The form of dispute resolution is key when structuring strategic businesses in Brazil, especially in financial transactions, M&As, funds, and complex commercial contracts.
Which one to choose: judicial or arbitration?
Although there is no direct answer or rule, it is possible to establish parameters for each type of transaction and the most appropriate way to deal with any disputes:
1. In M&As, Venture Capital, Private Equity and Joint Venture: the key instruments such as Share Purchase Agreement and Shareholders Agreement tend to provide for 2 stages of dispute resolution. First, it seeks to resolve the conflict through mediation. If not successful, arbitration is instituted. As they are more complex corporate transactions, the use of arbitration gives greater legal certainty to the parties due to the specialization and experience of the arbitrators on the subject, in addition to the shorter time to complete the process, when compared to the judiciary.
In addition to the arbitration, contracts that provide for material afirmative and negative covenants for one or more parties, must contain a specific performance clause so that, in case of default, the innocent party seeks a court order to demand that the defaulting party satisfy the specific obligation.
2. In Banking/Financial Transactions: contracts that involve credit extended by domestic and foreign financial institutions, funds and investors, predominantly elect the judiciary. Disputes of these transactions arise generally due to default of specific and objective obligations, such as payment of principal and interest, colllateral and compliance with financial ratios, being fundamental the use of the state’s power of the Judiciary to order payment, attachment, seizure, blocking and selling assets to settle the outstanding debt.
This understanding also includes contracts for convertible loan into equity entered into between angel investors and target startups.
3. In Investment Funds: there is no standardized way of resolving conflict in investment fund documentation, with FIPs, FIIs, FIDCs, among others. The choice between arbitration and the judiciary to settle disputes in funds Charter Documents (Regulamentos), Investment Commitments, Management Contracts and Distribution Contracts depends on the characteristics of the fund, type of investors, the format of the offering and the target assets.
4. In Complex Commercial Contracts: in commercial contracts involving technology, know-how, patents and/or engineering projects, arbitration is the most used means, because it is understood that arbitrators with experience in the area covered by the contract have better conditions to decide on conflicting issues than legal judges.
As in corporate transactions, commercial contracts that provide for affirmative and negative covenants must contain a specific performance clause so that, in the event of default, the innocent party may seek a court order to satisfy a particular obligation.
Whether arbitration or Judiciary, choosing the way to resolve disputs is essential for the success of any business, be it financial, corporate or commercial, and must be carefully evaluated by those involved.