Choice of Forum in Brazil: Recent Changes May Render Clauses Void

On 5 June 2024 the Brazilian Code of Civil Procedure (“BCCP”) was amended to restrict the parties’ freedom to choose the forum to decide their disputes. This will affect forum selection clauses in domestic contracts and, in many cases, international contracts.

Background

The old Brazilian Code of Civil Procedure did not contain any specific articles addressing forum selection other than for clauses found in proforma contracts (contracts of adhesion). It provided that the court had the power to void the parties’ choice and transfer the matter to “the court of the defendant’s domicile”.

The BCCP came into force in 2016 and fully replaced the old Code. The BCCP introduced a provision addressing forum selection by the parties:

“Article 63. The parties may modify the jurisdiction due to the value and territory, electing a forum where an action arising from rights and obligations will be filed.

Paragraph 1^st – The choice of forum only takes effect when it is contained in a written document and expressly alludes to a certain legal transaction.

Paragraph 2^nd – The contractual forum binds the parties’ heirs and successors.

Paragraph 3^rd – Before being served, the choice of forum clause, if abusive, may be considered ineffective ex officio by the judge, who will determine the transfer of the matter to the court of the defendant’s domicile.

Paragraph 4^th – Once served, it is up to the defendant to allege the abusiveness of the choice of forum clause in the defence, under the consequence of preclusion”.

In essence, the test of enforceability depended on whether the parties: (a) put their choice in writing in their contract (or in a document referring to a contract, even if the original contract was oral); and (b) the clause was not abusive. If this test was met, the parties’ choice would prevail in most cases.

The parties’ choice was never absolute, however, due to the restrictions contained in specific laws (such as the Consumer Protection Code). In addition to the basic principles of contractual freedom, the Economic Freedom Law supported the notion that the parties’ choice was to be preferred.

The 2024 Amendments

The 2024 amendments replaced the wording paragraph 1^st of article 63 with the following:

“Paragraph 1^st – The choice of forum only takes effect when it is contained in a written document, expressly alludes to a certain legal transaction and is relevant to the domicile or residence of one of the parties or to the place of the obligation, except for consumer agreements, when favourable to the consumer” (emphasis added).

The explanatory memorandum (justificativa) of the Bill provided that the choice of forum could not be “random and abusive or else it would breach the principle of objective good faith […] that guides the whole legal system”. It also emphasised that the parties’ choice “has to be used with procedural loyalty”. There was no mention of international agreements in the explanatory memorandum.

Before the 2024 amendments consumers already had the privilege of initiating proceedings in their own domicile, irrespective of any contractual provision stating otherwise. Thus, the introduction of the relevancy requirement altered things materially by adding a third prong to the test.

Moreover, a new paragraph (paragraph 5^th) was also added to article 63, defining what constitutes “abusive practice” and confirming that the court has the authority to reject jurisdiction on an ex-officio basis:

“Paragraph 5^th – The filing of a lawsuit in a random court, understood as one that is not connected to the domicile or residence of the parties or to the legal transaction under analysis in the complaint, amounts to abusive practice that justifies the ex-officio declination of jurisdiction”.

Therefore, it is clear that the new provisions limit parties’ choice to forums with specific connections to the contract, namely:

• domicile or residence of the parties; and
• the place where the obligation will be performed.

How do the 2024 amendments affect choice of forum in international contracts?

Where a contract is international (that is, the contract has material international connections or at least one party is based outside of Brazil), article 25 of the BCCP excludes the jurisdiction of Brazil’s courts where the parties have chosen an exclusive forum abroad. However, the BCPC expressly exempts from this rule the following:

• consumer disputes where the consumer is domiciled or resides in Brazil;
• disputes over alimony where the creditor is domiciled or resides in Brazil or where the defendant has connections with Brazil (such as where the defendant has assets, income or “economic benefits” from Brazil;
• disputes involving real estate located in Brazil;
• succession disputes involving assets in Brazil;
• disputes relating to the distribution of assets in divorce, separation and de facto relationships.

In addition to the exclusions listed above, paragraph 2^nd of article 25 states that only paragraphs “1^st to 4^th” of article 63 will apply to the parties’ choice. Note that there is no mention of paragraph 5^th, so the better view is that the court will not have the power to refuse jurisdiction of its own volition (ex-officio). This interpretation is consistent with the introductory words of article 25, which provides that the defendant must plead the exclusion of jurisdiction point in its defence (answer) or else issue preclusion will apply.

A potentially problematic scenario would be one where the parties choose a forum that is unconnected to the dispute and the contract is international – especially as such choices are often found in cross-border agreements, with New York, London or Switzerland being the parties’ preferred venues. Will the courts incorporate the definition “abusive practice” in paragraph 5^th and apply it to those situations despite it being left out of article 25, paragraph 2^nd?

In my view, the predominant risk that will lead to the parties’ forum selection being voided by Brazil’s courts will be those involving Brazilian parties with weaker bargaining power or insufficient resources to safeguard their interests in the foreign forum. It would be fairly easy for the court to draw from general principles and paragraph 5^th of article 63 to nullify the choice of law clause.

Incidentally, I note that adopting a non-exclusive choice of court provision is no panacea. parties should keep in mind that if the choice of forum is non-exclusive, disputes are often dealt with in parallel proceedings (that is, concurrent proceedings before the foreign court and the Brazilian court), as Brazil does not adopt the forum non-conveniens doctrine. When this situation arises, there is a “race to the finish line” because when the foreign judgment is recognised by the Brazilian courts before all appeals in the Brazilian proceedings are finalised, the foreign judgment will create res judicata in Brazil and force the Brazilian action to be permanently stayed.

What about arbitration clauses?

On its face, parties appear to have more latitude when opting for arbitration. Unlike the BCCP, Brazil’s Arbitration Law does not expressly restrict the parties’ freedom to choose a foreign arbitrator or arbitration institution.

However, the differences between the BCCP and the Arbitration Law provisions are likely to apply only to specific cases. This is because Brazil’s courts may refuse to enforce arbitral awards under article V of the New York Convention (where it applies) and under articles 38 and 39 of the Arbitration Law, which largely reflects the provisions of article V.

A choice of venue that is unconnected to the transaction and that was entered into having a weak Brazilian party may be held null and void, and the arbitration’s award will not be recognised in Brazil.

Time Required for Recognition of Foreign Judgments and Arbitral Awards

Another issue to keep in mind is the time required for recognising and enforcing a foreign judgment or arbitral award in Brazil. It takes years.

In addition to the time required for recognition and enforcement, parties need to consider if it is a good strategy to give the opportunity to the judgment debtor (and its arbitration equivalent) to argue the issues for refusing recognition before Brazil’s courts.

In practice, the whole recognition process is time-consuming, expensive and stressful. Yet, it is a process that may easily be avoided by expressly choosing the relevant Brazilian courts as the forum (or a suitable location in Brazil as the seat and venue of the arbitration) to resolve the parties’ disputes.

Final Remarks

Parties need to be careful when deciding on the selection of the forum or the arbitration’s seat and venue to resolve their disputes, especially when one of the parties to the contract is Brazilian. Further to the factors outlined above, the factors a party should consider include:

• which party is more likely to breach the contractual terms (parties often forget that they may be the ones that will not comply with their contractual obligations);
• where the party’s assets and the assets of the Brazilian party are likely to be located (as the judgments and arbitral awards may be enforced in other jurisdictions);
• which party has the deepest pockets (international litigation is far from cheap);
• in what jurisdictions the evidence relating to the dispute would be located (should the parties opt for the IBA Rules on the Taking of Evidence in International Arbitration?) and the parties’ respective legal traditions and document retention obligations;
• the predictability of the outcome if the matter is litigated in Brazil, abroad or before an arbitrator (or an arbitral tribunal);
• whether the risk of having a Brazilian court refuse recognition of the foreign decision justifies the advantages of a “home court advantage”; and
• the cost of conducting litigation or arbitration and having the ensuing decision enforced.

As with contracts generally, a well-drafted dispute resolution clause will reduce the likelihood that the parties’ choice of forum being voided by the courts.

Questions?

Contact me if you would like further information. My firm is ready to assist you.

arbitration Brazil Choice of forum Choice of law Contracts Forum non conveniens Forum selection IBA Rules of Evidence International contracts Recognition of Foreign Judgment

Last modified: 11 November 2024