Interviews Offshore Shipping

Brazil’s maritime legal woes: Seeking bridges over troubled waters

Kincaid lawyer Lucas Leite Marques weighs in on the need for reforms

Lucas Leite Marques started out in Brazil’s premier Maritime Law firm, Kincaid Mendes Vianna Advogados, in 2004. He became partner in 2014 and currently works mainly in litigation and arbitration cases, which are rather plentiful in the country. Besides being a member in various national and international associations, Lucas also lectures on Maritime Law at Fundação Getúlio Vargas (FGV).

We sat – digitally – with Lucas to discuss the hostile legal environment for maritime business in Brazil and much needed paths to improvement.

Since the peak in 2013, Brazil has had many crises in the maritime and oil&gas sectors. There was the Operation Car Wash corruption scandal, the dramatic collapse of the oil price after 2014, and never-ending economic and political crises. Then, last year, the pandemic hit. From your perspective, when will the Brazilian maritime market leave the survival mode to something a little more positive?

Indeed, in 2013, 2014, the scenario started to deteriorate. What then increased right after it? Litigation. Disputes everywhere. Petrobras, Brazil’s main charterer, used to turn a blind eye to various contractual clauses during the boom years. She wanted the vessels operating, and they were in short supply. When the crisis came, she started, at first, issuing fines. To anything that was controversial, she applied fines to the ship owners and found excuses to terminate the long-term contracts. She went on gradually terminating them.

Lucas Leite Marques. Image credits: Kincaid Mendes Vianna Advogados

The market participants, which were historically averse to litigating against Petrobras, began to see no alternative. They would either go broke or go to court. Then began a flurry of demands. Our office represents most of them. There are almost 150 lawsuits in recent years against Petrobras only discussing nuances of chartering contracts. The courts in Rio that were already specialized, the business courts, acquired even greater expertise on the details of charter contracts, Petrobras contracts, the role of the Regulatory Agency, etc. So, these litigations have changed a little the scenario. So much so that today, in new contracts, Petrobras includes an arbitration clause, and no longer a provision for litigation in Rio de Janeiro courts.

Then began a flurry of demands. Our office represents most of them. There are almost 150 lawsuits in recent years against Petrobras only discussing nuances of chartering contracts.

This is an important market development. On top of that, no matter how much people talk about alternative fuels, the goals for 2050, 2060 and such, oil and gas still has their value, exploration is still justifiable and will still happen. At a slower pace than what we saw from 2006 to 2013, of course. But exploration will continue to happen and this segment still supports the core of shipping in Rio de Janeiro. It is today still very much tied to offshore logistics, and Petrobras is still the main client.

Other oil companies are here increasing their presence and talking about alternative sources, like Equinor pushing for offshore wind energy exploration and production. In Europe this has been a reality for some time, but in Brazil I think that maybe there is not so much need yet, because we have a lot of onshore wind energy yet to be explored. We have incessant winds in the North and Northeast coasts. So, the need to go offshore is still not so pressing, but it will certainly be a key opportunity in the future.

In traditional shipping, cargo transport, there is still a lot of demand. Brazil is a great exporter of iron ore and agricultural commodities, mainly to Asia. Brazil will always have a strong presence in dry bulk cargo.

Do you see any progress in the container sector, especially coastal shipping and the BR do Mar reform?

In containers, we have a market today that is sizable, but worldwide, it’s not as much a priority as other key markets, like Asia, Europe and North America. Brazil has a bit of a secondary role in the container market. But any development will depend a lot on how the BR do Mar project is going. It had its urgency processing regime withdrawn in April. It doesn’t mean that the project is dead, but what message is Congress sending with this?

I think this project will guide what we expect in the future. We have the opportunity to revitalize the industry to serve all segments. We saw how Brazil was held hostage when there was, a few years ago, the truck drivers’ strike, as the road modal still dominates most of the inland transport. Maritime transportation can alleviate this logistical bottleneck without completely ceasing the use of trucking. We would reduce long-distance road transport, with maritime transport in the core section. Still, we will always need two road legs at each end, at the source and the destination.

Any development will depend a lot on how the BR do Mar project is going. It had its urgency processing regime withdrawn in April. It doesn’t mean that the project is dead, but what message is Congress sending with this?

And we have another front that is very important. Occasionally, developments happen on the international scene that allow emerging countries like Brazil to leapfrog to the future. Decarbonization is a great example. We recently held an event on green shipping at the office in precisely this perspective. We also discussed extensively about autonomous ships with the Maritime Authority. The sooner Brazil opens up and engages in these new markets, the better chance we have to skip steps and run faster to get closer to the international scene.

Brazil is many years, or decades, behind in participating in some relevant international conventions. Until the 1920’s and 1930’s, Brazil participated in several international conventions, of limitation [of liability], maritime privileges, bill of lading. We then secluded ourselves from the maritime conventions on private law. Brazil didn’t ratify any of the main rules, like the Hague-Visby Rules, the Hamburg Rules, the Rotterdam Rules, the Arrest Convention, etc. And then when you leave the international scene, you are kind of an ugly duckling in the segment. It makes it difficult for a foreigner to want to work with countries like that. Or at least it makes it more expensive to do it.

When you leave the international scene, you are kind of an ugly duckling.

It is not easy to modernize the legislation during a long crisis and amid the early stages of a big energy transition. But going back to what you mentioned about the litigation many ship owners have had with charterers. If you sign a charter party in Brazil, even if you use an internationally accepted framework such as the Bimco contracts and clauses, you are still subject to a national Commercial Code from 1850, isn’t that right? How is a shipping company supposed to navigate a piece of legislation from 170 years ago?

I see that with great concern. We have century-old legislation, super retrograde and overdue, still in force. And messy legislation as well, because we don’t just depend on the Commercial Code, right? We have a patchwork of legislation. There are norms, resolutions and ordinances from various sources that are also applicable to shipping. So, hardly any claim is based solely on the Commercial Code. It could not be. For example, there is an article in it saying that the ship has to sail with the first favorable wind. If the wind is favorable, the ship has to leave, if it doesn’t, it’s delayed. Well, this is how it was in the 1850s.

When the legislation is totally uncertain, you can’t even give a precise opinion, right? That’s why we always say, “it depends” on almost everything!

So, we are working with this legislation, it’s an effort for the judges, it’s an effort for the lawyers too. When the legislation is totally uncertain, you can’t even give a precise opinion, right? That’s why we always say, “it depends” on almost everything!

These challenges are exemplified in very palpable cases, sometimes with wide repercussions. For example, the FPSO OSX-3 ship mortgage controversy. Lower courts did not recognize the validity of the Liberian mortgage in Brazil, causing international outcry. Eventually, this was overruled by superior courts. A wild ride, but at least with a reasonable ending…

Yes, the lower courts decisions were complete anomalies. Our firm was not in the case. But we had many customers enduring similar situations, since all foreign ships in Brazil had mortgages registered under foreign flags. So, it became a situation of chaos and uncertainty. We went to Brasília to talk to justice [Luis Felipe] Salomão from the Superior Court of Justice, who was the special appeal assigned judge. We even presented a collection of news pieces from the specialized maritime media to him, showing how this case had worldwide reputational repercussions for Brazil. Fortunately, justice Salomão reversed the previous decisions and calmed the situation down.

FPSO OSX-3. The unit was eventually sold to PetroRio in 2020 and renamed FPSO Bravo. Image credits: PetroRio

Sometimes, averting a bigger disaster is already a win.

Yes. Congress is working on a new Commercial Code for almost 8 years now. There is a lot of controversy. The way it was conceived, a handful of people sat together and wrote two hundred or so articles, putting a lot of rigidity on maritime regulation. Many people opposed the content as well as the procedure, and after years of discussions, this situation is in a kind of a limbo. So, I don’t know if we’ll have a lot of news there.

In those Petrobras cases, it was fortunate that they ended up in Rio de Janeiro, in the business courts that are competent in the matter, so it fell into the hands of 7 judges. And the 7 judges from the 7 business courts talked a lot between them, because none of them was previously fond of the topic. So, they exchanged a lot of experiences, and learned from the first cases, and today they are already familiar with the dynamics of shipping contracts, and this improved the situation a bit.

Now, apart from Rio and Santos, you still see in several states in Brazil, the judge who is ruling in the neighbor’s fight with the doorman, is also ruling on the charter of a vessel or the arrest of a ship. And doing that without much insight. And this is a huge uncertainty, hinders business, hinders investments.

Still, there are initiatives trying to improve things. Our firm has an office in Brasilia through which we help our clients’ push for legislation modernization. We have Brazil’s Order of Attorneys (OAB, Brazil’s National Bar Association) supporting the adoption of pending conventions, with help from the Brazilian Navy. But unfortunately, progress has been slow.

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