Encouraging alternative dispute resolution in Brazilian infrastructure contracts – Provisional Measure 752

As part of the Brazilian Government’s attempts to mitigate the bottlenecks affecting infrastructure projects and to address the private sector’s concerns about problems in existing contracts, Provisional Measure N. 752/2016 (“MP 752”) was published on 24 November 2016.

MP 752 provides mechanisms to renew or re-tender for contracts in the construction, refurbishment and operation of highways, railways and airports under the Investment Partnership Programme that was created under Law No. 13.334.2016. Contracts may be renewed when projects are going well and the contractor is keen to make additional investments. Rebids may occur if the contractor is not able to comply with its obligations under the contract.

Arbitration and ADR

One of the mechanisms provided for by MP 752 allows disputes related to patrimonial rights to be solved by arbitration or other alternative methods of dispute resolution ("ADR"). This would include disputes regarding the financial-economic equilibrium of the contract, a very relevant principle of Brazilian contract law. This measure will be welcomed by investors who have requested referrals of disputes to arbitrators or encouraged the use of ADR to avoid lengthy procedures in Brazilian Courts.

Limited application

Nevertheless, there is a possibility that the arbitration and ADR provisions under MP 752 will fall below market expectations. Although MP 752 shows the Government’s willingness to avoid recourse to the Brazilian Courts, it does not require arbitration and ADR to be included in every contract for infrastructure projects. For contracts not included in the Investment Partnership Programme or for other economic sectors, the use of these mechanisms will continue to be assessed on a case by case basis.

MP 752 allows existing contracts to be amended to provide for arbitration and ADR. However, it does not make these amendments mandatory. Private parties and the competent governmental authority will have to agree a dispute resolution clause, which may be time consuming or impossible where one of the parties sees a benefit in insisting on court jurisdiction.

Arbitration requirements

MP 752 requires Brazil to be the arbitration seat and specifies that the arbitration shall be conducted in Portuguese. The government will provide a list of certain arbitration chambers that should be used for the purposes of disputes under MP 752. This is intended to ensure disputes are referred to reliable chambers. In relation to costs and expenses, MP 752 requires the private party to advance the costs of the arbitration and only provides for reimbursement after the final arbitral award. The parties will have to obtain a final administrative decision from the competent authority before filing a claim, as this is a requirement for commencement of arbitral proceedings.

What comes next?

Although MP 752 came into force immediately upon signature by President Michel Temer, its validity as a provisional measure is limited to a period of 60 days (that may be extended for a further 60 days). To take effect as an Act, approval of Brazil’s Congress will be required. We will monitor the forthcoming discussions on MP 752, paying close attention to any potential amendments of the provisional measure in the final law.

In the meantime, the practical effects of MP 752 depend on the Brazilian Government’s willingness to amend existing contracts, accredit arbitration chambers and conclude administrative processes to allow the parties to commence arbitration. The MP 752 is definitely a positive movement towards increasing the speed of dispute resolution in public contracts, though there is still work to be done.