Corporate bankruptcy does not affect validity of arbitration agreement, says Brazilian court

The Brazilian Superior Court of Justice (STJ), which is the highest court in Brazil to rule on non-constitutional issues, said that as long as the agreement was validly entered into between the two parties, only the arbitral tribunal could set it aside. The bankruptcy of one of those companies did not affect the validity of the agreement, it said, according to a report of the case by Practical Law Company (registration required).

The Brazilian Arbitration Act expressly provides that "issues concerning the existence, validity and effectiveness of the arbitration agreement, as well as of the contract containing the arbitration clause" should be heard by the arbitrator.

Kwikasair, a bankrupt transportation company, had begun a damages claim in the courts against AIG Venture Holdings due to the latter's refusal to pay an insured amount of approximately 640 million Brazilian real (just over £200m). AIG challenged the court proceedings, relying on an arbitration agreement between the two parties. Kwikasair argued that the arbitration agreement was no longer valid as a result of the economic disparity between the two companies.

In its initial judgment, the Trial Court of the State of São Paulo ruled that because the case considered whether the arbitration agreement itself was valid, the matter had to be decided by the courts. However, the Court of Appeal of the State of São Paulo overturned this decision, relying on the express provision in the Brazilian Arbitration Act.

In its appeal to the STJ, Kwikasair argued that parties were entitled to apply to the court for a binding decision on the validity of an arbitration agreement before arbitral proceedings began. Additionally, Kwikasair argued that once a company had been declared bankrupt, it was no longer possible to bring arbitration proceedings.

As well as agreeing with the wording of the Arbitration Act in relation to the validity of the arbitration agreement, the STJ referred to the Brazilian Bankruptcy Act when dealing with the second part of Kwikasair's argument. The Bankruptcy Act states that "bilateral contracts are not terminated by bankruptcy" in cases where the performance of them "reduces or prevents an increase in the liabilities of the bankrupt estate or is necessary to maintain and preserve its assets".

As the parties had previously agreed to arbitrate any dispute, the arbitration proceedings would be an appropriate forum to decide whether AIG did owe Kwikasair the insurance payment, the STJ ruled.

The decision confirms that Brazilian law complies with the international doctrine of 'Kompetenz-Kompetenz', under which an arbitral tribunal is able to rule on matters of its own jurisdiction.

The Brazilian Arbitration Act dates back to 1996. Last month, the Brazilian Senate set up a special committee to discuss potential amendments to the law, which will be chaired by STJ judge Luis Felipe Salomao. According to press reports from the country (registration required), major changes to the law are unlikely. However, Salomao has previously said that he is keen to adjust the text of the Act to reflect changes to the country's Civil Code and judiciary that have happened since the Act came into force.