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Brazilian court rejects pathological arbitration clause where no proof of consent to arbitrate
Practical Law Legal Update 1-505-9706 (Approx. 3 pages)
Brazilian court rejects pathological arbitration clause where no proof of consent to arbitrate
| Published on 05 May 2011 • Brazil |
Eduardo Damião Gonçalves (Partner), Flávio Spaccaquerche Barbosa (Associate), and Débora Auler de Almeida Prado (Associate), Mattos Filho Advogados
In a decision rendered on 31 March 2011, the Court of Appeals of the State of Rio Grande do Sul (TJRS) denied the defendant's motion to dismiss an action due to the existence of an arbitration clause contained in invoices issued by the claimant. TJRS based its decision on the pathological character of the arbitration agreement and the absence of proof of consent of the parties to arbitrate disputes. TJRS held that the structure of the clause, the pathological terms of the clause and the defendant's arguments that the invoices were not accepted and signed by them, meant that there was no evidence that the parties unequivocally intended to submit the dispute to arbitration.
Background
Article 4 of Law No. 9,307/96 provides:
"An arbitration clause is an agreement by which the parties to a contract undertake to submit to arbitration the disputes which may arise with respect to that contract.(1) The arbitration clause shall be in writing and it can be inserted in the main contract or in a document to which it refers.(2) In adhesion contracts, the arbitration clause will only be valid if the adherent party takes the initiative to commence the arbitration proceedings or expressly consents to it as long as it is in writing in an attached document or in bold font, with a signature or endorsement made specially for this clause."
Article 267, VII, of the Code of Civil Procedure (Law No. 5.869/73), amended by Law No. 9.307/96, provides that an action concerning a dispute which is subject to an arbitration agreement shall be inadmissible.
Facts
Planalto Tintas Ltda (claimant) filed a debt claim against Schmidt Construções e Incorporações Ltda (defendant), alleging that the defendant agreed to purchase a certain number of paint cans but failed to pay for them. The claimant presented the Lower Court Judge with unpaid invoices amounting to nearly R$ 3,000 (three thousand reais). The defendant was found to be in breach of contract and was therefore ordered to pay the amount due.
The defendant appealed, on the ground that the dispute should not have been decided by a state court, due to the existence of an arbitration clause contained in the invoices which were the basis for the proceedings.
Decision
TJRS denied the appeal and confirmed the court's competence to rule on the case.
TJRS held that the arbitration clause was not binding upon the parties because of its pathological character. The court stated that the invoices presented by the claimant could not be considered as legally binding documents. Rather, they were mere "debt notes" which only established the parties involved in the transaction. The court held that the parties' signatures on the documents were not to be deemed as completely accurate. Moreover, the arbitration clause contained terms that usually relate to state courts, and that might indicate that the parties were unsure about concluding an arbitration agreement.
Furthermore, the court also pointed out the defendant's contradictory behaviour. On the one hand, the defendant claimed that the arbitration clause was legitimate. On the other hand, it also argued that the company was not obliged to pay any amount in favour of the claimant, since the invoices could not prove the existence of any commercial agreement entered into by the parties. Such behaviour constituted a typical venire contra factum proprium (no one may contradict his own previous conduct) case, which is repudiated by Brazil's legal system.
TJRS found that the defendant failed to prove that the parties had unequivocally expressed their intention and consent to deal with the dispute by arbitration. The requisites set forth in Article 4 of the Brazilian Arbitration Act 1996 were not properly fulfilled and, for that reason, TJRS had jurisdiction over the case.
Comment
The rejection of the binding effect of the arbitration clause, due to its pathological character, turned out to be a correct decision. As a matter of fact, the court properly enforced Article 4 of the Brazilian Arbitration Act, by respecting the most important principle of arbitration, that is, consent. The parties' intention to submit their disputes to arbitration must be clear and unequivocal. As this decision shows, a mere provision of arbitration in an invoice, set forth with confusing terms, was not enough to prove such intent.
In this case, there was no evidence of the parties' consent to submit their dispute to arbitration, which is confirmed by the defendant's allegation that the document in which the arbitration clause was inserted did not prove that there was any agreement between the parties.