Arbitration Agreements in Adhesion Contracts: an overview of Brazil v. United States

Eduarda Teixeira Martins^[1]

 

1. Introduction

The arbitration agreement is the convention by which the parties to a contract agree to submit any disputes arising from that contract to arbitration^[2]. Once fixed, the clause must be observed, given that it is capable of producing positive and negative legal effects^[3].

The negative effect is related to the renunciation of the appreciation of the Judiciary, which entails that courts will decline to proceed with judicial claims when the defendant demonstrates the existence of an arbitration clause. On the other hand, the positive effect is related to the competence attributed to the arbitration, which even causes the Judiciary to force to arbitration the party that is unwilling to adopt it^[4].

In parallel, adhesion contracts are those that do not result from negotiation between the parties, but instead from the automatic acceptance of the clauses and conditions imposed by one party on the other^[5]. Therefore, it is a contract drafting method that can be applied to any category or type of contract, whenever the aim is to conclude the business quickly^[6].

Due to the binding nature of clauses in adhesion contracts, which in many cases reflects the  unequal bargaining power of the parties in a given relationship, the law in general has become more concerned about their content. It is in this context that this article seeks to address the use of arbitration clauses in adhesion contracts, outlining this scenario in Brazil and the United States.

2. Arbitration Agreements in Adhesion Contracts in Brazil

The Brazilian Arbitration Law (“LArb”), in its article 4, paragraph 2, imposes objective criteria for an arbitration clause inserted in an adhesion contract to be valid and, consequently, to be able to avoid judicial review . The law provides for two distinct hypotheses: the first consists of the adherent himself initiating the arbitration procedure, which would obviously demonstrate his consent to the clause; and the second requires the adherent to expressly agree to the establishment of the clause, for which it must be outline in a document attached to the contract or highlighted  in bold, within the contract, with his own signature or initials.

Therefore, in Brazilian law, in principle, arbitration clauses in adhesion contracts are valid, as long as these requirements are fulfilled. However, it is important to note that, in the vast majority of cases, adhesion contracts will govern consumer relations^[7] and, in this case, the Consumer Defense Code must be applies ^[8].

Article 51, VII, of the aforementioned Code prohibits the compulsory use of arbitration in general in contracts for the supply of products and services, i.e. the rule observed here is independent of whether or not the contract is an adhesion contract. In other words, when it comes to a consumer relationship, observing the requirements imposed by the Brazilian Arbitration Law will not be enough for the arbitration clause to produce positive and negative effects, which will only occur through the consumer’s free and conscious voluntary adherence to the arbitration procedure^[9]. This is because the Consumer Protection Code prevails over general regulations^[10].

3.  Brasilian Cases

The application and distinction of the aforementioned requirements becomes even clearer when we analyze Brazilian judgments on the subject.

In the Interlocutory Appeal in Special Appeal No. 2030593-SP^[11], which discussed the validity of an arbitration clause included in a franchise agreement established by adhesion, the Superior Court of Justice declared the clause to be valid because it understood that it had been agreed in strict observance of art. 4, §2 of the Brazilian Arbitration Law, since it had been signed in a separate declaration from the main contract, called “Term of Declaration and Acceptance of the Arbitration Clause”.

It should be noted that the above case does not discuss a consumer relationship and, as a result, the fulfillment of the requirements imposed by the Brazilian Arbitration Law was sufficient to grant validity to the arbitration clause.

On the other hand, in Appeal No. 0089804-25.2010.8.19.0001^[12], which discussed the validity of an arbitration clause in a real estate sales contract, the Rio de Janeiro Court of Justice decided that the clause was invalid, even in the face of compliance with the requirements of LArb. This is because, according to the decision, the contract between the parties was a consumer relationship, so the very fact that a lawsuit had been filed already demonstrated the consumer’s and adherent’s disagreement with the initiation of an arbitration procedure.

There is no doubt, therefore, that both Brazilian legislation and case law are concerned about the enforceability of arbitration clauses in adhesion and consumer contracts.

4. Arbitration Agreements in Adhesion Contracts in the United States

In the United States, however, the scenario is quite different, arbitration clauses in adhesion contracts are more flexible and, consequently, more easily enforced than in Brazil. This scenario stems mainly from two factors: the absence of specific provisions in the Federal Arbitration Act and the decisions of the U.S Supreme Court.

The Federal Arbitration Act (FAA), unlike the Brazilian Arbitration Law, does not have specific provisions on adhesion contracts, but only provides generically, in Section 2, that arbitration agreements entered into in writing in contracts involving commerce are valid, irrevocable and enforceable, except for the legal hypotheses that could lead to the nullity of any contract^[13].

     In light of this, the U.S. Supreme Court has adopted a pro-arbitration stance in enforcing arbitration clauses inserted in adhesion contracts^[14], in short, the interpretation adopted is that if consumers make contracts involving commerce, they are covered by the provisions of the FAA and, therefore, arbitration clauses can be enforced^[15]. At the same time, the Supreme Court has rule that state laws, despite having their own rules on the formation of contracts, cannot directly conflict with the Federal Arbitration Act, i.e. the FAA prevails over state laws that prohibit or regulate adhesion arbitration^[16].

5. U.S Cases

Among many others, we can mention the case AT&T Mobility LLC v. Vincent Concepcion^[17] to demonstrate the US Supreme Court’s position. In the case, the parties had signed an adhesion contract to purchase and service a telephone, which contained an arbitration clause that established the use of arbitration and determined that the proceedings should be individual, ruling out the possibility of class arbitration.

Years after entering into the contract, the adherent filed a complaint against AT&T, later consolidated as a class action, on the grounds that, under California law, the arbitration clause was invalid because it precluded class actions. Both the District Court and the Ninth Circuit sided with the plaintiff and dismissed the arbitration clause on the grounds that California law was not preempted by the FAA. However, the Supreme Court reversed these decisions, holding that the provisions of state law obstructed the purposes of the FAA and therefore could not prevail. In other words, the Supreme Court, contrary to the lower courts, ruled that the arbitration clause was valid and dismissed the class action.

6. Conclusion

In light of the above, it can be seen that Brazil has adopted a protectionist approach to the signing of arbitration clauses in adhesion contracts, in which the interests of the adherent and consumer take precedence prevail with regarding the use of arbitration. On the other hand, in the United States, a pro-arbitration approach has prevailed, in which concern is focused on strict adherence to the  Federal Arbitration Act.

 

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