Why Arbitrate in Latin America?

Development of arbitration should be treated as public policy for the strengthening and expansion of commerce in Latin America. Further, rejection or poor use of alternative dispute resolution mechanisms in the region should be understood to be a barrier to its commerce as, if ‘arbitration did not exist, there would likely be far less investment in the region because investors would be wary of local “home court” judiciaries with all the issues they bring’.^[2]

Today, several Latin American countries face constant shifts in their policies and administrations, moving back and forth between free trade and protectionism. During this period of turmoil, maintaining arbitration as an efficient, viable and solid alternative to court litigation is key; if not, we are doomed to regress decades of development.

Latin America has managed to overcome several obstacles in developing and embracing commercial arbitration.^[3] Since the past decade, after recognising the need to evolve its arbitration legislation and practice, many Latin American countries (such as Mexico) constitutionally recognised arbitration as a valid method of dispute resolution, as most of these countries adopted modern arbitration legislation^[4] and arbitration-related international treaties and conventions.^[5] Now, the majority of Latin American countries are either members of the Word Trade Organization or are parties to at least one integration agreement and likely have a number of bilateral or multilateral investment relationships with countries both in Latin America and beyond.^[6]

One of the reasons as to why this recognition and adoption of a new legal framework was needed is that there was a myth of Latin America being hostile to arbitration. That misconception partly originated from the adherence of some Latin American countries to the Calvo doctrine (named after the Argentinian 19th-century law professor Carlos Calvo) that impacted the enforcement of arbitration agreements, since said doctrine encouraged those countries to require foreign investors and local entities to resort to national courts for redress.^[7] That negative effect faded, giving room to the emergence of the constitutionalisation of the arbitral process in Latin American countries. The constitutionalisation has been applauded by some and criticised by others as, in some Latin American countries, it broadened the limited scope of review of arbitral awards allowed under the New York Convention and, thus, undermined the principle of finality of arbitral awards.^[8] Fortunately, this myth of Latin America being hostile to arbitration ‘can definitely be put to rest’.^[9]

The contitutionalisation and adoption of a new legal framework are worthy of recognition, as countries from the region have civil law systems that, as explained below, differ greatly from international arbitration practice. These countries share similar socioeconomic structure, political culture and legal heritage and have the same civil legal tradition. This sharing of a common legal tradition does not translate into uniformity of legal systems. Such idea of uniformity is a ‘widely spread misconception’.^[10] However, the similarities between these countries permit an analysis of why it is a good choice to arbitrate in the region (as a whole).

The benefits of arbitrating in Latin America are several; these benefits were tested during the covid-19 pandemic as several goverments (such as Mexico) implemented diverse measures to combat the consequences of the virus. Government lockdowns (including the temporary closing of courts), along with other government measures adopted during 2020 to 2022, created the need for, and encouraged the use of, alternative dispute resolution (ADR) mechanisms such as commercial arbitration.^[11] As a result, parties have increasingly turned to ADR to solve their disputes. The golden age of Latin American arbitrations may finally have arrived.

This chapter seeks to describe, address and comment on some of the main benefits of arbitrating in Latin America, how arbitrating is a better option to local courts and why Latin America is becoming an arbitration hub. Many of the benefits addressed in this chapter are well-known benefits of arbitration; therefore, the authors hope to offer an insight of how (and to which level) these benefits are present in Latin American countries.^[12]

These benefits include having specialists on the subject matter of the dispute to resolve the dispute; mitigating risks related to parties’ links to court; taking advantage of the procedural flexibility and cost-effectiveness features of arbitration; having internationally recognised arbitral institutions administering the dispute; and expediting the enforcement of awards.

Specialists as resolution makers

One of the well-known advantages of arbitration is that specialists on the subject matter of the dispute (i.e., M&A, corporate, energy, constructions, etc.) or on the type of agreement (i.e., share purchase agreement, shareholders agreements, power purchase agreements, etc.) will resolve the dispute; while in most of the civil Latin American courts, judges (who are specialists on, for example, labour, electoral, mercantile, civil or administrative law but not on the specific subject matter of the dispute) will resolve the controversy.

Each arbitration case is unique; the parties may have agreed for each one to choose an arbitrator and the third one to be appointed either by the party-appointed arbitrators, by the parties or by the arbitral institution. The arbitrator selection process is one of the main advantages of arbitration as the parties (unless agreed otherwise) have the option to select an expert who may understand, thoroughly, each of their arguments. Conversely, in court litigation, the parties have no influence or say in the appointment of the judge who will decide the matter.

Latin American countries with a dualist arbitral system,^[13] of which there are few, regulate or limit the parties’ choice of arbitrators in domestic arbitration proceedings. This, however, is not a common issue in the region as we only find it in, for example, Costa Rica and Colombia, where arbitrators in local arbitration cases heard in Costa Rica and Colombia must be Costa Rican lawyers and Colombian lawyers, respectively.^[14] These limitations are not applicable when the arbitration is international.^[15]

In addition to being experts in the subject matter of the dispute, industry or procedure, arbitrators must be and remain neutral and independent from the parties throughout the arbitration proceeding. Arbitrators have the duty to reveal any conflict of interests they may have. This duty is strictly followed by internationally well-known arbitrators in international arbitrations seated in the region.

Although the practice of incorporating a law firm with family members remains in the region, recent incorporation and growth of larger firms in the region (particularly in Mexico and Brazil), as well as the recent development of relationships of smaller law firms with larger foreign firms have increased awareness of international notions of conflicts of interests. Therefore, the former gap in notions on conflicts that used to exists between Latin American countries and Western European or North American countries is almost non-existent. The application of soft law (such as the the IBA Guidelines on Conflicts of Interest in International Arbitration, as well as other regulations about the taking of evidence and the parties’ representation) reduced the differences that may have existed on said notions. The application of these standards in most Latin American countries is the practice today.

Sophisticated problems call for sophisticated resolution-makers. In Latin America, arbitration provides just that.

Mitigation of risks related to parties’ links to courts

By agreeing to arbitrate, parties mitigate possible risks related to the links of the parties to the local courts (such as corruption, influence or a conflict of interests). Links to local courts are potentially greater when one of the parties is a government entity.

In the region, it is a common practice to include arbitration agreements in contracts involving Latin American government entities in a variety of state and commercial activities^[16] (including agreements where one of the parties is a foreign entity or individual),^[17] especially in the energy, infrastructure and construction sectors. When such entities participate in a conflict-resolution procedure (i.e., arbitration or court proceedings), two types of interests are identified: private and public interest.

When arbitrators must consider these two interests, the arbitrators resolve the issue based on the facts, the law and the agreements of the parties, as well as the evidence submitted by the parties. Arbitrators must provide an equal treatment to the parties without it mattering that one of the parties is a governmental entity. Conversely, in court proceedings, state entities often enjoy special status and courts often feel obliged or compelled to safeguard the state’s interests. The involvement of government entities as a party to a judicial proceeding often renders judicial decisions unpredictable.

Such unpredictability in the issuance of judicial decisions was considered to exist during judicial interventions to arbitration.^[18] However, recent cases have provided certainty to private parties when arbitrating against state entities.^[19] Additionally, such recent cases have also shown the pro-arbitration perspective adopted and maintained by Latin American countries.

Procedural flexibility

A traditional feature of international arbitration is its procedural flexibility. In arbitration, the parties may agree on, among other things, the deadlines for the submission of the memorials (writs) and whether an arbitration hearing is to take place. In contrast, in Latin American court litigation, the process is extremely formal, so the parties have no influence or say in the definition of the process or procedural schedule as it is already determined in the relevant procedural code.

The cited flexibility feature is shielded by the relevant arbitral laws of Latin American countries, diverse institutional arbitral rules (such as the International Chamber of Commerce (ICC) Arbitration Rules) and soft law. Although, recently, a widespread contention has been that arbitration is becoming more rigid, threatening to diminish the flexibility feature of arbitration, in Latin America such feature continues to be a characteristic of arbitration. The fight to preserve the flexibility feature is a major one, especially in Latin American countries where the arbitration practitioners of the region must consistently and consciously ensure that its formalist legal tradition does not permeate into the arbitration practice. Permititng such contamination could result in the creation of a Frankenstein of the arbitration, a situation that we are all called to avoid.

Cost-effectiveness

As compared to a court proceedings in Latin America, arbitration is faster (more so when agreeing on a fast-track arbitration) and confidential (avoiding the public scrutiny that can accompany a court trial). In contrast with judicial proceedings, the legal and administrative costs of administered arbitrations may be under control, to some extent, since the administrative costs may be calculated in advance in accordance with the fees published by each arbitral institution (which commonly include the administration costs and arbitrators’ fees) and the legal and experts’ fees may be also calculated in advance in accordance with the amount in dispute and the success rate.^[20] Conversely, although court litigation does not include fees for the judiciary, associated costs to the litigation are difficult to predict and control.

The arbitrators have the duty to make every effort to conduct the arbitration in an expeditious and cost-effective manner to ensure an economic management of the procedure. That duty is often provided for in the arbitration rules; for example, in the ICC Arbitration Rules, it is provided for in Article 22.

Enforcement of arbitral awards

An arbitration award may be recognised and enforced in any country where the losing party has assets if such country is a signatory party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards signed in 1958 (the New York Convention) or to the Inter-American Convention on International Commercial Arbitration signed in 1975 (known as the Panama Convention).

The New York Convention is the most comprehensive architecture tool of international commercial arbitration and, until now, the most successful effort to achieve adaption and cooperation of national judicial systems.^[21] As explained above, all Latin American countries have ratified the New York Convention and, additionally, 18 Latin American countries are signatories of the Panama Convention,^[22] thereby reaffirming fundamental principles of recognition and enforcement of arbitral agreements and awards.

Latin American countries recognise that setting-aside proceedings do not allow the review on the merits of an arbitral award.^[23] In fact, the New York Convention has not only been adopted by all Latin American countries; it has also been applied by the courts with a certain degree of consistency.

Arbitral institutions

In Latin America, it is fairly common – and strongly advisable – for the arbitration to be administered by international or local arbitral institutions. One of the most common international arbitration institutions with a strong presence in Latin America is the ICC. However, local institutions – such as CANACO and CAM in Mexico and the CCL^[24] in Peru – have today a solid position in terms of administration and promotion of arbitration services around the region.

The increase of cases in Latin America and the use of international arbitration rules are another indication of the uniformity that Latin American countries are achieving.

The development and sophistication of arbitration in Latin American countries has had an impact on the sophistication of arbitration practitioners within the region. Latin American arbitration lawyers have set their minds to increasing awareness of arbitration as a refined alternative dispute resolution mechanism, for example, by increasing arbitration scholarships, including arbitration curricula in the graduate and postgraduate degrees, and having moot competitions in place.^[25] This mindset has helped to establish (and, currently, keep) arbitration thriving in the region.

Conclusion

In times where administration of Latin American countries and its policies are facing constant changes, it is crucial for arbitration practitioners, arbitral institutions and governments of the region to continue to protect the pivotal and traditional features of arbitration herein discussed. Accomplishing such protection would result in the preservation of the commercial development that these countries have worked so hard to procure.

Convergence of the civil legal traditions in Latin America with common law legal tradition through soft law instruments and substantive law (such as the UNCITRAL Model Law) has been key for the successful development of arbitration in the region. For international commercial arbitration, achieving its goals of certainty, uniformity and simplicity, the support for arbitration by national courts is key. As the case law shows, such cooperation (or support) is increasing in the region.

In Latin America, arbitration enjoys increasingly global significance and, as this chapter illustrates, most Latin American countries have shown themselves to set out to profess an international arbitral culture. It is due to such determination that the core advantages of arbitration are protected in Latin American countries with such passion and intent.

It should be borne in mind that, even when the purpose of professing international arbitral culture and applying consistent and coherent arbitration laws (and its main concepts) are difficult tasks to tackle, as almost no jurisdiction can handle this without facing hurdles,^[26] cases that may be deemed to be contrary to this culture can be expected to arise. Those cases should be interpreted to be isolated cases and to be the product of the natural trial-and-error exercise of all jurisdictions as they deal with evolving and novel issues. Without hesitation, the new pro-arbitration stand that has finally emerged and intends to remain in Latin America provides a bright future for international arbitration in the region.

Footnotes