The popularity of arbitration is soaring in Latin America as foreign investors’ interest in the region increases – however, poor quality procedures, high costs and a lack of arbitration lawyers threaten to thwart its progress.
The use of arbitration to settle disputes is on the rise across Latin America as the region’s economies increasingly open up to foreign direct investment. Meanwhile, the more widespread use of public tenders by the region’s governments as a means of fostering investment in key sectors has also resulted in more parties resorting to arbitration, particularly in cases involving private companies and state-owned entities. However, there are still doubts about the quality of some arbitration procedures, while clients also highlight problems such as the associated cost, the shortage of arbitration lawyers and a tendency for some parties to try and avoid going to arbitration, even when it is supposedly obligatory. According to the International Chamber of Commerce (ICC), the number of arbitration cases in Latin America increased by around 8 per cent year-on-year in 2017, and following the establishment of a case management team in São Paulo last year, Brazil rose to seventh place in case rankings worldwide, with 51 cases compared with 36 in 2016. Latin America accounted for 15.8 per cent of the cases the ICC managed in 2017.
Faster and more trustworthy
Global law firms with offices in the region are keen to promote arbitration as the best dispute resolution mechanism. “The growth of arbitration is a constant across Latin America in recent years, with the number of cases increasing each year, which shows, independently of the criticism of this kind of dispute resolution, that arbitration is consolidating in many countries of the region, as it is without a doubt the best mechanism for resolving international disputes,” says Carlos de los Santos, partner and head of the arbitration and litigation department at Garrigues in Madrid. “Arbitration’s growth and consolidation show that, in this globalised world, it is a more effective, faster, trustworthy and more neutral option for dispute resolution compared to that offered by local tribunals,” he adds. De los Santos says that the growing number of infrastructure and energy sector projects worldwide, and particularly in Latin America, will drive demand for arbitration. “The intrinsic complexity of such cases means that, in many cases, differences arise between the parties that end up in arbitration, especially in relation to infrastructure,” he adds.
Client concerns
Construction and engineering projects – in addition to energy sector schemes – commonly result in parties resorting to arbitration, according to Katherine González Arrocha, director for the Americas for arbitration at the ICC’s International Court of Arbitration. According to ICC statistics, 23 per cent of new cases in 2017 were related to disputes in the construction sector, with the energy industry generating the second highest amount of cases (19 per cent). “Part of the growth in arbitration cases is fuelled by an increasing number of lawyers promoting the virtues of arbitration to their clients,” says Gary Davidson, a partner at Díaz Reus & Targ in Miami. “Another key factor is the continued globalisation of the world’s economies – corporate executives in many countries prefer arbitration instead of litigation, particularly when doing business in another country.” Clients typically have two primary concerns when it comes to the issue of arbitration, says Davidson. “Firstly, they want to know if their case has merit, and secondly, how much it will cost to arbitrate,” he explains. “The biggest challenge for us is to ensure that our clients always get the very best service and always feel part of the decision-making process,” Davidson adds that arbitration continues to be more widely accepted internationally. “Statistics indicate that the number of cases in international arbitration institutions continues to grow, and my feeling is that, at the same time, the number of international cases at a local level is also increasing,” he says.
Stress and distractions
The costs, duration and risks associated with arbitration are among clients’ biggest concerns, according to José Astigarraga, a partner at Reed Smith in Miami. He adds that, with regard to arbitration in Latin America, clients’ often have worries about the trustworthiness and predictability of the judicial body involved in the case. “For example, it is important that the judicial body respect the arbitration clauses, because if one party is able to escape its obligation to resolve controversies through arbitration or to delay the process and force the litigant to resort to the courts, this will have a high cost for the company, not only in economic terms, but also at the cost of stress and distraction as it is forced to defend the case in court,” Astigarraga explains. Lawyers stress that arbitration must be trustworthy and efficient, and point out that its benefit is lost if the award is not enforced. In Guatemala, significant cases of ‘investor-versus-state’ arbitration are emerging, according to Ignacio Andrade Aycinena, Guatemala managing partner at law firm Sfera, who says that this is generating opportunities for law firms. Meanwhile, commercial arbitration is also growing in Chile, in the view of Roberto Guerrero, a partner at Guerrero Olivos in Santiago. “Our country is a good jurisdiction for arbitration, as it has a longheld custom of resolving legal disputes through arbitration as it has prestigious institutions,” Guerrero says. “We also have laws regarding international commercial arbitration and our tribunals are familiar with the theme, making the execution of sentences easier, including those dictated by both Chilean and foreign courts.” As a result, Guerrero Olivos has strengthened its arbitration team in recent years and a number of the firm´s lawyers have been named as arbitrators in the Santiago Chamber of Commerce’s arbitration and mediation centre, according to Guerrero.
Worry for clients
Guerrero adds that the increase in arbitration cases in Chile is most evident in the construction, energy and mining sectors. He says the cases often relate to company acquisitions, where litigation is used in relation to price adjustments, and for compensation related to declarations and guarantees. “One of the advantages of arbitration in Chile is the specialisation of arbitration lawyers, which allows for conflicts to be resolved in an expert manner, and in a much shorter period of time than in a normal tribunal,” Guerrero says. “This means that practically all commercial contracts of a certain size contain a clause for conflict resolution via arbitration, so there are prospects for this kind of practice to grow considerably.” Among clients’ main preoccupations is selecting an arbitration lawyer, according to Guerrero, who adds that getting this decision right is critical for the resolution of the case. Lawyers also say that clients are also concerned about whether their team of lawyers will have a full understanding of the case, while another worry for clients is the cost of arbitration “especially as arbitration is paid by both parties in the case and the most prestigious arbitration lawyers tend to be expensive”, says one partner. Institutional arbitrators have pre-specified prices, and these are usually respected, he adds.
Brazil: Leader in arbitration
As all arbitration cases are different, each case brings a new challenge for lawyers, according to De los Santos. He adds that, as a consequence, law firms need strong arbitration teams with global experience. Meanwhile, Fernando Mantilla-Serrano, a partner in the Paris office of Latham & Watkins, says a key concern for clients is seeking a “rapid resolution at a reasonable cost”. The costs associated with arbitration represent a significant opportunity, as well as a challenge for law firms, according to José Feris, a partner at Squire Patton Boggs in Paris. “Clients are now much more conscious and demanding regarding costs, particularly states and state-owned companies, and they expect flexibility, value for money and efficient use of resources from the law firms they hire,” he says. Feris adds that parties often resort to arbitration if the dispute has a high level of technical complexity and is international in nature. “Without a doubt, Brazil continues to be the leader in the region in terms of the number of arbitration cases, as well as growth rates, and this is reflected in the opening of an ICC office in the country due to the demand from both the domestic and international markets,” according to Feris. According to the ICC, Brazil is the Latin American country that has seen the sharpest rise in arbitration cases.”
Shortage of lawyers
Growth in the use of arbitration in Brazil is due to measures taken over the last 15 years to promote this form of dispute resolution – this has involved the legislature and judiciary, as well as the local legal community, says Feris. He The increase in arbitration cases in Chile is most evident in the construction, energy and mining sectors adds that this promotional effort has not only taken place in Brazil’s largest cities but also in other areas – this is unlike the situation in Mexico where the majority of arbitration cases are concentrated in Mexico City. Such measures have meant that many companies and industry sectors have switched from litigation in the courts to arbitration as their main method of dispute resolution, not only at an international level but also domestically. Meanwhile, the public administration in Brazil has also adopted arbitration and even passed laws that oblige parties to settle disputes via arbitration. However, Feris acknowledges that the lengthy duration of arbitration cases is a concern for clients, while the shortage of arbitration lawyers is also a problem. There are also some question marks about the processes adopted in some cases. “In some regions, there is a lack of available arbitration lawyers, and this often leads to a poor process and low-quality decisionmaking, and that has led to a search in Latin America for foreign arbitration lawyers,” Feris says.
Be proactive
According to Yves Derains, Paris-based founding partner of Derains & Gharavi International, the best opportunities for boutique firms dedicated to international arbitration is complex cases that require international experience both as counsel and as arbitrator. He adds that the ability to work in more than one language is vital. Derains continues: “Proactive thinking and original procedural strategies are necessary, as well as bringing flexibility and tailormade solutions.” Whether it is domestic or international, focused on commercial or investment cases, arbitration requires highly specialised lawyers, according to Carlos A. Soto, founding partner at Carlos Soto & Asociados in Peru. “Arbitration in Peru has increased exponentially in recent years, and this has generated an increase in conflicts of interest in the designation of arbitrators, which is why our law firm decided to dedicate itself exclusively to arbitration,” he says. “One of the reasons for the growth of arbitration in Peru is the obligation to resort to arbitration to solve public contracts disputes – all contracts contain an arbitration clause,” Soto adds. “From the smallest municipal government purchase to the construction of a mega project, in the event of a disagreement between the two parties, they must resort to arbitration, and this has meant that, when we have had moments of huge public investment in infrastructure, the number of arbitration cases has increased,” Soto says that the increase in the number of arbitration cases in Peru has not led to a corresponding increase in quality. He adds that the quality must be improved if arbitration is to be “consolidated as an effective and efficient mechanism for dispute resolution”. Soto concludes: “An improvement of legislation and greater scrutiny in the selection of lawyers for the role of arbiter will be fundamental elements to increase the quality of arbitration.” While arbitration may be growing in popularity in Latin America, it is clear that steps need to be taken to improve the quality of the services on offer to clients.
Multilingual lawyers in demand for Latin American Arbitration
Clients from Latin America increasingly favour Miami as a seat for arbitration because the city is seen as a “gateway to the Americas”, according to Díaz Reus & Targ partner Gary Davidson. Law firms with a presence in Miami are well-positioned to pick up such work, and Davidson says: “The principal opportunity for our firm in relation to arbitration is that we have the capability to undertake, arbitration in more than one language, and regularly do.” Davidson adds that his firm currently has three lawyers involved in a commercial arbitration case in Panama, where the case will be conducted entirely in Spanish. ‘Staggering amounts of money’ He explains that, in Latin America, the majority of disputes that end up in arbitration involve private commercial matters. Less common disputes that arise from rights based on multilateral and bilateral treaties. “However, while these treaty-based disputes are more infrequent than private commercial ones, the amounts of money at stake can be staggering,” Davidson says. Criminal matters “In addition to our work in the areas of international litigation and arbitration, the firm has well-known expertise in international criminal matters, and this helps us address such issues when they arise in arbitration—directly or indirectly,” Davidson explains. He also notes that, while clients come to the firm “principally because of its reputation for handling international arbitration and litigation work, they also discover that we treat clients like family and are available around the clock to provide guidance and counselling.”
