South spark: international arbitration in Latin America

Latin America has finally realised that it needs to start trusting international arbitration. By Ignacio Suarez Anzorena and Christian Leathley

For historical reasons, Latin American countries used to distrust international arbitration. The reason for such distrust was the perception that many international arbitrations and claims commissions established in the late 19th and early 20th centuries were the reflection of military or political pressure exerted by the superpowers of the time.

This phenomenon was commonly referred to as ‘gunboat diplomacy’. It did not result in neutral tribunals rendering fair decisions. The famous Calvo Clause was the popular waiver of diplomatic protection in contracts with state parties. The Calvo Clause (upholding equal treatment and the submission of disputes to local tribunals) constituted the defensive reaction to the perceived threat of international arbitration, and was incorporated not only into legislation but also into the constitutions of several countries in the region.

During the past 20 years, the panorama of international arbitration has changed dramatically in Latin America.

In the area of international commercial arbitration, most countries in the region (with the exception of Argentina and Uruguay) have modernised their legislation in accordance with the United Nations Commission on International Trade Law (Uncitral) model. Today, all countries in Latin America have ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention).

The adoption of the New York Convention has been an important litmus test for the way arbitration is being received in the region. In fact, the resulting change in attitude towards arbitration has been quite dramatic. For example, until recently, Brazil could have been described as one of the most arbitration-phobic countries. However, in 1996 the country passed a reasonably modern arbitration law. It signed and ratified the New York Convention in 2002 and is developing case law that is quite supportive of arbitration.

The international and national regulation of foreign investment is the other area in which the change in attitude towards international arbitration is apparent. With the exception of Brazil, governments in the region have entered into many international investment treaties aimed at promoting and protecting foreign investments. These treaties tend to provide for international arbitration as the method by which disputes between the investors and the host government shall be resolved.

As a result of these investment treaties, numerous arbitrations have been commenced against Latin American governments, most notably the Argentine Republic in the wake of the 2001 economic crisis. The typical venue for these arbitrations is the International Centre for Settlement of Investment Disputes (Icsid), which was established in 1965 by the Icsid Convention and has its seat in Washington DC.

Some governments have reacted negatively to both the increase in investment arbitrations against them and Icsid as an institution that is seen to foster the increase. In May 2007, Bolivia announced its withdrawal from the Icsid Convention. Various other countries have threatened the same, including Venezuela. Ecuador threatened to not renew its bilateral investment treaty with the US, and Argentina threatened that its own courts would review the awards rendered against it by Icsid tribunals to determine whether they are enforceable.

Notwithstanding some of these political machinations against Icsid and investment arbitration, it is evident that international arbitration as a broader discipline for the resolution of commercial disputes is consolidating in the region, and on the whole, most countries are aware of the demand foreign investors now place on the need to have access to neutral forums to resolve disputes.

This is regarded as an essential element in fostering much needed economic integration and cross-border investments. The respect shown by governments to the enforceability of arbitral awards is a critical factor when measuring political risk.

Ignacio Suarez Anzorena is special counsel and Christian Leathley is counsel at Clifford Chance