Amendments to the Peruvian Arbitration Act: The good, the bad and the ugly

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Adrián Simons Pino
Simons Abogados, Lima, Perú
adrian.simons@simonsabogados.com

Verónica de Noriega Madalengoitia
Simons Abogados, Lima, Perú
veronica.denoriega@simonsabogados.com

In order to standardise the applicable law regarding international arbitration, various countries modernised their arbitration regulation by basing them on the 2006 UNCITRAL Model Law on International Commercial Arbitration. Peru was not the exception to this trend as, in 2008, the Peruvian Arbitration Act, Legislative Decree No 1071 was promulgated. This law was largely based on the aforementioned UNCITRAL Model Law of 1985 with the amendments of 2006. It was a great step for the Peruvian arbitration community, at both national and international level, as it also consolidated Peru as a very attractive arbitral destination for international arbitration. To this, it is also worth pointing out that, the possibility of judicial review of an award was largely limited to what was strictly provided in the law. Therefore, over the last few years, at an international level, Peru has been able to become a reliable destination for investments, which were necessary for its economic development.

Since coming into force 12 years ago, the Peruvian Arbitration Act has been modified only twice. This is because, in general terms, the law has been working positively for both national and international arbitration. The modifications have essentially been attempts to regulate further aspects regarding the following:

• special arbitrations, such as: (a) those regarding public procurement contracts; or (b) ‘popular arbitration’ (arbitration to all citizens at a reasonable cost);¹

• the registration of precautionary measures and awards in the Peruvian Public Records.

Regarding the mentioned modifications, the authors highlight the laudable legislative intention of seeking greater transparency and security in arbitration proceedings. These actions are a response to recent events involving corruption in Peruvian arbitration, which may be isolated and should not stain the great strides achieved over the past few years in arbitration in Peru. However, a number of mistakes were made through the efforts to amend the situation, which are concerning and further discussed below.

First alert

Consider the amendments contained in the Legislative Decree No. 1231 (published on September 20th, 2015), which mainly concern three issues: popular arbitration; automatic undue precautionary measure; and ‘the icing on the cake’.

Popular arbitration (amendments to the first ‘Disposición Final’ of the Arbitration Act)

While the original rule was more of a tone-setter for what an accessible and popular arbitration should look like,² the new regulation added more concrete rules regarding what qualifies as popular arbitration and eliminated the possibility of arbitration in equity (amiable compositeur), establishing institutional arbitration as the only legal possibility. In other words, ad-hoc arbitration and arbitration in equity were discarded, which were the necessary ingredients for this kind of (low-cost/easy-access) arbitration to blossom and reach its intended public.

Automatic undue precautionary measure (addition of article 39.5 to the Arbitration Act)

This addition provided that in any claim or counterclaim dealing with matters that could be registered with the Peruvian Public Records Office (such as property rights), the tribunal was mandated, ex officio, to register it. Given that, in Peru, the registration of a claim with the Public Records Office is a type of interim measure, this innovation meant casting aside fummus boni iuris (likelihood of success on the merits) as well as periculum in mora (risk of damages not being adequately compensated) as elements to be consider for the issuance of an interim measure. Thus, the addition of this article to the Arbitration Act created a completely unconstitutional rule: an interim measure issued without hearing the affected party, violates equality, defence and the right to one’s day in court, which are building blocks of the preliminary-protection system. Indeed, here is a clear violation of the rights of defence and due process upheld by the Peruvian Constitution (article 139.3). For the same reasons, it also appears to go against article 14.1 of the International Covenant on Civil and Political Rights (regarding equality under the Law) and articles 8.1 (regarding fair trial) and 25.1 (regarding judicial protections and appeals) of the American Convention on Human Rights.

This new regulation was advocated for on ‘the purpose of safeguarding legal certainty, preventing the commission of fraud and the violation of the rights of third parties through the improper use of the arbitration institution […]’. Nevertheless, laws cannot be passed as a negative, nor can they disable legal tools, as a precautionary measure, while seriously undermining constitutional rights.

The icing on the cake (addition of article 56.3 to the Arbitration Act)

It was provided that ‘In order for the award which includes a non-signatory party to be registered with the Public Records Office […], the award must be expressly reasoned’. The Peruvian Arbitration Act pioneered in the legislation of the doctrine created by the Dow Chemical leading case by including an article (14°) that defined non-signatory parties. Such an achievement is being overshadowed by the modified regulation. According to the law, the Peruvian Public Registrar will be in charge of evaluating whether the award is reasoned and therefore allow its registration. This means that a public official (registrar) will be empowered to assess the motivation and reasoning of an Arbitral Tribunal. This is also clearly unconstitutional³ and goes against what the Peruvian Arbitration Act stands for, which is the basic principles of party autonomy and freedom from undue interference from the state.

Second alert

Modifications contained in the Emergency Decree No 020-2020, published on January 24 2020, passed a number of undue and unconstitutional advantages in favour of the state, when it intervenes as a party in an arbitration.

Requirement to give an unconstitutional letter of guarantee when filing for  precautionary relief measures:

The Emergency Decree added a paragraph to article 8.2 of the Arbitration Act which provided that, in arbitrations regarding public procurements, when a contractor wants to request an interim measure, they may only do so if they offer a bank guarantee letter or a bond equivalent to ten per cent of the total amount of the contract. Although this paragraph is added to the provision regarding judicial aid before the arbitral tribunal is formed, it might be inferred that this new requirement also applies to interim measures granted by the arbitral tribunal.

The forgotten

the Peruvian Constitution, specifically the right to effective judicial protection recognised in its article 139.3, since the amendment, not only means higher costs for private subjects, but erodes the right to a due process that requires interim measures to ensure actual compliance. Therefore, legislators cannot eliminate or restrict the possibility of requesting interim measures, since this would imply depriving the parties of an essential guarantee that rests in the right to due process.⁴

What else has been forgotten?

International courts, like the Court of Justice of the European Union, and Constitutional courts, like the Spanish courts, have recognised precautionary protection as a constitutional right. It is worth noting that this right has also been recognised by the Peruvian Constitutional Tribunal. Despite all these, the aforementioned legislative modification affected those important recognitions by limiting such constitutional right.

Even more, in public procurement contracts, the state comes into the contract as a commercial party, stripped of its ius imperii, and behaves accordingly. If suddenly, one party receives a privileged treatment in such circumstances (and imposing a financial burden to the opponent for seeking an interim measure is certainly a privileged treatment), the whole balance needed for a contractual relationship to flourish crumbles. Especially when arbitration is the only possible mechanism for solving disputes with a state entity (as it happens in Peru).

Unexplained results

In February 2020, the Permanent Commission of the Peruvian Congress was summoned to verify whether the Emergency Decree being discussed here met the constitutional parameters. Representatives of the most important arbitration centres in Peru were invited to the mentioned parliamentary session to voice their opinions but, unfortunately, their claims landed on deaf ears (resulting in unconstitutional rules in the Peruvian Arbitration Act, restricting the possibility of requesting interim measures).

What is left to do?

It is possible that a judge or an arbitrator may apply diffuse control of constitutionality (judicial review) and declare this regulation to be incompatible with the Constitution. This faculty has been ratified by the Peruvian Constitutional Tribunal in the precedent contained in Case No 142-2011-PA/TC: ‘the guarantee of diffuse control of constitutionality […] may also be exercised by the arbitrators in the arbitration jurisdiction’.

The cherry on top this convoluted reform

Despite the efforts of the Peruvian arbitral community to separate between litigation and arbitration and, thus, avoid applying litigation-specific institutions to arbitration, the concept of abandonment of procedure was introduced in arbitration – adding article 50(A) to the Arbitration Act – for cases in which the state is a party. Therefore, it was decreed that, when no motion has been introduced to promote the continuation of the proceedings for a period of four months, the Arbitral Tribunal must declare abandonment ex officio, or at the request of a party, and terminate the proceedings. And not only that: it has also been provided that, if the arbitration is institutional, this declaration can be made by the General Secretariat of the arbitration centre in which the arbitral proceedings are being held. Meaning that, someone who is not an arbitrator will be invested with the power to end arbitration proceedings. This is something previously unheard of.

Conclusion

To conclude, a wake-up call to the Peruvian legislative system is necessary, urging it not to further deviate from the constitutional principles on which the arbitration institution is set. The achievements of Peruvian arbitration should not be overshadowed by changes based on ‘mere practicality’ for political expediency. It must be kept in mind that the law is a science and its growth and development must be orderly and respectful of the principles of said discipline. Arbitrators and practitioners must not become mere operators of a system, without questioning the aforementioned issues. Patching up the Arbitration Act like this, affects the (until now) strikingly resilient Peruvian Arbitration Act.

Notes

1. This is an unknown and rarely used type of arbitration, that has not been regulated, despite the fact that more than five years have passed since its approval, meaning that, unfortunately, the intention of bringing arbitration to all citizens at a reasonable cost has only remained a well-intentioned, but nevertheless idle, attempt.

2. Declaring peaceful resolution of conflicts as a national interest and ordering the Ministry of Justice to promote: (i) the use of arbitration at reasonable costs; and (ii) the creation of arbitration centres.

3. Article 139.1 of the Peruvian Constitution gives arbitration equal footing with judicial decisions, while art 139.2 states the independence of justice from administration or legislative authorities.

4. See Joan Picó i Junoy, Las garantías constitucionales del proceso, 2nd edn (Barcelona: Bosch Editor 2012), p 90.

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