On November 24, 2016 President Temer signed a Temporary Decree (MP 752/2016) that permits (i) the termination and re-auctioning of airport, highway and rail concessions whose holders are either not in compliance with the obligations set forth in the underlying concession contracts or deemed incapable of meeting such obligations and (ii) the extension of qualifying highway and rail concessions (without new competitive bidding) if the present concessionaires commit to making additional investments and quality improvements.
A critical component of the MP 752/2016 is that the disputes between the Government and the private sector that will inevitably arise as a result of its implementation may be resolved by arbitration or other alternative dispute mechanisms – even in instances where the original contracts do not provide for arbitration.Given the multiplicity of contracts and parties involved in public concession disputes, and the highly technical nature of the of the parties’ respective rights and obligations, the ICC Rules of Arbitration (ICC Rules) – and in particular certain rules that were introduced in 2012 – are especially suitable for resolving the types of disputes that the operation of MP 752/2016 may engender.
MP 752/2016 is, in fact, an anxiously awaited piece of the regulatory framework that was envisioned by the “Investment Partnership Program” that President Temer signed into law (the “IPP Law”) on September 13th, 2016 – and applies only to the concessions covered by the IPP Law.The IPP Law introduced a number of measures aimed at optimizing the speed and efficiency with which new concession projects were packaged for tender.Skeptics, however, rightly pointed out that effective follow-on regulation would be needed to meaningfully effectuate the Program´s goals of reducing bureaucratic gridlock and unleashing the infrastructure sector´s potential for attracting the large scale investment that it desperately requires.
But there are many aspects of MP 752/2016 that skeptics should greet with relief.First, underperforming concessions may now be terminated and expeditiously re-auctioned with business terms and contractual conditions that are likely to be more attractive than the terminated agreements (and it is telling that neither the holder of the terminated concession nor any of its shareholders may participate in the new auction).Second, the Government will be able to renew qualifying highway and rail concessions early in exchange for new investments by operators that have completed the bulk of the construction work in the original concession contract.
But it is the arbitration provisions of MP 752/2016 that will be crucial to effectuating the Investment Partnership Program´s goals of imposing efficiency and modernization on the procedures for investing in Brazilian infrastructure, as disputes that may otherwise require years to wind their way through the judicial process may now be resolved expeditiously through arbitration.Specifically, MP 752/2016 allows for arbitration of any disputes arising out of any of the contracts to which it applies to the extent such disputes relate to certain “property rights,” which are defined as:
- Any contractual issues questions relating to “recomposition of the financial-economic balance” (a concept of Brazilian concessions laws that protects the revenue expectations of concession operators in the event of a unilateral contract change imposed by a governmental entity);
- The calculation of the amount of any indemnification due as the result of the termination or assignment of any concession agreement; and
- The non-performance of any contractual obligations by any of the contract parties.
As noted above, arbitration is available even for contracts that did not originally contain arbitration clauses.Furthermore, any arbitration contemplated by MP 752/2016 must be held in Brazil and conducted in Portuguese.
A number of ICC Rules introduced in 2012 accommodate well the types of complicated, multi-party disputes that may arise due to the enactment of MP752/2016.These include:
Joinder of parties. Article 7 states that a party to ICC arbitration may request joinder of an additional party, provided that the request is made before the appointment of an arbitrator.
Multiple contracts. Articles 8 and 9 include rules governing arbitrations involving claims between multiple parties and/or involving multiple contracts.
Consolidation of arbitrations. Article 10 states that the ICC Court may, at the request of a party, consolidate two or more arbitrations pending under the ICC Rules into a single arbitration, where: (i) the parties have agreed to consolidation; (ii) all of the claims in the arbitrations are made under the same arbitration agreement; or (iii) where the claims in the arbitrations are made under more than one arbitration agreement, the arbitrations are between the same parties, the disputes in the arbitrations arise in connection with the same legal relationship, and the Court finds the arbitration agreements to be compatible.
MP 752/2016 represents another step forward in the Temer Government´s goal of forging a welcoming environment in Brazil for infrastructure investment. The new regulation will create new opportunities for investment – but not everyone will be happy with the results.Aggrieved parties may be soon heading to arbitration venues throughout the country.
Allen Moreland is an American corporate and finance lawyer based in Brazil, and Head of International at Mac Dowell Advogados, a member of ICC Brazil. Previously, he worked at a number of large international law firms, always focusing on Latin American and Caribbean transactions. Mr. Allen is a graduate of Columbia University Law School, a member of the New York Bar and registered with the OAB-RJ as a Foreign Law Consultant. He speaks fluent Portuguese.