International Arbitration 2019

Last Updated August 08, 2019

Panama

Law and Practice

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FABREGA MOLINO has 22 lawyers and 102 employees, and acts for a significant number of clients, including multinational corporations and institutions, shipowners and agents, international law firms, family businesses, high net worth individuals, major international groups, holding companies, banks and financial institutions, as well as aviation and pharmaceutical companies. Its lawyers are members of the most pre-eminent international associations, and represent clients in commercial and investment arbitrations concerning a wide range of industries. The firm’s dispute resolution lawyers are fully trained.

In the Republic of Panama (RoP), the use of arbitration as a means of conflict resolution is increasingly common.

Similarly, the City of Panama ("CoP") is used as the seat of international arbitrations. As will be explained later, arbitration was even included in the tax legislation in order to solve the conflicts that arise between the administration and the taxpayers. The grounds for this is the constitutional protection of arbitration; indeed, article 202 of the constitution states that arbitration agreements that incorporate the principle of competence-competence will be recognised.

The use of arbitration in the domestic sphere is increasingly widespread, and is seen an alternative to the collapse of the judicial system. At the international level, there is an increase in arbitrations from the region, potentially due to the following three factors:

  • the modernisation of the RoP arbitration law, which was taken from the UNCITRAL Model Law ("LMU");
  • the RoP is a hub for regional flights; and
  • there is a high level of access to communication in the RoP.

The industry that most frequently uses the arbitration mechanism is the construction industry, and activities derived therefrom.

There are two arbitration administration centres in the COP. The oldest is the Conciliation and Arbitration Centre of Panama ("CeCAP"), which is attached to the Chamber of Commerce, Industries and Agriculture of the CoP. The second is the Conflict Resolution Centre ("CESCON"), which is linked to the Panamanian Chamber of Construction. The CeCAP manages a greater number of arbitrations than CESCON.

In addition to the constitutional provision mentioned above, arbitration in Panama is regulated by Law 131 of December 31, 2013 ("L131/13"), which is based on LMU according to its modified version of 2006. 90% of LMU was incorporated into L131/13. A remarkable feature of the Panamanian arbitration regime is that the parties that enter into an arbitration cannot previously renounce the recourse to annulment of the award that is issued.

Since L131/13 came into force, no changes have been made to the national regulation.

The essential requirements for an arbitration agreement to be executed are that it is recorded in writing, and that the unequivocal decision of the parties to resort to arbitration to settle the dispute is established in its text. It should be noted that L131/13 has a provision for arbitration agreements by reference.

In accordance with L131/13 (art. 4), matters of free disposition, in accordance with the law, may be submitted to arbitration, as may those matters provided for in international agreements or treaties. Such matters can in no way be related to public order (public policy), be it protection, economic or co-ordination – ie, matters relating to the performance of public powers or those that derive from the functions of protection of persons or that are regulated by imperative norms of Law. The recent issue of Law 76 of 2019 (L76/19) is important to highlight, article 360 of which allows for arbitration in tax matters. The relevance of this regulation is the possibility to submit public order-related matters to arbitration. According to L76/19, the arbitration trigger is the taxpayers' request for arbitration to the tax authority, which immediately obliges the tax authority to join the arbitration proceedings. The request must be filed before the tax authority; the arbitration could be ad-hoc or institutional. The award will always be binding by law, so any equity award is forbidden. As a characteristic note, each member of the arbitration panel must be a lawyer admitted in the RoP.

Two kinds of tax matters are eligible for arbitration:

  • matters where the amount of the tax liability is a minimum of USD100,000; and
  • conflicts that arise out of transfer prices and international taxation.

Tax arbitration is an exceptional kind of arbitration; there is no general rule. Actually, the rules for tax arbitration have been challenged as being unconstitutional, but, at the time of writing, no judgment has been passed on the matter.       

According to L131/13 (art. 17), if an arbitration agreement exists, the courts of justice must refer the parties to arbitration; this way, the judges leave it to a party to take the initiative to commence arbitration. The courts' respect for this legal provision has been adequate. On the other hand, L131/13 does not foresee that, before a party waives the right to arbitration, the courts of justice may order such party to observe the arbitration agreement. In the aforementioned regulations, it is stated that, if one of the parties wishes to resort to arbitration, the arbitration process will proceed despite the reluctance of the other party, if it is administered by an arbitration administrator or arbitration centre. If it is an ad-hoc arbitration, the party that needs to resort to arbitration may request an arbitration administrator or arbitration centre entity to conduct the arbitration and, where appropriate, arrange for the arbitration to be held (art. 22).

The rule regarding the autonomy of the arbitration agreement was incorporated in art. 30 of L131/13, so that if the contract in which it was agreed is declared null, such declaration does not affect the validity or effectiveness of the arbitration agreement.

The parties may designate any person as an arbitrator, regardless of whether or not they are nationals of the RoP. The general rule is that the persons appointed as arbitrators are lawyers because the arbitrations are conducted by law, unless the parties expressly agree in the arbitration agreement that the arbitrators' decision is ex aequo et bono (art. 56). In any case, L131/13 (art. 21) states that the following people may not act as arbitrators:

  • individuals who have seriously attacked the Code of Ethics of any arbitration entity, national or international; and
  • individuals who have criminal convictions for the crimes of prevarication, falsehood or fraud.

If the parties cannot agree on the arbitral tribunal, mainly due to the reluctance of the defendant, L131/13 does not establish that the party that requires the arbitration can go to the courts to request it. In such cases, the remedy provided for in L131/13 (art. 22) is that any arbitration administrator entity can be contacted, even if it is international, which means that, if it is not located within the RoP, it can proceed with the integration of the respective arbitral tribunal. If the defendant is still reluctant, the arbitration will continue until the award that ends the arbitration is issued.

It is not anticipated that courts of justice may appoint arbitrators.

L131/13 establishes two reasons for recusing an arbitrator:

  • if there are justified doubts regarding their impartiality or independence; or
  • if the designated person does not have the qualifications agreed on by the parties (art. 25).

In addition, a person already designated as an arbitrator can be removed from their role as arbitrator if, for reasons of fact or law, he cannot continue with his role as arbitrator, or if he does not perform his functions as an arbitrator within a reasonable time (art. 28).

For arbitrations with legal awards, the arbitrators must be practising lawyers, either Panamanian nationals or foreigners. In cases of arbitration ex aequo et bono, the arbitrators are not required to be lawyers. Regarding independence and impartiality, the person nominated as an arbitrator is required to disclose any condition or circumstance that may affect their independence or impartiality in the arbitration for which they have been nominated.

Certain matters or conflicts cannot be resolved through arbitration. L131/13 does not include a list of these subjects, but at least the following events can be understood to be excluded from arbitration:

  • conflicts arising from the faculties or duties of the State, such as the direction of economic policy or diplomatic relations. In spite of this, in a recent modification of the tax system, the possibility was created for taxpayers to submit their disputes with the tax collection entity to arbitration, as regulated by L76/19. However, this norm has been questioned as unconstitutional, and the authorities have not yet put the law into effect;
  • conflicts arising from the application of norms aimed at protecting disadvantaged people, such as the protection of minors, consumer protection, and labour or criminal cases;
  • conflicts arising from the regulation of the essential institutions of society, such as the civil status of persons, their birth or death; and
  • conflicts over which there is a previous decision with the authority of res judicata.

In the RoP, arbitration is protected as a mechanism to settle disputes by the Political Constitution (art. 202), which also establishes that the arbitration courts will decide on their competence in each specific case.

The general rule in the RoP is that courts of law cannot decide on the competence of an arbitral tribunal. By the constitutional rule, only the arbitration tribunal is capable of determining its own competence. However, in a specific case, when the arbitral tribunal has decided on its competence, the party that does not agree can challenge said decision before the Fourth Chamber of the Supreme Court of Justice ("Fourth Chamber") by means of an annulment motion for the award.

The opportunity to file a motion for annulment against the arbitrator's decision for lack of competence can be tried on two different occasions:

  • once the tribunal has been constituted and has pronounced its decision on its own competence; or
  • when the court issues the award that ends the arbitration.

When examining the allegations requesting the annulment of the award, the Fourth Chamber must strictly abide by what is established in L131/13 (art. 67) as specific grounds for annulment. Therefore, the standard of legality examination is deferential, in the strong sense of the word.

The courts of justice are obliged to refer arbitration on any party who files an action in violation of the arbitration agreement. This translates into not admitting the demand or petition in question; if the court does admit it, the party will cease its jurisdiction and procedure as soon as it becomes aware of the violation, whether the counterparty makes it known to it, or whether they notice it themselves.

L131/13 does not establish the possibility of involving third parties in arbitrations, be they international or domestic. However, it is very common for requests to be raised that the arbitration includes a third party as a defendant. In such cases, the arbitral tribunals have mostly accepted those petitions or demands, based on the fact that the participation of the third party is necessary to decide the question raised as the object of the conflict. It is very common for insurance companies that have acted as guarantors of the defendants to be required as third parties, as well as in long-term relationships, where, due to this condition, there have been successors in one of the parties. After L131/13 came into force, the Fourth Chamber has been permissive of those events and does not accept that those third parties were judged by an arbitral tribunal without competence to do so.

In CeCAP and CESCON regulations, third parties are expected to participate as procedural parties.

In the Panamanian arbitration regime, the plaintiff is expected to obtain interim relief. The parties are also allowed to agree that precautionary measures will not be taken (art. 33). There is no catalogue of classes of precautionary measures that can be requested; the general rule is that it can be of any type, provided that it serves to guarantee the effects of the arbitration award that will be issued, including the preservation of evidence. The precautionary measures can be issued in domestic and international arbitrations, and they can be executed in Panama if they were issued by a foreign arbitral tribunal (art. 42).

The measures can be ordered by the arbitral tribunal itself or, if the tribunal has not been constituted (art. 33), they can be requested and obtained by order of a court of justice (art. 35), who will refer the parties to arbitration once he has made the ordered precautionary measure. When the arbitral tribunal is constituted, only the tribunal may order precautionary measures. To make these measures effective, the arbitral tribunal can request assistance from the courts of justice (art. 42). In any case, the precautionary measures granted by Panamanian justice tribunals before initiating the arbitration will have to be those listed in the law of civil judicial proceedings, and will be processed in accordance with its rules (art. 35).

L131/13 does not contain any regulation on emergency arbitrators. However, if the arbitration agreement adopted by the parties refers to the regulations of the International Chamber of Commerce ("ICC"), the arbitration may be presided over by an emergency arbitrator, pursuant to its powers, including that of adopting precautionary measures.

When declaring a precautionary measure, the arbitral tribunal may require the petitioner to deliver security for costs (art. 39). The main reason for this faculty of the arbitral tribunal is that LMU has this disposition. On the other hand, RoP has an important tradition of asking for a security cost for all kind of precautionary measures, so this rule is an innovation for Pananamanian laws.

If the precautionary measure is requested and obtained before a court of justice, a bond or security cost shall be required as a prerequisite for ordering the requested precautionary measure. This is due to the fact that, in civil suits, a security for costs is required before a precautionary measure can be ordered.

The main rules of arbitration in Panama are as follows:

  • Article 202 of the Political Constitution of the RoP;
  • L131/13;
  • Law 5 of October 25, 1983, adopting the New York Convention on the recognition and enforcement of international awards; and
  • Law 11 of October 23, 1975, by which the Inter-American Convention on International Commercial Arbitration is approved.

Subject to the LMU, L131/13 does not include regulations on what steps the arbitration process should follow. However, it does state that such steps will be determined by the parties, or by the decision of the parties to avail themselves of a regulation of a national or foreign entity that administers arbitrations (art. 46). Notwithstanding this, L131/13 expressly requires that the parties should be treated equally, and each given the full opportunity to defend their rights (art. 45).

The arbitrators have the following powers:

  • to decide precautionary measures;
  • to direct the arbitration proceeding; if there are no rules established by the parties or if there are events not foreseen in the rules, they can resolve the gaps with their decisions;
  • to dictate the award, its clarification or the complementary awards; and
  • to join third parties to the arbitration in progress.

The arbitrators have the following duties:

  • to attend to the arbitration;
  • to be impartial and independent;
  • to issue the award within the established deadline or within the terms established in the respective regulations; and
  • to behave in an ethical and transparent manner.

No special requirement is imposed in L131/13 on the representative of the parties. The only requirement is that the representative is designated by the party it will represent (art. 9).

The parties can use any means of proof. In accordance with L131/13, the arbitrators decide whether to admit the evidence offered by the parties, and whether to assess it. Even the arbitral tribunal can decree ex officio evidence. Under the different regulations that are applied, or directly, the parties can regulate what type of evidence they will provide, the opportunities to do so and the system for assessing the evidence presented (art. 53).

In terms of evidence, L131/13 does not contain any difference between domestic or international arbitration. The rules on evidence are not contained in the law, which leaves that aspect to the agreements of the parties and, where appropriate, to the regulations of the arbitration administration entities to which the parties apply. This rule applies to domestic and international arbitrations.

The arbitral tribunal has the power to compel the parties to comply with the evidentiary agreements or with the evidentiary rules adopted by the parties or by the court itself, including the power to compel the parties to produce and deliver the documents required as evidence or information about it (art. 53). Likewise, the arbitral tribunals have the power to request the courts of justice to practise probative means in a coercive manner when they so determine (art. 54).

L131/13 does not include any rule about the arbitrators' duty of confidentiality regarding the matter that is subject to its decision. However, both the CeCAP and CESCON regulations expressly establish such a duty of confidentiality. Since the duty of confidentiality does not weigh on the parties, they can use the evidence or information obtained in a specific arbitration in other arbitrations.

An award is subject to the following three requirements (art. 60):

  • it must be in writing and signed by the members of the arbitral tribunal – if there is a discrepancy between the arbitrators, the president or the arbitrator may adopt the award on his own, and it will have value with his signature alone;
  • the arbitrators must state the grounds on which they adopted the decision contained in the award – ie, the reasons upon which it is based. This rule applies even in cases where the parties have agreed an award under an ex aequo et bono; and
  • the award must include the date and place where it was rendered.

For international arbitrations, the law does not establish a deadline for an award to be issued; the time to issue the award will be established by the parties or by the rules of the arbitration centre selected by them. In domestic arbitration, L131/13 fixes the deadline to issue the award as two months after the proceedings have ended, which can be extended for another two months at the request of the arbitrators.

There is no limit or restriction on the type of remedy, declaration or sentence that may be decreed by an arbitral tribunal. The decisions adopted by an arbitral tribunal in the award will depend on the law used to render the award.

The regulations of CeCAP and CESCON expressly stipulate that any award must include an order to pay the legal costs. The recognition of interest usually depends on the applicable law for the decision of the conflict. In domestic arbitration awards, there is generally an order to pay costs and interest, including for the expenses of the arbitration, such as managing fees and flights, or expert witness fees.

The award rendered in the RoP is a decision that has the value of res judicata, which cannot be appealed. However, it can be challenged (art. 66) through the motion of annulment (motion to annul or setting aside). The procedure for these cases establishes that any of the parties may request its annulment within 30 days of the award being rendered, by submitting a petition to the Fourth Chamber, on the specific grounds set forth in L131/13 (art. 67), which are as follows:

  • that the arbitration agreement is not valid because one of the parties did not have the capacity to enter into such agreement, or that the law of the place where the arbitration takes place considers it invalid, or that Panamanian law considers it worthless;
  • that the party filing the motion was not duly notified of the appointment of an arbitrator or of the arbitral tribunal's proceedings, or was unable to exercise its rights for any other (justified) reason;
  • that the award decides on a dispute that was not included in the arbitration agreement, or exceeds the scope of the dispute;
  • that the integration of the arbitral tribunal or the proceeding carried out in the arbitration was not in accordance with the agreement of the parties;
  • that the award contains decisions on matters that are not subject to arbitration; and
  • in the case of an award issued in international arbitration, that it contains decisions that are contrary to international public order, or, in the case of domestic awards, decisions that are contrary to Panamanian public order.

The reasons established to support a motion for annulment cannot be agreed or limited by the parties. In fact, the parties cannot waive the right to exercise the remedy of motion for annulment in the arbitration agreement.

In order for the Fourth Chamber to give or grant the total or partial annulment of the award, the party that requests it must have proven the cause that it alleges as a reason for annulment. The standard is de novoreview.

The New York Convention of 1958 was adopted in Panama and constitutes Law 5 of October 25, 1983, and the Inter-American Convention on International Commercial Arbitration constitutes Law 11 of October 23, 1975. In both cases, the accessions were made without reservation.

The Fourth Chamber itself is the authority responsible for allowing the execution in the RoP of an award issued abroad. For this, the person interested in the execution must submit the application for execution before the Fourth Chamber. That request must be accompanied by the original award or an authenticated copy of it. If the award is written in a language other than Spanish, it must be translated into Spanish.

Once the application and the documents have been received, the Fourth Chamber will notify the defendant or foreigner of the existence of the request so that, within a period of 15 days, he or she can express his or her consent or opposition to the request for recognition. Upon the expiration of said period, the Fourth Chamber will proceed to resolve the request for recognition. If the decision is positive, the petitioner for recognition may present the award to a circuit civil court, in order for it to proceed with its execution. It is important to note that this period is never is observed by the courts because they have a lot of trials to decide.

In order for an award to be recognised and subsequently become enforceable, it cannot have been annulled by the authorities where the award was rendered, nor can it be pending the resolution of an annulment remedy against it. If the award is executed against a State, the State cannot invoke its condition or sovereign privilege (art. 4).

The Fourth Chamber has stated that it strictly follows the New York Convention in its decisions on the recognition of foreign awards. As for public order, it follows Panamanian public order.

There are no rules regarding class action arbitration or group arbitration. However, under L131/13 it is possible to reach an arbitration agreement with the characteristics of a class action arbitration or group arbitration, on the grounds of the legal intention of the parties involved in the arbitration agreement. On the other hand, in the regime for consumer protection, Law 45 of 2007 (L45/07) contains rules for consumer class action and for consumer arbitration, so it is possible to initiate class action arbitration under this regime. Despite this, it must be noted that consumer arbitration is not actually used as a method to resolve conflict, due to the lack of regulations for it. According to L45/07, such regulation should come from executive power. 

Both CeCAP and CESCON have ethical codes, which apply to the arbitrators and the lawyer practitioners. However, there is no unique ethical code in arbitration matters. The only code that could apply as a unique code is the ethical code adopted by the Colegio Nacional de Abogados (Panamanian Bar), but this code does not apply if the arbitrators are not lawyers; it is also not binding if the lawyer that is acting as arbitrator does not belong to the Panamanian Bar.

There are no rules regarding third-party funding in Panama, so it is not forbidden. The relationships that arise from this role should be regulated by the general rules of contracts or obligations.

L131/13 does not contain provisions about the consolidation of separate arbitrations proceedings, but the CeCAP and CESCON rules both allow the consolidation of separate arbitration proceedings. Obviously, if the parties reach an agreement to consolidate arbitrations, it is allowed.

L131/13 does not contain rules regarding third parties joining the arbitration, but the CeCAP and CESCON rules contain provisions to allow the intervention of third parties in an arbitration. In practice, the Fourth Chamber has allowed the arbitration tribunal to bind third parties to the proceeding, under their direction.

L131/13 does not contain rules that give power to the judicial court to bind foreign third parties in an arbitration; this power only belongs to the arbitrator panel. 

FABREGA MOLINO

Bmw Plaza
9th Floor, Calle 50. Panama
Republic of Panama

+507 301 6600

fmm@fmm.com.pa www.fmm.com.pa
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Law and Practice

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FABREGA MOLINO has 22 lawyers and 102 employees, and acts for a significant number of clients, including multinational corporations and institutions, shipowners and agents, international law firms, family businesses, high net worth individuals, major international groups, holding companies, banks and financial institutions, as well as aviation and pharmaceutical companies. Its lawyers are members of the most pre-eminent international associations, and represent clients in commercial and investment arbitrations concerning a wide range of industries. The firm’s dispute resolution lawyers are fully trained.

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