The Superior Court of Justice (“STJ”), which is the highest court in Brazil for non-constitutional matters, has recently decided that a party under bankruptcy cannot submit a dispute under a contract subject to arbitration clause directly to the judicial courts, so that the issue on whether the bankruptcy adversely affects the validity and enforceability of the arbitration clause shall be first resolved in arbitration.
Special Appeal 1.959.435, which was judged on August 30, 2022, analyzed a dispute arising from a contract with an arbitration clause entered into by an architecture firm which went bankrupt. The bankrupt estate of the architecture firm brought a lawsuit to review the arbitration agreement before the judicial courts, under the argument of impecuniosity, that is to say, that it did not have funds to litigate in arbitration, which would be much more expensive than court proceedings. The court of appeals of the State of Rio de Janeiro upheld the dispute in the judicial venue allegedly to avoid denial of access to justice, as the bankrupt estate proved that it had no money to commence arbitration.
STJ reviewed the second-level decision and dismissed the judicial lawsuit, due to the existence of the arbitration clause. According to the unanimous understanding of the 3rd Chamber of the STJ, per articles 8, sole paragraph and 20 of Brazilian Arbitration Act, the arbitral tribunal shall decide on its own jurisdiction, which is in line with the worldwide adopted arbitration principle of “Kompetenz-Kompetenz”, ie, that the arbitrators shall have jurisdiction to assess their own jurisdiction. It is likewise in line with art. 6, paragraph 9 of Brazilian Bankruptcy Law, according to which the declaration of bankruptcy of a party does not affect the enforceability of the arbitration clause.
Therefore, albeit this decision does not exactly bring news, it is relevant because it shows a pro-arbitration approach from Brazilian highest non-constitutional court. Moreover, it reinforces the adoption of the principle of “Kompetenz-Kompetenz” even in an extreme scenario such as insolvency. In addition, it deals with a highly controversial issue worldwide, which is whether the impecuniosity could render the arbitration clause invalid or unenforceable.
This article was contributed by Trench Rossi Watanabe, a Brazilian firm. Trench Rossi Watanabe and Baker McKenzie have executed a strategic cooperation agreement for consulting on foreign law.