Arbitration Clauses in Contracts: Advantages, Risks, and Drafting Precautions

This page is a translation of the original Portuguese text, provided for convenience. It deals with Brazilian law. If there is any discrepancy, the Portuguese version prevails. Read the original in Portuguese

Signing a contract with an arbitration clause (cláusula compromissória) means agreeing that any disputes will go to private arbitration rather than the ordinary courts. Common in business, real estate, corporate, and service contracts, this provision removes the courts’ authority to hear the dispute and hands the decision to arbitrators chosen by the parties themselves. Understanding what you are giving up before you sign can spare you costly surprises later.

What an arbitration clause is

The arbitration clause (cláusula compromissória) is governed by Article 4 of Law 9.307/1996, known as the Arbitration Law. It is an agreement in which the parties to a contract commit in advance to submit to arbitration any disputes that may arise from their relationship. It is signed before any conflict exists, usually in the contract itself, and works as an advance choice about who will decide future disagreements. Because it sits within the body of the contract, it often goes unnoticed at signing, even though its legal effects are profound.

The clause should not be confused with the arbitration submission agreement (compromisso arbitral). The clause is general and looks to future, uncertain disputes. The submission agreement is signed once a conflict already exists, to start arbitration of a specific dispute. Both are forms of the arbitration agreement (convenção de arbitragem), but they operate at different points in the contractual relationship.

Under Article 1 of the same law, arbitration can only address disposable property rights. Questions of personal status, non-waivable family law rights, and matters of public policy remain outside its reach. Including such matters in the clause does not make them arbitrable, and an attempt to decide them by arbitration exposes the award to being declared void later.

Giving up the courts and what follows

The central effect of an arbitration clause is to displace state jurisdiction. By accepting it, a party gives up the right to bring the dispute before a judge and agrees that one or more arbitrators will resolve it. This has an immediate practical consequence: if one party files a lawsuit on a matter covered by the clause, the other can invoke the arbitration agreement, and the case will be dismissed without a ruling on the merits.

This waiver is not merely formal. An arbitral award has the same effects as a court judgment and is an enforceable instrument, under Article 31 of the Arbitration Law. There is no appeal to the courts to reargue the merits of an arbitral decision. Judicial review is limited to narrow grounds for annulment, such as defective consent, a disqualified arbitrator, or a decision that goes beyond the limits of the agreement, and must be sought in a separate action within ninety days.

There is also the principle of competência-competência (the arbitrator’s power to rule on his or her own jurisdiction), set out in the sole paragraph of Article 8. The arbitrator decides whether the clause exists, is valid, and is effective. In practice, this means that challenging arbitration directly before a state court judge, before the arbitrator has ruled, tends to be rejected, which reinforces the final character of the choice made in the contract.

Choosing the arbitral institution and the costs

A decisive feature of the clause is the choice of arbitral institution. Legal scholars distinguish between a “full” clause (cláusula cheia) and an “empty” clause (cláusula vazia). In a full clause, the parties already name the institution that will administer the arbitration and the rules that apply, which brings certainty and speed. An empty clause merely provides for arbitration without specifying how it will work, which can lead to deadlock when the time comes to start the proceeding.

Whoever signs an arbitration clause trades the judge for private arbitrators, and that choice is usually final.

Choosing the institution is not a bureaucratic detail. Each one has its own rules, fee schedule, and roster of arbitrators. Unlike the state courts, arbitration is paid for entirely by the parties: there is an administrative fee, the arbitrators’ fees, and often the cost of expert reports. In lower-value disputes, this cost can make arbitration disproportionate, which is why the fee schedule and location of the institution deserve careful review before you sign.

You should also check the seat of arbitration, the language of the proceeding, and the number of arbitrators. These elements directly affect the cost and logistics of the case. Settling everything in the clause itself reduces the risk of side disputes when a conflict actually arises, saving time and money at an already tense moment between the parties. Providing for a sole arbitrator, for example, tends to make the dispute cheaper than a tribunal of three arbitrators.

Points to consider before accepting the clause

Before signing a contract with an arbitration clause, it is prudent to assess the nature of the relationship. In adhesion contracts (contratos de adesão), where one party sets the terms without negotiation, Article 4, paragraph 2, of the Arbitration Law imposes extra requirements. The clause is effective only if the adhering party takes the initiative to start arbitration or expressly agrees to it in writing, in a separate document or in bold type, with a signature or initials specifically for that clause.

In consumer relationships, protection is even stronger. The Consumer Protection Code (Código de Defesa do Consumidor), in Article 51, item VII, declares void any clause that requires compulsory arbitration. A consumer cannot be forced to give up access to the courts in advance, although once a dispute has arisen, he or she may freely choose arbitration if that seems advantageous.

For companies and professionals entering into contracts between parties of equal bargaining power, the advice is to read the clause with the same care you give to price and deadlines. Confirming that the chosen institution is reputable, that the costs are reasonable relative to the value of the contract, and that the subject matter can actually be arbitrated helps you avoid disputes over the validity of the clause itself. It is also worth checking whether the other company has a habitual relationship with a particular institution, which could undermine the impartiality expected of the proceeding.

Legal advice during negotiation is usually far less expensive than a later fight over whether the arbitration clause is effective. Adjusting the wording, opting for a full clause, and estimating the costs are steps that protect the balance of the contract and make dispute resolution more predictable, both for the party that proposes the text and for the party that adheres to it.

Frequently Asked Questions

Does an arbitration clause completely block access to the courts?

It removes the courts from deciding the merits of the dispute, which is then decided by arbitrators. Even so, the courts remain available in specific situations, such as enforcing the arbitral award, granting urgent relief before arbitration begins, and hearing an annulment action on limited grounds. What you give up is arguing the merits before a state court judge, not every possible contact with the justice system.

Can an arbitral award be annulled?

Yes, but only on the exclusive grounds listed in the Arbitration Law, such as a void arbitration agreement, a disqualified arbitrator, a decision beyond the limits of the agreement, or a violation of procedural principles. The annulment action must be filed within ninety days and cannot be used to reargue whether the arbitrator decided the merits well or badly. It is a review of the legality of the procedure, not a second tier of review of the substance of the decision.

Is an arbitration clause valid in a consumer contract?

A clause that imposes compulsory arbitration on the consumer is void under the Consumer Protection Code. That does not mean arbitration is prohibited in this area: the consumer may agree to it voluntarily after a dispute has arisen. The difference lies in freedom of choice. What the law forbids is forcing the consumer, at the time of contracting, to give up the courts with no real alternative.

As informações deste artigo são de caráter informativo e não substituem consulta jurídica individualizada. Cada caso possui particularidades que exigem análise específica.