Imagine that company “X,” headquartered in the city of São Paulo, is in negotiations to sign a food supply contract with company “Y,” located in Araraquara, in the countryside of the state.

When they sit down to negotiate the clauses, the representatives of these companies understand that if any dispute arises related to the contract, it would be beneficial for the judgment to take place in a “neutral territory,” so that neither party is disadvantaged, for example, with expenses for possible personal appearances and process monitoring.

They believe that Campinas, halfway between the two cities and with a good judicial structure, would be a suitable location for any disputes arising from the contract to be processed and judged. By mutual agreement, they include clause 18, which states that “The jurisdiction of Campinas is hereby elected to resolve any controversies arising from this contract.” This is usually referred to as a “forum selection clause.”

These clauses are very common in contracts and used to be respected in business relations, as long as they were agreed upon in writing and referred to a specific legal transaction, as in our example.

However, a new law has changed this scenario. On the 4th of the last month, Law No. 14,879 was sanctioned and amended paragraph 1 of article 63 of the Code of Civil Procedure (“CCP”), now providing that “the choice of forum only produces effect when it is included in a written document, expressly referring to a specific legal transaction and having relevance to the domicile or residence of one of the parties or to the place of the obligation, except for consumer agreements, when favorable to the consumer.”

The Law also added paragraph 5 to article 63, giving the judge the power to, even without a request from the parties, understand that an agreement that has no connection with the domicile of the parties or the legal transaction discussed in the process is abusive and, therefore, that forum is not competent to judge.

Therefore, in practice, the Law restricts the free choice of the forum, that is, the place where a specific case arising from a written agreement will be processed and judged. In our example, it could be possible that even with the agreement made in clause 18, the court in Campinas understands that the case could not be judged there because “it has no relevance to the domicile or residence of one of the parties or to the place of the obligation.”

One of the criticisms of the legislative change is that it restricts an agreement made by the parties freely and willingly, even if it has a motivation like the one referred to by the representatives of companies “X” and “Y.” Additionally, it is not clear whether clauses signed before the promulgation of the Law will be considered valid.

The wording of the article also favors conflicting decisions in the future, especially because the term “having relevance” can have multiple interpretations, which can cause legal uncertainty.

It remains to be seen how this change will be applied in practice. Only time will tell.

The Dispute Resolution team at Nasser Advogados is available to provide any clarification.