CHAPTER 6 INTERNATIONAL ARBITRATION AND MULTIPARTY DISPUTE ISSUES IN LATIN AMERICAN EPCM AND EPC CONTRACTS

• Jurisdiction: Derecho Internacional

Mining And Oil & Gas Development In Latin America
(2001)
CHAPTER 6
INTERNATIONAL ARBITRATION AND MULTIPARTY DISPUTE ISSUES IN LATIN AMERICAN EPCM AND EPC CONTRACTS
Francis M. Wikstrom ^*
Parsons Behle & Latimer
Salt Lake City, Utah, USA

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Anglo-American companies face many hurdles in deciding whether to do business in Latin America. One concern is the possibility of becoming involved in litigation or arbitration under the local laws and procedures of a Latin American country. Part of the concern is simply discomfort in the face of the unknown or the unfamiliar. Part, however, is based on unpleasant experiences encountered by Anglo-American companies in the course of litigation or arbitration in Latin America. Whether or not the concerns are justified, they do have an impact on whether, and under what conditions, a company will do business in Latin America.

This is particularly true for Anglo-American natural resources companies. These companies are faced with large investments, a long-term presence in a Latin American country, and numerous contracts with local contractors and vendors. Often a natural resources project will involve contracts with companies based in several different countries. For example, a United States mining company may build a plant in Peru using a Canadian EPCM contractor, German-built process equipment, Japanese steel fabricators, and Peruvian earth-moving and construction contractors. This paper will focus on contracting concerns from the point of view of North American natural resource companies that wish to construct and operate projects in Latin America.¹

I. CONCERNS OF ANGLO-AMERICAN COMPANIES

A. Contracting With Latin American Companies

Most Anglo-American companies considering doing business in Latin America are unfamiliar with local laws, institutions, customs, and languages. The mere existence of language, cultural, and legal differences increases the likelihood of misunderstandings and disputes between Anglo-American companies and their Latin American contract partners. Predictability of risk is important to any business and the uncertainties are compounded when doing business in a completely unfamiliar arena. As a consequence, natural resource companies considering whether to do business in Latin America often look for ways to avoid local litigation or local arbitration by requiring that all disputes be taken "offshore" for resolution through international arbitration.

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B. Avoiding Local Litigation

Heading the list of concerns is the desire to avoid litigation in a local court system in the event of a dispute. Businesses dislike litigation anywhere and particularly in a foreign country. In the first place, the civil law system followed in Latin American countries is completely unfamiliar to most Anglo-Americans. The hallmarks of the common law system of dispute resolution—jury trials, oral testimony and argument, cross examination, discovery, reliance on precedent, to name a few—are absent or unrecognizable under the civil law system.² There is a concern about the qualifications and competence of the local judiciary to handle complex, technical, commercial disputes. There is also the fear that local courts may give a "home court" advantage to the local party. Finally, there are historical concerns, whether justified or not, about possible corruption in some local court systems.

At best, an Anglo-American company involved in litigation in Latin America will be required to deal with totally unfamiliar procedures that rely on formalistic written presentations in an unfamiliar language. It will find that the law and practice relating to ex parte contacts with a judge are strikingly different.³ It will learn that its lawyers must check the court docket on a daily basis to guard against ambush, since lawyers are not required to serve motions and pleadings on opposing counsel.⁴ If for no other reason than the discomfort that arises from this unfamiliarity, Anglo-American companies typically seek to avoid local litigation wherever possible.

C. Avoiding Local Arbitration

For many of the same reasons, Anglo-American companies are uncomfortable with domestic arbitration in Latin America. Unlike the single form of arbitration that is customary in North America, there can be as many as three forms of arbitration available under the civil codes of Latin American countries. In Chile, for example, there are three forms of arbitration. These include arbitration before an arbitrator known as an "arbitro de derecho," who is governed by both the substantive and procedural laws of Chile; before an "arbitro mixto," who is governed by Chilean substantive law, but not the procedural code; and before an "arbitro arbitrador," who is governed by neither and may decide solely on principles of equity.⁵ Characteristically, an arbitrator who is governed by the substantive law of the country, as in the first two examples, must be a lawyer licensed to practice in

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that country.⁶ The same result may apply if the parties to a contract select the local law as the substantive law governing the contract. If a local lawyer is the arbitrator, whether or not the local procedural code must be applied, the proceedings, not surprisingly, will be similar in many respects to the litigation process. Although local arbitration is certainly preferable to litigation, it raises many of the same concerns for an Anglo-American company.

D. Taking Arbitration "Off-shore"

Assuming that an Anglo-American company has sufficient economic clout in a transaction, it will often seek to include a dispute resolution clause in its contract that requires all disputes to be resolved through offshore, international arbitration. For obvious reasons, the company would prefer the arbitration to be in its own country. If that is not possible or desirable, it will look for a "neutral" site. It is important that the laws of the arbitration site are supportive of arbitration and that the country in which the arbitration site is located has ratified or acceded to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (the "New York Convention").⁷

The importance of the law applicable at the arbitration site cannot be overstated. The world has not yet reached the point of "stateless arbitration," i.e., arbitration that is not tied to the law of any country and is controlled solely by the private law agreed by the parties to the contract.⁸ The law of the arbitration site will determine how far the parties may go in establishing their own procedural rules to govern the arbitration. The courts of the arbitration site will be the ultimate arbiters of these issues according to the laws of the arbitration site.

Secondly, the courts of the arbitration site will play a potential role in overseeing the arbitration itself. A local court might frustrate or assist the arbitration by enjoining or enforcing arbitration, prohibiting or allowing discovery, enjoining or enforcing compulsory process to compel testimony, enjoining or enforcing injunctive relief or interim measures, and by the extent to which it will review or allow an appeal from the ultimate award.⁹

Finally, the laws of the arbitration site will have an impact on the enforceability of an arbitral award in another country. Many of the countries that have ratified the New York Convention require that an international arbitral award must be rendered in a country that is also a party to the New York Convention.¹⁰ The New York Convention requires that an award must be enforceable at the arbitration site in order to be enforceable in another contracting country.¹¹

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Accordingly, the first and most important consideration in determining whether international arbitration is appropriate is whether the country in which the project is located, and any country in which the arbitration award might be enforced, have ratified or acceded to the New York Convention.¹² While it is possible that a country may have signed another treaty¹³ or have local laws regarding enforcement of foreign arbitral awards, the New York Convention was developed under the auspices of the United Nations and is the most widely known and adopted treaty. Under the New York Convention, a party country may refuse to recognize an arbitral award rendered in another party country only if it can be established that one of seven procedural defenses exists. These include (1) the lack of a valid arbitration agreement or the incapacity of the parties to the agreement under the law applicable to them; (2) the lack of notice and an opportunity to be heard; (3) the decision rendered was beyond the scope of the submission of the arbitrator; (4) the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or failing such agreement, was not in accordance with the law of the country where the arbitration took place; (5) the award has not yet become binding or has been set aside by a competent authority in the country in which it was made; (6) the subject matter is not arbitrable under the laws of the country where enforcement is sought; and (7) enforcement of the award would violate public policy of the country where enforcement is sought.¹⁴

E. Is the Dispute "Local" or "International"?

One concern that has been expressed regarding natural resource projects in Latin America is whether a "local" dispute may be taken offshore for arbitration. In this context, a "local" dispute might include a construction contract dispute between a local Latin American subsidiary of an Anglo-American company and a local construction company relating to a

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project located in the same country. According to this view, a dispute must have some "international" nexus in order to be a subject of "international" arbitration. Since the parties to the dispute and the project are all...