The Law on International Commercial Arbitration

9 September 2024 was the 20th anniversary of the entry into force of Law No 19971 on International Commercial Arbitration (the “LACI”). According to the history of that legislation, the bill was the joint initiative of the Chilean Bar Association, the Arbitration and Mediation Centre of the Santiago Chamber of Commerce and the Arbitration and Mediation Centre of the Chilean-North American Chamber of Commerce.

The LACI closely follows the Model Law of the UN Commission on International Trade Law. When it was submitted to the Chilean Chamber of Deputies, it was stipulated that it was aimed at helping Chile take a prominent place as a centre of arbitration in international commerce, especially in Latin America.

In order to achieve that (along with other proposed objectives) the LACI took up the principle of minimum intervention of state courts in arbitral disputes subject to the LACI. Essentially, the principle was that in the matters regulated by the LACI, no court would be able to intervene unless otherwise stipulated. The jurisdiction of state courts in international commercial arbitration is specific and restricted. It is therefore limited to providing assistance and supervising the arbitration.

In terms of the means of challenging an arbitral award, the LACI clearly states that only an appeal of annulment may be brought against it on the grounds (and according to the specific requirements) set out in Article 34. The jurisdiction of the Court of Appeals hearing the appeal is therefore limited to examining or reviewing the existence of the grounds and the facts of the case.

However, it is of no use to have robust and strict legislation or regulations on international commercial arbitration if they, and the principles that support them, are not respected by the entities called upon to enforce them and make them operational: the Chilean state courts.

It seems that, over the two decades that the LACI has been in force, that the Chilean state courts (and specifically, the Courts of Appeals (courts that have jurisdiction to hear the appeal of annulment of the LACI)) have correctly enforced the rules of the LACI and respected the principles governing it.

The judgment handed down by the Court of Appeals of Santiago on 25 January 2024 is illustrative of this.

In its judgment the Court of Appeals said: “To this effect, it should be considered that the higher courts have understood that the Law 19.971 incorporates into national law the most widespread and uniform international arbitration statute among the countries that practice international trade. In addition, it is necessary to establish that this law constitutes a regulatory statute that includes different principles of private international law, which characterise international commercial arbitration as an autonomous statute different from domestic arbitration. It should also be noted that these principles include the presumption of validity of the award and the fact that the limit of legitimacy and effectiveness of the jurisdictional decision is given by the international public order, which conceptually differs from the national public order.”

This is not an isolated judgment. Since the LACI has been in force, the Courts of Appeals have not accepted appeals for annulment filed against international awards. Their intervention, in compliance with the LACI, has been limited to the review of the strict grounds that authorise the filing of such an appeal, thereby preventing appeals for annulment from becoming a second instance, in which the facts and the law applied in the award are reviewed once again.

However, the attempts to declare the inefficiency of international awards in a non-explicit way through the appeal of a complaint cannot be ignored. In simple terms the appeal of a complaint in Chile is a means of challenge, extraordinary and disciplinary in nature, which applies in those cases in which there has been a serious violation or abuse in the delivery of a final or interlocutory judgment, which is not subject to any other appeal, whether ordinary or extraordinary.

In some instances, this type of challenge has been brought against Courts of Appeals judges who rejected appeals of annulment filed to challenge an arbitration award. The complaint, which in this case is heard by the Supreme Court, seeks to invalidate the decision that rejected the appeal so that the appeal of annulment is upheld in the subsequent decision of the highest court.

The Supreme Court previously refused to accept appeals filed in these cases. The Supreme Court based its reasoning on the LACI itself, which the Supreme Court deemed established that annulment is the only appeal against an international award. The Supreme Court stated “this case will not be accepted since, in accordance with the provisions of Article 34 of Law 19.971, an arbitral award may only be appealed before a court through an appeal of annulment to be heard by the respective Court of Appeals, from which it transpires that the legislator intended for the resolutions issued by such courts while trying the appeal may not be subject to review (case No 62.114-2016, CS)”.

Notwithstanding this, an unenforceability action is currently pending before the Constitutional Court. The action, in simple terms, seeks to declare Article 34 of the LACI (where it states that only an appeal of annulment may be filed against an international arbitration award) unenforceable. The unenforceability action was filed by one of the parties that filed an appeal against the judgment of the Court of Appeals of Santiago (which rejected the appeal of annulment).

The unenforceability action was filed with the Constitutional Court prior to the Supreme Court’s ruling on the admissibility of the appeal of the complaint filed.

This has given rise to a wide-ranging debate in Chile. There are those who believe that this path calls into question the principle of minimum intervention. Some have even described it as a sort of “guerrilla tactic” which, if successful, “will only discredit our arbitration regulations in the international community” (Romero Seguel, Alejandro: Las Tácticas de Guerrilla en el arbitraje), Santiago, El Mercurio Legal, 15 April 2024).

The Constitutional Court will have to rule on the unenforceability action filed, which, if accepted, will only effect the particular case in which unenforceability is sought, ie, in the venue of the admissibility of the appeal filed against the judges of the Court of Appeals of Santiago (who rejected the annulment of the award) and which is currently pending before the Supreme Court.

Prohibition of Unjust Enrichment

On 22 August 2024 in case No 28.402-2024, the Supreme Court upheld a judgment issued by the Court of Appeals of Chillán, which ratified the validity of one of the most relevant principles in the Chilean legal system, namely the principle of unjust enrichment without cause or unjust enrichment.

Summary of the case

During the 1980s, in the county of Bulnes (in Diguillín province, Ñuble region), a third party built a residential building in plain sight of the landowner. In 2018, the Chilean Treasury subsequently expropriated the entire land (including the third party’s building) and paid compensation to the landowner for the expropriation of the land and the third party’s building on it.

The third party who built on the land sued the landowner, demanding USD100,000 from them. The landowner had received the compensation from the Chilean Treasury for the expropriation of the building that the third party built.

The first instance judge upheld the claim. The landowner appealed the decision, but the Court of Appeals of Chillán upheld the first instance decision. The landowner filed an appeal in cassation on the merits to the Supreme Court.

The Supreme Court considered that the reasoning of the judges on the merits of the case (the Court of Appeals and the lower court) was in accordance with the law, particularly the principle that proscribes unjust enrichment. In fact, the compensation received by the landowner from the Chilean Treasury considered the building built by the plaintiff, so they received a greater gain than they would have received without the building.

The Supreme Court went on to say the greater gain obtained by the landowner was at the expense of the third party who built the building, without the owner’s opposition and through his mere tolerance.

In other words, the Supreme Court correctly ruled that the third party who built a building on his property must be compensated if part of the compensation paid by the Treasury included the value of the building that was allowed by the landowner. Essentially the compensation that should have been paid to the landowner if the building had not existed would have been less, so the owner unjustly enriched himself by receiving the full compensation.

Analysis of the case

This case is interesting because it ratifies the validity of one of the most relevant principles in the Chilean legal system: unjust enrichment. The Supreme Court did not limit itself to ratifying its validity. It went further and classified it as a principle of an essentially economic nature. Consequently, we believe the principle is applicable to all disputes of a patrimonial nature.

The Supreme Court specifically ruled that, although this principle is not expressly regulated in any provision of Chilean law, it is a source of inspiration for a number of legal provisions of Chilean civil law, among them those underlying the case in question, which seek to avoid, in general, a person obtaining a greater gain than they should have obtained if the gain is at the expense or sacrifice of a third party (who is unduly impoverished) and without a title that justifies the gain or impoverishment.

As can be seen, the Supreme Court emphasises that the purpose of this principle is to prevent a person from enriching themselves at the expense of another if they cannot legally justify this gain, so that if the assumptions justifying it are met, together with other provisions of the Chilean legal system (for example, to execute contracts in good faith in accordance with Article 1546 of the Civil Code), it will give rise to the obligation to return what was unlawfully acquired or to compensate for the impoverishment of others.

Res Judicata

On 7 June 2024, the Supreme Court issued an interesting decision in case No 141.758-2023 whereby it ruled that the exception of res judicata arising from a previous trial is not an impediment in a subsequent trial if in this trial compensation is claimed for damages that did not exist at the time of the first trial, even if both cases involve the same facts.

Summary of the case

In 2022, an individual affected by an occupational disease that caused them bodily injury brought an action for damages against their employer. The claim was accepted by the Court and the defendant was ordered to compensate for the damages caused.

Subsequently, after their condition worsened (resulting in an increase in their physical disability), they filed a new claim for damages based on the new injuries caused as a result of the same facts that had already been discussed in the first lawsuit.

In this respect, the court of first instance decided to accept this new claim, awarding the individual USD25,000 in compensation. However, the Court of Appeals of Valparaíso, accepting an appeal filed by the defendant, reversed the first instance judgment and accepted the exception of res judicata, rejecting the claim.

Subsequently, the Supreme Court, on 7 June 2024, upon hearing an appeal filed by the plaintiff, overturned the judgment issued by the Court of Appeals of Valparaíso, stating that, as a result of the new injuries suffered, compensation for damages is payable. Taking the existence of a previous trial (which supported the exception of res judicata) into account, the Supreme Court pointed out that the original action for damages could only address the payment of the damage that existed at that time and was known by the parties, being the only one on which the evidence presented could be based, in accordance with the principle of full payment of damages enshrined in Article 2329 of the Civil Code.

Analysis of the case

This case is interesting because it ratifies another fundamental principle of the Chilean legal system, namely the principle of full payment of damages.

In this regard, under Chilean law, the purpose of the principle of full payment of damages is to compensate a person to put them in a position equal or equivalent to that which would have occurred if the act causing the damage had not occurred.

Pursuant to the principle of full payment of damages, the Supreme Court understands that the fact that there is a previous trial (which has declared the liability of a subject and has obliged them to compensate damages) is not an impediment for that same person to be obliged to compensate additional damages in a subsequent and different trial, if such damages did not exist at the time of the first trial (and even if they have arisen from the same facts).