Dispute resolution in Latin America

November 2010 | TALKINGPOINT | LITIGATION & DISPUTE RESOLUTION

financierworldwide.com

FW moderates a discussion between Omar E. Garcia-Bolivar at BG Consulting, Inc., Hernando Diaz-Candia at Squire Sanders & Dempsey, LLP and Marco Tulio Venegas at Von Wobeser y Sierra, S.C., on dispute resolution trends in Latin America.

FW: Have you seen an increase in commercial disputes across Latin America over the last 12 months or so? What types of disputes seem to be most prevalent?

Garcia-Bolivar: In spite of the global financial crisis Latin America has had one of its best economic times since the 1960s, which has of course been accompanied by a growth in commercial disputes. Disputes between private parties have increased significantly as businesses have become more sophisticated and aware of different instances to obtain economic satisfaction. Significantly, the growth of investment disputes – that is, disputes between investors and sovereign States – has been noticeable. Latin America as a region has more claims presented by investors against States than anywhere else in the world. With very few exceptions – and the big exception of Brazil, which is not part of the system of international protection of foreign investment – all Latin American countries have been respondents to investment arbitrations. That trend has been growing in recent years and is expected to continue growing as investors become more aware of that mechanism. In addition, a combination of factors such as social disparities, financial crisis, commodities price increase and ideological motives have pushed governments to impose more stringent regulations and in some cases expropriate. All of which create a scenario for more disputes.

Diaz-Candia: There has certainly been an increase in disputes. In particular, for foreign investors, access to arbitration is almost always a condition precedent for investment in Latin America. Unfortunately, state entities, which control a significant part of Latin American economies, take a less than favourable view of international arbitration. In countries like Venezuela, for instance, arbitration is resented for historical reasons relating to geographical border arbitrations conducted in the late 19th century, which Venezuela lost. Latin America has recently seen a particularly boom in treaty arbitration relating to investor protections. In contract arbitration, the main areas of arbitration growth are probably construction and oil and gas.

Venegas: There has been a significant increase in commercial disputes in Latin America in the last 12 months. Among the types of disputes which appear most prevalent, there has been a significant increase in disputes related to commercial contracts in which one of the parties is a governmental or related entity. Also, disputes regarding the compliance and interpretation of construction contracts seem to be most prevalent. Moreover, commercial disputes over the last year particularly in Mexico have increased, given that local arbitration institutions have encouraged this dispute resolution method and have strengthened their dispute resolution services.

FW: To what extent are companies in the region embracing alternative dispute resolution methods?

Venegas: Nowadays, arbitration is considered by Mexican companies as an attractive alternative to judicial litigation before domestic courts. Mexican companies are increasingly seeking to include arbitration clauses in their contracts and referring to counsel for advice on alternative dispute resolution methods. Latin American companies are more readily arbitrating within the region amongst themselves, as opposed to, for example, Latin American companies arbitrating against American or European based companies. This trend is an indicator that companies within the region are comfortable exploring dispute resolution methods for a broader scope of cases. Specifically, Mexican companies have also been encouraged to submit their controversies to arbitration, based on the security Mexico’s arbitration framework provides. Also, Mexican parties to arbitration have increased their recurrence to local arbitral institutions, such as the CAM, which announced its New Arbitration Rules, which came into force on 1 July 2009.

Garcia-Bolivar: Economic indicators show how slow the judicial procedures in the region are. Moreover, lack of judicial independence has been a notorious vice in many Latin American countries. It simply does not make economic sense to spend years litigating in court and not be certain if the other party has a friend susceptible to influences at a deciding level. Hence major companies are embracing ADR methods ostensibly. Arbitration is the most used ADR method. However, arbitration can be expensive, in some cases time consuming and in many countries it may lack the ‘teeth’ of the ordinary courts. The weakness of arbitration is that is it an alternative, not a substitute for dispute resolution. Many countries in the region take that reference literally and consequently arbitrations need to resort to litigation either for purposes of forcefully enforcing an award or to request interim measures. Other ADR methods, such as mediation, conciliation and event solutions by court appointed experts, have been less predominant. However, given the costs, time and uncertainty that parties might face in arbitration, mediation could become the next fashionable ADR method in Latin America among companies.

Diaz-Candia: Private companies have fully bought into the benefits of alternative dispute resolution methods. The problem, again, lies with state entities. In Latin America, government authorities are prone to believe that arbitrators do not apply substantive local laws as they should, and consequently conclude that local companies and government entities in particular are not treated fairly in international arbitration. Arbitration can obviously be efficient and facilitate impartiality. To effectively promote arbitration, however, it is necessary to discuss the constructive criticism applied to the way arbitration is often handled by some institutions and some of the most prominent international arbitrators, particularly as to the application of substantive laws of developing countries.

FW: How would you describe arbitration facilities and processes in Latin America?

Diaz-Candia: Facilities and processes are reasonably good. Traditional court litigators have begun to explore arbitration in Latin America, with the benefit of making arbitration more widely used. The disadvantage of that, however, has been that court litigators sometimes bring formalistic views and a positivistic approach to issues like the taking of evidence and legal reasoning, which sometimes defies the intrinsic flexibility that arbitration must have.

Venegas: Over the past decades, as a result of a growing interest in arbitration, many Latin American countries have adopted the UNCITRAL Model Law on International Commercial Arbitration; many have also ratified the New York Convention.. Additionally, Latin American States, including Mexico, have signed the Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards (the Montevideo Convention). These instruments provide and facilitate the legal means required for arbitral proceedings to take place. It should be duly noted that Mexico amended the Commerce Code, as well as the Federal Civil Procedures Code, to establish new arbitration rules for resolution of commercial disputes. The UNCITRAL Model Law was adopted in the Commerce Code with minor modifications; as a result, its provisions are incorporated in domestic legislation and have become a part of the Mexican legal system. Thereby, Mexico has witnessed a significant increase in the number of arbitration requests, as it provides a complete and satisfactory arbitration regulation.

Garcia-Bolivar: Over the years arbitration has become more sophisticated in the region. In many countries there are more than three well established institutional centres in its main cities. Santiago, Chile is becoming a significant regional arbitration hub, as is Lima, Peru both with world-class facilities and quick processes. Significantly, the government of Ecuador has referred the disputes that might arise under the new oil exploitation contracts to arbitration in Chile. Brazil has had an arbitration law since 1996, which was upheld by its Supreme Court in 2001. Along with Mexico, both countries have seen significant growth in commercial arbitrations before the ICC. All the countries are signatories to the New York Convention on enforcement of foreign arbitral awards. Few are not signatories to the Panama Convention on international commercial arbitration. And most, with the big exceptions of Mexico and Brazil and the recent withdrawals of Bolivia and Ecuador, are signatories to the Washington Convention on investment disputes. Thus, for the most part the framework is set for the prominent rise of arbitration. However, although there is a potential for international arbitration to shine in the region, the preferred arbitration venues for companies doing business in Latin America remain New York and Miami.

FW: What arbitration-related challenges have you seen in your jurisdiction of focus?

Garcia-Bolivar: The main challenges are technology, language, costs and cooperation by the judiciary. In Central America, for example, the law of some counties require arbitrations to be conducted in Spanish exclusively. To allow arbitrations to be fully conducted in a foreign language is crucial as is the use of technology. Video-conferencing and electronic submission of memorials and discovery would be beneficial to the efficiency of arbitration. However, the costs of the procedures added to the legal fees have made arbitration a method available only to elite companies. In addition, in many countries arbitration is not fully independent and cooperation of the courts is needed for certain matters. Moreover, the legal framework in many countries allow for the use of legal mechanisms to circumvent the arbitration processes or its outcome. That is the case of the constitutional protection action of ‘amparo’ widely used in most countries in the hemisphere.

Diaz-Candia: Courts in the region have, in my view, eroded the principle of Kompetenz-Kompetenz and traditionally taken a rather restrictive approach to the interpretation of arbitral clauses. In countries like Venezuela, some courts still insist that arbitration represents a limited exception to the judiciary, not understanding that when a valid arbitral clause is present, the extent of the clause must be expansive and universal. We have seen substantial improvement recently, however.

Venegas: In Mexico the main challenges that arbitration has faced are the costs involving it as well as the ‘judicial’ approach that some lawyers have while litigating in arbitration. Basically, arbitration is seen as a dispute resolution method for complex and costly controversies because of the related costs. Notwithstanding, local arbitration institutions are fighting against this trend and have even supported ‘low-cost arbitration schemes’ for disputes which may not involve huge amounts of money but that are important for the parties. In addition, there are still some lawyers who treat the arbitration procedures as another form of ‘judicial procedures before Courts’ and therefore use a very formalistic approach in their briefs and are constantly challenging and objecting to every procedural order with the aim of artificially complicating the arbitration. When the Arbitral Tribunal is not firm enough or experienced, this formalistic approach of some lawyers has proven to be an obstacle against the development of arbitration in Mexico.

FW: Are there any problems with the enforcement of arbitration awards by Latin American Courts?

Diaz-Candia: Enforcing awards against private companies, in purely commercial cases, is relatively simple and expedited. Venezuela, for instance, has adopted both the New York and the Panama conventions under which international arbitral award may be enforced without a prior domestication procedure. The true challenge in Latin America is enforcing arbitral awards against state entities inside their own country, which in practice I would say is statistically impossible, unless, of course, the state entity voluntarily complies with the award. Even in Latin American countries where the separation of powers is, in relative terms, institutionally strong, statutory prohibitions are very protective of state assets far beyond the sovereign immunity theories typical of common-law jurisdictions.

Garcia-Bolivar: With some caveats, for the most part arbitration is accepted by the courts and enforcement faces the common hurdles seem in other parts of the world. For example, in Brazil courts can refuse to recognise and enforce a foreign arbitral award under certain circumstances, such as the award being contrary to its public policy. Argentina has expressly stated that for a final ICSID tribunals’ arbitral awards to be enforceable within its territory, a judgment creditor needs to comply with the same formalities required to enforce any type of award in that State through procedures within its domestic supreme court. And in some countries there is a special requirement for State entities to participate in arbitration, which if absent can be an obstacle to forcefully enforce the arbitral awards.

Venegas: Mexico, having ratified the New York Convention, offers a complete and well articulated framework for recognising and enforcing awards, rendered in both domestic and international arbitration. In past years, Mexican courts have received various cases related with the setting aside, recognition and enforcement of arbitral awards, based upon sections 1415 to 1463 of the title IV of the Commerce Code and in their vast majority have issued favourable decisions to arbitration and have increasingly delineated that only in exceptional circumstances – for example, when there have been grave violations to due process during the arbitral proceeding – should enforcement of awards be denied.

FW: To what extent is the region being influenced by international dispute resolution processes?

Venegas: International dispute resolution processes and the decisions issued by foreign courts which apply the civil law system, such as the French or Spanish, have historically provided a learned opinion and influenced the evolution of law within the Latin American region, due to the proximity of legal traditions. Mexico has also been notably influenced by international dispute processes which have interpreted articles of the UNCITRAL Model Law or of the New York Convention, which, having been adopted in their integrity in the Mexican regime, naturally provide useful guidance. Moreover, Mexico and the Latin American region has recently been host to several arbitration conferences which has favoured the exchange of information regarding arbitration; that certainly impacts and influences Mexican arbitrators and its arbitral institutions in various matters.

Diaz-Candia: There are clear signs of international influence. In Latin America the most prominent commercial arbitration centres have a direct and strong connection with the ICC and domestic arbitration rules are either modelled after, or made compatible with, ICC rules. Several countries have at least partially adopted the UNCITRAL model law on commercial arbitration. Commerce is global and it is in commerce where arbitration has mostly thrived. The main cultural shock for international arbitration in Latin America has been, of course, the common-law concept of discovery in the taking of evidence. As an additional reference, international arbitration conferences are almost always very well attended in Latin America.

Garcia-Bolivar: As governments themselves have been party to international arbitration, either directly or through State owned companies, the influence of international dispute resolution is noticeable. Not only have some countries taken measures to diminish their exposure to international arbitration, such as renegotiating bilateral investment treaties and redrafting arbitration clauses, but significant reforms of the local judicial systems have been promoted, such as procedural laws that provide for oral and faster procedures. In addition, countries have initiated discussions to create multilateral regional dispute resolution centres (as is the case in some South American countries) or arbitration advisory facilities (as is the recent case of most of the countries who are signatory of the free trade or bilateral investment agreement with the US). From the standpoint of the business community, international dispute resolution is a topic commonly understood, not to mention that there is plenty of information available and knowledgeable professionals.

FW: What changes would you make to existing arbitration rules, and why?

Diaz-Candia: I would regulate multiparty arbitrations which almost always represent procedural and substantive challenges, and make clear that arbitration must be expanded beyond strictly commercial disputes. Issues of administrative law and competition law, for instance, for which arbitration has been traditionally barred in Latin America, must not be excluded per-se from arbitration.

Garcia-Bolivar: Changes that promote time efficiency and reduce costs are all welcome. For example, provisions that allow efficient consolidation of cases are needed. The same can be said of provisions that allow the appointing authority to impose preventive measures while the arbitral tribunals are constituted. In the short term, there is a need to allow arbitration to be fully undertaken in a foreign language, not only mere translations of relevant parts. Likewise, foreign lawyers should be allowed to act as counsels and as neutrals provided they have the right credentials. To reduce time and anxiety there should be a strict time limit for the neutrals to reach a decision once the procedures have concluded. Of paramount importance is the need to foster the use of technology to reduce costs and accelerate the procedures.

Venegas: Since Mexico adopted the standard version of the UNCITRAL Model Law on International Commercial Arbitration of 1985, and taking into consideration that on 7 July 2006, UNCITRAL adopted several amendments to the original version, nowadays Mexico has initiated the legislative process to amend title IV of the Commerce Code, as well as the Federal Civil Procedures Code in order to be in accordance with the amendments made in the UNCITRAL Model Law 2006 version. Among the inclusions which have been suggested in this project is the inclusion of a more detailed framework on the court proceedings to carry out the judicial assistance to arbitration.

FW: What clauses would you recommend that Latin American companies insert into their commercial contracts to manage potential disputes down the line?

Garcia-Bolivar: Mediation can be a good way to solve disputes. Companies doing business in Latin America could be better off including mandatory clauses requiring mediation in addition to other ADR methods. The terms of the mediation can be customised and provisions could be made for a two-tier ADR method, with mediation being the first one and arbitration the second, with different procedures and different neutrals for each one. The few experiences with professional mediation in the region show that a high percentage of cases mediated are successfully and satisfactorily solved. For potential investment disputes with the governments, of course investment planning to take advantage of the relevant Bilateral Investment Treaty is the trendy recipe. But given the costs of investment arbitrations, investors will be wise to consider any kind of non-commercial risk insurance to cover the given business.

Diaz-Candia: There are, of course, at least two extremely opposite schools of thoughts on this: one stating that arbitral clauses must be short and precise, deferring to the wisdom of, and incorporating by reference, the rules of a particular arbitration centre. Another one states that the clauses must be as detailed as possible. However, my main advice is that in arbitration clauses one size does not fit all. Sometimes brevity is good, but sometimes detail is better. Arbitration clauses should ideally be industry specific and adapted to the particularities and quantum of each contract. And of course, reviewed by a true specialist and not sacrificed at the altar of the eleventh hour when contract negotiators are tired. An important issue to be always considered for potential regulation in the clause is the one about a group of companies and multiparty arbitration.

Venegas: In Mexico it has been proven that the best dispute resolution clauses are those which are short and precise. Therefore, we will strongly suggest using one of the arbitration clauses of the arbitral institutions such as ICC (for international disputes) or CAM (for national disputes). Adding a non-mandatory mediation clause is also recommended since it gives the parties a good framework to discuss a matter before going to arbitration.

Omar E. Garcia-Bolivar is an international lawyer, arbitrator and public policy consultant. He is currently President of BG Consulting in Washington, D.C. specialised on law and development consultancy and investment disputes management. He is an arbitrator before the International Center for Settlement of Investment Disputes (ICSID) and the World Intellectual Property Organization (WIPO), a member of the American Arbitration Association International Panel, and listed in the ICC Arbitrator Database. He is Chair of the Inter-American Legal Affairs Committee of the International Law Section of the Washington, D.C Bar. He can be contacted on +1 (703) 535 7577 ext 102 or by email: omargarcia@bg-consulting.com.

Hernando Diaz-Candia is a partner in the International Arbitration Group at Squire Sanders & Dempsey, LLP. Admitted to practice in Venezuela and in the State of New York, Mr Diaz-Candia wrote his doctoral thesis about Administrative-Contentious Arbitration and State Entities. He is a member of the list of arbitrators of the two most prominent arbitration centres of Venezuela and is frequently appointed as arbitrator in multiple cases. His practice focuses strongly on international dispute resolution, including Arbitration, Administrative Law and Corporate-Law. He can be contacted on +58 (212) 953 4006 or by email: hdiaz@ssd.com.

Marco Tulio Venegas is a litigation partner at Von Wobeser y Sierra, S.C. (Mexico City). He has specialised in commercial and construction disputes and has successfully represented national and international clients. A recent highlight of his work is the successful representation of a brewing company in an arbitration for more than US$1.5bn. He obtained his law degree from the Escuela Libre de Derecho in which he is currently Professor in the Post-graduate course of Arbitration. He is a member of the Mexican Bar Association and the Young Arbitrators Form of the Mexican Chapter of the ICC. He can be contacted on +52 (55) 5258 1034 or by email: mtvenegas@vwys.com.mx.

THE PANELLISTS

Omar E. Garcia-Bolivar

BG Consulting, Inc.

Hernando Diaz-Candia

Squire Sanders & Dempsey, LLP

Marco Tulio Venegas

Von Wobeser y Sierra, S.C.