PERU APPROVES ARBITRATION REFORM ON DISPUTES INVOLVING STATE ENTITIES

On January 24, 2020, the Executive Branch of Peru approved the Emergency Decree No. 020-2020 (“Emergency Decree”), introducing amendments to the rules on international and domestic arbitration contained in Legislative Decree No. 1071 (“Peruvian Arbitration Law”).

Interestingly, the modifications provided by the Emergency Decree only concern arbitration proceedings in which the State is involved as a party, apparently as a response to the corruption scandals in the region. The Emergency Decree suggests that the new amendments are aimed to strengthen arbitration in the country and avoid “bad habits” when the State is involved.

The decree was approved without the involvement of the Peruvian Congress, which was dissolved last year in September – and congressional elections were still to be held at the time of its enactment. While the stated intention behind the amendments is to be welcomed, some of the new provisions have already raised concerns among the arbitration community in the region. These concerns are discussed further below.

Background

In Peru, domestic and international arbitrations are governed by the Peruvian Arbitration Law which is based on the 2006 UNCITRAL Model Law (with certain modifications). Adopted in 2008, following extensive deliberations by the Legislative Branch and consultations with experts in the field, the Peruvian Arbitration Law is viewed as a modern arbitration law in the region.

While introducing a number of important improvements to the arbitration regime in Peru, the Peruvian Arbitration Law did not contain specific provisions regarding arbitration proceedings with the State. This was emphasized in the Preamble of the Emergency Decree, which states that, while the Peruvian Arbitration law is suitable for arbitrations between individuals, said law did not consider the particularities of the proceedings where the State was a party. As such, it was “[…] not adequate to ensure transparency and to avoid acts of corruption or situations that affect the interests of the State that can cause serious economic consequences.”

Amendments introduced by the Emergency Decree

The main amendments introduced by the Emergency Decree are as follows:

  • Ad-hoc and institutional arbitration: when the State is involved, the Emergency Decree establishes that it is possible to have institutional or ad-hoc arbitration – however, the latter is only possible when the amount in dispute does not exceed a certain very low amount (approximately US$ 13,000).
  • Provisional measures: a party seeking a provisional measure against the State must provide security of an amount not lower that the performance bond under the contract. Such bond shall not be subject to any condition and shall continue for the duration of the arbitration proceedings. The provision is not clear on whether this is a requirement applicable when the provisional measure is requested to the arbitral tribunal or a Peruvian court.
  • Conflicts of interest: addressing concerns about conflicts of interest in the appointment of arbitrators, the Emergency Decree prohibits a person who has been previously involved in the same dispute as lawyer of any of the parties or as an expert, or has personal, labor, economic, or financial interests that could be in conflict with the exercise of his or her arbitration function (either as lawyers and/or experts) from being appointed as arbitrator.
  • Challenges and removal of arbitrators: where a party challenges an arbitrator and the other party does not agree with the challenge and the arbitrator rejects the challenge, remains silent, or does not resign, the challenge shall be decided by the arbitral institution administering the arbitration. In domestic arbitrations, if there is no arbitral institution administering the proceedings, the decision will be referred to the corresponding Chamber of Commerce located in the arbitration seat or in the place where the arbitration agreement was concluded. In case of an international arbitration proceedings, the Chamber of Commerce located in the arbitral seat or the Lima Chamber of Commerce (if no arbitration seat was agreed by the parties) will decide on the challenge. Any agreement providing that other members of the arbitral tribunal will decide on the challenge is void.
  • Transparency: the arbitration proceedings as well as the award are to be made public once the proceedings are concluded – although there are exceptions to this rule. Where the parties have agreed to institutional arbitration, such institution’s rules will apply regarding publication. If the arbitration is ad-hoc, such obligation is assumed by the State entity participating in the arbitration proceedings.
  • Abandonment of the case: if no action is taken to pursue and advance the arbitration proceedings involving the Peruvian state in four months, either party may declare that the case is abandoned. The “abandonment” of a case ‒a figure borrowed from the Peruvian Civil Procedural Code− has the effect of concluding the process notwithstanding the parties’ rights.
  • Damages and costs: in the arbitrations in which the Peruvian State is involved as a party, arbitrators are not allowed to order administrative fines or concepts other than the costs of arbitration. The provision does not clarify which other concepts would be excluded.
  • Setting Aside: the Peruvian Arbitration Law already provides that if the award is set aside because a party was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case, the arbitral tribunal shall re-initiate the arbitration proceedings at the procedural stage in which the party’s defense right violation occurred.  In those cases, the Emergency Decree adds that either party may request the replacement of the arbitrator that it had appointed, or request the disqualification of the arbitrators who issued the award.

Comment

Although the reforms introduced by the Emergency Decree are portrayed by the Executive Branch as a way to increase transparency and the integrity of arbitration when State entities are involved, they are not exempt from criticism – especially when it appears that the Emergency Decree was adopted without  debate by Congress, and no consultation was offered with commercial parties who may contract with the State.

One of the main criticisms is the decision to incorporate these changes within the arbitration law rather than to produce a consolidated legal framework for disputes involving the State.  It has also been suggested that the provision enabling the parties to request the disqualification or replacement of an arbitrator when the award has been set aside due to the lack of proper notice or inability to present the case could be deemed a disguised appeal given that it allows the parties to have a new tribunal deciding on the same dispute. In addition, some of the provisions have not been clearly drafted, which can create room for disputes regarding their interpretation.

The provisions of the Emergency Decree will be tested once they are concretely applied to arbitration proceedings with State entities. Only at this stage will it be possible to confirm whether the concerns raised by the arbitral community are justified.

For more information, please contact Florencia Villaggi, Of Counsel, Lucila Marchini, Associate or your usual Herbert Smith Freehills contact.

Florencia Villaggi
Florencia Villaggi
Of Counsel
+1 917 542 7804
Lucila Marchini
Lucila Marchini
Associate
+1 917 542 7850