The use of Dispute Boards in Brazil

Dispute boards (‘DBs’) were used for the first time in Brazil during the construction of São Paulo’s subway line 4 (i.e. Yellow Line) initiated in 2003 (‘Metrô Contract’). The DB mechanism in the Metrô Contract was triggered eleven times, allowing the construction to continue despite parties’ disagreements on important matters.1 This initial use of DBs essentially arose out of demands by international institutions financing the relevant projects (e.g. the expansion of a ring road in São Paulo called Rodoanel Mário Covas and other subway lines), such as the International Finance Corporation (IFC) and the International Bank for Reconstruction and Development (IBRD). These early experiences, coupled with the consolidation of such mechanism in Latin America, strengthened the culture of DBs in Brazil, and several public and private construction as well as infrastructure projects in Brazil consequently established the use of DBs as a dispute resolution method.

Nonetheless, the lack of specific regulation generated a certain degree of uncertainty, especially regarding the inclusion of use of DBs in public bids. Considering this gap, the City of São Paulo undertook the regulation of the DB mechanism in public contracts by enacting the municipal Law 16.873 on February 23, 2018 (‘São Paulo’s DB Law‘), which provides the municipal administration with regulatory framework and security to expand the use of DBs in public contracts.

São Paulo’s Dispute Board Law

Considering that São Paulo’s DB Law is a municipal legislation, its application is restricted to long term contracts concluded directly with the municipality of São Paulo, or indirectly via a company or entity owned by the City of São Paulo.

Following current international practice, São Paulo’s DB Law provides that DBs are constituted by three members, subject to a DB agreement between the parties and the DB members within 30 days of the execution of the public contract. The DB thus formed can be of the following nature:

  • Dispute Review Board, which can issue non-binding recommendations;
  • Dispute Adjudication Board, which can issue binding decisions; and
  • Combined Dispute Board, which can either issue a non-binding recommendation or a binding decision.

The use of DBs is restricted to matters involving freely transferable property rights. This means that the right underlying the claim to be analysed by the DB must refer to property that can be subject to pecuniary valuation and be freely transferable, i.e. encompasses the possibility of being alienable, transferable, waivable and tradable.

Another important provision of São Paulo’s DB Law regards the liability regime of the DB members. Inspired by the Brazilian Arbitration Law (i.e. Federal Law No. 9.307 of 1996), São Paulo’s DB Law provides that, when performing their duties, DB members must act within the same boundaries imposed on judges, thus being subject to the same requirements and standards set forth in the Brazilian Code of Civil Procedure for the independence, impartiality, and criminal liability of public officials.

São Paulo DB Law does not provide specific rules on implementing and conducting the proceedings of the DB, stating that comprehensive regulation will be provided via municipal decree. Nonetheless, the Law establishes that the use of DBs in municipal contracts must be provided for in the bid documents and specify the DBs implementation and procedure. The public bids may refer to institutional rules, such as the ICC Dispute Board Rules, to govern such DBs.

Challenges in the application of the Law

In construction and infrastructure projects, dispute boards provide for swift and cost-effective resolution of disputes allowing works to proceed without delays or additional costs, especially by warranting maintenance of cash flows of the project and avoiding interruption of the works. Accordingly, it is paramount that any framework providing for the use of DBs ensures that DB decisions are complied with on time.

Uncertainties in this regard may very well spell disaster for the consolidation of DBs in Brazil, as evidenced by a recent decision regarding Line 4 of São Paulo’s subway rendered on 2 April 2018 by a Lower Court of São Paulo which stayed a DB decision on the grounds that there was no certainty or liquidity on the obligation to pay imposed therein upon the public entity (12a Vara da Fazenda Pública de São Paulo, Companhia do Metropolitano de São Paulo - Metrô vs. Consórcio Tc Linha - 4 Amarela, Proceedings No. 1014265-98.2018.8.26.0053).

In addition to the uncertainty problem, Brazilian public contracts are often in favour of public entities, which may eventually become a problem for the enforcement of DB decisions. While public contracts are often silent with respect to the penalties for breaches of contract by the public entities, contractual and legal penalties for breaches of contract are usually imposed to the private party. Consequently, the public party can usually rely on a series of contractual and statutory provisions to ensure compliance by the private party with DB decisions. Yet, the latter is forced to pursue court/arbitral remedies to ensure compliance by the public entity.

In this scenario, it is disquieting that even institutional rules, such as the ICC Dispute Board Rules, that establish that DB decisions are binding, final and must be effected in due time by the parties, do not address the consequences for breaching such a decision.

Considering that the São Paulo’s DB Law is also silent in this respect, it is essential that – in order to ensure effectiveness of the DBs – the public contracts and/or the municipal decree to be issued pursuant to Article 9 of the such law, address the consequences for breaches of the DB decisions, as well as provide an enforcement mechanism for such decisions.

Conclusion

Despite possible issues with implementing, conducting and enforcing DB decisions, São Paulo’s DB Law is a remarkable improvement to dispute resolution in Brazil. São Paulo is Brazil’s largest economic centre and its endorsement to DBs is an important milestone for the implementation of the practice throughout the country. The lack of specific regulation, rather than an obstacle, must be generally seen as an opportunity to develop such practice, and for specialised institutions such as ICC, to further position themselves in the Brazilian dispute resolution market.


1
One of the most notorious controversies decided by the DB in the Metrô Contract related to a claim on a change in the construction method, from TBM (Tunnel Boring Machines) to NATM (New Austrian Tunnelling Method), which increased the costs of the works.