Why Parties Should Consider Arbitration 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 faces 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 reverse 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 recognised arbitration as a valid method of dispute resolution, as most of these countries adopted moderns arbitration legislations^[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 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] The modernisation of their arbitration legal framework and the development of an arbitral culture among the law practitioners in these countries, gave room to the development of a solid practice and the diminishment of this negative effect.

Therefore, this myth of Latin America being hostile to arbitration can definitely be put to rest.^[8]

Although the situation regarding each country would have to be analysed on a case-by-case basis, these countries have a similar civil law legal culture, share similar socioeconomic structure, political culture and legal heritage, which allows a general statement that it is good choice to arbitrate in the region (as a whole). ^[9]

The benefits of arbitrating in Latin America are several; these benefits were tested during the covid-19 pandemic as several governments 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.^[10] As a result, parties have increasingly turned to ADR to solve their disputes.

Likewise, the pandemic not only resulted in a severe economic impact to these countries, also it reverberated through Latin American politics. Therefore, Latin America is facing a transition era that portends an increase of disputes. Considering the improvements previously described, we may state that the golden age of Latin America arbitrations has finally 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.^[11]

These benefits include having specialists on the subject matter of the dispute to be resolved; 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 labour, electoral, commercial, civil or administrative law, among others, but not on the specific subject matter of the dispute) will resolve the controversy.

Each arbitration case is unique; the parties may have agreed to choose one arbitrator each 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 arbitrator expert on the subject matter of the dispute 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,^[12] of which there are few, regulate or limit the parties’ choice of arbitrators in domestic arbitration proceedings. This, however, is a rare exception in the region as we only find it in, for example, Costa Rica and Colombia, where arbitrators in local arbitration cases heard in those countries must be national lawyers.^[13] These limitations are not applicable when the arbitration is international.^[14]

According to the International Chamber of Commerce (ICC) statistics 15.5 per cent of the appointed arbitrators are nationals of a Latin America country. Particularly, the appointment of arbitrators coming from Brazil and Mexico saw a significant rise – 41 per cent and 30 per cent, respectively – from 2019 to 2020. This upward tendency confirms the solid path that Latin America countries have followed throughout these years.^[15]

Also, the sophistication of the arbitration practice can be measured in terms of the industry fields involved. Formerly, the practice was limited to certain specific industries such as construction, sale of goods and energy. Nowadays, the scope of industries involved is much broader, including disputes related to life sciences, sports, intellectual property, among others.^[16]

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 and imposed by many of the most prominent regional arbitration institutions. Therefore, the former gap in notions on conflicts that used to exist between Latin American countries and Western European or North American countries is almost non-existent.

The application of soft law (such as 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. Particularly, local arbitral institutions such as the Conciliation and Arbitration Centre of the Uruguayan Chamber of Commerce and Services in its 2022 amendment had introduced principles consistent with the IBA Rules on the taking of evidence.^[17]

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). These links are potentially greater when one of the parties is a state entity.

In the region, it is a common practice to include arbitration agreements in contracts involving government entities (private and public interest) in a variety of state and commercial activities^[18] (including agreements where one of the parties is a foreign entity or individual),^[19] especially in the energy, infrastructure and construction sectors. According to ICC statistics, 12.6 per cent of the international arbitrations in the region involves a state or state-owned entity;^[20] this percentage rises to 38 per cent in domestic arbitrations.^[21] In some particular jurisdictions, such as Peru, any controversy arising from public contracts is subject to arbitration.

This tendency seems to be here to stay; in February 2022, Ecuador’s executive branch sent a draft law to the National Assembly named Organic Law for the Attraction of Investments, Strengthening of the Stock Market and Digital Transformation,^[22] which includes a provision stating that delegated management contracts and public–private partnerships concluded with the state must include a multi-tier dispute resolution clause–negotiation between the parties, mediation, and arbitration.^[23]

When dealing in cases where there is a public party against a private one, the arbitrators must specially ensure to provide an equal treatment to the parties without it mattering that one of them is a state 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 state 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.^[24]

However, recent cases have provided certainty to private parties when arbitrating against state entities.^[25] These cases had shown the pro-arbitration perspective adopted and maintained by Latin American countries.

Procedural flexibility

A traditional feature of international arbitration is its procedural flexibility. 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 courts, the process is extremely formal and rigid, 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 ICC) Arbitration Rules) and soft law.

Moreover, this flexibility was tested due the covid-19 pandemic and the impossibility of holding in-person hearings. Considering that situation and following the Latin American Arbitration Association (ALARB) protocol initiative, some of the prominent arbitral institutions of the region have adopted rules regarding virtual hearings^[26] and electronic communications,^[27] making the arbitral process even more flexible than it used to be.

However, recently, a widespread contention has been that arbitration is becoming more rigid, threatening to diminish its flexibility.^[28] 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 the formalist legal tradition does not permeate into the arbitration practice. Otherwise, such contamination could result in backsliding of the arbitration practice, a situation that we are all called to avoid.

Cost-effectiveness

As compared to a court proceeding in Latin America, arbitration is faster (all the more so when agreeing on a fast-track arbitration). According to statistics, the average duration of arbitral proceedings in the region was less than two years in 73 per cent of international arbitrational cases^[29] and 84 per cent in domestic arbitrations.^[30]

In contrast with judicial proceedings, although arbitration cost tend to be higher, the administered arbitrations are somehow under control, to some extent, since the administrative expenses 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.^[31] 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.^[32]

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.^[33] As explained above, many Latin American countries have ratified the New York Convention and, additionally, 18 Latin American countries are signatories of the Panama Convention,^[34] thereby reaffirming fundamental principles of recognition and enforcement of arbitral agreements and awards. As reported by recent statistics, only 14 per cent of the request of international awards annulment in a Latin American jurisdiction had been granted by local courts and the remaining 86 per cent petitions of annulment were rejected.^[35] Even more, 90 per cent of the awards were fully recognised and only 10 per cent of them were partially recognised.^[36] These data demonstrate Latin Americas’ commitment with the New York Convention principles.

In this same line, Latin American countries had recognised that setting-aside proceedings do not allow the review on the merits of an arbitral award^[37] and that the grounds upon which the recognition and enforcement may be refused, established by the New York Convention, must be understood in a restrictive manner and not in extension by the local courts.^[38]

In fact, the New York Convention has not only been adopted by many Latin American countries; it has also been applied by their courts with a certain degree of consistency following its original spirit.

Arbitral institutions

In Latin America, it is fairly common – and strongly advisable – for the arbitration to be administered by international or local arbitral institutions. Until today, ICC seems to be the most preferred arbitral institution for administrating international arbitrations concerning Latin America parties.^[39]

However, in recent years local arbitration institutions have achieved a solid presence in the region in terms of administration and promotion of arbitration services. In particular, institutions such as the Arbitration Center of Mexico (CAM), the Conciliation and Arbitration Center of the Uruguayan Chamber of Commerce and Service (CNCS), the Ecuadorian American Chamber of Commerce (AMCHAM), the Chamber of Commerce of Guayaquil (CAC), The AmCham Peru International Arbitration Center, among others, had adapted their rules to the main global tendencies in order to address the needs of its users.

The sustained increase of cases in Latin America (Brazil had risen from third to second place worldwide in the nationality of the parties involved in arbitration proceedings and Mexico was ranked 10th^[40]) and the use of international arbitration rules are another indication of the uniformity that Latin American countries are achieving.

The development 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.^[41] 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 shifts, it is crucial for the arbitration community – practitioners, arbitrators, 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 one of the keys 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 of its countries have shown a high level of commitment to increase 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 keep improving 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,^[42] cases that may be deemed to be contrary to this culture can be expected to arise.^[43] 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 arbitration in the region.

Footnotes