Jonathan C. Hamilton, “International Arbitration as a Component of Latin American Reforms: The Case of Peru” (1997). This article was written following work by the author as a visiting foreign associate in Lima at a time of expanded investment flows and emerging laws and treaties.

International dispute mechanisms matter to development. They facilitate investment by controlling economic and political risk and promoting the rule of law. Led by aggressive reformers touting market-oriented policies that swept emerging markets after the end of the Cold War, Latin American countries made major strides towards integration into the globalized economy. One important component of Latin American reforms was the adoption of new laws and treaties for cross-border dispute resolution. This contemporaneous article, written before the wave of contemporary international arbitration had taken hold in the region, focused on Peru as a case in point.

In addition to a solid grasp of general legal principles and domestic American perspectives, the practice of international arbitration requires an understanding of the dilemmas posed by historical practice and legal provisions in specific geographic and political contexts.  Led by aggressive reformers touting capitalist agendas, Latin America has made major strides over the last decade towards status as a full-fledged player in the global economy.[1]  One important aspect of increased foreign investment and trade in Latin America is the identification of suitable dispute mechanisms.  Traditionally, foreign companies and developed nations have viewed Latin American courts as an unreliable and costly method of dispute resolution.  Meanwhile, Latin American states have viewed international arbitration as an infringement on sovereignty.  This memorandum examines:  (1) the reasons why Latin American states traditionally have been wary of arbitration; (2) the more hospitable attitudes toward arbitration in light of the Panama Convention;  and (3) a case example of new arbitration laws and practice in the Republic of Peru, which has implemented some of the most aggressive economic and legal reforms in the region.

I.          The Traditional Latin American Disregard for Arbitration and The Impact of the Panama Convention

International arbitration has been in use among developed nations for almost two centuries, and can actually be traced back as far as ancient Greece.[2]  However, Latin American states were traditionally unwilling to recognize arbitration for the resolution of private disputes, and their objections were codified in national constitutions and laws.[3]  The Latin American concern over arbitration is represented by the Calvo Doctrine,[4] which developed out of the “exploitation by large foreign-owned corporations of natural resources in the underdeveloped world in the late nineteenth and early twentieth centuries.”[5]  Affirmed at the 1933 Seventh International Conference of American States in Montevideo, the Doctrine provides that sovereign states should be entitled, on the principle of equality, to complete freedom from interference by other states.[6]  It further provides that aliens should not be entitled to any greater protection than those available to nationals; that the courts of the host country should have exclusive jurisdiction over disputes involving aliens; and that  aliens should be able to seek redress only in those courts.[7]  In Peru, for example, foreigners had to submit to local law and tribunals, and commercial questions affecting state interests were not arbitrable.[8]  The 1969 Andean Code, to which Peru was party, specifically excluded the option of arbitrating conflicts “relating to investment or the transfer of technology.”[9]  In short, Latin American states were wary of the central characteristic of arbitration:  the circumvention of the traditional judicial system of a state.[10]

The United States and European countries have regarded the Calvo Clause as an example of “non-responsibility” which long has been an excuse for  states to avoid international claims.[11]  The lack of a sound legal foundation for investment and trade left economic ties with Latin American severely underdeveloped.  The Peruvian judiciary is a perfect example of a system which foreign companies historically have avoided.[12]  As one Peruvian lawyer has observed:

“In Peru, it would be difficult to wish upon someone a greater evil than to threaten to involve him or her in a lawsuit. This collective sensation of entering Dante's inferno when we sue or are sued is no exaggeration. The descent into a judicial system with a penchant for useless formalities, a system designed by medieval legislators (hence the arcane terminology of the day found in the laws) is a harrowing experience....”[13]

One example: Until 1993, Peruvian courts regular dismissed important photographic evidence because such forms of evidence were not specifically provided for under the civil code.[14]  Additionally, the stability of the judicial system has been out of balance in recent years due to the controversial secret terrorism trials which were instituted as part of a broader anti-terrorism program.[15]

The 1975 Panama Convention was a significant break from the protectionism of the Calvo Doctrine.[16]  Almost every nation in Latin America has subsequently ratified the Inter-American Convention on International Commercial Arbitration, including the United States and Peru.[17]  The Panama Convention is virtually the same as the 1958 New York Convention, except that it provides that, “in the absence of an express agreement by the parties, the arbitration shall be conducted in accordance with the rules of procedure of the Inter-American Commercial Arbitration Commission.”[18]  The Panama Convention introduced one major difference from the New York Convention in providing that parties which have not agreed to any arbitral rules will be governed by the rules of the Inter-American Commercial Arbitration Commission (IACAC), which has adopted rules virtually identical to the UNCITRAL Arbitration Rules.[19]  The actual effect of the Convention varies by country and by court;  procedural laws still upset efforts to enforce arbitral awards in many cases.[20] 

The efficacy of arbitral practice in the region lingers on the brink of stability, as nations continue to “make transitions back and forth from dictatorship to democracy, prodded by norms and regimes or international law.”[21]  It is still not completely clear whether the legal systems of Latin American states have the means or the will to execute the two main judicial responsibilities of international arbitration:  compelling arbitral proceedings and enforcing awards.[22]  Judicial reform is a “second generation” reform in Latin American states, following on the heels of largely successful macroeconomic programs such as major privatization programs.[23]  In the meantime, even though it is rarely used in other sorts of disputes, arbitration has become widely accepted in the Latin American business community.[24]

There are many reasons why, in law and in practice, Latin states have become more conducive to arbitral practice.[25]  First and foremost, foreign investment and public loans are dependent on arbitration.  For instance, the World Bank, a key source for development funding in the region, requires that its loans include arbitral provisions, though no cases have arisen where arbitration has proven necessary.[26]  Second, the increasing international attention to world intellectual property rights has given rise to new arbitration requirements.[27]  Third, arbitration is considered a sign of the cautious movement toward regional economic integration.[28]  Finally, the theoretical view that arbitration is a cost-effective and reliable method of resolving disputes has spread throughout Latin America along with a powerful market ideology.[29]

II.        The Legal Framework in Peru

The facilitation of arbitration practice by the Peruvian judicial and legal system is a recent phenomenon.  The Peruvian Civil Code of 1852 contained only general dispositions regarding commercial agreements;  and the Civil Code of 1936, while include modern laws regarding international private investment, still did not address arbitration.[30]  The Civil Code of 1984 systematized contemporary norms of international private law, but the general arbitration provision was only applicable to foreign judicial decisions.[31]  Despite the 1984 law and Peru’s ratification of the 1975 Panama Convention, Peru only recently created a solid legal foundation for arbitral proceedings.  In practice, arbitration now has been widely used in Peru for approximately five years,[32] in concert with President Alberto Fujimori’s ongoing overhaul of the national economic regime and efforts at judicial reform.[33]  Changes in the law have been a bit slower, but a new arbitration law is now in place.  A decree of the General Law of Arbitration was promulgated on December 10, 1992, and the actual Arbitration Law (the “Law”) was passed on January 5, 1996.[34]

Arbitration in Peru is categorized as either domestic or international, depending on the domicile of the parties. [35]  Under Article 84 of the Law, an arbitration is international if:

"(1) the parties to an arbitration agreement have their place of business in different countries at the time of that agreement; or

(2) one of the following is outside the country in which the parties have their places of business: (a) the place of arbitration pursuant to the arbitration agreement; (b) any place where a substantial part of the obligations of the commercial relationship is to be performed, or the place with which the dispute is most closely connected; or

(3) the parties have expressly agreed that the subject of the arbitration agreement relates to more than one country. If a party has more than one place of business, the place of business is that which has the closest relationship to the arbitration agreement; if a party does not have a place of business, reference is to be made to his/her habitual residence.”[36]

Under Article 90 of the Law (and Articles 446 to 457 of the new Civil Procedure Code), courts cannot hear issues which are subject to an arbitration agreement if one of the parties invokes the arbitration agreement as a defense.[37]  Following the UNCITRAL Model Law and the New York Convention, the Law eliminates the distinction between the arbitral clause and the submission of a matter to arbitration.  Arbitration agreements must be in writing, and the invalidity of a contract does not invalidate an accompanying arbitration agreement.  Some other aspects of the Law track the UNCITRAL Model, including number of arbitrators, challenge of arbitrators and procedural matters.  The Law distinguishes between legal arbitration, which must be submitted to licensed attorneys, and equitable arbitration, which can be submitted to non-lawyers.  If not clearly indicated, the presumption is that an arbitration will be require legal credentials of all arbitrators.  If international parties fail to make a choice of substantive law, the arbitrators may make a choice.  International proceedings may be conducted in any language. 

International arbitration awards are not subject to judicial appeal.  International awards may only be set aside due to incapacity of the parties; an invalid arbitration agreement; a violation of due process; a lack of arbitrability; an improperly composed tribunal; or a conflict with public policy.[38]  Peru enforces awards under the New York and Panama Conventions;  other enforcements may be denied under Article 109 of the Law, which follows UNCITRAL Article 34. [39]  Requests for enforcement of foreign arbitral awards must be filed in the Court of Appeal of the domicile of the individual against whom enforcement is being sought:  The requesting party must include in the request a copy of the award and a copy of the arbitration agreement, both translated into Spanish by an official or sworn translator, or by a Peruvian diplomatic or consular agent, if necessary.”

Under Article 63 of the 1993 Constitution, the Republic of Peru can now enter into arbitration agreements with foreign parties, a particularly important step in light of the wave of privatizations over the past four years.[40]  The aim is that, in the future, the government will be able to use private arbitral institutions in Peru or abroad.  Several arbitration institutions have emerged in Lima, most notably the Colegio de Abogados de Lima (Lima Bar Association), Camera de Comercio de Lima (Lima Chamber of Commerce), and the Instituto Peruano de Arbitraje y Conciliación (Peruvian Institute for Arbitration and Mediation).  The institutions each have established rules which parallel the UNCITRAL Arbitration Rules.[41]

The implications of these provisions or the new Law in general is unclear due to a lack of available case histories.  The most important case abroad involving Peruvian arbitral matters — where an English court examined an arbitration agreement between two Peruvian companies — predated the new Peruvian laws.[42]  As the English court pointed out, “there are broad variations in the international community on how arbitration is to be conducted and under what customs, rules statutes, or court decisions, that is, under what ‘competent authority.’”[43]  Peru has now taken legal steps to fall into the mainstream of arbitration practice among developed nations.  Perhaps more importantly, it has attempted to establish a secure political and economic regime favoring involvement in the global market economy.  As that trend continues to unfold across the region, the future of arbitration in Latin America rests on the development of its nations as both emerging democracies and emerging markets.

[1] See, e.g., Inter-American Development Bank, Economic and Social Progress in Latin America: 1996 Report (1996).

[2] See generally Simpson and Fox, International Arbitration 1-4 (1959).

[3] See Doak Bishop, The United States’ Perspective Toward International Arbitration With Latin American Parties, 8-AUT Int’l L. Practicum 63 (1995); David J. Branson and Richard E. Wallace, Jr., Choosing the Substantive Law to Apply in International Commercial Arbitration, 27 Va. J. Int’l L. 39, 46 (1986); Straus, Why International Commercial Arbitration is Lagging in Central America, 33 Arb. J. 21 (1978); Note, International Commercial Arbitration: Domestic Recognition and Enforcement of the Inter-American Convention on International Commercial Arbitration, 10 Syracuse J. Int’l L. & Com. 169 (1983); Note, The Future of Arbitration in Latin America: A Study of its Regional Development, 8 Case W. Res. J. Int’l L. 480 (1976).

[4] Branson and Wallace, supra note 3, at 46 note 28.  “The Calvo doctrine.... permeates Latin American attitudes toward arbitration.”  Id.

[5] Jane L. Volz and Roger S. Haycock, Foreign Arbitral Awards: Enforcing the Award Against the Recalcitrant Loser, 21 Wm. Mitchell L. Rev. 867 (1997).  The Latin American countries responded to the concept of an international minimum standard with the doctrine of national treatment and national autonomy.  Id. at 882.

[6] Id. at 883.

[7] Id.

[8] Doak, supra note 3 at 64.

[9] Id. 

[10] Id. at 869.

[11]Volz and Haycock, supra note 5, at 883.

[12] See, e.g., Jose Daniel Amado, Recognition and Enforcement of Foreign Judgments in Latin American Countries: An Overview and Update, 31 Va. J. Int’l L. 99, 119-121 (1990) (discussing bureaucratic requirements for the enforcement of awards in Peru).  See generally Legal System of Peru, 40 St. Louis U. L. J. 1403 (1996); Fernando de Trazegnies, The Judicial System, in Haciendo Negocios en el Perú [Doing Business in Peru] (Beatriz Boza ed., 1994), available at http://ekeko.rcp.net.pe/promperu; Emilio Alipio Montes De Oca, Commentary, 40 St. Louis U. L. J. 1079 (1996) (a commentary on Peruvian judicial ethics by the Vocal of the Supreme Court of Peru).

[13] Juan Monroy, Judicial Proceedings, in Haciendo Negocios en el Perú [Doing Business in Peru] (Beatriz Boza ed., 1994), available at http://ekeko.rcp.net.pe/promperu.

[14] Id.

[15] See, e.g., Peru: Economic Boom, Chronicle of Latin American Economic Affairs (February 16, 1995), available in Westlaw, Latin American Database, 1995 WL 2297413.

[16] Inter-American Convention on International Commercial Arbitration, signed in Panama on January 30, 1975; reprinted at 9 U.S.C.A. § 301 and III Y.B. Comm. Arb. 15 (1978).

[17] Other signatories include Argentina, Chile, Columbia, Costa Rica, Ecuador,  El Salvador, Guatemala, Honduras, Mexico, Panama, Paraguay, Uruguay and Venezuela.  The most notable nation which has signed but not ratified the treaty is Brazil. Regarding cases involving signatories to both the Panama and New York Conventions, 9 U.S.C. § 305 provides that the Panama Convention applies in cases where the majority of the parties are from state which are signatories to that Convention, and that in all other cases, the New York Convention applies.  Russell J. Weintraub, International Litigation and Arbitration: Practice and Planning 64 (1994).

[18]Volz and Haycock, supra note 5, at 884.

[19] Gary B. Born, International Commercial Arbitration in the United States: Commentary and Materials 20-21 (1994).  The Panama Convention omits the New York Convention provision regarding national court proceedings in breach of an arbitration agreement;  but Chapter 3 of the Federal Arbitration Act provides for the enforcement of agreements anyway.  For a discussion of enforceability under the Panama Convention, see Born at 319-322.  See, e.g., Productos Mercantiles E Industriales SA v. Faberge USA, Inc. No. 92 Civ. 7916 (S.D.N.Y. Sept. 14, 1993).

[20] Born, supra note 19.  “[T]he efficacy of international arbitration may be illusory where local law requires that a decree arbitral must be reviewed by the domestic courts before it can be enforced.”  Id. at 1011.  See also David J. Branson and W. Michael Tupman, Selecting an Arbitral Forum: A Guide to Cost-Effective International Arbitration, 24 Va. J. Int’l L. 917 (1984).

[21] Harold Hongju Koh, Transnational Legal Process, 75 Neb. L. Rev. 181, 202 (1996).  See also Inter-American Development Bank,Economic and Social Progress in Latin America: 1996 Report 87 (1996) (discussing the “sustainability of stabilization and reform programs in Latin America).

[22] Paul B. Stephan, III, et al., International Business and Economics 203 (1993).  The issue of interim relief is indicative of the potential pitfalls of arbitration agreements involving Latin American countries in general, and the selection of a Latin American arbitral situs in particular: “If the arbitral tribunal has not yet been appointed, an application for interim relief must usually be addressed to the local courts at the place of arbitration.” David E. Wagoner, Interim Relief in International Arbitration: Enforcement is a Problem, 51-OCT Disp. Resol. J. 68 (1996).

[23] Maria Dakolis, A Strategy for Judicial Reform: The Experience in Latin America, 36 Va. J. Int’l L. 167 (1995).

[24] Id. at 202.  See also W. Lawrence Craig, Some Trends and Developments in the Laws and Practice of International Commercial Arbitration, 30 Tex. Int’l L. J. 1, 10 (1995).  It is a sign of the increased cross-fertilization of ideas that the leading law journal in Peru recently published an article on alternative dispute resolution written by an Argentinean lawyer who quotes a Robert Coulson article quoting Abraham Lincoln (who was quoting Isaiah) on the vices of litigation.  See Roque J. Caivano, Un desafío (y una necesidad) para los abogados: Los medios alternativos de resolución de disputas[The challenge (and the necessity) for lawyers: Alternative means of dispute resolution], 31 Themis 209 (1995).

[25] Bishop, supra note 3, at 64.

[26] John W. Head, Evolution of the Governing Law for Loan Agreements of the World Bank and Other Multilateral Development Banks, 90 Am. J. Int’l L. 214, 220 (1996).

[27] Camille A. Laturno, Comment,  International Arbitration of the Creative: A Look at the World Intellectual Property Organization’s New Arbitration Rules, 9 Transnat’l Law. 357 (1996).

[28] Frank J. Garcia, Americas Agreements: An Interim Stage in Building the Free Trade Area of the Americas, 35 Colum. J. Transnat’l L. 63, 83 (1997).

[29] Weintraub, supra note 9, at 455.

[30] Gonzalo Garcia Calderon Moreyra, El arbitraje y el derecho internacional privado [Arbitration and international private law], 33 Themis 85,86-87 (1996).

[31] Id. at 87, note 5.

[32] Fernando de Trazegnies, supra note 10.

[33]See Jorge Gonzalez Izquierdo, El modelo económico adoptado por el Proyecto de Constitución de 1993,  4 Ius et Veritas 206 (1993) (for a discussion of the legal provision establishing a new open economic regime); José Daniel Amado V. and Luis Miranda A., La seguridad jurídica en la contratación con el Estado: el contrato ley [The judicial security of contracts with the state: The contract law], 33 Themis 15, 19 (discussing increased judicial stability of contracts under the new laws); Albert Forsyth and Luis Pizarro, Contract Law, in Haciendo Negocios en el Perú [Doing Business in Peru] (Beatriz Boza ed., 1994), available at http://ekeko.rcp.net.pe/promperu.

[34] Gonzalo Izquierdo, supra note 30, at 88.  The applicable laws are: Decreto Ley 25936 de 10 de diciembre de 1992;  Ley 26572, promulgada el 5 de enero de 1996.  In Peru, a general decree must be followed by a more specific enactment.  Arbitration is now widely recognized in Peru as a central part of the right of contract described by Dr. Manuel de la Puente, Peru’s leading legal scholar:  “La autonomía importa dos clases de libertades: la libertad de contratar y libertad contractual... la libertad contractual solo existe dentro del contrato, pues se refriere a la libertad que tienen los contrates para determinar entre si la forma y el contenido del contrato.” [“Autonomy to contract includes two important classes of liberties: the liberty of contract and contractual liberty.... the contractual liberty only exists within the liberty of contract, because it refers to the liberty to have contracts determined and and formed in the contents of a contract.”  Gonzalo Izquierdo, supra note 30, at 91 (citing Manuel de la Puenta, Estudios del contrado privado, Tomo I 52-53 (1983) (identifying arbitration as a contractual liberty within the liberty of contract).

[35] Fernando Cantuarias, Arbitration, in Haciendo Negocios en el Perú [Doing Business in Peru] (Beatriz Boza ed., 1994), available at http://ekeko.rcp.net.pe/promperu.

[36] Ley 26572, Art. 84.

[37] Id., Art. 90.

[38] Cantuarias, supra note 35.

[39] Ley 26572, Art. 109.

[40] Constitución del Perú de 1993, Art. 63.

[41] Cantuarias, supra note 35.

[42] In Naviera Amazónica Peruana SA v. Compania Internacional de Seguros del Perú, [1988] 1 Lloyd’s Rep. 116 (C.A.), two Peruvian companies had agreed to arbitration in London as a supplement to a previous agreement that all disputes would be handled in the jurisdiction of Lima.  The lower court determined that the applicable law was English, but that Peru was still to be the place of arbitration.  The decision of the lower court was overturned on appeal when the court held that England was the seat of the arbitration and the proceedings should therefore be held in England.

[43] Id.

In the 1990s, Peru established a secure political and economic regime favoring involvement in the global market economy, including new laws and treaties favoring arbitration. The future of arbitration in Latin America rests on the development of its nations as both emerging democracies and emerging markets.