Brazil Investment Protections

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1. INVESTMENT TREATIES AND THE ICSID CONVENTION

Prior to the 1990s, Brazil had long maintained a policy of not concluding bilateral and multilateral investment treaties. During the 1990s, however, with the opening of the Brazilian economy and the trend towards privatization, the Brazilian Government initiated negotiations with several countries and signed fourteen bilateral investment treaties (“BITs”), with Portugal, Chile, the United Kingdom, Switzerland, Denmark, France, Finland, Italy, Venezuela, South Korea, Germany, Cuba, the Netherlands, and Belgium and Luxembourg. These BITs provided various substantive protections including provisions regarding expropriation. Disputes between the investor and the host State generally were to be resolved by arbitration before ICSID (assuming both States would become parties to the ICSID Convention) or through ad hoc arbitration under the UNCITRAL arbitration rules.

Out of the fourteen BITs signed, the Government submitted only six treaties to the Brazilian Congress for ratification but withdrew the ratification requests soon thereafter. As a result, none of these treaties have been ratified. In any event, the Congress at the time was hostile to the ratification of the BITs due in part to a misunderstanding of the investor-State arbitration mechanisms and in part because the 1990s saw a strong inflow of foreign venture capital into Brazil and – given the impasse surrounding the negotiation of the OECD Multilateral Agreement on Investments (“MAI”) at that time – Brazilian parliamentarians may have thought that as capital-exporting countries, the OECD counter-parties to these bilateral investment treaties were seeking advantages that they could not get through the MAI.

Another obstacle to the ratification of the BITs at the time concerned the BITs’ provisions that payments arising from disputes under a BIT should be made in a freely convertible currency, without restriction or delay.[1] Such provisions, in the opinion of some, could be perceived as preferential treatment of foreign investors over domestic investors because Brazilian law requires that in certain circumstances payments of claims enforced against the Government must be made in long-term National Treasury bonds.

As the Brazilian economy has grown steadily and as Brazil has become not only a foreign capital recipient but also a foreign capital exporter, these attitudes have started to change. While Brazilian companies are increasingly visible and important to the international markets, because Brazil has not ratified any bilateral investment treaties, Brazilian companies encounter difficulties ensuring that their investments abroad are protected. Consequently, Brazilian companies are known to engage in “treaty shopping” by channeling their investments through countries that adopted investment treaties with the target countries. Nevertheless, such approach has its disadvantages, not only in terms of the organization of the corporate structure necessary for the investment but also in terms of potential objections by the respondent State when a dispute arises.

Nevertheless, when President Luiz Inacio Lula da Silva was elected in 2002, the new Government’s trade team requested that the BITs under review in the Congress be removed from the agenda. In September 2003, the Foreign Trade Council created an Interministerial Working Group, which presented some suggestions for dealing with BITs. More recently, in 2007 the Council of Ministers of the Office of Foreign Trade (Câmara de Comércio Exterior, or “CAMEX”) approved the latest report of the Working Group, which included the following guidelines for renegotiation of investment agreements, subject to CAMEX’s prior approval:

a) the Colonia and Buenos Aires Protocols regarding investment protection under Mercosul should be renegotiated;

b) BIT negotiations should proceed with other South American countries; and

c) BITs with countries outside of South America should be negotiated only in the context of more comprehensive commercial agreements.

Considering the broad internal consensus accepting arbitration after the 2001 decision of the Brazilian Supreme Court confirming the constitutionality of Arbitration Law,[2] and the fact that Brazil has ratified the most important conventions on international commercial arbitration,[3] one could expect Brazil to sign, in the very near future, “new generation” bilateral investment treaties with other countries. Arguably, this would strengthen Brazil’s position within the international commercial community. Presently, Brazil is engaged in BIT negotiations with Chile and Mexico.

Most recently, on March 18, 2011, Brazil and the United States signed an Agreement on Trade and Economic Cooperation,[4] (“ATEC”) which established the United States-Brazil Commission on Economic and Trade Relations (the “Commission”), designed to promote bilateral economic and trade cooperation. The Commission, which will be co-chaired by U.S. and Brazilian officials, is charged with, among other things, consulting on specific trade and investment matters of interest to either Brazil or the United States, identifying opportunities for expanding bilateral trade and investment flows, and promoting the removal of bilateral trade and investment obstacles, particularly in the regulatory field.[5] Although the ATEC is not a bilateral investment treaty, it may signal a willingness on Brazil’s part to negotiate a bilateral investment treaty or a free trade agreement in the future.

Brazil has still not become a party to the ICSID Convention because of the perception among certain Brazilian authorities that the ICSID Convention conflicted with various provisions of the Constitution and that the application of the ICSID Convention in Brazil would favor foreign investors to the detriment of domestic investors.[6] Brazil now has a modern arbitration law, and the protection granted to both foreign and domestic investors is perfectly in line with current rules governing investments, as well as with the position adopted by Brazilian courts in accepting foreign arbitration. There is an expectation within the Brazilian legal community that Brazil will ratify the ICSID Convention in the near future.

[1] See, e.g., Agreement Between the Government of the Republic of Finland and the Government of the Federative Republic of Brazil on the Promotion and Protection of Investments (Brasilia, 28 Mar. 1995), Art. 7(3); Agreement on Encouragement and Reciprocal Protection of Investments Between the Kingdom of the Netherlands and the Federative Republic of Brazil (Brasilia, 25 Nov. 1998), Art. 5(1).

[2] Supreme Court of Brazil [STF], M.B.V. Commercial and Export Management Establishment vs. Resil Industria e Comercio Ltda, Agravo Regimental em Sentenca Estrangeira, No. 5206-7 (13 Dec. 2001).

[3] [Brazil has ratified several key conventions dealing with enforcement of awards arising from international commercial arbitration: the Montevideo Convention, which entered into force in Brazil on December 27, 1995 (Inter-American Convention of Extraterritorial Validity of Foreign Judgments and Arbitration Awards (Montevideo, 8 May 1979) 1439 U.N.T.S. 87, entered into force 14 June 1980 (“Montevideo Convention”); the Panama Convention, which entered into force in Brazil on December 27, 1995 (Inter-American Convention on International Commercial Arbitration (Panama, 30 Jan. 1975) 1438 U.N.T.S. 245, entered into force 7 June 1976 (“Panama Convention”); and the New York Convention, which entered into force in Brazil on September 5, 2002 (Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958) 30 U.N.T.S. 38, entered into force 7 June 1959 (“New York Convention”).]

[4] Agreement on Trade and Economic Cooperation Between the Government of the United States of America and the Government of the Federative Republic of Brazil (Brasilia, 18 Mar. 2011) (“ATEC”).

[5] ATEC, Art. 2.

[6] Foreign Capital Law (Brazil), Art. 2.