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ARBlog International Arbitration News, Trends and Cases

The business of arbitrating in Latin America

On November 4, 2013, a session at the 11th annual ICC Conference on International Arbitration in Latin America discussed recent trends of arbitrating disputes in Latin America.

The panel started by discussing the issue of treaty planning vs. treaty shopping, and how nowadays companies are increasingly analyzing investment treaty protections during early stages of the investment. The panel also discussed when corporate restructuring would be considered legitimate, in case treaty planning was not undertaken before the investment was made. In this case, tribunals might look at the date on which the dispute arose and compare it with the date on which the investment was made. In practice, however, this is not an easy task, especially in cases of creeping expropriation, where it is not clear when the dispute arose along the spectrum of government interference. Some other lingering questions include whether the change of ownership would still be considered legitimate if there is no real financial or other contribution by the new investor.

The panel then reflected on the issue of stabilization clauses and their purpose. While some considered that their objective is to protect the investors as the weaker part in an asymmetrical relationship with the host state, others considered that the true purpose of these clauses is to protect the economic bargain of the contract, and not the parties to it. Therefore, if a change of circumstances shifts the balance in favor of the investor, the state would be able to reduce the price of the contract, thus denying the investor this incidental benefit.

Next, the panel examined the risks of doing business in Latin America. Investors are mainly concerned about regulatory, environmental, political, social, administrative-related, and corruption risks. Regarding the latter, the panel warned that some investment tribunals may decline to hear investors’ claims when the investment was acquired through corrupt means. The difficulty then comes when local markets make it impossible to invest without participating in locally acceptable corrupt practices.

For US investors, however, corruption risks have been greatly diminished by the Foreign Corrupt Practices Act, which compels US companies investing abroad to keep very tight internal controls. The biggest concern is now political stability. Venezuela, Bolivia, Ecuador and Argentina have turned on investors, something hard to believe in the late 1990s. In contrast, investors trust the rule of law in Uruguay, Chile and Colombia, which are perceived as stable economies in the region. In Brazil’s case, the attractiveness of the market is countered by the levels of administrative arbitrariness, which make it difficult to predict the cost of doing business.

Finally, the panel commented on the risks of domestic arbitration regulations contaminating international arbitrations in the region, especially in dualist systems where there is a great deal of participation of domestic arbitration laws. However, the panel commented that US courts are not without blame when it comes to contaminating international arbitration, as they too can be difficult and challenging.