to do so at the end of the hearing. Additionally, Usimec did not object to the accuracy of the translation contained in the hearing’s transcript and recordings.

Regardless of the measures duly adopted by the arbitrator to safeguard due process, Usimec sought to set aside the award based on the violation of the allegedly mandatory rule of Brazilian procedural law set forth in art. 138, IV, of the CPC/1973. Usimec’s request to set aside was granted by the Lower Court and confirmed by the Appellate Court of Rio Grande do Sul. Citic then presented a Special Appeal to have its claim to maintain the validity of the award heard before the STJ.

The STJ reversed the Appellate Court’s decision, and therefore maintained the validity of the arbitral award. The STJ’s ruling endorsed party autonomy and procedural good faith, as it held that:

the rules of procedure agreed upon by the parties are the only ones applicable to the arbitration, even in case they contradict rules of the CPC;
the CPC provisions that deal with procedural techniques (as opposed to the ones that deal with cardinal principles of due process with which both arbitrator and judges must comply) are not applicable to arbitration, not even subsidiarily, and the fact that the arbitrator did not apply them cannot be a ground for setting aside the award; and
the request to set aside an arbitral award is inadmissible in case it is inconsistent with the party’s previous behavior during the arbitration.

Party Autonomy and the Non-applicability of the CPC in Arbitration

On the first issue, the STJ held that the choice for Brazilian law does not entail the subsidiary application of statutory procedural rules. In the Court’s words:

“[…] there is no legal nor interpretative ground to admit that, having the parties established that the ‘arbitrator shall decide the merits of the controversy based on Brazilian law’, this agreement, by itself, would authorize the subsidiary application of the CPC, as the Appellate Court understood, despite the fact that the contracting parties, when specified the procedural rules applicable to the arbitration, did not mention said piece of legislation”.

The STJ found that applying the CPC provision would be contrary to procedural rules determined by the arbitrator and against which the parties did not object. The Court considered that the unwarranted application of the CPC rules on taking of witness evidence would “completely denature the concept of arbitration”. Such understanding is in line with the best international practices in arbitration, as it recognizes party autonomy as the cornerstone of arbitral jurisdiction

The Distinction Between Procedural Techniques and Procedural Principles

On the second issue, the STJ made an epistemological distinction between the rules of the CPC that deal with the technique employed during the proceedings (which are not applicable to arbitration) and the ones that inscribe the theory applied to undergird the pursuit of Justice through the exertion of jurisdiction (with which both arbitrators and judges must comply, since they are invested with equivalent jurisdictional power).

Regarding the technique, the STJ reiterated that:

“[…] the arbitrator is not, in any manner, bound to the procedure set forth in the CPC, as there is no legal ground to determine, generically, its application, not even subsidiarily, to arbitration”.

The STJ thus reversed the Appellate Court’s holding and maintained the award valid and enforceable, since an award cannot be set aside for not applying the CPC, as the statutory procedural rules are not applicable to arbitration, not even subsidiarily.

As to the theory of civil procedure, the STJ emphasized that arbitrators and judges are bound by the same principles that stem from due process, namely: equal treatment, the right to be heard, the prohibition of a surprising decision, and the prohibition of inconsistent behavior which stems from procedural good faith. Therefore, the STJ found that:

“During the taking of evidence in the arbitral proceeding, which is detached from the formalism akin to the judicial procedure, it is up to the arbitrator, exclusively, to define, in adversarial proceedings that ensure participation of all parties, not only the pertinence of a certain piece of evidence to the solution of the case and the moment in which it must be produced, but, mainly, the manner in which it will be produced. This healthy and convenient interaction between the parties and the arbitrator hinders not only the possibility of issuing a surprising decision, but also hinders inconsistent behavior and claims when compared to the conduct adopted during the whole procedural dialogue performed in the arbitration”

The STJ’s holding thus recognizes the arbitrators’ inherent powers to resort to the cardinal principles of due process inscribed in the CPC and other statutory provisions related to the dispute to determine which are the adequate procedural standards and measures to be applied to a specific case.

In this sense, the CPC/2015 and the Brazilian Constitution set forth principles that are accepted and applied in most common and civil law jurisdictions, namely: compliance with procedural good faith (art. 5 CPC/2015), duty to motivate jurisdictional decisions (art. 11 CPC/2015 and art. 93, IX, Brazilian Constitution), equal treatment (art. 7 CPC/2015), right to be heard (art. 7 CPC/2015), and prohibition of surprising decisions (arts. 9 and 10 CPC/2015), all of which stem from the principle that no one can be deprived of their liberty or their possessions without due process (art. 5, LIV, Brazilian Constitution).

Consistency of Behavior and Procedural Good Faith

On the third issue, the STJ understood that the claim to set aside the award was inconsistent with Usimec’s prior conduct in the arbitration, since it did not raise any objection regarding the validity of the arbitration and the adequacy of the taking of evidence. In this sense, the STJ stated that:

“The underlying claim to set aside – which is in complete disagreement with the behavior displayed throughout the procedural dialogue that took place in the arbitration proceedings under scrutiny – is absolutely unsubstantiated, be it because the arbitration was carried out in the exact terms agreed upon by the parties, notably with regard to the way in which the witness evidence was to be produced (with the help of a translator provided by the party who presented the witness and at its expense), which had the express acquiescence of the defendant; be it because the parties did not choose the rules of the Civil Procedure Code to govern the arbitration under scrutiny, and they do not apply to it even subsidiarily, otherwise it would deform arbitration and affront the autonomy of the contracting parties”.

As per art. 20 BAL, the parties must raise any objection to the validity of the proceedings at the first opportunity they have to do so. The statutory rule Usimec sought to apply, as though not applicable to arbitration, also provides in its paragraph 1 that any objection to the impartiality and independence of any person that must comply with the standards of the CPC must be raised at the first opportunity the party has to do so. Thus, the Brazilian legislation imposes a duty to the parties to assess any eventual harm they might have suffered and to immediately inform it to the arbitrator. Failure to act in such manner is interpreted as acquiescence to the adequacy and validity of the proceedings.

In the case at hand, the arbitrator acted in compliance with the applicable law, as he specifically called upon the parties to manifest any disagreement they might have had as to the taking of evidence at the end of the hearing (which they did not do) and provided them the opportunity to object to the accuracy of the translation after they received the hearing’s recording and the transcript (which they did not do either).

Conclusion

The STJ’s ruling, although not binding upon Appellate and Lower Courts, provides strong guidance as to the non-applicability of the CPC to fill gaps of procedural technique in arbitration. The decision is also in line with the best practices in international arbitration, as it endorses the autonomy of the parties to rely upon the powers of arbitrators to fill the gaps of procedural rules in arbitration based on the cardinal principles of due process abovementioned, reinforcing arbitration’s flexibility and adequacy to the parties’ needs. This bolsters legal certainty and allows the parties to rely on their initial risk assessment and the respective cost allocation when resorting to arbitration in Brazil.

ABOUT THE AUTHORS

José Augusto Bitencourt Machado Filho, Partner at MRTC Advogados. LLM Student at the Pontifical Catholic University of São Paulo. Specialist in Corporate Law by FGV Law. JD at the University of São Paulo. His practice is focused on dispute resolution in negotiations, litigation, and arbitration, both as an attorney and as an arbitrator. He has experience in dealing with complex commercial disputes in many industries, such as energy, construction, insurance, mergers and acquisitions, infrastructure, banking, securities, and stock markets.

Luis Felipe Baquedano, Senior Associate at MRTC Advogados. LLM Student at the University of São Paulo. JD at the University of São Paulo. His practice is focused on dispute resolution in negotiations, litigation, and arbitration, both as an attorney and as tribunal secretary. He has experience in dealing with complex commercial disputes in many industries, such as energy, construction, insurance, mergers and acquisitions, infrastructure, banking, securities, and stock markets.

*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.