Martim Machado of CGM Advogados takes part in Negotiating Effective Contracts & Dealing with Disputes

QUESTION ONE – Which techniques are typically used by international counterparties in your experience to overcome challenges in the negotiation process?

The negotiation process is dynamic and may vary depending on the type of contract to be negotiated and the characteristics of the parties involved. For this reason, several techniques can be used to overcome the obstacles that normally arise during the negotiation process, including the following:

Knowing the parties involved in the negotiation process is essential. Obtaining information from the client about its objectives, while assessing the main risks involved in the contract and understanding potential ways to mitigate these risks, are also important. Getting a sense of the expectations and interests of the other party is equally important.

Obtaining background information on your counterparty is key to a successful negotiation. A first draft that is insensitive to the characteristics of the counterparty and contains clauses that may be seen by it as unbalanced (even if they would not be unbalanced in other jurisdictions or under different circumstances) is unlikely to contribute to a friendly and collaborative negotiation process.

In negotiations involving complex commercial contracts, investing some time in preparing and discussing a term sheet with the main conditions to be included in the contract is very important. A consensus on these key conditions and on how they should be dealt with allows the parties and their advisors, including lawyers, to work more efficiently. When the preparation of a term sheet is not possible, holding a kick-off meeting before any draft is prepared to align expectations and objectives is a good compromise to a term sheet.

Establishing a clear timetable for the negotiation process, with well-defined (and feasible) timelines is another important step. Lack of discipline during the negotiation process normally leads to delays, which often make the entire negotiation process more complicated.

QUESTION TWO – Is there anything special or peculiar about commercial contract law in your country that General Counsel should be aware of?

There are three things that are peculiar to Brazil that I would point out. Firstly, Brazil is a civil law country and many contracts governed by Brazilian commercial law are subject to mandatory and default rules, established in the Civil Code or specific statues. Generally speaking, parties are allowed to modify default rules, but cannot avoid or override mandatory rules. When preparing a commercial contract to be performed in Brazil, non-Brazilian parties should be mindful of existing mandatory and default rules. Many standard forms prepared in common law jurisdictions and used by non-Brazilian parties in various parts of the world may not work as intended in Brazil. In order for a client not to be surprised by the application of default rules to a contract, it is important that standard forms be carefully evaluated before being adopted as the basis for commercial contracts to be performed in Brazil.

Secondly, there are several legal principles applicable in Brazil, some of them already codified in the Civil Code, that may be invoked by contracting parties to repudiate or obtain relief from certain contractual clauses. Principles requiring parties to act in good faith or authorising parties to excuse themselves from complying with contractual clauses upon the occurrence of ‘extraordinary and unforeseeable events’ that make their obligations ‘excessively onerous’ are some examples.

Not everything written in a contract and subject to Brazilian commercial law will be binding and enforceable as expected by the contracting parties. Pacta sunt servanda, a Latin brocard that means that ‘agreements must be kept’ or, in other words, that agreements are ‘law between the parties,’ finds exceptions in Brazil.

Finally, it is always important to carefully consider contractual clauses on applicable law and dispute resolution method/venue. The choice of arbitration as a dispute resolution method gives parties more flexibility to define how, where and under which law disputes will be resolved. However, arbitration awards issued outside Brazil are only enforceable in Brazil if they are approved by the Superior Court of Justice, one of Brazil’s highest courts alongside the Supreme Court.

Although the Superior Court of Justice will not revisit the merits of arbitral awards when vetting them, it may deny enforceability to an award if it offends ‘national sovereignty’, the ‘dignity of human beings’ or ‘public order.’ So, the enforceability in Brazil of a non-Brazilian arbitration award may never be taken for granted. The choice of courts abroad to rule on disputes may also bring some difficulties for contracting parties. For example, court decisions issued outside Brazil are also subject to the approval of the Superior Court of Justice under the same requirements mentioned above. Non-Brazilian parties to a commercial contract involving a Brazilian party should thoroughly evaluate the pros and cons of choosing non-Brazilian venues and foreign laws to rule disputes. The choice of a non-Brazilian court or law may create difficulties for the enforceability of the contract in Brazil.

QUESTION THREE – What recent legislative developments in your jurisdiction affect commonly drawn up contracts such as articles of incorporation, shareholder agreements or executive remuneration? Can you provide any relevant case law to illustrate this?

The Brazilian Congress has been discussing for some time a new Commercial Code. In a similar way to the existing Civil Code, the new Commercial Code will establish several mandatory and default rules that will apply to commercial contracts and corporate documents in general, including articles of incorporation and shareholder agreements. There are still uncertainties about whether the new Commercial Code will be approved by Congress and, if so, about when it will come into effect, but approval is at this point more likely than not. A new Commercial Code will bring an additional and very important set of rules to be taken into account during the preparation and enforcement of commercial contracts in Brazil.

TOP TIPS FOR: Successful negotiations

Be mindful and sensitive about the parties’ goals and expectations. The negotiation process is not about winning or losing, but about bridging gaps and building long term and fruitful relationships.

‘Trees are important, but don’t forget they are in a forest!’ A contract is a risk allocation tool; a myriad of complex rights and obligations that must work well together. Details are important, but that hardly negotiated, written-to-perfection clause will not do the trick if there are flaws elsewhere in the contract. Spending time on the ‘nuts and bolts’ without losing sight of their role and importance for the functioning of the ‘engine’ is key.

Focus on what is important. Have clear goals throughout the way and pursue them fiercely but with elegance and intelligence. Concessions are the building block of successful negotiation and knowing when and how to make them is important to move the negotiation process forward.