Legal abroad: Doing business in Brazil

Last year was an important one for the Brazilian economy, with a stock market all-time high and falls in inflation and interest rates. The “country risk” has been significantly lowered. This increased trust in Brazil’s economy is reflected by growth in foreign direct investment (FDI), which rose 26% to US$75bn in 2019, from US$60bn the year before, bringing Brazil up from ninth to fourth among global FDI destinations – after the US, China, and Singapore.

This expansion of FDI came in the wake of privatisations such as the sale of Petrobras subsidiary Transportadora Associada de Gás to a foreign private group for US$8.7bn. National regulatory agencies, for instance on civil aviation (ANAC) and on petroleum, natural gas and biofuel (ANP), have also played a role in promoting foreign investment by concluding several concession contracts for airports and oil fields (including production sharing agreements). 

All this has put an end to a retraction cycle in the infrastructure sector that lasted from 2014 to 2018, when the sectoral GDP shrank by about 30%. For 2020 the growth forecast is close to 3%. For the years ahead, expected growth is even higher, mainly due to concessions and public-private partnerships (PPP). There may be great opportunities to be had in Brazil, in particular in infrastructure.

Infrastructure procurement

Infrastructure procurement in Brazil was traditionally governed by two laws: (i) Law No. 8,666 of 1993, establishing the rules for public bidding and public contracts, and (ii) Law No. 8,987 of 1995, governing public concession contracts. However, in light of the state’s inability to finance large projects by itself, more recently PPP started to have a more prominent role (Law No. 11,079 of 2004). To this end, the federal government created the Investment Partnership Program (PPI), Law No. 13,334 of 2016, also with the purpose of expanding and strengthening interaction between the state and the private sector.

Public contracts provide for the so-called clauses exorbitantes

Brazilian administrative law is largely influenced by the French model of administrative contracts, which accepts the existence of public prerogatives, placing the public administration in a position of superiority in relation to the private party. Accordingly, public contracts provide for the so-called clauses exorbitantes, which, to a certain extent, allow the public administration to modify or terminate contracts unilaterally. 

On the other hand, one distinguishing feature of Brazilian administrative law is the adoption of the principles of fait du prince, fait de l’administration and unforeseeability (imprévision), which recognise the right of the private company to request re-establishment of the economic-financial balance of the contract. This request can be based either on the law itself or on the basis of economic clauses in the contract.

Moreover, recent laws such as the Economic Liberty Law (No. 13,874 of 2019) and Law No. 13,655 of 2018 offer further protection to private parties contracting with the state. For example, these laws provide that the private party has the right to be equitably treated and that public entities must take into account the practical consequences and wider impact of their decisions.  

Dispute resolution

Parties to Brazilian state contracts may submit their disputes to arbitration and mediation, as well as other alternative dispute resolution mechanisms.

The possibility of submitting a dispute to arbitration has been established by Law No. 13,140 of 2015, which amended the Brazilian Arbitration Law (Law No. 9307 of 1996). Paragraph 1, Article 1, of the Brazilian Arbitration Law now provides that: “The direct and indirect public administration may use arbitration to resolve disputes related to economic disposable rights.” Disputes related to the re-establishment of the economic balance of the contract may therefore also be subject to arbitration. In practice, the vast majority of the more recent public works, concession and PPP contracts contain arbitration agreements. A special feature of arbitration involving the state and state entities in Brazil is that these procedures will be made public. However, specific documents, such as those related to trade secrets, may be treated as confidential.

Although not so frequently used, these contracts may also contain a mediation clause, or a so-called multi-tier clause, which anticipates mandatory mediation prior to arbitration, according to Law 13,140 of 2015 (the Mediation Law). 

It is worth mentioning that although there is no federal law providing for the inclusion of dispute review/adjudication boards, there is no law preventing the use of these mechanisms. In practice, some branches of the public administration have already submitted their disputes to dispute adjudication boards. The State of São Paulo, for example, has, in addition to including provisions referring its disputes to a dispute adjudication board in some of its contracts, enacted Law No. 16.873 of 2018 expressly providing for this possibility.

Gustavo Scheffer da Silveira is counsel in the São Paulo office and Raid Abu-Manneh is a partner in the London office of Mayer Brown