1.1.- Professor Peter Brews, of Duke University, asked
me to make a presentation on the Brazilian legal environment for business, focusing
on the workings of Brazil´s Judiciary and the difficulties encountered by foreign
companies. He also asked me to present a list of common errors/misperceptions
made by international capital whilst doing business in and with Brazil.

1.2.- In my view, most problems encountered by international companies doing
business in our country derive from the very dangerous combination of ignorance
with ethnocentrism. Accordingly, I chose to first address Brazil´s historical
and cultural background, believing that, without this fundamental, it is impossible
to understand the country´s legal structure and the business environment. This
will be followed by an analysis of the Brazilian Judiciary, its structure and
2.1.- Failure to appreciate a country´s cultural specificities
can be quite costly in terms of an investment decision, in general, and in doing
business, in particular. Of course, the legal framework of a country is intimately
linked to its historical and cultural heritage. Neglect in the absorption of
these elements comes with a high price tag. Recently, a major international
company bought a privatised public utility based only on representations and
warranties of the government. Such utility company had a high tax contingent
liability which materialised after the acquisition. The buyers had neither availed
themselves of a thorough due diligence nor of the usual apposite mechanisms
of price retention. Surprised with the liability, the buyers made the second
error in replying that they will not bother with the tax assessment. In this
case, the buyers failed to appreciate that Brazil is a democratic society, in
which the government is subject to the law in very much the same way as any
other member of society. They believed that a representation of the government
is above the law. They probably would not have made this mistake in their own
country. Their ignorance and patronising attitude had a very high cost.

2.1.1.- In another occasion, a major European company merged with a large American
organisation their respective subsidiaries in Brazil. Counsel for the US company
prepared all documents in accordance with American law. European counsel agreed.
They asked their subsidiaries to file the documents in Brazil at the Board of
Trade. They were returned. The documents had to be adapted to Brazilian law
and that affected the terms of the merger, which had to be almost entirely renegotiated.
That took a long time, after which US and European counsel sanctimoniously agreed
that Brazilian law was to blame. Another story involves the senior Latin-American
counsel of a major US company, which position the lawyer had occupied for more
than 10 years. His company had operated in Brazil for decades. The lawyer obtained
translations into Spanish of contract documentation and was surprised that the
Brazilian party demanded Portuguese versions. He had perhaps forgotten that
Portuguese is the official language of Brazil. I could go on with many similar
stories, but I think the point has already been made.

2.1.2.- The following is an effort to provide you with some cultural background
which may be helpful in understanding the business environment of Brazil and,
consequently, in minimising risks. It is my firm belief that MBA programmes
today not only fail disgracefully in this regard, but rather make matters much
worse in promoting the cowboy business ethics, according to which profit at
all costs is the basic cannon as well as the ultimate truth and exclusive end
of society.

2.2.- Brazil was discovered by the Portuguese 500 years ago next April 22, when
a fleet of thirteen ships commanded by navigator Pedro Álvares Cabral arrived
in the shores of what is now the state of Bahia. His expedition represented
the official claim by Portugal of the lands apportioned to it by the Treaty
of Tordesillas of June 7, 1494, between Spain and Portugal, mediated by Pope
Alexander VI, that allocated rights of the discoveries. Spain was to receive
the territories west of the Tordesillas line, as long as Portugal would acquire
the lands to its east. In 1500, the population of Portugal was only approximately
1,100,000 people or 280,000 households. The country´s human resources were already
overextended by the impact of the discovery by Admiral Vasco da Gama of the
naval route to India in 1498 and the need to man trading stations in Africa,
in India, in Malaga and subsequently in China and Japan. It is estimated that
in the first half of the 16th century, 80% of Portugal´s male population was
in colonial or trade service abroad.

2.2.1.- Portugal had become a nation state and a separate kingdom since 1139,
with the Frenchman Henry of Bourgogne as its first king, had already expelled
the moors from its territories in 1239, and successfully fought off Spain´s
attempts of domination. Conversely, Spain only began a nation state at the end
of the fifteenth century and expelled the moor only in 1492, the year Columbus
discovered America. This situation determined the attitude of the two countries
towards their new colonies: whereas the Spaniards continued the ruthless military
campaign against the infidels, supported by a very militant catholic church,
the Portuguese adopted an official policy of racial miscegenation.

2.3.- When the Portuguese arrived, in 1500, Brazil was inhabited by approximately
5 million native Brazilians, of numerous different indigenous peoples, who spoke
languages now divided in four main groups. Upon disembarkation, the Portuguese
were promptly met by waiting friendly Tupinikins. The predominant language group,
also spoken by the Tupinikins, used in most of the coast areas and deep into
the interior up to the Amazon and what is now Paraguay, Uruguay and parts of
Argentina was the Tupi-Guarani, known in some areas in this language as “nhenhen-gatu”,
or general language. The indigenous tribes called their land “pindorama” or
land of the palm trees. They were basically hunter-gatherers, but also cultivated
some basic crops, such as manioc, peanuts and cotton. They had a profound knowledge
of and respect for the land, knew cartography, navigation by the sun and by
the stars and had numerous musical instruments. The basic artistic manifestations
were plumery art and body painting. Their botanical knowledge was profound.

2.3.1.- The native Brazilians were in constant warfare. It was speculated by
contemporary European travellers that this was necessary as a means of population
control. When the Portuguese arrived in Pindorama, the Tupi-Guarani Indians
were asserting control of the coastal regions of the country. They had their
own legal system, evidenced by extant lexics in the Tupi-Guarani vocabulary
for lawyer, court, court-house, defence, sentence and other terms indispensable
for the functioning of society. Violence within the tribes was practically non-existing.
When it occurred, the aggrieved, or his/her family, would be authorised to redress
the damage in the same manner as it was inflicted. Property was communal. The
tribes were nomads, so as not to exaust the land, and thus there was no accumulation
of riches. The ultimate sanction was a social penalty: exclusion from the tribe.
Prisoners of war would be normally integrated into the tribes as labourers,
but not warriors. In many tribes, the brave prisoners would be subject to ritual

2.4.- The Portuguese settled along the coast-line of the country, which they
initially called the Land of True Cross. After approximately 20 years, the country
started to be called Brazil, after its main produce, the Brazil wood, used as
a red die. The origin of the name comes from the Italian Verzino through the
French Brésil. The Portuguese promptly tried to impose their culture, including
religion and laws, on the native population, as well as attempted to enslave
it to be put to economic use. The native population almost immediately started
a movement of civil resistance against the new order, by means of moving further
inland. They resisted slavery to such extent that they did not hesitate to suicide
immediately after capture, in great numbers. There are many extraordinary written
accounts of how native Brazilians would die in such circumstances, including
various after pronouncing the formula “I die” three times. By this movement
of civil resistance, the Brazilian indigenous people not only refused an unjust
law or practice of slavery, but also declined to accept the artificial frontiers
imposed by alien powers. On both accounts they ultimately prevailed. [1]

2.4.1.- Simultaneously, the Portuguese proceeded with understandable delight
with their policy of miscegenation. There are accounts of some who had as many
60 wives, which gave them enormous political power. This is so because Brazilian
indigenous peoples also had a policy of social co-optation. [2] They wanted
to bring the European elements into their families. Thus, some of those Portuguese,
such as the case of João Ramalho in São Paulo, could come up with Indian armies
of up to 5,000 people, as long as the king of Portugal could only produce 2,000.
In the native culture, the children of such parents were considered to be the
same as their fathers, but they all spoke Tupi-Guarani. When São Paulo [3] was
founded by the Jesuits 466 years ago today, only a minute part of the population
spoke Portuguese, which was taught by the priests in the college they started
in 1554. Until 1640, the city of São Paulo had neither a set of the laws in
force at the time, the Spanish Philipine Ordinations, nor any judges. An attempt
to introduce a judge in 1611 year failed miserably, as the hapless official,
Manuel Bravo, was received with arrows and returned to Europe[4]. In the 1640,
the Jesuits were expelled from the land by the Paulista population, as they
were perceived to interfere beyond reason with the local culture, in what they
opposed the slavery of native Brazilians. Within this same period, the cleric
Pe. Vieira, one of greatest intellectuals of his time, cited Aristotle in one
of his memorable sermons to remind the congregation that “good laws are those
which are obeyed”[5], in view of the generalised failure of compliance with
those statutes that prohibited the slavery of Brazilian Indians.

2.5.- As the attempts to slave the native population failed, the Portuguese
introduced African slaves in Brazil in such great numbers that they soon overtook
the population of native Brazilians. They were brought from the regions that
today make up the territories of Nigeria and Angola. The first group, which
spoke Yoruba, was introduced in what is today´s Brazil the state of Bahia. The
second group was introduced in what is presently the states of Rio de Janeiro
and Pernambuco, the first in the centre-east part of the country and the second
in the north-east. As a result of this geographical distribution and the resulting
pocket of Yoruba in Bahia, there was a lack of continuity of the areas where
Kimbundo was spoken. As a result, Brazil had in the early 1800s four general
languages: one native, Tupi-Guarani; two African, Kimbundo and Yoruba; and one
European, Portuguese.

2.6.- In 1807, General Junot, under the orders of Napoleon, invaded Portugal.
The whole Portuguese court fled to Brazil. It was the first time a reigning
European monarch crossed the line of the equator. The Portuguese court settled
in Rio and brought about renewed prosperity to the country, in spite of a tragic
trade agreement with Great Britain, signed in 1810. After the French were defeated
at Waterloo, in 1815, the Portuguese court chose to remain in Brazil, elevated
to the category of kingdom. In practice, there was for the first and only time
in history a reversal of the role of colony and colonial power. In 1821, there
was a liberal revolution in Portugal and the king chose to return to the country
as a hostage. His crown heir remained in Brazil, and refused to accept the orders
from the Portuguese parliament, and declared the country independent from Portugal.
Brazil had then the only monarchy of the Americas up to 1889, when the Republic
was proclaimed.

2.7.- During the second half of the nineteenth century, under Peter II, European
immigration was encouraged, particularly from Italy, the country of his wife,
and Germany, the country of his mother. European immigration was directed mostly
to southern Brazil. Italians came in such great numbers that the only reason
why Italian did not become the main national language is due to the fact that
it did not exist as such. The Italians came from different areas of the peninsula
and spoke diverse dialects. When they arrived in São Paulo, for instance, only
one of three Paulistas spoke Portuguese; the others spoke Tupi-Guarani. The
Italians found it easier to learn Portuguese and thus boosted its usage as a
general language. As there were few good reference factors for Portuguese, the
language spoken in São Paulo became very idiosyncratic.

2.8.- Slavery was only effectively abolished in Brazil in 1888, which was accomplished
in a peaceful manner, no minor achievement for the country with the largest
African population outside Africa. In 1831, however, slavery had already been
abolished by law, but never put into practice, for lack of social acceptance,
in spite of the very harsh penalties imposed, which involved the loss of liberty.
This was yet another example of a law that “did not catch”. In this case, the
law failed to be obeyed and enforced because it went against the prevailing
economic interest of the agricultural society that characterised Brazil. [6]
In this category, there were other laws enacted in response to external pressure,
notably by the British. These were known as laws “for the English to see”, that
is, not to be enforced.

2.9.- As a result of so many diverse ethnic influences, the Portuguese language
spoken in Brazil today is very rich. It has approximately 10 thousand words
of Tupi-Guarani in current use, together with about 3 thousand words of Kimbundo
and 2,5 thousand terms of Yoruba. The language also has about twice as many
sounds as Spanish, for instance, which facilitates the understanding of that
language by Brazilians, whilst Spanish speaking people cannot understand Portuguese.
[7] Very often, there are in Brazil choices of words from different origins
such as for “bald”, which can be expressed as “calvo”, from Latin; “careca”,
from Kimbundo; or “abayama”, from Tupi-Guarani. The same goes for witchcraft:
“bruxaria” and “feitiço”, from Portuguese; “mandinga”, from Kimbundo; and “pagelança”
from Tupi-Guarani. Other examples abound.

2.10.- After the proclamation of the Republic, Brazil had in the 20th century
many ruptures of the rule of law. In the 1930s Brazil had a fascist regime led
by a repellent dictator who was inclined toward the Axis powers. In 1941 and
in early 1942, the Brazilian people massively demonstrated for entry into the
war with the allied powers[8], which Brazil did in August of 1942, in response
to this enormous demand. In the process, one expeditionary force of 35 thousand
soldiers and aviators was sent to Italy, and a ferocious naval war raged in
the South-Atlantic, which cost Brazil the loss of 98% of its merchant navy.
[9] Following the war, democracy was reinstated in 1945 only to be suppressed
by a military coup in 1964, which started a regime that lasted until 1986, when
the rule of law was again reinstated in the wake of a great popular movement.
Brazil had become a very complex society with the largest Italian population
outside of Italy, estimated at 37 million people (the city of São Paulo alone
has more Italians than the combined populations of Rome and Milan) and the largest
African population outside of Africa. Millions of ethnic native Brazilians,
the majority of which integrated, live mostly but not exclusively in the centre
and north of the country. In addition, there are numerous other nationalities,
such as Arabs, Germans, Japanese, Koreans, Poles, in great numbers. Lastly,
there is the phenomenon of widespread racial miscegenation, which has greatly
contributed to the benign nature of our people and for its renowned tolerance.
3.1.- Brazil´s legal system has its roots in Roman law,
with strong influence from various European sources, such as Portuguese (constitutional
law), French (civil, commercial, company law), German (civil and criminal procedure)
and Italian (criminal and labour) legislation. Some elements of US inspiration
can also be found in the areas of competition; securities; environmental law;
as well as in taxation. Unjust and/or impractical law is fiercely resisted by
the civil society, in the best Tupi-Guarani tradition. Following the re-democratisation
of Brazil in 1986, a constituent assembly was formed with the mission of enacting
a new constitution, which task was accomplished in 1988. The Constitution of
1988 was, at very best, highly inadequate in time and space, and accordingly
has already suffered 29 separate amendments. In the present federal administration
only, the constitution has been amended by 19 different bills. [10] However,
what is most striking about Brazil´s constitution is not the number of amendments
it has suffered, but the reforms it will still have to undergo, before it becomes
a rational platform for the rule of law, federative pact, political balance
and economic activities.

3.2.- The 1988 Constitution divided the Judiciary in ordinary and specialised
courts. As Brazil is a federation, the ordinary court system is established
at the state and federal levels. The ordinary courts comprise civil and criminal
benches and the specialised courts attend to labour, military and electoral
cases. Appeals may be filed to second and third instances. At the top of the
pyramid, there is the constitutional court, the Federal Supreme Tribunal. The
Superior Tribunal of Justice (STJ), with 33 ministers, is the court of last
resort for non-constitutional matters. All last resort tribunals are based in
Brazil´s capital, Brasília. With the re-democratisation of the country and the
adoption of the new constitution, Brazil became an increasingly litigious country,
second only to the USA in terms of litigation. In 1997, 4 million suits were
filed in the Brazilian courts. This number jumped to 5 million in 1999. The
specialised labour courts alone tried 2.3 million cases in 1998. In the same
year, the STJ decided 101,000 cases with published opinions, whereas the STF,
with 11 justices, decided 52,000 cases.

3.2.1.- The 1988 Constitution allowed the Executive branch to legislate by means
of decrees, Provisional Measures (MPs). In theory, those MPs should be enacted
only in those cases of relevance and urgency and to be valid for only 30 days.
However, in case Congress does not approve the law within 30 days, the administration
is allowed to re-enact the measure. The current administration enacted 199 measures,
which were re-enacted 3,336 times. For each MP, there are approximately 30,000
suits. Thus, the legislative effort of the FH Cardoso administration brought
about, only in connection with MPs, 5,970,000 suits. Federal, State and Municipal
governments have a policy of litigating in bad faith and never settling cases,
as the interest of the respective administrations is put above that of the public´s.
What counts is to procrastinate the obligation to pay to the extent possible,
so that another administration will have to foot the bill. The State of São
Paulo alone, in spite of having the reputation of one of the best managed in
the Brazilian federation, has approximately of US$ 6 billion dollars of judicial
indemnification in arrears, and the municipality of São Paulo, which does not
enjoy the same reputation, US$ 1 billion. As the State of São Paulo refuses
to pay those judicial awards, there were, in 1999, 1,103 requests for judicial
intervention in the State´s executive branch, whose governor has resorted to
evading summons! [11]

3.3.- In spite of such numbers, the Brazilian judiciary has only approximately
10,000 first-instance judges and 200,000 active lawyers for a population of
150 million people. As in France, those judges are all civil servants subject
to a public examination for qualification. Brazilian judges have benefited from
continuing legal education programmes for more than 10 years. In the higher
courts, 20% of members come from the legal profession as well as from the public
prosecution service, another category of civil servants. More sophisticated
judges and courts tend to be found in more economically developed federal states,
where follow-up of the cases can be done by computers. At present, cases normally
take from 3 to 5 years before conclusion. Discovery is extensive. Litigation
is expensive and the discomfited party will pay full court fees and reimburse
legal costs of between 10 and 20% of the value of the case. The judiciary system
does not adopt the “stare decisis” doctrine and thus every case has to be tried
individually, even if higher courts have already decided on the matter of law.

3.3.1. The states and the federal governments are the most frequent litigants,
more often than not in the passive pole, as a result of the numerous attempts
against the legal order, commonly in the economic area. Former President Collor,
for example, attempted to eradicate inflation in the country by means of the
outright sequestration of 80% of the financial assets of physical and juridical
persons, rather than by fiscal policy. The expected result was a tidal wave
of legal actions where his hapless government was most thoroughly and inexorably

3.4.- Recently, the prestigious newspaper, The Economist, published a feature[12]
stating that establishing a firm rule of law remains a challenge throughout
Latin America; hailing the Brazilian judiciary of corrupt and inefficient and
accusing lawyers as well as judges from benefiting from the creeping chaos in
the judicial system. In reply to this article, I sent a letter to the editor
on September 20, which was duly published[13], to the effect that the assertive
that the Brazilian judiciary is both corrupt and inefficient not only fails
to portray reality but is flagrantly irresponsible. I also wrote that the topic
of corruption is insufficient to allow for generalisations and that efficiency
of the courts is comparable if not greater to what is found today in the European
Union. I also commented that the decision of the Brazilian Bar to oppose the
“stare decisis” doctrine, equally not recognised by the ICJ or the WTO, comes
out of concern for the prevalence of the rule of law, keeping into memory the
sombre years of military dictatorship in the country. Furthermore, the domestic
statistics speak strongly in favour of the Judiciary. Against the 4 million
suits filed in 1997, there were fewer than 100 arbitration cases.

3.4.1.- As to efficiency, court proceedings in Brazil are faster than in most
of continental Europe today. Lawyers can follow-up proceedings in all federal
courts via computer and can file pleadings by the same means. In the most economically
developed states, follow-up via computer as well as filings are also possible.
Distribution of new cases is done by computers. Jurisprudence is immediately
made available via computer as well as published in hard copies. The legal prosecution
service or public ministry is both independent and quite effective. The Bar
has a superb continuing legal education programme and conducts a thorough examination
before new lawyers are admitted. The recent vilification of the Brazilian legal
system undoubtedly has its roots in bad politicians who had their evil designs
frustrated by the workings of the legal machinery.

3.5.- Brazilian courts have jurisdiction over defendants domiciled in Brazil
and on disputes resulting from obligations to be performed in Brazil, as well
as on matters arising from acts occuring in the Brazilian territory. Foreign
companies having a commercial presence in Brazil are deemed to be domiciled
in the country. Election of foreign law to govern local obligations is possible
whenever there is no violation of Brazil´s public policies. This is not a common
occurrence, however, as the proof of foreign law in a Brazilian court tends
to be quite burdensome.

3.6.- Foreign sentences are ratified in Brazil by the STF upon the fulfilment
of five requirements, as follows: 1) foreign court having personal and subject
matter jurisdiction; 2) proper summons; 3) final judgement; 4) legalisation
and sworn translation; and 5) compliance with basic principles. Ratification
will be denied if Brazilian courts have exclusive jurisdiction of a matter,
which occurs in case of property located in Brazil and probate of assets in
the country. Defendants resident in Brazil must be properly summoned by means
of rogatory letters. An affidavit will have to be presented to the effect that
no appeals are possible in the country of origin of the judgement. The judgement
must not violate Brazil´s national sovereignty, public order or morality.

3.7.- Until very recently, for foreign arbitration awards to be enforced in
Brazil, ratification by the courts of the country of origin of the award and
ratification by the STF were necessary. This ensured that arbitration was eschewed
in Brazil. On December 27, 1995, Brazil ratified the Panama convention on arbitration,
which eliminated the necessity of ratification of an award by the local courts
in most cases. Furthermore, in accordance with new domestic legislation on arbitration[14],
international awards are dependent on ratification by the STF only. Summons
are allowed in accordance with applicable international treaty or foreign law.
The award may be based on submission clauses, whose validity will survive the
relevant agreement. In spite of such positive developments, arbitration remains
only exceptionally used in Brazil.
4.1.- I hope this presentation will help you to better understand Brazil and the workings of its democratic society. This knowledge will undoubtedly assist you in doing business with this country.