Brazil's top court strikes down validity of arbitration clause in franchise agreement

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In a recent and potentially far-reaching decision, the Superior Tribunal of Justice – the highest court of Brazil for non-constitutional matters with responsibility for harmonizing interpretation of federal laws by the state and regional federal courts of appeal – has addressed the validity of arbitration clauses in franchise agreements in Brazil, in Special Appeal no. 1.602.076-SP.

In the original suit, the franchisee sued to terminate the franchise agreement and to obtain a refund of the payments made to the franchisor, as well as damages arising from the franchisor's failure to deliver the required franchise disclosure document and contractual breaches committed by the franchisor.   

In the trial court, the franchisor argued that the lawsuit should be dismissed because of the arbitration clause included in the agreement. The lower court rejected this argument, and the franchisor submitted an interlocutory appeal to the state appellate court, which overturned that decision and held the arbitration clause to be valid.  This resulted in the dismissal of the case on the grounds that the courts did not have jurisdiction.

The plaintiff/franchisee then filed a special appeal to the Superior Tribunal of Justice, which decided the arbitration clause was void due to the failure to meet the requirements for validity set out in Article 4, § 2, of Law 9,307/1996 (the Arbitration Law). That article provides that arbitration clauses in adhesion contracts are only effective if the adherent takes the initiative to file for arbitration, or expressly consents to participate in it. 

Brazilian courts frequently treat agreements between consumers and commercial suppliers of goods and services as adhesion contracts. The Brazilian Consumer Protection Code (Law No.8,078/90) expressly defines adhesion contracts as those with clauses that have been approved by the competent authorities or established unilaterally by the supplier of the products or services where the consumer is not allowed to negotiate or modify the contract.

The question of whether an agreement between two companies is subject to the Consumer Protection Code is often controversial in Brazil. The majority doctrine from legal scholars and jurisprudence from the courts take the position that franchise agreements, by their nature, are not subject to the Code, and this position was also confirmed in the decision in question. However, the Superior Tribunal of Justice in this case took the position that all adhesion contracts, even those that do not involve relations between consumers and suppliers, are subject to article 4, § 2, of the Arbitration Law.  That provision is tantamount to a statement of public policy whose purpose is to prevent the weaker party from being forced to submit to arbitration. 

The majority opinion of the Supreme Tribunal of Justice confirmed that arbitral tribunals generally have the primary authority to take jurisdiction to hear the cases that are submitted to arbitration and to decide on their own jurisdiction and the validity of arbitration clauses.  However, the majority of courts have found that there is an exception to this rule when arbitration clauses are found in adhesion contracts.  Thus, the Superior Tribunal in this case held that courts can nullify arbitration clauses if they perceive a disadvantage for the weaker party to an adhesion contract.

This decision must be carefully analyzed, since there are franchise agreements that are substantially negotiated, such as international franchises, even though such agreements follow some standardized form in the beginning. As an example of case law regarding this issue, a decision rendered by the São Paulo State Court of Appeal concerned the defendant/adherent's objection to arbitration on the grounds that the agreement (a hotel management agreement) was an adhesion contract and thus the arbitration clause would only be effective if the adherent took the initiative to file for arbitration or expressly consented to participate in it. It was decided that both parties were significant companies who were deemed to have equal negotiation powers and the arbitration clause was considered valid (Interlocutory Appeal No. 815580-0/9 – 2nd São Paulo State Auxiliary Superior Court (TACSP).

The recent decision by the Superior Tribunal of Justice is important because it confirms that franchise agreements under Brazilian law are not deemed to be consumer contracts, but may still considered to be adhesion contracts, and as such are subject to the terms of the Arbitration Law regarding validity of arbitration clauses. 

However, foreign franchisors who negotiate franchise agreements with substantial Brazilian companies have solid grounds to allege that their agreements are not likely to be adhesion contracts and that, therefore, arbitration clauses contained in them should be valid.

Learn more about this decision and its implications by contacting the author.

*Paula Mena Barreto is a partner in the Intellectual Property group of Campos Mello Advogados, an independent law firm in Brazil.