Litigation can become a bad economic decision in Brazil

Rafael Zabaglia 18/02/2019

Litigation is the ordinary dispute resolution mechanism in Brazil and its unreliability is one of the most recognizable elements of the so-called Custo Brasil, i.e., the inefficiencies that disproportionately increase the costs and risks of doing business in the country. Anyone who has had to engage in a commercial dispute before Brazilian courts will likely complain that they are overwhelmed and take too much time to adjudicate a claim; or that the outcome of a dispute can be unpredictable as courts sometimes fail to follow their own precedents on identical cases; or that few courts have expertise in complex areas of the law (such as banking, capital markets, mergers, competition, anticorruption or regulatory law).

On top of those structural problems, foreign parties may be unfamiliar with certain characteristics of the legal system that could greatly affect their economic assessment of whether or not to engage in litigation in Brazil. Knowing some of them would help foreign parties decide when to bring, defend or settle claims in the country.

The first important characteristic is the fact that claims pending before local courts are statutorily subject to accrual of both interest rates and adjustment for inflation. While there is still debate over the applicable indexes, state courts – which are the ones with jurisdiction over commercial claims – apply interest rates of 1% per month (not compounded) plus official consumer price indexes such as the INPC. As a result, the increments in claim value over time could be greater than the return on low-risk investments. This creates an unusual situation in which the low speed of Brazilian courts could in some cases benefit patient plaintiffs and incentivize defendants to pursue quick settlements.

It also creates an additional layer of complexity for foreign parties, who customarily make decisions based on their own home currency as opposed to the Brazilian currency (BRL). On the one hand, the BRL is volatile, and a claim could become less or more expensive depending on whether the currency appreciates or depreciates; on the other hand, claim value tends to grow steadily as inflation has been relatively under control for years and is to some extent predictable.

This could have different impacts on litigation strategy under different circumstances. Two examples: (a) while a foreign defendant may believe that its exposure is lower or that a settlement would be cheaper when its home currency is strong, that effect may have been cancelled out by the accrued interests and inflation; (b) conversely, a foreign plaintiff who treats its Brazilian claim as an investment might just end up wasting (a lot of) time, as the statutory accruals may eventually be eroded by a weak BRL.

A second aspect to be considered by foreign parties is the peculiar way Brazilian law addresses attorney’s fees. Many jurisdictions apply one of two standards: the “American rule”, by which each party must bear the fees of its own counsel regardless of the outcome of the dispute; or the “English rule”, by which the defeated party must pay the fees of the prevailing party’s counsel. Brazil applies neither.

Instead, the defeated party must pay an amount (sucumbência) ranging from 10% to 20% of the adjusted amount in dispute; that amount is owed directly to counsel. In other words: the prevailing party will not be reimbursed of its legal fees, while the defeated party will still have to pay attorney`s fees (which might be even higher than the actual legal fees incurred by the prevailing party); and if both parties are successful in part, then both will have to pay attorney’s fees to the opposing party’s counsel and neither will be reimbursed of their own legal fees.

A third aspect should be taken into account specifically by foreign plaintiffs: as a rule, they must secure the court costs plus the attorney’s fees (sucumbência) upon filing the initial pleading. This essentially forces foreign plaintiffs to post security upfront covering up to 25% of the amount that they are pursuing – and that they may only collect several years later. The requirement is not applicable if a treaty is in force with the plaintiff’s country of origin – as is the case with certain South American and European nations – or if the foreign company has a representative, agency or branch in Brazil against whom the court costs and attorney’s fees can be pursued.

The bottom line is that foreign parties need to be very careful upon assessing opportunities to bring, defend or settle claims in Brazil since they could be caught off-guard by hidden costs of litigation. To a large extent, these costs cannot be avoided. But with proper advice they can be anticipated and factored in by the foreign party in its decision-making process – as is the case with other elements of the Custo Brasil.

L&S Authors

Rafael Zabaglia

Rafael Zabaglia


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