Publish in Perspectives - Wednesday, November 24, 2021
Among those surveyed in Latin America, Sao Paulo was ranked as the preferred arbitration seat, behind only Paris and New York, according to the most recent White & Case and Queen Mary University Survey. (Photo: Govt of Brail)
Jonathan C. Hamilton and Ank Santens, White & Case. (Latinvex collage)
A disruptive era portends a new wave of disputes using well-established frameworks for commercial and investment arbitration.
BY JONATHAN C. HAMILTON, ANK SANTENS & ESTEFANIA SAN JUAN
Latin America faces disruption on a scale not seen in three decades due to the confluence of the global pandemic, the fallout of years of scandals and shifting political perspectives on globalization. While the particular circumstances differ by jurisdiction, arbitration will continue to be the preferred mechanism to resolve resulting disputes. Arbitration institutions and market stakeholders should be prepared for these new changes. Arbitral institutions in Latin America should continue to strengthen their rules and their practices. Market stakeholders who may face arbitrations in the years to come should consider taking steps to avoid or best prepare for these coming disputes, including, for instance: (i) reviewing the dispute resolution clauses in their contracts with commercial actors and state agencies; and (ii) assessing, securing and protecting international investment protections.
Latin America is once again in a state of transition. The disproportionate impact of the global pandemic on Latin American economies, coupled with complex domestic politics and global trends related to globalization, reflects a new and complex turn of the wheel of history in a region historically marked by cycles of nationalization and privatization. This confluence of factors is already triggering new trends in disputes in the region, including commercial and investment disputes. Whereas arbitration was an emergent dispute mechanism at the time of the political and macroeconomic transitions of the 1990s, it is now deeply embedded in the region for the resolution of both private and public sector disputes.
World in transition: Latin American perspective
Latin American history was shaped over time by cycles of political and economic regimes that embraced or rejected cross-border investment. Authoritarian regimes rose in the 1970s, and fell in the 1980s. In the 1990s, the end of the Cold War and emergence of the "Washington Consensus" favoring free markets shaped a sea change in the region. Latin American countries overwhelmingly liberalized their economies and embraced globalization in an effort to bolster trade and attract foreign investment. In line with the Washington Consensus, most countries adopted structural adjustment reforms centered on fiscal discipline, tax reform, deregulation of the market, and financial and trade liberalization, among others.
This turn of the historical cycle was marked by a critical additional element: arbitration. As a component of sweeping reforms, most countries adopted new domestic arbitration laws and ratified international treaties providing for investment protections and access to arbitration. Critically, sovereigns in the region broadly signed on to arbitration, largely abandoning deeply rooted historical resistance to submission to arbitration. As a result, as disputes emerged, they both were handled in new fora and also had the effect of reinforcing the macroeconomic models of the era.
Some countries went their own way in the 2000s, prompted by a range of ideological and economic factors. Argentina, Venezuela, Bolivia and Ecuador turned against pro-investment policies, and against investment arbitration, signaling a backlash against the Washington Consensus. The result was not merely political; waves of arbitrations centered on those jurisdictions followed. Meanwhile, until more recent years, many countries largely maintained the underpinnings of the Washington Consensus, at least in principle—including for instance the Pacific Alliance countries of Chile, Colombia, Mexico and Peru. But cracks began emerging over time.
Over recent years, a confluence of factors have impacted the relative continuity of the historical cycle in the region that persisted over the past quarter-century and, mostly, through the global recession of more than a decade ago.
First, the assumptions of the post-Cold War era of globalization have been shaken. The Brexit vote in the United Kingdom in 2016 is the most blatant symbol of this shift, but for the Americas, there is another example that marked a turning point in 2016: the demise of the participation of the US in the Trans-Pacific Partnership (TPP). The US was an architect and champion of the Washington Consensus, and developed the TPP as a broad alliance of like-minded countries. The TPP also constituted the realization of a form of the long-imagined free trade agreement of the Americas, including the NAFTA countries plus Chile and Peru. It promised to consolidate the Washington Consensus at a time when contrarian countries like Ecuador and Venezuela were faltering. Instead, the US exited the TPP, and support for free trade and investment agreements deteriorated significantly in the US. The replacement of NAFTA with the US-Mexico-Canada agreement reflected the complex mix of continuity and change.
In the context of a broad debate over globalization, Latin American countries were impacted by a series of complex corruption issues that impacted established political order and assumptions.
As a further addition to this complex confluence of factors, the COVID-19 pandemic hit the region hard, exacerbating existing economic and political fault lines. As a region, Latin America experienced the sharpest contraction in gross domestic product (GDP), namely 7 percent, compared to a global average of 3 percent. Peru experienced an especially severe contraction, with GDP shrinking by 11 percent in 2020.
The impact of the pandemic reverberated through Latin American politics, reflecting especially in countries where general elections took place. In April 2021, for example, Peruvian citizens elected a leftist former schoolteacher and union leader, Pedro Castillo, who spoke against globalization during his campaign. In Colombia, violent protests broke out after the government announced a new tax reform that purported to shrink deficits that grew during 2020. Following sustained blowback, the reform was withdrawn, but protests have continued with expanded demands. Other countries with traditionally economically open economies, such as Chile, have also begun taking measures that may signal a return to more nationalist economies. Policies instituted in Brazil under President Jair Bolsonaro and in Mexico under President Andres Manuel López Obrador seem to confirm how deeply nationalist movements are linked to anti-globalization sentiments.
Time will demonstrate whether the disruption of recent years, and the pandemic, is a sign of permanent disruption of core components of the Washington Consensus, or merely a detour. Despite broad political drama, many core tenants of the prescriptions for economic growth in the 1990s, such as a focus on fiscal responsibility, have persisted, and there are mixed political developments. For instance, Ecuador is returning to a model friendlier to foreign direct investment (FDI) under recently elected President Guillermo Lasso, proclaiming that he wants "more Ecuador in the world and more of the world in Ecuador." In his inaugural presidential speech, Lasso promised to put an end to former President Rafael Correa's caudillo era, and to restore fair economic trade for the country. Two months into his presidency, Lasso enacted a new hydrocarbon policy that had immediate effects. Under the new hydrocarbon policy, Ecuador will once again allow foreign companies to exploit petroleum resources in its oil fields.
These diverse factors impacting policies in Latin America present challenges and opportunities for trade and investment in the region, as countries' different leaders focus on closing, opening or expanding certain markets. This shifting historical and political context must be assessed carefully with respect to the particulars of any particular deal or dispute, and caution is required in this regard. What is certain is that factors portend future disputes, and have implications for commercial and investment arbitrations.
Disruption and commercial arbitration
Building on historical examples of the use of arbitration in the region, the framework for commercial arbitration across the region was consolidated during and after the 1980s and 1990s. Over the past quarter-century, Latin America has broadly embraced commercial arbitration as an alternative to domestic courts to resolve disputes. Over the past 30 years, commercial arbitration has consequently become far more ubiquitous in the region's jurisdictions. Strong arbitral institutions have emerged and grown, and national legal frameworks have been enhanced to support arbitration in the region. In short, arbitration is now deeply entrenched in the private and public sectors in Latin America, and will be the key mechanism for international disputes arising out of unfolding transitions in the region.
The trends described above are likely to increase the range and number of disputes and hence commercial arbitrations stemming from international business transactions involving Latin America.
Latin American arbitral institutions: Continuity and growth in the face of change
Latin American legal frameworks for commercial arbitration mostly have been solidified, and regional arbitral institutions have emerged as robust leaders for the continued growth of the field as new types of disputes emerge. With the support of global arbitral institutions, Latin American jurisdictions began, toward the end of the 20th century, to create legal infrastructure to accommodate commercial arbitrations. As regulatory frameworks, they adopted the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), which provides a regime for the enforcement and recognition of arbitral awards within its 157 contracting states, and the 1975 Inter-American Convention on International Commercial Arbitration (Panama Convention). National laws were also enacted that follow the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration.
In 2011, the Institute for Transnational Arbitration (ITA), with White & Case LLP, undertook an unprecedented survey, to better understand the landscape of arbitration in Latin America. It focused on legal frameworks and institutions in the region. This survey discovered that regulatory and policy shifts toward globalization and free trade in the 1990s in Latin America was accompanied by an increase in arbitral institutions. More than half of Latin America's arbitral institutions were established between 1997 and 2002.
While most of these arbitral institutions resolve disputes between local parties, a significant and increasing number settle disputes involving foreign parties. In some, such as the International Center for Conciliation and Arbitration in Costa Rica and the Arbitration Center of the Peruvian American Chamber of Commerce Peru, cases involving foreign parties now make up a significant percentage of their caseload. In the same vein, while the majority of cases involve private parties, the percentage of public parties represented is growing steadily.
As disputes become more complex, they also tend to involve multiple parties. While most disputes in Latin America still involve only two parties, this is changing. Again, Brazil's Market Arbitration Chamber leads the region, with 80 percent of its caseload involving more than two parties. Overall, the trends uncovered in the ITA's study indicate that the rest of Latin America will soon see more complex disputes, as the nature of arbitration in the region becomes more multifaceted. Overall, the data in the inaugural study confirmed that Latin American arbitral institutions were becoming increasingly sophisticated and reliable.
Latin American "seats" of arbitration
As in the rest of the world, in Latin America international arbitration is the preferred method to resolve cross-border disputes. In recent years, Latin American countries have worked to modernize their legal frameworks to accommodate international arbitration and the arbitration of cross-border disputes.
The "seat of the arbitration" is critical to maximizing the efficacy of arbitration and avoiding the risk of jurisdictions with newer laws or less reliable enforcement. A party may be limited to seek to set aside an arbitration award at the domestic courts of the seat of arbitration. Accordingly, the law and practice governing how the courts of the seat handle set-aside proceedings is critical. In addition, the choice of the seat may affect other important considerations, such as confidentiality, the degree of judicial intervention in an arbitration proceeding, and whether an arbitral tribunal may issue or enforce interim measures. Choosing an appropriate seat of arbitration is therefore critical.
The most recent White & Case and Queen Mary University Survey confirmed that the preferred seats to arbitrate Latin American disputes in 2021 were Paris, New York, São Paulo, Singapore and Geneva. The Survey also showed that other seats were growing in reputation and popularity. For example, 2 percent to 4 percent of respondents named other cities in terms of arbitral seat appointments, including Washington, DC and Miami. Among those surveyed in Latin America, Paris (64 percent), New York (54 percent), and São Paulo (21 percent) were ranked as the three preferred seats. Miami (15 percent), Lima (6 percent) and Madrid (5 percent) were also among the eight preferred seats.
These Survey results show the continued trend of Miami as a preferred seat for Latin American arbitration. This can be attributed to the efforts of the local legal community to develop both the legal and institutional infrastructure to support the locale as a seat. For instance, in 2010, Florida implemented the Florida International Commercial Arbitration Act, a state law based on the UNCITRAL Model Law. Further, in 2013, the state created the International Commercial Arbitration Court, within the civil division of state courts—one of the few specialized courts in international arbitration in the US. The Florida Bar has also supported these developments, allowing foreign lawyers to practice arbitration hearings without being members of the Florida Bar.
Disruption provokes a new wave of arbitrations in Latin America, particularly in targeted sectors
In recent years, Latin American countries have attracted the interest of foreign companies that have begun developing very significant construction projects in the region. For example, Spanish construction companies are involved in the construction of new airports, highways, ports and railways throughout the continent including in Colombia, Peru, Chile, Mexico and Panama.31 China's involvement in the infrastructure development in Latin America is also prominent, with the country investing a total of US$86 billion in 59 construction projects in 2019.
While foreign construction projects are advancing full steam ahead, Latin American regulations of construction projects have lagged. Unsurprisingly, construction and commercial disputes are on the rise. In 2021, a Spanish newspaper article reported that more than €4 billion is at stake in commercial arbitrations in the region, arising between Spanish construction companies and Latin American entities.
Investment protections and arbitration remain critical to doing business across borders, and the rise of environmental, social and governance (ESG) issues portends future battlegrounds for investment disputes. ESG reporting and regulatory requirements are evolving rapidly and frequently differ significantly across jurisdictions and industries. This can lead to the disruption of existing commercial contracts, in turn giving rise to disputes. For example, the International Maritime Organization (IMO) (the specialized unit of the United Nations responsible for global shipping regulation) agreed at its last meeting in June 2021 to re-open discussions on putting a price on shipping companies' emissions.34 At least in its most ambitious forms, this proposal could radically overhaul the way in which ships operate.35 It is foreseeable that disputes will arise to determine who should shoulder the cost of innovation, policy implementation or even liability for non-compliance—for instance among shippers, fuel providers and other actors in the supply chain.
This is just one example of a raft of ESG policies with which organizations are expected to comply. This trend will draw further attention following the United Nations 2021 Climate Change Conference (COP26) in Glasgow in November.
Disruption and investment arbitration
Investor-state dispute settlement (ISDS) is a system to resolve disputes between foreign investors and host states. Consent to investment arbitration is given by the host state in an international investment agreement (IIA), which takes shape as a bilateral investment treaty (BIT) with another state, a free trade agreement (FTA), or a multilateral agreement such as the Energy Charter Treaty (ECT). Consent to investment arbitration may also be found in investment agreements concluded directly between the host state and the investor. International investment arbitration allows a foreign investor to seek redress for state conduct that has harmed it before a neutral forum, thereby bypassing national courts that might be biased toward their respective states and result in significant delays.36
While the substantive protections in each IIA may differ, the most common protections afforded to foreign investors are:
Protections of investments from expropriation
Fair and equitable treatment (FET)
National treatment, which ensures that foreign investors/investments will be treated no less favorably than their domestic counterparts
Most favored nation (MFN), which ensures that all foreign investors are treated equally
The freedom to transfer funds
Full protection and security of the investment
An investor can take advantage of treaty protections in various ways, for instance by structuring the investment in a manner that provides the best coverage. In many cases, company incorporation in a state that is party to an IIA suffices to establish corporate nationality that attracts the desired treaty protection.
Latin American countries are parties to hundreds of IIAs, which provide for investor-state dispute settlement proceedings, often at the International Center for the Settlement of Investment Disputes (ICSID) established under the auspices of the World Bank in Washington, DC. Given the continent's history of changing political economies, it is unsurprising that Latin American countries have been among the states that have faced the most claims at ICSID since it began operating in the 1980s. A 2017 report prepared by the Transnational Institute indicates, for example, that by 2017, 28 percent of respondents in ICSID cases were from Latin America. It further notes that the states facing the most claims in the region include Argentina, Venezuela, Mexico, Bolivia, Peru and Ecuador; and that in fact, taken together, "the number of claims against these countries accounts for 77.3 percent of the total number of claims against [Latin American] countries." In the past ten years, four of the 13 most frequent respondent states are Latin American.
Disruptions in Latin America have not meaningfully undermined access to investor-state arbitration, and they will likely generate more investment disputes in Latin America, as described below.
Access to international investment arbitration appears to be here to stay
During the 1990s, Latin American states entered into an array of IIAs as part of their policies of economic liberalization and deregulation. When several of these countries traded open-market economies for nationalist ones in the 2000s, countries like Argentina, Ecuador and Bolivia threatened to terminate IIAs. This caused some at the time to cast doubt on the future of investment treaties and investment arbitration in Latin America.
Bolivia, Ecuador and Venezuela did eventually terminate their investment treaties and withdrew from the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) in 2007, 2010 and 2012 respectively. Investment arbitration however, and international investment agreements in Latin America, have persistently stood the test of time. Latin American countries continued signing new investment arbitration agreements, even recently. Even those countries that favor anti-globalization participate in investment arbitration proceedings and generally comply with arbitral awards. Furthermore, given the presence of "survival clauses" or "sunset clauses" in the investment treaties of Ecuador, Bolivia and Venezuela, those countries continued facing investment-arbitration proceedings for years after they terminated certain agreements. (Survival clauses allow the BIT to continue to have a legal effect even after the BIT itself has been terminated, usually ranging from ten to 20 years.)
At the same time, the moves years ago by a trio of countries did not lead to a trend of disruption of access to investment arbitration. Indeed, Mexico itself became a party to the ICSID Convention in 2018 in the context of re-negotiations of NAFTA (whereas Mexico disputes previously were conducted under the ICSID Additional Facility Rules). Similarly, in 2021 Mexico conditioned any economic deal with Ecuador to that country's joining of the ICSID. For its part, Ecuador, which for the past decade embraced a state-centric model and denounced the ICSID Convention, recently re-joined the instrument, by signing the ICSID Convention in June of 2021. In summary, continuity of access to investment arbitration is likely.
Disruption provokes disputes and opportunities for investment arbitration
Given that Latin America's economies are not homogeneous, it is difficult to predict how current socio-political and economic trends are likely to influence challenges and opportunities to investment arbitration in the region. Some patterns can be identified, though, that might characterize the years to come.
Expropriation of private assets and nationalization of private industries is a recurring element of Latin American disputes over history, including with respect to states that effectively rejected globalization in the early 2000s. Some states, such as Bolivia, Ecuador and Venezuela, nationalized foreign investments, particularly in the oil & gas sector. In other countries and sectors, state conduct to the detriment of foreign investors has been more subtle and incremental. For instance, governments might promulgate measures purporting to protect the environment or some other public policy objective that, in effect, harm or discriminate against foreign investors.
With the return of many Latin American countries to nationalist economies and populist policies, threats to foreign investor assets loom on the horizon. While any particular country, or case, requires careful and particularized analysis, some trend lines are evident.
Chile: In May 2021, Chileans voted for a reform to end neoliberalism, which has been cited as the "left's biggest victory" since the end of Augusto Pinochet's dictatorship in 1973. Left-leaning parties won the elections on May 15 and 16, 2021 for local and regional offices, and won majority representation in the assembly that will draft Chile's new constitution. Such developments are possible signals of future state measures that impact foreign investment.
Colombia: Concerns over high unemployment, inequality and lack of police accountability prompted protests in 2021. Observers cite growing political polarization ahead of presidential elections scheduled in 2022. Some commentators note that Gustavo Petro is the "clearest candidate on the left without serious competitors on that side of the spectrum." Disruption of the Colombian macroeconomic model is in the range of possibilities.
Argentina: The cyclical nature of Latin America's political economies has played out starkly in Argentina. Current president Alberto Fernández previously served as Chief of Staff to both President Néstor Kirchner and his wife who succeeded him, President Cristina Fernández de Kirchner, and their populist left-wing brand of "Kirchnerism." When President Mauricio Macri succeeded Fernández de Kirchner as president and brought in a center-right government, Fernández and Fernández de Kirchner teamed up in 2019, with Fernández re-taking the presidency with the goal of returning a leftist agenda to office. In June 2020, President Fernández took a page from Vice-President Fernández de Kirchner's playbook when he expropriated crop trader Vicentin SAIC. The move provoked concerns of investors in the market, as Fernández had previously voiced his support for an increase of foreign direct investment in the country.
Peru: After relative continuity of, at least, macro-level support for pro-investment policies over many years, Peru has become a more complex jurisdiction and market. President Pedro Castillo suggested during his campaign that he would nationalize Peru's mines and concessions, and consider withdrawing from the World Bank arbitration system. The early days of his government have not definitively resolved these risk factors.
These developments are likely to lead to more investment disputes involving respondent states, such as Chile, Colombia and Peru, that faced comparatively fewer cases in the past than countries like Argentina and Venezuela.
This trend is already playing out. Indeed, as of January 2021, Peru rose to the top of the list of Latin American countries with the most pending ICSID cases, and there were 17 investor-state cases pending against Colombia.
The coronavirus pandemic may leave a footprint in the ISDS setting
Finally, as the coronavirus pandemic has adversely affected Latin American economies, governments are looking for ways to recover their economies, at times by taking steps that will impact the private sector and investment. It is plausible that a fresh wave of investor-state arbitration cases against Latin American sovereigns will arise in response to these measures. Although it may be too early to conclude whether or to what extent pandemic-related claims will emerge in the coming years, the measures taken by certain Latin American countries in response to the pandemic may be in breach of investment-treaty protections and guarantees.
Indeed, already one state–Chile–is facing arbitration before the ICSID for claims related to the pandemic. On August 13, 2021, the ICSID registered a claim initiated by a French consortium against Chile claiming US$37 million in losses due to the COVID-19 pandemic. According to the French investors, the consortium saw profits fall by 90 percent in 2020, as Chile lost 19 routes and 630 weekly frequencies since the pandemic broke out.60 In June 2020, a road concessionaire notified Peru of a potential claim related to certain emergency measures taken during the pandemic affecting toll roads.
On balance, disruption in Latin America is likely to provoke new disputes, while maintaining the robust commercial and investment arbitration frameworks that did not exist decades ago, but are now firmly established in the region.
Jonathan C. Hamilton is Head of Latin American Arbitration at White & Case. Ank Santens is a partner in the Firm's International Arbitration Practice, and heads the Firm's Americas Disputes Section. Estefanía San Juan is an associate in the Litigation and International Arbitration Practice Groups.
This article reflects the additional authorship of Vivi Mendez.
This article is based on a new report from White & Case. Republished with permission.