Enforcement of Common and Civil Law Arbitral Awards in Latin America and the Caribbean: The Brazilian and Cayman examples

Posted on January 26, 2021 by Insurance Professionals Miami

I. Arbitration Clauses in Insurance Contracts

Arbitration provisions under contracts for insurance can often provide for a more expeditious and confidential (although not necessarily cheaper) settlement of disputes than passage through the courts. These provisions can either be mandatory or voluntary to the insured (or cedant) and insurer (or reinsurer) bound by the contract.

Furthermore, the procedural rules by which the arbitration will be governed tend to be agile, and usually involve a third party arbitration service (e.g. the International Chamber of Commerce, the Jamaica International Arbitration Centre, the Arbitration and Mediation Court of the Caribbean in Barbados, or the Centro de Arbitragem e Mediação da Câmara de Comércio Brasil-Canadá in Sao Paulo and Rio de Janeiro).

Several government and consumer agencies in the US, Latin America and the Caribbean region, criticise the presence of mandatory arbitral provisions such as the suppression of the consumers’ pursuit of remedies. In observance of such concerns, Brazilian courts for instance will usually invalidate commercial agreements to arbitrate where there is imbalance of economic power between the parties and where there was no option to amend or review the contractual terms and conditions.

However, while there may be regulatory push-back against mandatory provisions to arbitrate, jurisdictions in the region such as Jamaica, Barbados, and Brazil recognize the use of arbitration in insurance contracts.

II. Cayman Enforcement of Brazilian ICC Award

The recent decision of the Caymanian Court of Appeal in the matter of Gol and MP Funds regarding a 2007 Brazilian ICC Arbitral Award in favor of Gol has strong implications for the importation and enforcement of arbitral awards among various countries and between contrasting legal systems. Thus, because of the Cayman decision, it is conceivable that an insurer who receives a favorable arbitral decision in a civil law jurisdiction, for example, can have that award enforced both under the English common law system as well as within the Caribbean Commonwealth to the extent that the relevant jurisdiction has adopted English law and reasoning. Of course, the insured who receives a favorable award will, also, have a broader jurisdictional reach within which to enforce their rights.

In this case, MP Funds essentially challenged the jurisdiction of the arbitral tribunal and the validity of the award on grounds allowed under Section 7(2) of the Caymanian Foreign Arbitral Awards Enforcement Law (1997 Revision) (“FAAE”) which is similar to Article V of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“Convention”). Namely, Section 7(2) challenges failings in the application of arbitration rules and procedure by allowing for the refusal of recognition and enforcement of a foreign arbitral award on these bases. Both Brazil and Cayman have acceded to the New York Convention and have promulgated laws that import the principles of the Convention into their respective legal systems. In Brazil’s case, it is the Brazilian Arbitration Act (Law 9,307/1996) (hereinafter, “BAA”) and in Cayman it is the FAAE.

The Court of Appeal found in favor of Gol and against MP Fund’s arguments by determining that the Brazilian arbitral award is recognizable and enforceable in Cayman. The Court reached its reasoning based in large part on the principles underpinning Article III of the Convention which states: “[e]ach Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon…” It reasoned, applying the English and Caymanian jurisprudential principles, such as those related to due process determinations, public policy and the doctrine of estoppel, that the matters before it were the same matters that had been addressed in the Brazilian local court judgments regarding the ICC award.

As such, English and Caymanian jurisprudence (inclusive of the principles within the Convention) mandated that the Court should follow the decision of the Brazilian courts on matters decided according to its own law rather than re-interpreting Brazilian law in Cayman courts. It recognized and acknowledged that civil law concepts (e.g. iura novit curia[1] which has no equivalent under the common law) were applicable to the decision in Cayman courts.

Within the civil law jurisdiction of Brazil, arbitral awards have the same legal status as court judgments and can be enforced by the courts. Brazilian courts are increasingly friendly towards arbitration and, as such, they try to limit their intervention in arbitral proceedings to a minimum. In 2018, the Brazilian Superior Court (Superior Tribunal de Justiça – STJ) issued the decision REsp1.550.260, wherein it was decided that agreements to arbitrate entail recognition of the jurisdiction of the arbitral tribunal over the Brazilian Courts. The contractual clauses related to arbitration as the primary mechanism by which to solve any disputes between the parties is widely respected by the Brazilian courts. The courts tend to amend it only when an element to create a binding contract is absent or when a substantial issue with the contractual parties is identified. In that sense, one of the judges that voted in the decision REsp 1.550.260 emphasized the following:

“Arbitration Act allows capable people of contracting to submit the disputes that may arise to the arbitral tribunal, by means of an arbitration agreement, inserting arbitration clause or arbitration commitment into the contract. In doing so, the jurisdiction of the arbitral tribunal, as a rule, precedes the Court’s jurisdictional action to settle disputes relating to available rights. The arbitral award produces the same effects between the parties involved and, in case of an indemnity award, the award can be executed in the same way as a court decision. Furthermore, only after an award issued by the Arbitration Tribunal, the Court can act to eventually annul it, under the terms of articles 31, 32 and 33 of Law 9,307/1996.”

Brazilian arbitral awards are not subject to appeal, unless so agreed by the parties, which is not common. Nonetheless, an arbitral award can be set aside by the Brazilian courts within a 90-day period from the notification of the award per Art.33(1) of the BAA. According to art.32 of the BAA, the grounds for an award to be set aside are as follows: (1) the arbitration agreement is null and void; (2) the award was rendered by someone who could not serve as an arbitrator; (3) the award does not meet the BAA’s mandatory requirements for an award; (4) the award exceeded the scope of the arbitration agreement; (5) the award does not decide the entirety of the dispute; (6) the award was rendered in the presence of nonfeasance, extortion, or passive corruption; (7) the award was not rendered within the term established by the parties or within six months, if no other term was stipulated, from the initiation of the arbitration proceeding; or (8) due process was not observed. However, the courts do not review the merits of the case and it has been their consistent trend to recognize awards and avoid intervention of any form.

Thus, this is the rubric inherited by the Caymanian courts via Article III of the Convention. The Court of Appeal’s reasoning presents an example of the seamless convergence of various systems of law (i.e. arbitration v. traditional courts and civil law jurisdictions v. common law jurisdictions), as guided by the Convention, resulting in the potential for broad international enforcement of arbitral awards throughout a multiplicity of jurisdictions.

III. Regional Foreign Arbitral Awards Enforcement Law

The likelihood of decisions similar to the Cayman Court of Appeal’s decision being found throughout Latin America the Commonwealth Caribbean is strong given the common law principle of precedent as well as the principle of reciprocity, applicable to both common and civil law jurisdictions as established under the Convention. Additionally, one important innovation introduced by the Convention is the exclusion of the “double exequatur” requirement—the party seeking enforcement of an arbitral award had to prove that the award was final and un-appealable in the country of the seat of the arbitration and in the country where the award was to be enforced. 

Barbados and Jamaica, both seats of arbitration in the Caribbean, as parties to the Convention, have local laws like the FAAE that import the Convention’s principles into their respective domestic legal systems. In Barbados, it is the Arbitration (Foreign Arbitral Awards)(Cap. 110A)(Foreign Arbitral Awards Act). In Jamaica, it is the Arbitration (Recognition and Enforcement of Foreign Awards) Act 2001. The Jamaican law recites the Convention’s articles within its texts and the Barbados law contains sections similar to both the Convention and the Cayman law such as Section 6(3) which refers to public policy as a basis for refusing to recognize and enforce foreign arbitral awards. Similarly, Brazil, also a party to the Convention, has the BAA. However, per Art. 35, an award by a foreign arbitral tribunal must be recognized by the Brazilian Superior Court (“STJ”).

Jamaica’s seat of arbitration, the Jamaica International Arbitration Centre (“JAIAC”) and Barbados’ seat of arbitration, the Arbitration and Mediation Court of the Caribbean (“AMCC”) both have rules and procedures based on the UNCITRAL Rules. Each nation’s courts are also subject to their respective, aforementioned laws on foreign arbitral award enforcement. Further, both have inherited the English common law as prototypes for their respective legal systems with Jamaica still giving heavily persuasive value to the decisions of British courts (the Privy Council still maintaining precedential value) and both Jamaica and Barbados allotting persuasive value to the decisions of courts throughout the Commonwealth, at large. Therefore, the reasoning employed in the Cayman decision and the similarity of its laws to those of Barbados and Jamaica, as well as the Commonwealth Caribbean region, make it highly likely that similar decisions will be made on the recognition and enforcement of foreign arbitral tribunal awards.

Although, it should be noted that uniform implementation of the New York Convention by member states is not a foregone conclusion. Members are allowed to limit the application of the Convention, such as adoption of the reciprocity reservation or the commercial reservation (wherein the application of the Convention is limited to commercial matters only). Thus, the lack of uniformity may be a hindrance to the enforcement of foreign arbitral awards and the development of a cohesive international arbitration system.

IV. Implications for Enforcement of Foreign Arbitral Awards Under Insurance Contracts in the Region

Insurers who may want to have a foreign arbitral award awarded in a civil law jurisdiction enforced in a Commonwealth Caribbean jurisdiction subject to the Convention and with foreign award laws similar to Cayman, Barbados, and Jamaica should apply to the local courts for recognition and enforcement and supply, per Article IV of the Convention: (1) a duly authenticated original award or a duly certified copy and (2) the original or duly certified copy of the agreement under which the parties have undertaken to submit to arbitration all or any differences which have arisen or may arise between them under the insurance contract. It is the same process for those insurers with awards in common law jurisdictions who would want to have their awards enforced in civil law jurisdictions such as Brazil.

It should be reiterated that insureds will also have the facility to reach a multinational insurer for the enforcement of a foreign arbitral award, in a jurisdiction subject to the Convention and relevant domestic laws.

Thus, notwithstanding the caveats regarding inconsistent adoption of the Convention’s principles by member states, the Cayman decision showcases that Civil Law, as represented by Brazil, and English Common Law, as represented by the Commonwealth Caribbean, legal systems can be complimentary when enforcing arbitral awards.

 [1] I.e. “the judge knows the law” or, rather, it is the role of the parties to a legal dispute to the adduce the facts, they need not plead or prove the law. It is for the court to apply the law.

Authors: Isadora Talamo, Kennedys Associate; Danielle Benjamin, Kennedys Law Clerk; Alex Guillamont, Kennedys Head of Latin America and Caribbean; Fabio Torres, Kennedys partner in Brazil.

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Fiscal Liability – Update on Colombian Law Decree 403 and case law in Spain

Posted on December 17, 2020 by Insurance Professionals Miami
Irregularly shaped wooden blocks background

In our third and last update on this topic so far, issued in November 2019, we discussed a case handled by Kennedys in which the office of the Comptroller General (CGR) revoked a decision that disregarded how claims made policies work. The CGR recognised claims made policies and ordered a full return of the payments done by the insurers.

In two previous articles, we wrote about how fiscal liability proceedings work in Colombia and mentioned that, on 11 September 2019, a Constitutional Amendment had been approved, on 11 September 2019, to allow Congress to enact legislation to further regulate on the subject. That happened on 16 March 2020, when Law-Decree 403 was issued.

In this article, we outline relevant provisions of Law Decree 403 and some additional developments that have taken place since, also with regard to case law in Spain.

Law-Decree 403

Law-Decree 403 introduced what has been called the “superpowers” of the CGR. After its enactment, the CGR can supervise and control the administration of public funds of all administrative levels, and in accordance with the Constitutional Amendment the CGR can exercise its control preventatively, and simultaneous to other administrations. Judicial police powers, among others, are now enjoyed by the CGR.

The remit of what the CGR can investigate has also been widened. By way of LD 403, all activities, actions, omissions, operations, proceedings, accounts, contracts, agreements, projects, acts or facts, as well as all other business that are included or that affect directly, or indirectly public funds management or that involve public property, funds, or monies, are subject to the CGR’s vigilance and control. With such augmentation of the CGR’s jurisdiction, many academic and practical discussions have been brought to an end, including whether fiscal liability can be incurred by omission.

However new issues arise, for instance whether the CGR exercising preventative control should be a cause for insureds giving precautionary notice under the policy.

The limitation period or “caducidad” to start fiscal liability proceedings is now 10 years (double than the previous 5) from the moment in which the damage occurred followed by yet another 5 years (as before) from the moment in which, in the Opening Writ, it is determined whether fiscal liability attaches. The changes to the limitation period are essential for insurers since timings in fiscal liability proceedings will affect, and apply, to insurance contracts.

Refreshingly, pursuant to article 144 is possible for the alleged liable parties and third civil liable parties (insurers) linked to the proceedings to petition the termination thereof when prejudice is considered negligible, and the costs of the proceedings and subsequent enforcement would become uneconomical. If agreeable, the CGR will report the matter in their “lessons learned” Improvement Plan, which sounds edifying.

To speed things up once the administrative resolutions are (invariable) appealed, the contentious-administrative courts hearing the appeal are ordered, by way of Article 152, to give such appeals preferential treatment but only somewhat—much as when we used to travel, seven other type of causes of action also qualify for preferential treatment. Perhaps too optimistic is the law’s mandate that the judicial review, which consists of two instances, cannot take longer than a year. It remains to be seen whether there will be enough judges to make this a reality.

ILC CASE

We have probably beaten to death the IDU case in previous updates, and there is another important precedent regarding the interrelationship of claims-made clauses with fiscal liability proceedings. Industria Licorera de Caldas is a state-owned enterprise located in the region of Caldas, that produces and markets brandy, rum and other spirits such as the Cheers beverage. However the CGR investigation that commenced on 26 March 2015 was not that cheerful, as it related to payment of penalties and interest for the irregularities in the company’s 2002 sale tax declaration. The CGR sought to collect COP 1,543,105,619 (c. USD 397,051).

On 27 December 2018, the CGR issued the accusation writ (indictment) against two ILC officers and of their 2001-2003 D&O insurers. On 29 August 2019, the CGR issued the first instance decision against the ILC officers and insurers, ordering the joint and several payment to the State of such funds. On 31 January 2020, the Director of Fiscal Trials of the CGR issued the second instance administrative decision confirming liability.

In this case, the CGR again disregarded the application of claims made clauses. However, on 17 July 2020 the CGR Conciliation Committee, considering the action filed by ILC’s D&O insurer before the Administrative Courts, decided to revoke its decision against insurers, on grounds carriers were no longer considered a liable third party within the fiscal liability proceedings since the policy was claims made, and the Opening Writ was issued outside the policy period.

CGR’s Circular 5 dated 16 March 2020 issued by the CGR

It is no coincidence that the CGR´s chief issued Circular 5 on the same date LD 403 was issued, as the market has been quite vocal with the need to remove uncertainties as to the impact of fiscal proceedings on insurers, and the Circular, addressed to all Contralorías and investigators within them, attempts to do just that. The Circular states:

• Insurance companies are not fiscal managers; therefore, their liability is limited to the risks determined in the policy.

• Insurer’s obligations have limits—these are established in the insurance contract; among others: sum insured, limits of liability, deductibles, periods of insurance, and certain conditions and exclusions that determine what is a covered loss. Investigators are implicitly invited to familiarise themselves with these concepts.

• Under article 44 of Law 610 of 2000, for insurers to be linked to fiscal liability proceedings the policy must cover the alleged liable party, the property, or the contract subject to the investigation, that must be clearly ascertained. Particular care, it is said, should be taken to avoid piling up the wrong policies.

• Emphasis is made on investigators performing what is, in effect, a proper coverage review: they are directed to obtain all policy terms and endorsements making up the entire policy, not just cover notes, and to pay particular attention to the basis on which the policy is predicated—occurrence, claims made, etc. and there is a well-intended attempt in the Circular to give specific guidance as to how these work.

• It is considered of utmost importance that “in the future”—admitting this did not necessarily happened in the past—an early, timely and comprehensive study is made of all insurance policies that could potentially respond in the proceedings, to comply with the provisions of Law 389 of 1997, the Commercial Code and the contractual terms of the respective insurance contracts, in harmony with the particular rules that regulate the fiscal liability proceeding.

Regarding claims made policies it is specifically stated that the policy period to be triggered is the one that was in effect at the moment in which the Opening Writ was issued. Unfortunately, this guideline ignores the possibility of the insured to give notice of circumstances, or when the claim is other than the Opening Writ.

In short, Circular 5 is a herculean attempt to summarise in three short pages the workings of the type of insurance that would respond to fiscal proceedings. For that, it must be commended, and although it has imperfections, time will tell how it is actually implemented.

Ministry of Finance Decree project draft regarding claims made policies.

On 18 September 2020, the Ministry of Finance published the draft of the Decree that aims to regulate claims made policies. The Decree draft in principle applies to all claims made policies, but it refers to D&O policies. The Decree incorporates some definitions such as what should be considered as a claim, aggregation, retroactive date, notice of circumstances, exclusion of previous claims or circumstances.

Whilst overall a noble initiative, there are some issues in the definitions as drafted, and there can be several problems when the policy defines such concepts in different terms.

Regarding the terms of the Decree some general comments can be made:

• The definition of a claim under D&O policies is different depending on whether it is a fiscal liability proceeding or not. For proceedings different from fiscal liability proceedings, the definition determines 45 cases in which there is a claim. By listing those cases, the meaning can leave aside other possible scenarios different from formal claims or investigations. For fiscal liability proceedings claim defined as the notification of the Opening Writ or Preliminary Investigation, leaving aside the possibility of arguing in these type of proceedings that the claim is another investigation, requirement or notification.

• The definition of policy term leaves aside the possibility to make any claim in the extended period if it has been granted in the policy. Now the second paragraph of said definition, which refers to the premium calculation does not relate to the meaning of the term.

• The definition of notice of circumstance refers to facts that the Insured have known during the policy period of which it is reasonable to expect could give rise to a claim and which are informed to the insurer during the policy period or the extended notification period, if applicable. This definition leaves aside other policy requirements that can be established within the policy terms and conditions such as the reasons why it is anticipated that the fact or circumstance may give rise to a claim with full particulars of the reasons for foreseeing that the claim will be brought, the dates, acts or circumstances and persons involved.

• The drafting of the exclusion of claims or facts known before the inception of the policy period, and the definition of a claim for fiscal liability proceedings, is such that it would be challenging to argue that this exclusion is applicable.

• The draft was opened to comments, and different market operators provided remarks. Kennedys presented some observations, and all of them were accepted.

• We will update the market on further developments on the draft Decree.

Fiscal Liability in Spain

Fiscal Liability in the traditional meaning, and in particular its insurability has always been controversial, as well as insurability of tax fines. The Spanish Supreme Court has recently admitted a tendency in favour of the insurability of fiscal liability. For instance, the Spanish Supreme Court decision of 29 January 2019 has ruled that the fiscal liability of directors and officers was insured under the D&O policy in spite of the exclusion for taxes in the policy. The Court considered that the invoked exclusion for taxes is a limitation of the insured rights beyond what the insured may expect from a standard D&O cover cover and that limitative clauses have to be expressly accepted by the insured (article 3 of the Spanish Insurance Contract Act).

Arguments against insurability of tax fines are: (i) fines imposed for wilful misconduct (own conduct or by way of vicarious liability) are not insurable under article 76bis of the Spanish Insurance Contract Act; (ii) the insurability of fines is contrary to public order (articles 1255 and 1275 of the Spanish Civil Code); (iii) if fines are insurable, their deterring and punitive purpose falls away as well as the inherent personal character of a fine and, finally (iv) it may not be possible to consider the risk as fortuitous, it being a basic requirement for the validity of an insurance contract.

It will be interesting to see how Spanish case law develops this question which will be
of paramount importance for the insurance market in Spain.

Authors: Alex Guillamont, Head of Latin America and Caribbean at Kennedys; Monica Tocarruncho, partner at Kennedys in Colombia; Isidoro Ugena, partner at Kennedys in Spain and Catalina Botero, senior associate at Kennedys in Colombia

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Questions on insolvency and bankruptcy in Latin America and Spain

Posted on December 3, 2020 by Insurance Professionals Miami

Many businesses from different sectors and industries around the world have been affected by the crisis caused by the pandemic. Businesses have been forced to close, and there is a heightened risk of bankruptcy.

These businesses have insured its risks to be protected or to recover in case of a loss, but what happens then when the insured files for bankruptcy? What rights does the insurance company have? What if it is the insurance company who becomes insolvent and files for bankruptcy? How would it affect the insured? What is the impact on reinsurers?

These and other questions related to Spain and Latin America are answered on this chart where we give a brief overview on such issues.

Authors:
Alex Guillamont, Head of Latin America and Caribbean, Kennedys (Miami hub office); Radoslav Depolo, Partner, Kennedys (Chile office); Isidoro Ugena, Partner, Kennedys (Spain office)

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