The Development of Collective Redress/Class Action Regimes in Brazil
Until the beginning of the 20th century, most countries’ legal systems focused on protecting individual rights, in particular, property rights and the freedom of speech. In Brazil, the legal remedies available at that time were accrued to individuals and entities to pursue their rights. However, as time passed and society became more organised and interconnected, legislators saw a need for change and established mechanisms to protect not only individuals themselves, but also their community. Laws were enacted in that record allowing the public and certain types of groups, depending on the circumstances, to seek protection of collective rights.
In Brazil, the first judicial remedy to defend collective rights was introduced into the legal system by Section 113 of the Brazilian Federal Constitution enacted in 1934 and was called a popular action (ação popular). This provision established that any citizen could file a popular action against public authorities alleged to have committed acts capable of causing damage to public assets and to obtain the annulment of such acts. Federal Law No 4,717/1965 was enacted 32 years later to regulate the popular action, creating specific provisions for the procedure. Despite being an important mechanism, popular actions have had limited scope, since they may only be brought against public authorities/bodies.
In 1985, an authentic procedure for collective redress was introduced into the Brazilian Legal System through Federal Law No 7,347/1985, referred to as a public civil action (ação civil pública). Federal Law No 7,347/1985 was originally intended to create a mechanism for certain parties to sue a person, public or private, who committed an unlawful act causing damage to:
After the advent of the Consumer Protection Act in 1990 (Federal Law No 8,078/1990), public civil action became a legitimate means of seeking compensation for damages caused to a class or a group of determined or undetermined individuals. At present, in addition to the above three instances, public civil actions may also be brought against those who have negatively affected the:
As briefly explained in 1.1 History and Policy Drivers of the Legislative Regime, in Brazil, public civil action was first conceived to protect collective rights in general. This means that public civil action is the suitable judicial mechanism for obtaining redress for acts violating:
Although to some extent Brazilian public civil actions related to homogeneous individual rights were inspired by US class actions, since both proceedings can only be brought to litigate matters of collective interest, and not individual ones, there are significant differences between these two procedures.
Differences between the Brazilian Public Civil Action and the US Class Action
In Brazil, public civil actions cannot be filed to seek compensation for any kind of damages other than in connection with the rights expressly provided for in Section 1 of Federal Law No 7,347/1985. In the US, Federal Rule of Civil Procedure 23 (“Rule 23”) does not set forth as a prerequisite for the filing of a class action that a certain type of right has been violated, but only that the claims or defences of the representative parties must be typical of the claims or defences of the class.
Parties that may file these actions in both countries
Another difference pertains to the parties that may file such actions. In Brazil, only a few parties have standing to file a public civil action, as per Section 5 of Federal Law No 7,347/1985:
In the US, according to Rule 23, one or more members of a class may file a class action as representative parties on behalf of all members.
As to the possibility that a person may decide not to be a party to a collective action, Brazilian law does not provide for the opt-in/opt-out mechanism set forth in US law for class actions. This means that, while in the US it is mandatory for all parties potentially involved in a class action to decide whether to opt in or opt out of the lawsuit, potentially waiving their right to take further action in the event the class action is dismissed, in Brazil, it is not necessary to do so, as the decision rendered in the public civil action will only benefit, not harm, the individuals affected by the unlawful act. In the event of an unfavourable ruling in the public civil action, any party with standing is entitled to file another lawsuit with new evidence in order to potentially obtain compensation.
Effects of the decision on the merits
Finally, there is a significant difference as to the effects of the decision on the merits rendered in each proceeding. In Brazil, the court may issue a decision in a public civil action that can produce effects:
In the US, the decision rendered in the class action will produce erga omnes effects, no matter the nature of the rights litigated.
There is no applicable information in this jurisdiction.
As explained in 1.1 History and Policy Drivers of the Legislative Regime, the principal statute in Brazil regulating collective actions is Federal Law No 7,347, enacted in 1985, which introduced public civil action into the legal system. The public civil action was designed to allow persons or entities that committed an unlawful act and violated collective, diffuse or homogeneous individual rights, to be sued to compensate the damages caused to the community or a specific group of individuals. Additionally, there are at least four other laws that in some manner seek to protect transindividual rights in certain areas of law:
As already mentioned, Federal Law No 4,717/1965 provides, in Section 1, that any citizen may file a popular action against public authorities who have committed acts capable of causing damage to public property, in order to obtain annulment of such acts.
The Consumer Protection Act provides, in Section 81, that the defence of the interests and rights of consumers and victims may be pursued through the filing of collective actions when the litigation involves collective, diffuse, or homogeneous individual rights.
Further, on that point, Sections 208 et seq of the Brazilian Child and Adolescent Statute provides that collective actions may be brought to seek redress for offences against the fundamental rights of children and adolescents.
Lastly, Section 47 of Federal Law No 12,529/2011 provides that all individuals who have been affected by an unlawful act are entitled to bring an action in order to compel the defendants to cease acts constituting offence against the economic order, and for those individuals to seek compensation for the damage caused, aiming to protect their individual rights or homogeneous individual rights.
As defined in 1.1 History and Policy Drivers of the Legislative Regime, public civil actions may be filed against private or public persons who have committed an unlawful act causing damage to:
Federal Law No 7,347/1985 does not provide a definition as to what constitutes a public civil action. Due to the lack of a statutory definition, Brazilian scholars define public civil actions as being a special judicial mechanism for the protection of collective rights in general, which encompass collective rights stricto sensu, and diffuse and homogeneous individual rights, and which may be brought by public or specific private entities.
As explained previously, in Brazil, public civil actions may only be brought to litigate violations of collective rights related to the matters set forth in 3.1 Scope of Areas of Law to Which the Legislation Applies, pursuant to Section 1 of Federal Law No 7,347/1985. To be admitted, the lawsuit must be initiated by one of the parties expressly listed in Section 5 of such law:
The proceeding must be filed before the court having jurisdiction over the place where the damaged was caused, which can be either a federal court or a state court.
As provided for in Section 3 of the Federal Law No 7,347/1985, the claimants may request that the court compels the defendants to:
Laws and Rationale in the Framework of Brazilian Class Actions
Brazil has not adopted a specific procedural code for collective/class actions and redress of collective rights. Collective proceedings relating to this matter consist of the following commonly used laws:
One must bear in mind that the current Brazilian Code of Civil Procedure (Law No 13,105/2015), which came into force in March 2016, contains a provision allowing for repetitive individual appeals (appeals on the same issue of law) to be decided together (Sections 976 to 987, Code of Civil Procedure), which is considered by some scholars to be another means of addressing collective issues.
Legal Concepts and Collective Judicial Relief
In general, class/collective actions are procedures aimed at the protection of collective rights, defined as follows.
There are no differences between the regulatory framework for collective actions brought before federal or states courts in Brazil. According to Section 2 of Federal Law No 7,347/1985 and Section 93 of the Consumer Protection Act, a public civil action may be filed in the place where the damage at issue occurred, ie, in the state capital for damages at the local level and in federal districts in the case of regional or national reach.
Among the most frequent collective actions in Brazil are those filed for the protection of consumers and for redress for environmental accidents, including those related to civil damages to be paid to victims of an accident.
Standing to Sue in Brazilian Class Actions
As a general matter, in accordance with the overall procedure of public civil actions (Section 5 of Federal Law No 7,347/1985), the following groups are indicated.
Plaintiffs outside the jurisdiction
There are no restrictions on bringing claims on behalf of individuals from multiple jurisdictions. One example in which such a situation could potentially occur is a class action on behalf of victims of an aeroplane accident where some of the victims, or the airline itself, are from another country, or on behalf of victims of an environmental accident caused by a foreign person or entity.
It should be mentioned that the Brazilian Code of Civil Procedure includes a provision (Section 139, X) stating that, when facing multiple repetitive individual claims, a judge may notify the institutions referred to in Section 5 of Federal Law No 7,347/1985 for them to consider the filing of a collective action.
Main Procedural Aspects and Opt-In/Opt-Out Mechanism
Brazil has not adopted a mechanism for preliminary decisions defining and certifying a class. A general analysis of standing is conducted, according to the provisions of Federal Law No 7,347/1985 and the general rules of the Code of Civil Procedure. The plaintiff identifies the class in the complaint and the judge defines the beneficiaries at the trial level (generic award).
The mechanism for joining the action in Brazil is opt-in. Once the case is filed, a public notice should be published in the Official Gazette to enable individuals to join the case as co-plaintiffs. Other associations can also join the case.
Opt-in is not mandatory in order for individuals to benefit from a favourable decision. To benefit from a generic award, plaintiffs in individual lawsuits must request suspension of any individual claims within 30 days of publication of the public notice of the class action.
Furthermore, no minimum number of plaintiffs is required before an action may be brought.
The potential plaintiffs are restricted to those referred to in 4.3 Standing and do not include individuals. Since transindividual rights cannot be exercised individually, there are no opt-in or opt-out provisions concerning this type of class action.
For cases involving homogeneous individual rights, the following rules establish the relationship between a class action and individual claims.
It should be mentioned that any of the potential plaintiffs may file, solely, a class action with no need for joinder or need to obtain authorisation from the other parties who have standing.
A defendant can apply for a joinder with other defendants if one of the requirements established in Section 113 of the Brazilian Code of Civil Procedure is met (common rights or obligations related to the claim; the connection between claims due to their subject matter or cause of action; affinity due to a common point of fact or law).
The Brazilian Code of Civil Procedure establishes the possibility of admitting an amicus curiae and public hearings (Section 138) in cases in general, especially class actions, in order to assist the court and provide clarifications, considering the relevance and complexity of the case under discussion.
Regarding the powers established by the Brazilian Code of Civil Procedure, amicus curiae may appeal against the decision adjudicating an incidental proceeding for repetitive individual appeals (Sections 976 to 987).
As a general rule, a potential plaintiff or legal entity that is not a party to a class action can also ask to participate as an "assistant" to one of the parties if it is established that the assistant has a legal interest in the outcome of the case.
Brazilian Case Law
Furthermore, for the justices of the fourth panel of the Brazilian Superior Court of Appeals (STJ), in collective actions related to procedural substitution by parties with extraordinary standing, it is not necessary for the same parties to be present to give rise to lis pendens. In line with the STJ's understanding in other judgments, the judge must eminently observe the identity of the potential beneficiaries of the outcome of decisions.
The leading case on the subject before the STJ was the ordinary appeal in writ of mandamus (RMS) No 24.196/ES, for which the opinion was drafted by Justice Felix Fischer and decided by the Fifth Panel of the STJ on February 18, 2008. On that occasion, it was ruled that "the subjective aspect of lis pendens in collective actions must be seen from the perspective of the beneficiaries affected by the effects of the decision, and not by a simple examination of the parties that appear as plaintiffs in the claims." This understanding was reiterated by Justice Eliana Calmon, who drafted the opinion in REsp 1.168.391/SC (decision rendered on 05/20/2010), and other subsequent judgments.
There are no specific rules concerning the powers the courts have in respect of class actions. However, under the general rules of the recently enacted Brazilian Code of Civil Procedure, one of the first steps of any lawsuit is a conciliation/mediation hearing seeking amicable settlement of the dispute, aided by a specialised mediator or conciliator. While this conciliation hearing was optional under the prior Code of Civil Procedure (1973), it is now mandatory, unless both parties agree to waive it (“Alternative Dispute Resolution”).
In Brazil, it is quite difficult to estimate the timeframe of proceedings in individual lawsuits or collective actions at the trial level, since this is subject to various acts/facts that are beyond the control of the parties, in addition to the possibility of interlocutory appeals from certain decisions and the lengthy production of evidence. Also, the duration of each step of a lawsuit depends significantly on the place where it is filed, as this can vary significantly between different courts.
At the appellate level (eg, State Court of Appeals of Minas Gerais), an appeal tends to be heard within a period of eight to ten months, depending on its complexity.
Regarding the hearing of Special and Extraordinary Appeals, this is also very difficult to estimate due to a backlog at both courts.
Accordingly, a trial decision generally takes a couple of years. When filing a class action, plaintiffs may request in limine relief, which is likely to be decided within a few weeks, if not days.
Alternative Dispute Resolution Methods and Brazilian Class Actions
Section 5, paragraph 6 of Federal Law No 7,347/1985 establishes a framework for settlement of claims filed by the public prosecutor, eg, alternative dispute resolution (ADR) as applied in the collective action system.
ADR requires defendants to abide by legal requirements or face penalties.
In public civil actions, it is common for plaintiffs to request in limine relief, which is likely to be decided within a few weeks, if not days (Section 4, Federal Law No 7,347/1985). The following applies for res judicata.
Territorial Reach of the Decision
In accordance with Section 16 of Federal Law No 7,347/1985, the territorial reach of decisions rendered by a court should be limited to the jurisdiction of the court issuing them. However, the STJ has decided a considerable number of cases recognising that res judicata in public civil actions is not limited to the jurisdiction of the court rendering the decision, but to the matters for which relief was granted and the persons affected.
This scenario was confirmed by the Brazilian Federal Supreme Court, acknowledging the leading-case status of this issue in Extraordinary Appeal 1.101.937 (decision rendered on 4 July 2021), which recognised that it is unconstitutional to limit the territorial reach of decisions rendered in public civil actions.
In class actions, the plaintiff is exempted from paying court fees, judicial expert fees, and awards of attorneys’ fees unless bad faith is proved (Section 17, Federal Law No 7,347/1985 and Section 87, Consumer Protection Act). This legal prerogative is intended to protect collective rights and the fundamental right of access to court.
However, because plaintiffs are exempted from paying court costs, public civil actions are unfortunately frequently filed with little consideration for the actual chances of success.
Furthermore, regarding the value of the claim, the Brazilian Code of Civil Procedure establishes that all lawsuits are to be ascribed a certain value, even if this is not a readily ascertainable monetary sum. Also, it establishes that the judge must correct, sua sponte, the value of the claim if it is observed that it does not correspond to the property rights in question, or the economic benefits claimed by the plaintiff (Section 292, Code of Civil Procedure).
Criticism of the Procedural Framework Concerning the Value of the Claim in Class Actions
Unfortunately, public civil actions are often filed by potential plaintiffs disregarding the overall procedure, especially Section 292 of the new Code of Civil Procedure mentioned above. This scenario allows a court to “award” unreasonable attorneys' fees to the potential plaintiffs, entirely disregarding the procedural principles of proportionality and reasonableness.
For example, with regard to the case strategy and defence in more than 100 significant public civil actions for Samarco, there are two similar class actions, the first filed by government entities and the second by the Public Prosecutor's Office. Both involve the accident mentioned above, where the value of the claim is ascribed a total of BRL20 billion and BRL155 billion, respectively, in total disrespect for the regulatory framework specified above.
In Brazil, there is no procedure for pre-trial disclosure, unlike in some common law systems. All necessary evidence may be requested during the judicial phase.
Parties can only request advance production of evidence in some specific cases, especially where there is a reasonable fear that it may become impossible or very difficult to ascertain certain facts in the future, or the evidence relates to facts that could avoid the need for a judicial claim. It should be noted that this procedure takes place before a judge, unlike in the case of US pre-trial disclosure.
Brazilian law does not provide for the duty of full disclosure, although the judge may order a party (or third party) to exhibit a document or object in its possession.
A party may be exempt from disclosing a document, even if ordered by a judge, where:
However, a party may not refuse to present a document if:
Rules of privilege apply to all attorney-client communication, regardless of how the communication was held.
There is no rule restricting the remedies that can be sought through a public civil action in Brazil, as compared to general individual civil cases. As one of the main goals of this procedure is the resolution of the harmful act, affirmative and negative injunctions are remedies usually seen in this kind of case, in order to oblige the defendant to perform some act (eg, to disclose certain information on a product’s packaging) or refrain from performing it (eg, refrain from using a polluting substance in its production process).
In addition, plaintiffs usually claim redress and compensation for substantial and moral damages, which can be awarded cumulatively.
Moral Damages and Punitive Damages in Brazilian Class Actions
Moral damages discussed in a public civil action may have either an individual or a collective nature. These two types of moral damages differ not only on their grounds but also their recipient: while individual moral damages are intended to cover each person affected by the conduct discussed in the lawsuit (usually, in consumer collective actions) and can be individually enforced by them, collective moral damages aim at the group or community affected, as a whole, and are allocated to a fund managed by the Public Prosecutor’s Office and members of the community.
Punitive damages are not expressly provided for in Brazilian law and the possibility of contemplating them in collective actions is the subject of great debate among courts and scholars. Even though the topic is still controversial, it is not uncommon to find judicial decisions in public civil actions where the reasoning refers to the exemplary effect of this type of remedy, justifying a high amount of non-economic damages as a tool to prevent the recurrence of such conduct.
It is very common to see interim relief requested in public civil actions in Brazil, especially to bring about the ceasing of misconduct or the freezing of assets to guarantee compliance with a future monetary remedy.
The judge is allowed to order interim relief at any stage of the proceeding.
Brazilian law provides a few special rules with respect to settlement of collective actions, but there are no systematic rules as seen in other jurisdictions. The most relevant provisions on this matter are:
In public civil actions filed by the Public Prosecutor’s Office, settlements usually take the form of Conduct Adjustment Terms (Termo de Ajustamento de Conduta).
Extrajudicial settlements are allowed, but the parties usually submit the settlement for judicial approval when the lawsuit has already been filed. The judicial assessment is generally limited to formal requirements.
Awards granted in collective actions in Brazil generically establish the liability of the defendant, but when an award is given to the benefit of a specific group of individuals (see 1.2 Basis for the Legislative Regime, including Analogous International Laws), each injured class member (or respective successors) may file an individual enforcement proceeding to ascertain the portion they are entitled to receive.
Defendants will have the opportunity to present a response to this enforcement proceeding, but this should be limited to discussing the amount due, not the liability itself.
To prevent defendants from avoiding liability in certain circumstances, Brazilian law authorises one entity with standing to enforce awards granted in public civil actions whenever it is impracticable or unlikely that each class member will, as a practical matter, file an individual enforcement proceeding. According to Section 100 of the Consumer Protection Act, entities with standing are allowed to plead fluid recovery after a period of one year without identifying a minimum number of individual enforcement proceedings, compatible with the seriousness of the damage.
In 2020, the Brazilian National Justice Board (CNJ) approved two important normative acts to improve the performance of the judiciary in collective actions. These acts create an executive committee and oblige the superior, circuit, and state courts to create centres for registering and monitoring collective actions and the awards granted therein. The goal is to promote efficiency in these proceedings, standards for decisions, and transparency in the information discussed in collective actions.
Another trending topic at the moment is the use of collective actions to defend rights provided by the Brazilian General Data Protection Regulation, which recently came into force in the country. This could have a great impact on companies operating in Brazil, given that awards granted in public civil actions can reach very high amounts.
There are currently three legislative bills being discussed in Brazil, which propose deep changes in the processing of public civil actions in the country: Bill 1,641/2021; Bill 4,441/2020; Bill 4,778/2020.
In general terms, these legislative bills intend to modernise the procedure and harmonise the various rules related to the subject, which are currently spread throughout different statutes. In addition, Legislative Bill 1,641/2021, specifically, brings in an important rule on case management and structural process.
Brexit has had no significant impact in the context of collective actions in Brazil.
In the scenario of the pandemic, public civil actions were used, in some specific cases, as an instrument for the protection of collective rights, such as cases of potential irregularities in bids for the acquisition of medical equipment or to guarantee access to medicine and vaccines for the homeless population.
“Class Arbitration”: the Brazilian Approach to Corporate Disputes Involving Publicly Held Companies
According to the OECD’s 2020 report, Brazil is one of the few countries to use arbitration as the main way of resolving corporate disputes involving publicly traded companies. This circumstance is a result of the provisions for corporate governance in the Brazilian stock market – B3 – which require a mandatory arbitration agreement in the by-laws of companies that wish to be listed before B3.
After the reform of the Brazilian Arbitration Act, in 2015, any shareholder – regardless of whether they have consented to the inclusion of the arbitration clause – is bound by the arbitration agreement established in the company’s by-laws. Along with the reform of the Brazilian Arbitration Act, the Brazilian Corporations Act was also amended to expressly establish, in its Article 136-A, that the inclusion of an arbitration agreement in the by-laws applies to all the company’s shareholders. A shareholder who does not agree with the inclusion of the arbitration clause is entitled to withdraw from the company upon reimbursement of the market value of its shares. Pursuant to §2 of Article 136-A, the right to withdraw is not applicable to publicly traded companies, since in those cases, the dissenting shareholder can simply sell its shares in the stock market.
The arbitration agreement established in the by-laws can also bind the company’s management, and not only its shareholders. Many scholars support that administrators should be bound to the arbitration clause if (i) the arbitration agreement already existed when the administrator was elected, and (ii) the arbitration agreement is included in the by-laws during the term of the administrator's mandate and the administrator does not resign. In both cases, administrators will be considered as having tacitly expressed their consent.
Considering this environment, Brazil has recently started to see not only arbitration procedures filed individually by investors in publicly traded companies, but also arbitration procedures filed by civil associations that collectively represent minority shareholders seeking indemnification for damages caused by the company’s controlling shareholder and/or administrators – the so-called “class arbitrations”. Those entities act as extraordinary representatives for the shareholders bound to the arbitration agreement.
Unlike in the United States, where the idea of class arbitration has already been consolidated, the lack of specific regulation causes insecurity about the use of this type of arbitration in Brazil for the protection of collective rights. Notably, commentators highlight controversies regarding:
The present article aims to provide an overview of the discussions about the so-called "class arbitrations" involving publicly held companies in Brazil.
Legitimacy to claim collective rights
Brazilian Procedural Law – applicable to judicial procedures – establishes under Article 17 that whoever intends to file a lawsuit must comply with the requirements of (i) legitimacy and (ii) interest to sue. In relation to the first requirement, Article 18 of the Brazilian Code of Civil Procedure clarifies that only the holder of a certain right may claim it "unless authorised by the legal system”. The exception to such provision is called extraordinary legitimacy, in which a third party seeks the judicial protection of another's legal right.
Based on this legal provision, the entire Brazilian system of “collective actions” emerges. Major regulatory milestones of the system include the Consumer’s Defence Code, which establishes important provisions of substantive law, and Federal Law No 7,347/1985 (“Collective Action Act”), which regulates the so-called collective civil lawsuits. This kind of lawsuit could be seen as the Brazilian equivalent of the class action, in comparison with the North American model.
Normally, the collective action is instrumentalised by the Brazilian public authorities, such as the public prosecutor or the Security Commission (CVM), which uses its extraordinary legitimacy, provided by law, to claim or prevent damages that would be supported collectively by society. In addition to this, in accordance with Article 5, item V, of the Collective Action Act, not only public authorities, but also civil associations have extraordinary legitimacy to file a collective lawsuit. The possibility, in fact, has as its main foundation the constitutional text (Article 5, item XXI), which establishes the legitimacy of an association to represent its members when expressly authorised. To do this, it has to comply with certain requirements, namely: (i) be incorporated for at least one year before the Public Register, and (ii) include, among its institutional purposes, the protection of certain public, collective and social interests.
It is precisely from this extraordinary legitimacy that the Brazilian “class arbitration” has been built in recent years. Civil associations formed by the minority shareholders of publicly traded companies argue that they would be the appropriate entity to represent investors’ interests in arbitration procedures based on the Brazilian Corporations Act, against controlling shareholders or administrators. In the majority, it is considered that an association of investors, constituted in accordance with the above-mentioned requirements, may exercise this role. Also, in another less-discussed hypothesis by Ana Luiza Nery in Arbitragem Coletiva (São Paulo, 2017), it is admitted that a large investor, with the technical capacity and resources, could also represent other shareholders in a “class arbitration”. Brazil has elected a system with an opt-out model, in which any shareholder can be legally represented by a civil association if such shareholder does not pronounce otherwise.
However, mostly because the provisions of the Collective Action Act were originally conceived for judicial proceedings, many questions arise about its legitimacy when it comes to the filing of so-called “class arbitration”. Following the comparison with the North American model by Gary B Born in International Commercial Arbitration (Kluwer Law International, 2021), which already refers to the concept of class arbitration, one of these questions is whether the association's legitimacy should be verified by the arbitrator based on an ope judicis criterion, or if the fulfilment of the two legal requirements mentioned above should be enough, instituting an ope legis criterium.
Brazilian scholars Ana Luiza Nery and Nelson Nery Junior in Legitimidade e coisa julgada na arbitragem coletiva (Arbitragem Coletiva Societária, São Paulo, 2021) understand that the verification of legitimacy should be guided solely by formal aspects of the legal criteria, with no further verification by the arbitrator of the merits of the association’s purpose. In their view, this would be the legislative intent when instituting the requirements set out in the Collective Action Act, regarding any collective judicial lawsuit or arbitration procedure. In another perspective discussed in Controle de representatividade adequada nas arbitragens coletivas (Arbitragem Coletiva Societária, São Paulo, 2021) Marcelo A Muriel and Aline Dias see the need for the arbitrator to verify whether the association effectively has the capacity and the good faith to claim the legal rights of the group it represents in a collective arbitration. In this case, the judgment would not be on legitimacy as a standing to sue, under the terms of the Brazilian Code of Civil Procedure, but on the adequacy of representation, a concept consolidated in the North American context, although little discussed in Brazil.
"Adequacy of representation" is an English-language expression applicable to US class actions which, according to Flávia Hellmeister Clito Fornaciari in her doctoral dissertation Representatividade adequada nos processos coletivos,means "a quality shown by the representative that will act on behalf of society or of a group in defence of collective interests, with the capacity to efficiently and tenaciously defend the interests involved whether in a societal forum or before administrative or judicial authorities". In the words of Rodolfo de Camargo Mancuso in his famous book about collective lawsuits, Ação Civil Pública em defesa do meio ambiente, do patrimônio cultural e dos consumidores (São Paulo, 2007), “The lawmaker's purpose is understandable: to prevent associations that are not sufficiently solid or whose objectives are not consistent with the interest in dispute from casually filing class actions; indeed, if that casualness indicates 'malicious litigation', the court will punish the association...”. Under this concept, it would be lawful for the judge and, therefore, for the arbitral tribunal, to actively verify the adequacy of the representation of the association based on the circumstances of the concrete case and, therefore, eventually limit the admissibility of these “class arbitrations”.
Consolidation of procedures filed by different investors v class arbitration
Most arbitration institutions predict the possibility of consolidating arbitration proceedings, as long as “a) the parties have agreed to consolidation; or b) all of the claims in the arbitrations are made under the same arbitration agreement or agreements; or c) the claims in the arbitrations are not made under the same arbitration agreement or agreements, but 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” (Article 10 of the ICC 2021 Arbitration Rules; see also SIAC, Rule 8, and LCIA, Article 22A).
As for the correct interpretation of the Brazilian class arbitration system, it is important to distinguish between, on the one hand, (i) arbitration procedures filed by various different investors with the same scope (eg, identical claims against the company, its managers or its controlling shareholders), which, once consolidated, may lead to a multiparty arbitration; and, on the other hand, (ii) a class arbitration per se.
As explained above, a class arbitration – like the one filed to protect collective rights under the system of Collective Action Act (Law No 7,347/1985) – is a case of extraordinary legitimacy in which the right of a group of investors will be claimed by a third party on their behalf, usually a civil association. In a multiparty arbitration, which can be generated by the consolidation of separate arbitration procedures, the legitimacy is ordinary – in the sense that each investor (or each investment fund) will be claiming its own legal rights – or sometimes extraordinary, but in the specific situation where an investor is acting on behalf of the company as established by Articles 159 and 246 of the Brazilian Corporations Act.
Even if parties are claiming identical damages arising out of the same facts or the same alleged illegal conduct of the company’s controlling shareholders or management, requirements of legitimacy and interest to sue may be very different in the case of individual claims filed by investors versus collective claims filed by an association. Arbitrators will have to assess procedural requirements of admissibility separately. In any event, investors may prefer to opt out of the “class arbitration” and continue with their own separate individual claims.
The confidentiality of arbitration proceedings, under Brazilian law, constitutes a contractual obligation between the parties. There is no legal provision that entails the need for the proceeding to remain confidential, meaning that this is exclusively subject to the parties’ autonomy. In fact, if confidentiality was inherent to any arbitration proceeding, it would not be possible for the state to be a party in the arbitration proceeding, since it is bound to the principle of publicity – and, as expressly stated in Article 1, §1, of the Brazilian Arbitration Act, there are no reservations for the state to participate in an arbitration.
That being said, since confidentiality constitutes a contractual obligation, it cannot be absolute. As with any other contractual provision, it cannot overlap obligatory legal provisions. Thus, specifically regarding arbitral confidentiality, it will be mitigated when it poses an obstacle to the party’s access to justice or the exercise of a duty to inform.
When it comes to the stock market environment, arbitral confidentiality conflicts with the principle of full disclosure – which is designed to ensure that investors are well informed regarding potential facts that may impact the company’s financial results, and can make rational decisions over the negotiation of its shares in the market. Due to this, there are those such as Guilherme Setoguti J Pereira (Enforcement e Tutela Indenizatória no Direito Societário e no Mercado de Capitais, São Paulo, 2018) who argue that arbitral confidentiality is incompatible with interests involving publicly traded companies.
Transparency in disputes involving publicly traded companies may become even more relevant when it comes to class arbitration. The ones that support transparency argue that it is necessary to guarantee that every shareholder is aware of the existence of the collective procedure – if they want to be part of it, as they may be entitled to receive indemnification for direct damages.
This issue has already been dealt with by CVM on two separate occasions, in which it concluded that there is no problem for publicly held companies to conduct confidential arbitration proceedings. However, if the existence of said proceeding or any decisions issued therein can influence the shareholders in their investment decisions, this must be disclosed to the market in the form of a “relevant fact”, pursuant to CVM Resolution No 358.
The need to disclose relevant facts, however, does not mean that the entire case files must be opened to the shareholders. As mentioned, the arbitral confidentiality is only mitigated, and not waived. Even if it was to be waived, the shareholder's right to request information from the company is not unrestricted and is bound by legal standards. The duty to disclose information to be complied with pursuant to CVM Resolution No 358 means that the company only has to disclose information that can actually influence shareholders’ investment decisions – ie, the existence, scope/object and value of the arbitration; most relevant decisions and motions; and the parties involved.
Therefore, in the current system, even though a class arbitration may be subject to confidentiality due to the provisions of the arbitration clause in the by-laws (or due to the provisions of the institution administering the procedures), investors and stockholders will likely become aware of the existence of a class arbitration and its scope, as such a procedure usually encompasses relevant information that must be disclosed to the market according to the regulatory rules applied to publicly traded companies.