The Future of Arbitration? We Have Some Ideas

If you are like us and spend quite a lot of time at arbitration conferences, you will soon learn that conferences can lack really aggressive topics. Sometimes the panelists want to avoid them, other times the audience does not want to hear it, and then there are times when it feels like many of the main topics have just been discussed enough. So what is the future of arbitration?

In many ways, the next stage of arbitration may be the growth of claims between countries and investors based on contracts. Many of the growing economies have aggressive economies that include a sizable state presence, like Brazil, China, and India. Other emerging economies are following similar models, where you see the public sector blending with the private to support industries through Latin America, Asia, and Africa. In many of these countries, there is no recourse to treaty arbitration through ICSID, or the government is contracting directly with the investor and bypassing ICSID for other arbitral institutions, like the ICC, the SCC, and the ICDR. And even when the arbitration is in a different institution, there can be difficult and challenging issues to resolve regarding the parties’ expectations, the role of the institution, and the role of third-party interest groups. How do these claims differ from more traditional ICSID treaty claims? Are they the same kinds of claims as commercial arbitration? How does one calculate damages in these contract-treaty claims? These questions and many others are the subject of Young ICCA’s upcoming program, ”The Future of Arbitration: The Boundary between Contract and Treaty Claims.”

The program will be on September 15, in Buenos Aires, and it will be Young ICCA’s first event in South America. There will be three roundtables with excellent speakers looking at three important issues: investor and state action in times of distress, the unique challenges of contract claims against state entities, and how to avoid double recovery in contract and treaty claims. Following the program, there will a joint program hosted by a number of young arbitration associations and the opening of the Spanish-language international arbitration moot, hosted at the University of Buenos Aires.

So if you can make it to Buenos Aires in September (and who wouldn’t want to go), you can take the opportunity to participate in Young ICCA’s interesting event and stick around for the moot, which will have 53 schools this year (an amazing number after only four years of existence). If you can make it, stay by and say hello.

Focus on Ports: What Does the Widening of the Panama Canal Mean?

Recently, we have looked at some of the different industries in Brazil, providing an overview of the sector and some of the important legal aspects. Today, we look at ports, especially in light of the expansion of the Panama Canal.

Port re-construction from Moìn, Costa Rica to Miami, Florida is underway with an eye on the Panama Canal. The expansion of the canal is planned for 2014, and with the expansion comes a new driving force for ports across the hemisphere that see the major economic opportunities of an all-water route for oversize ships transiting from Asia to the Atlantic.

Over the last few years, the canal’s present size has hindered the movement of large ships, causing a loss of an estimated 15 percent of seaborne shipping opportunities. Now, as the canal expands to accommodate the “post-Panamax vessels, ports throughout the region are racing to expand to handle post-Panamax vessels in time for the canal opening.

What Does this Mean for Businesses?

·         Increased port construction. The countries expected to move quickly to widen their ports include Peru, Chile, Ecuador, and Costa Rica. Other ports in the Caribbean are expanding as well, with plans underway in the Dominican Republic’s Causedo, Jamaica’s Kingston, Trinidad’s Point Lisas, and France’s Guadeloupe Island.

·         Increased container traffic in Miami. As the closest US port to the Panama Canal, the Port of Miami expects to be the first port of call for fully laden post-Panamax vessels. The State of Florida plans to complete construction on the Port of Miami project by May 15th, 2014. With this project bigger ships from the Panama Canal will be able to move cargo to Miami from the Caribbean, Latin America, and straight to China.  Locally, the Miami expansion will create 30,000 new trade-related jobs in international trade and commerce. Additionally, the State of Florida is overseeing a $1 billion tunnel project which will maintain truck/cargo movement at twice today’s capacity out of the Port of Miami.

·         Increased investment related to maritime shipping combined with the increasing demand for goods throughout Latin America,

·         The demand for warehouse space in South Florida will likely expand. Investors are looking at industrial space, especially near the Port of Miami. As an example recently from Brazil, the conglomerate Vale announced it will invest 3.5 billion reais in the coming years to expand its port-related activities in Santos, near São Paulo.

What Are Some of the Legal Implications?

·         Arbitration should increase. International arbitration remains the only reliable way to get an enforceable judgment in multiple countries. With increased sales involving many different countries, businesses should be looking to international arbitration to resolve the disputes that arise. Even in purchase and sale contracts with limited terms, adding a binding arbitration clause is simple.

·         Increased use of the CISG (United Nations Contract for the International Sale of Goods). The CISG is a treaty offering uniform international sales law for contracting parties. The CISG governs contracts for the international sales of goods between private businesses, excluding sales to consumers and sales of services, as well as sales of certain specified types of goods. It applies to contracts for sale of goods between parties whose places of business are in different Contracting States, or when the rules of private international law lead to the application of the law of a Contracting State. Contracting Parties are countries that become signatories to the treaty. China as well as several countries in Latin America are signatories to the CISG, and the convention could apply, even when the parties have not contemplated it.  

·         Further “internationalization” of legal issues. As volumes expand, it is highly likely more international businesses will be investing in ports and related facilities. These international deals will require companies to consider proper business entities for investing in different countries, collection on guarantees and assets in the event of default, and the balance of different legal systems and how they can affect international contracts.

What Should You Expect When Buying Property in Brazil?

In a country with 4,650 of shoreline, there are a number of nice places for residential purchases. If you were waiting to get that perfect spot overlooking Ipanema, it may cost a bit more than a few years ago. But there are still plenty of beautiful places scattered throughout the country, from the arid beaches of the northeast to the stunning coast in the south and everwhere in between, Brazil has a lot to offer. But like most things, buying property in Brazil is a bit different than the US. What can you expect?

Looking for the property

Unlike the US where we have a rather complete listing of properties available online to real estate brokers, in Brazil buyers have to rely on the brokers to know the location of available properties and their relative prices. Right now, price can be a difficult thing to gauge, but it is important to have a quality real estate broker.

Financing the property

Brazilian banks have loosened lending some, but it is highly unlikely to find the kinds of mortgages and financing options available like in the US. It is possible to buy a property pre-sale, but the down payment requirements are higher. And the prospect of a 30 year mortgage is dim; in Brazil the maximum amount of time typical on a mortgage is 20 years.

The Legal process

• Brazilian law requires all sales of real estate to be executed through a public title agent (“tabelionato de notas”). All Brazilian cities have at least one. An English translation of the document prepared by the tabelionato de notas is a “public deed.”
• After executing the public deed, you must take it to the local real estate county clerk for registration. This real estate county clerk is called the “Cartorio de Títulos e Documentos.”
• The cartorio should attach a document to the public deed called a “matricula.” The matricula has an identification number, and later events related to the property are recorded on the matricula.

The Savior of the PC Market?

With recent reports of the PC market underperforming, some companies are looking for growth in other places. And according to the CEO of Intel, this place is Brazil. So what are some of the key features of the PC market in Brazil? And because this is a legal blog, what are some of the legal considerations for companies in the PC market in Brazil?

As recently as 2008, Brazil was the fifth largest PC market in the world. Browsing old articles on CNET, the writers highlight some of the issues spotted on this blog previously, such as access to capital, which is already changing. Intel seems to have consistently been optimistic on Brazil, and as PC sales soared in 2009 and 2010, Intel estimated Brazil would become the third largest PC market in the world. The biggest retailer in Brazil is Positivo, which has targeted its products at the growing middle-class, keeping it ahead of its foreign rivals. Now, Brazil trails only the US and China, making it the third-largest PC market in the world.

Part of the success of companies like Positivo stems from the policies we discussed regarding the Pão de Açucar/Carrefour transaction; the Brazilian government has enacted policies creating a favorable environment for Brazilian companies. Positivo has prepared a rather complete table of the different tax incentives and structures that apply to the Brazilian PC industry. In sum, Positivo and other Brazilian PC manufacturers benefit from a tax structure that requires foreign PC manufacturers to pay an average of 43% in taxes, while Brazilian manufacturers pay on average 2.75%. This is a substantial advantage, and it is one Positivo foresees the Brazilian government maintaining into the future.

What are some of the legal implications facing PC manufacturers and other companies related to the PC market? Some of the clearest examples are the tax incentives and related requirements for Brazilian PC manufacturers. This has lead some companies to look at mergers with Brazilian companies in order to access the Brazilian market. As recently as 2008, Lenovo and Positivo were in talks about a merger, and although the merger was called off, one of the factors supporting the merger may have been the tax incentives for Brazilian companies.

Other legal issues to consider when expanding into the PC market or any other are the type of legal entity and the method for entering the market. Normally, there are four main options: direct export to Brazil, sales through an agent or distributor, creation of Brazilian subsidiary, and joining with other companies in a joint venture or consortium. Each of these methods has its own pros and cons, which will discuss in another post. But they remain the primary ways for entering the Brazilian market.

Companies focused on the tech industry often worry about IP protection and enforcing licensing agreements, and according to the WTO, Brazil has made major strides in this area. There are some special concerns regarding licensing contracts, and to be enforceable against third parties, licenses of technology must be registered with the Brazilian Patent and Trademark Office.

While there are many other legal issues related to the PC market in Brazil, it is clear the market is growing substantially, and for companies like Intel, it may hold the future to remaining profitable as the US economy sputters.

Speaking of Real Estate Bubbles…

For many people in the US, the pain of the popping of the recent real estate bubble continues to wear on. Many owners owe more on their homes than their value, and prices have fallen dramatically in many parts of the country. In Brazil, the real estate market continues to heat up, with prices in the major urban centers growing rapidly. This has lead many observers to ask, are we seeing a real estate bubble develop in Brazil? Valor Economico, one of the primary business journals in Brazil, addresses this topic in its Valor Investe, now available in English. According to Valor, there is no little to no chance of a bubble growing.

What are the reasons to reject a real estate bubble? Valor cites to different sources to name a few:

• Little to no access to cheap credit. Interest rates in Brazil are between 9-12% for mortgages: “‘In the Brazilian market, where interest rates are among the world’s highest, how can anyone speak of real estate speculation?’ asks Alexandre Fonseca, vice president of the Rio de Janeiro Association of Real Estate Company Directors (Ademi-RJ).”
• Credit represents a relatively small percentage of the Brazilian economy, especially when compared to the US: “In Brazil, the total volume of real estate financing accounts for only 5% of the GDP – in 2009, the figure did not reach 3% – in comparison to the roughly 10% in Mexico, 12% in China, almost 20% in Chile and exhorbitant 80% in the United States.”
• Price correction, not an overvaluation. The demand for housing is increasingly rapidly as more people join the middle class or can afford some kind of financing: “In general, there is somewhat of a consensus among market specialists that the demographic and economic factors indicate we are outside the bubble. The first is that there is a housing deficit of 6 million units, with 95% of this total concentrated in the middle to lower income population.”

Inflation? Forget Inflation. We’re Talking about “Valorization.”

If you follow Brazilian business, one of the primary concerns is the value of the Brazilian real versus the US dollar and the euro. Over the last few years, the movement of the real has driven or hurt the fortunes of many Brazilian businesses, and with the Copa America getting into high gear with the quarterfinal games over the weekend, now is a great time to look at the value of the real and its effect on doing business with Brazil.

How does the value of the Real relate to soccer? Look no further than today’s Financial Times, which has two articles looking at the value of the real in light of current soccer player movement between Brazil and Europe. Yesterday, one of Brazil’s largest soccer teams offered 40 million euros for Carlos Tevez, a value unthinkably high just a few years ago. Why can Corinthians make this kind of offer? The value of the real has risen significantly against the euro and made player pay packages much more lucrative.

According to the Financial Times, the value of the real is at a 12 year high. There are various causes cited by experts, including the massive inflow of foreign investment into Brazil and the policy of other countries who are keeping their interest rates very low. In fact, the Minister of Agriculture of Brazil recently said the increased strength of the real is the principal concern of the Brazilian government, and the government is doing everything in its power to control the slide.

So what does this mean for those doing business with Brazil? On the contractual side, parties should consider including a clause that adjusts the prices of imports from Brazil based on the value of the currency. For many Brazilian exporters, they are receiving revenues in dollars but paying expenses in reais. As the value of the real increases, the value of expenses increases while the value of profits decreases. Both sides should be prepared for this risk. Non-Brazilian companies also need to recalculate the costs of sending expat employees to Brazil. The value of the real is one of the single greatest factors pushing São Paulo and Rio de Janeiro to the tenth and twelfth spots as most expensive cities in the world. Finally, the value of the real has affected different industries in different ways, which investors should carefully consider. With a strong real, many Brazilian consumers travel abroad to buy consumer goods and luxury items in the US and Europe. This has been a huge boon to retailers, airlines, and the tourism industry. For each industry the impacts can be different, but keeping the role of the value of the real in mind is crucial.

Now, only one question remains, why “valorization”? It’s pretty simple and a nice Portuguese lesson for the day: value=valor; valuation=valorization. I’m sure our Brazilian readers got it from the start.

Checking up on the FCPA and its Effects on Brazilian Business

After passing the halfway point on 2011, it is time to look back at the Foreign Corrupt Practices Act (FCPA) and its enforcement by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). Gibson Dunn provides a biannual update with lots of statistics and thoughts on 2011 in comparison with the past, present, and future. The results are noteworthy, especially for US and Brazilian businesses.

For those unfamiliar with the FCPA, the DOJ has provided a layman’s guide to the act and enforcement. The FCPA stretches to all US companies doing business in foreign countries, but it also includes some more unlikely suspects, like foreign companies that issue shares or ADRs in US capital markets or have US subsidiaries controlled by US individuals. The FCPA prohibits payments to foreign officials with the intent of misusing the foreign official’s position to direct business to the company making the payment. Of course, this is only the two sentence version of the FCPA, and there many other nuances and distinctions, but we watch out for it in two circumstances: US clients selling to governments and state-owned companies and non-US clients looking to expand their operations to the US.

According to the Gibson Dunn’s guide, FCPA enforcement continues to be aggressive. More individuals and companies are pushing the matter to trial and refusing to settle, which has tied up enforcement resources in the court. This has not diminished the position of the DOJ and SEC to increase their enforcement efforts. Corporations are responding with increased compliance efforts and lobbying of key committees and individuals in Washington D.C. to change the legislation. The Practising Law Institute has an overview describing the current state of enforcement.

While Brazil has not made a big splash in the world of FCPA enforcement, this does not mean it is off the radar. According to a report by Transparency International, a group focused on tracking anti-bribery efforts around the world, Brazil is on the list of countries with little to no enforcement activity of anti-bribery laws. This does not mean that all Brazilian businesses are corrupt, but it brings us to a nice article written recently about the FCPA and how to comply with it.

In “Top Ten Basics of Foreign Corrupt Practices Act Compliance for the Small Legal Department,” the author lists his number one “basic” of compliance as the assumption that corruption in international business is common and frequently ignored. There is certainly corruption in US business, but when US companies consider doing business in Brazil, they should be careful to have an FCPA compliance program, especially because Brazil has many state-owned businesses that might qualify as “foreign officials” under the FCPA. Failing to adequately monitor the practices of third-party distributors and agents could trigger liability for the US company, something we all want to avoid. For Brazilian companies looking to expand to the US, they should consider the effect of the FCPA on their operations in Brazil as well as other countries. For a Brazilian business, the FCPA may come as a bit of a surprise, and it is better to prepare now than wait for a potential enforcement action in the future.

Legislative Update: Brazil Adopts New Rules for Creating a Company

For many years, one of the key differences between corporate law in the United States and Brazil was the concept of the single-member entity. It is quite common in the U.S. to have an LLC or corporation with a single member or shareholder, and the process for creating the company is quite easy in many states. Brazil had a more complex system, requiring a minimum of two people to form any entity. This included “limitadas,” which are the closest comparison to an LLC from one of the states in the U.S. As of today, this divergence is no longer the case.

Yesterday, Dilma Rousseff signed a bill creating the Empresa Individual de Responsabilidade Limitada (Eireli), translated as the “Individual Company of Limited Liability.” The Eireli will allow individuals to create single-member entities for business purposes and benefit from the separation of personal assets from business assets. An Eireli will not be as widely available as an LLC, and it appears an entrepreneur can only have one Eireli in her name. Thin capitalization rules will apply, and many of the other details remain to be worked out in the “jurisprudencia,” or scholarly writings on the topic.

In many ways, the new rules represent an adaptation to the reality of Brazilian businesses. As mentioned in critiques of the bill, Brazilians were increasingly using silent partners to hold a small percentage of ownership in the company then operating it as a sole member entity. Instead of dealing with complications arising from this relationship, like overly aggressive silent partners, the new law simplifies the process of creating and operating a sole-member entity. During debate on the bill in the Senate, the analysis of the bill mentioned the extraordinarily low number of entities because of the high cost of creating them; only approximately 10,000 entities existed in Rio de Janeiro, a city of almost 13 million people. With the creation of the Eireli, the number of entities should likely rise.

What’s Next? Looks like Arbitration on the Horizon

If you have been following our blog the last couple of weeks, you probably noticed a number of posts on the potential merger of Pão de Açucar and Carrefour. We have looked at some of the regulatory aspects and the outlines of the deal, noting how it speaks to the current business climate in Brazil. The latest developments touch on a subject near and dear to our hearts, the source of hours of debate over dinners and drinks (we’re a bit obsessed), and an area of constant fascination–international arbitration. According to reports from Pão de Açucar, Groupe Casino has filed a demand for arbitration against Pão de Açucar before the International Court of Arbitration of the International Chamber of Commerce, referred to simply as the ICC. What does this latest development mean? We explore some of the issues arising from the pending arbitration:

• The arbitration clause. Arbitration relies on consent, normally found in a contract. In this case, it appears Groupe Casino and Abilio Diniz were shareholders of Pão de Açucar. In order to have an arbitration, there was likely a clause in the shareholder’s agreement, bylaws, or some other document signed by Groupe Casino and Abilio Diniz containing the arbitration clause. This clause probably included a selection of the ICC and its rules, and it could have any number of features, including the choice of language, the location of the arbitration, and any qualifications for the arbitrators. Without knowing more about the clause, we cannot give greater detail, but we have seen similar arbitrations select Portuguese or English; locating the arbitration in Brazil, Miami, Paris, or New York; and requiring the arbitrators understand Portuguese.
• The arbitration process. The arbitration will likely follow the ICC Rules, unless the parties have made some form of modification. The ICC Rules follow a process where the demandant submits its notice of arbitration, followed by a response from the respondent. There can be a preliminary challenge to jurisdiction lodged with the ICC Court, and the ICC will normally assess the costs and fees of the arbitration based on the amount in dispute. The tribunal will be selected, either by the parties, the ICC, or a combination of the two. Normally, there are three members of the tribunal, but this is no guarantee; it depends on the arbitration clause. After resolving any challenges to the arbitrator(s), the tribunal and the parties will draft a “terms of reference,” which includes some of the ground rules for the arbitration and an outline of the parties’ case. From there, the arbitration will run its course, likely involving writtens submissions, written testimony, oral hearings, and an award. The exact process is flexible and depends largely on the parties to the arbitration, the tribunal, and the attorneys on both sides.
• The confidentiality of the arbitration. Groupe Casino has affirmed the arbitration is confidential, but this can depend on the arbitration clause. The ICC Rules do not require confidentiality of the proceedings, allowing only for the tribunal to take measures to ensure confidentiality. Without knowing more facts, it is impossible to make a statement guaranteeing or denying confidentiality, but this is an important issue the parties might discuss further, especially considering the influence of BNDES in the deal and its characteristics as an entity receiving public funds.
• Some of the wildcards. Arbitration can be a complex topic, especially when dealing with multiple contracts, laws, and timelines. What might happen here? The role of the public eye and media pressure could be important. It can affect the parties’ positions in the arbitration and the potential for a settlement. The president of Groupe Casino has called the potential merger of Pão de Açucar and Carrefour as an “expropriation” of Casino’s holdings in Pão de Açucar. Is there any room for a treaty claim? There is a breed of arbitration based on investment treaties designed to protect foreign investment from expropriation without compensation and equal treatment of the foreign investor in the host country. Here, such an investment claim would be unlikely because Brazil has not ratified any investment treaties allowing such a claim, but the role of the Brazilian state (explicit or implied) in the arbitration can definitely have an impact on the proceedings.

As the Battle Heats Up, What Can CADE Do?

Last week, we gave a brief overview of the proposed merger of Pão de Açucar and Carrefour and how it says a lot about Brazil at this time. The Economist has been following the situation as well, and yesterday it published an article detailing the role of CADE–the Brazilian government agency in charge of approving mergers and enforcing competition law. The conclusion was not too supportive of CADE:

“The outcome of the fight could hinge on any number of strategic, legal or political factors. Consumer welfare, however, will not be among them . . . CADE is crippled by rules that stop it from acting until after deals have gone through. It can then impose conditions, or even order mergers unpicked if it thinks them irredeemably anti-competitive. But by then it is often too late.”

The Economist went on to criticize competition law in Brazil generally, arguing the Brazilian government’s policy of encouraging industrial concentration to create Brazilian titans who can compete internationally has not helped the Brazilian consumer:

“The ruling Workers’ Party has maintained orthodox domestic economic policies. However, it has been more interested in creating national champions than in fostering competition. The result, says Mr Lazzarini, is that businesses ‘can consolidate markets, reduce competition and increase their profits with government money.’”

So what can foreign companies take away from The Economist’s article? It appears like CADE does not have the authority to meaningfully halt mergers that could violate antitrust rules. Or even if CADE has the authority, it has not flexed its muscles sufficiently to prevent future mergers that test the limits of antitrust policy. There are rumblings of increased action in another major merger, but for now, the threats have yet to materialize into concrete action limiting future planned mergers.