On 24 May 2023, the São Paulo State Court of Appeal set an arbitral award aside for considering that a co-arbitrator failed to vote in the decision of one of the claims and thereby violated the parties’ fundamental right to access to justice.[1]
Factual Background
Claimants and Respondents entered into three contracts for, among others, the purchase and sale of spaces for the broadcast of Claimants’ advertising media on Respondents’ radio and TV. The Claimants filed for arbitration (i) claiming that the Respondents unlawfully terminated the contracts and (ii) seeking damages for loss of profits because of a drop in the sales that followed Respondents failure to advertise Claimants’ products on their media. Respondents, on the other hand, filed a counterclaim requesting payments for the advertisement they did publicize in their channels.
The Arbitration Proceedings
The dispute was submitted to a three arbitrators tribunal, which decided on a partial arbitral award that the Respondents unlawfully terminated the contracts, partially granting Claimants’ claim for loss of profits but sentencing Claimants to pay Respondents for the advertising services they did. Yet, the decision on the loss of profits was not unanimous. While the presiding arbitrator and one co-arbitrator (“first co-arbitrator”) shared the prevailing position, the other co-arbitrator (“second co-arbitrator”) understood that the Claimants failed to prove the necessary correlation required between their losses (drop in sales) and Respondents’ unlawful termination of the contract.
The final arbitral award dealt with the amount of damages. The presiding arbitrator decided that Respondents should pay Claimants damages for lost profits in the amount estimated by the expert. The first co-arbitrator found that damages for loss of profits were due but not in the amount suggested by the expert, considering necessary a new expert opinion considering certain economics aspects.
The second co-arbitrator reaffirmed its opinion that no loss of profits were due to the Claimants and refused to vote on the quantum due. The final award reads:
“[…]The co-arbitrator […] was defeated at this point, reiterating his understanding (already expressed in § 173 of the Partial Arbitral Award) that the necessary causality between the failure to supply the media and the alleged frustration of expected profits was not demonstrated. In his view, therefore, no damages are due to the Claimants by way of lost profits.”[2]
The arbitral tribunal then ruled that the presiding arbitrator’s opinion should prevail based on Art. 24, § 1° of Brazilian Arbitration Act. The provision reads: “§ 1 When there are many arbitrators, the award will be made by majority vote. If there is no majority agreement, the vote of the president of the arbitral tribunal shall prevail.“[3] Likewise, the applicable arbitration rules provide that: “15.2. The award shall be made by majority vote, each arbitrator having one vote. In the absence of a majority agreement, the vote of the President of the Arbitral Tribunal shall prevail.“[4]
The final award ordered Respondents to pay Claimants R$ 1.5 million for lost profits and sentenced Claimants to pay Respondents R$ 4.9 million for the advertising services.
The Court Proceedings
Despite being successful on their claim, Claimants challenged the final arbitral award before the São Paulo Court claiming the invalidity of the tie-breaking vote the president casted. They argued that tie-breaking vote is possible only when both co-arbitrators voted but had divergent opinions. Claimants contended that the second co-arbitrator’s refrained from voting on the amount of damages due, which would go against the non-liquet rule, according to which tribunal cannot refrain from deciding the merits of an admissible case, regardless of the reason.
The judge of the São Paulo Court denied Claimants request and upheld the validity of the award. Following, Claimants filled an appeal before the São Paulo State Court of Appeals.
The São Paulo State Court of Appeals Proceedings
The São Paulo State Court of Appeals set the arbitral award aside. It held that the presiding arbitrator could not have relied on Art. 24, § 1° of Brazilian Arbitration Act because the second co-arbitrator’s abstention is a case of non liquet. The non liquet violates a party’s right to access to justice, a fundamental right under the Brazilian Constitution, and therefore the Brazilian public order.[5]
The São Paulo State Court of Appeals found that the fact that the second co-arbitrator did not agree that the damages were due did not allow him to abstain from deciding the issue of the final arbitral award, namely the amount of damages due. A party’s right to access to justice presumes that all those that are responsible for judging take a position on all the matters they are judging, even if they disagree in a previous issue.
The ruling was based on Art. 32, VIII of the Brazilian Arbitration Act, which provides that the arbitral award is invalid if it violates the principles safeguarded by Art. 21, § 2° of the Brazilian Arbitration Act. These principles include right to be heard and right to equal treatment. The São Paulo State Court of Appeals considered that those principles include the right to access to justice in the meaning of Art. 5°, XXXV of the Constitution, although it is not expressly mentioned. As such, arbitrators – like judges – have the duty to ensure parties’ right to access to justice when deciding a case and may not refrain from taking a position on a matter put before them.
Since the São Paulo State Court of Appeals considered that the second co-arbitrator failed to vote on the amount of damages due and, if he did, the outcome could have been different, the final arbitral award should be annulled and the issue submitted again to the arbitral tribunal. This decision is still subject to appeal before the Superior Tribunal of Justice, which can review it. In another case, the Superior Tribunal of Justice ruled that an arbitral award issued by two members of the arbitral tribunal should be confirmed provided that the missing co-arbitrator was properly notified of the proceedings.[6] As such, this very interesting issue has not yet been settled under Brazilian case law.
[1] TJSP, Apelação Cível nº 1094661-81.2019.8.26.0100, 2nd Chamber for Corporate Law, reporting justice Cesar Ciampolini, judged on 24 May 2023 (available here in Portuguese).
[2] Translated by the authors.
[3] Art. 24, § 1° of the Brazilian Arbitration Act (available here). Translated by the authors.
[4] Art. 15.2 CMA Arbitration Rules (available here). Translated by the authors.
[5] See Art. 5°, XXXV of the Brazilian Constitution (available here). Translated by the authors.
[6] STJ, REsp 904813-PR, reporting justice Nancy Andrighi, judged on 20 October 2011.
