International arbitration is of importance in business and commercial affairs within a country’s jurisdiction and across borders. It has become the preferred method of solving international disputes and while Puerto Rico is limited by the United States broad reach on international affairs, Puerto Rico has taken steps to adopt legislation in accordance with international commercial arbitration that benefit trade among borders and supports adjudication of transnational disputes. This brief article provides a broad review of international commercial arbitration in general and as it is applied in Puerto Rico.
Arbitration is an alternative method of resolving differences without having to go court. It has been used for hundreds of years for reasons such as dispute with workers, among citizens and, between commercial merchants. It emanates from the agreement of parties to solve a dispute in a place other than the court. It has filled gaps of justice that traditional legal structures did not supply. In the commercial context, it was and still is used as a private less formal and more effective mechanism to solve dispute amongst states and merchants with the presentation of claims through counsel to an independent and impartial adjudicator. This agreement is what obliges the parties to proceed accordingly as provided in their arbitration clause, typically through an informal and somewhat flexible process administered by an impartial adjudicator that examines the submission of the controversy and issues a binding award. It is a voluntary procedure that supports itself on the agreement of the parties and the willingness to resolve dispute on their own terms through final and binding decisions without referring to a court of law. This method has coexisted with traditional law and has evolved into an appropriate and legal way of settling matters out of courts.
Arbitration has not only been legalized but promoted by states through specific laws pursuing different national interests beyond the scope of this article. However, it is safe to say that it has filled gaps of justice that traditional legal structures did not supply. This can be seen today in both commercial disputes and labor employment matters. However, at the international level, these laws have limited or no reach. Their validity largely depends on treaties, conventions and laws developed by states for international commercial arbitration. As we elaborate further, there has been international efforts adopted by many states to help remediate these limitations.
In general, there are two types of arbitration in Puerto Rico. One addresses commercial disputes and the other deals with labor & employment matters which is not the topic of this article. Labor arbitration is conducted based on the dispute resolution provisions of the collective bargaining agreement without any legal framework overseeing the process other than the general National Labor Relations Act authorizing it and applicable caselaw. In Puerto Rico, the Department of Labor serves as a facilitator to such labor arbitration disputes through the Negociado de Conciliación y Arbitraje, although these may be also channeled through private arbitration structures. Employment arbitration is also based on the employment agreement but subject to Puerto Rico and Federal arbitration laws that apply to commercial disputes. These disputes can be domestic or international. Domestic commercial disputes in Puerto Rico are governed by the Federal Arbitration Act (“FAA”) (if the controversy submitted for decision arises out of interstate commerce) and by PR Commercial Arbitration Law No. 376-1951 (“PRCA”). The FAA was enacted in 1925 to overcome judicial resistance to arbitration . .. and to declare “a national policy favoring arbitration of claims”. The Act as interpreted by the U.S. Supreme Court stands on the constitutional authority of Congress under the Commerce Clause. Based on a national policy favoring arbitration, it makes dispute resolution agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
The PRCA is based substantially on the old Uniform Arbitration Act of 1955 (created by the National Conference of Commissioners on Uniform State Laws), itself significantly influenced (and preempted) by the FAA. Many of its key provisions are a translation of the federal law. Under the PRCA, two or more parties may agree in writing to submit to arbitration any existing or future dispute and such an agreement shall be valid and irrevocable except for the grounds prescribed by law for the reversal of an agreement. Initiation of arbitration begins with a notice of intent to arbitrate. If court proceedings are initiated, a party to the agreement may file a motion to stay the process until arbitration is completed according to the agreement. At any time within the year following the award, the parties may request from the court an order confirming the award. Unless the award is reversed, modified, or corrected, the court shall issue the confirmation. The fact that no motion has been filed for confirmation shall not undermine the validity of an award. The court may modify or correct the award when there was obvious miscalculation as to the figures, or obvious error in the description of any person or property; when the arbitrator has resolved matter not submitted for consideration; and when the award is imperfect in matter of form without affecting the merits of the dispute.
As with any other state, the FAA applies in Puerto Rico when the transactions subject to arbitration affect interstate commerce. Thus, local courts are required to follow the provisions of the FAA and enforce arbitration contracts agreed by the parties like any other agreement. The doctrine of federal preemption is based on the supremacy of the U.S. Constitution and federal law. It arises when a valid federal law conflicts with a state law causing it to supersede the inconsistent state law. The “Supremacy Clause forbids state courts to dissociate themselves from federal law because of disagreement with its content or a refusal to recognize the superior authority of its source.” Federal law can expressly preempt state law when it includes explicit preemptive language. It can also implicitly preempt state law when the federal statute implicitly reflects congressional intent to preempt. Puerto Rico Supreme Court has not necessarily followed these directives.
International Commercial arbitration began and evolved following parallel objectives, structures, and mechanisms of traditional arbitration with similarly ancient roots. Emerging from conflicting coexistence with private procedural processes, states made efforts to actively participate in accepting, supporting, policing, and enforcing agreements through legislation enacted to specifically address international commercial arbitration. States also fixed limits as to the ultimate arbitrability of a dispute by providing boundaries as to what type of law can be settled through arbitration. In the United States for example, antitrust and bankruptcy issues can only be resolved through courts. Still arbitration awards were limited to their jurisdiction.
As states began to acknowledge that international trade was central to the economic development and the sustainability of a state, they became interested in developing a robust arbitration process that supported the flow of commerce that would allow merchants to trade amongst states minimizing commercial risk. Thus began the enactment of laws that governing international arbitration based on integration and uniformity of cross border arbitral disputes. The underlying interest was to oversee that trade conflict was managed properly and not used as a tool to grab “the law into their own hands.” Despite these laws, they were limited by each state’s boundaries.
Arbitration reached international prominence when states solved the mayor difficulties of enforcing arbitration awards outside their boundaries. Even though states had enacted laws to protect and supervise the arbitration process, they only operated within their jurisdictions. Those parties that made cross-border commercial transactions and had agreed to arbitration had limited recourse to enforce the awards by their own seat of arbitration and by the applicable foreign state. Parties from one country agreeing to do business with others from a different country had to decide the applicable laws. The arbitration would likely take place in a neutral territory and as such several decision and consequences need to be addressed if a dispute arises. This includes the decision of what law would apply to the agreement (the law of the contract), the law of the arbitration process (the lex arbitri or law that governs the arbitration procedure) and even the law that applied to the arbitration agreement itself. If a dispute arises, the parties need to foresee the possibility of where would an award be enforced if the losing party refuses to comply. Then some form of administrative body would have to be contracted to operate the arbitration process. That is the private organization that the parties would have to pay to conduct the procedure including the choice of arbitration, hearings, and final adjudication. All these decisions had far reached ramifications that were complicated by the fact that at the international level, these laws have limited or no reach. Their validity largely depends on treaties, conventions and laws developed by states for international commercial arbitration. Fortunately, an international enforcement framework began to develop following the adoption by over 150 countries of the New York Convention of 1958. The fundamental change that the Convention brought to international commercial arbitration was that if the award complied in the form required, it had to be considered prima facie worthy of credit and enforced in any of the countries that had adopted the Convention. This meant that signatories to the convention, committed to recognize and enforce arbitral awards made in the territory of another contracting state. The requisite was that the party seeking enforcement of a foreign award had to provide the court copy of the arbitral award and the arbitration agreement. To this day the New York Convention has stood as the pillar from which international commercial arbitration has developed and is considered by states as the legal system structured to solve intentional commercial disputes that is beneficial to the interests of their merchants. Hence, member states of the Convention have incorporated the provisions of its agreements into their own law applicable to international arbitration. In the United States is the FAA, Puerto Rico followed with the PR International Commercial Arbitration Law No. 10-2012 (“PRICA”).
PRICA is a law modeled by the UNCITRAL Model Law for Commercial International Arbitration of 1985 and subsequently amended in 2006 (“Model Law”). UNCITRAL (The United Nations Commission on International Trade Law) is part of the United Nations, and it is focused on promoting international commerce and investments by standardizing laws affecting trade and international business. There is a need for improvement of many domestic arbitration laws that vary between jurisdictions and are inappropriate for international disputes. The model law intents to fill this void and also seeks to be congruent with the New York Convention. However, it is a soft law because it simply provides guidance to states to reform their international arbitral laws to be uniform among states and congruent with the agreed procedures of international arbitration agreements and its enforcement. Countries are free to choose adopt partially or fully the guidelines as in the case of Puerto Rico. According to the latest information by the United Nations, 85 states had adopted the Model Law. In United States only 8 states had done so. <https://uncitral.un.org/en/texts/arbitration/modellaw/commercial_arbitration/status >.
PRICA applies to international commercial arbitration, without prejudice to any existing multilateral or bilateral treaty between the USA and any other country or countries. Under PRICA arbitration is deemed international if a) the parties; or b) one of the following places is located outside the country in which the parties have their business: i) the place of arbitration, if it has been determined in the arbitration agreement or pursuant to the arbitration agreement; (ii) the place of performance of a substantial part of the obligations of the business relationship or the place with which the subject of the dispute has a closer relationship; or c) the parties have expressly agreed that the subject matter of the arbitration agreement relates to more than one country.
PRICA serves to support the process of international comercial arbitration in Puerto Rico. Courts are not meant to get involved. This is specifically stated in Art. 1.07, just as the Model Law provides, that “in matters governed by this Law, no court shall intervene except where so provided in this Law.” 32 L.P.R.A. § 3241e. The Law also grants considerable authority to administer proceedings. The arbitral tribunal may even rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. Art. 4.01 32 L.P.R.A. § 3244. Arbitrators may also issue interim temporary measures at the request of a party ordering the other to maintain status quo, to take action or refrain from taking actions that is likely to cause imminent harm to the arbitral process. Art. 5.01, 32 L.P.R.A.§ 3245.
While arbitrators have flexibility to conduct the process, there are specified guidelines as to equal treatment (Art. 6.01 32 L.P.R.A. § 3246) to the parties; the way complaints and answers should be presented and conduct of the arbitral proceeding. Arts. 6.06-6.07, 32 L.P.R.A. § 3246e-f. The award must also be issued following a specific form which include the issuance in writing, with an explanation of the basis for the award, and signatures. Art. 7.04, 32 L.P.R.A. § 3247c.
There are several exceptions to judicial involvement. One is when a claim subject to arbitration is brought in court. In such cases, the party seeking arbitration may petition the court to refer the claim to arbitration and will do so, unless it finds that the agreement is null and void, inoperative or incapable of being performed. Article 2.01. 32 L.P.R.A.§ 3242. Another exception is to intervene upon request by a party when they are unable or unwilling to appoint an arbitrator. Art. 3.02, 32 L.P.R.A. § 3243a. Courts may also get involved when a party requests assistance in compelling the production of evidence (Art. 6.10, 32 L.P.R.A. § 3246i) or challenges the arbitrator if there are justifiable doubts as to his impartiality or independence, or if he does not possess qualifications agreed to. Art. 3.03., 32 L.P.R.A. § 3243b.
The last but most important court participation is in the request for setting aside the international commercial arbitration award. This recourse is limited to specific reasons and as an exception. To set aside the award, the application must be made after three months have elapsed from the notice of the award. Art. 801, 32 L.P.R.A. § 3248(3). Upon request, the petitioner must prove that:
The Court may also set aside an international commercial arbitration award if it finds that: (i) the subject-matter of the dispute is not capable of settlement by arbitration under the law of Puerto Rico; or (ii) the award conflicts with the public policy of Puerto Rico. Art. 801 ,32 L.P.R.A. § 3248(1)-(4).
PRICA will recognize arbitral awards of international commercial arbitration, irrespective of the country in which it was made, and shall be binding upon application in writing to the courts. The party seeking recognition or applying for enforcement shall supply the original award or a copy thereof. If the award is not made in an official language of this State, the court may request the party to supply a translation thereof into such language. Art. 901, 32 L.P.R.A. § 3249. A party against whom it is invoked, may oppose its recognition if it provides proof based on the similar grounds that the courts use to set aside the award. Art. 9.02, 32 L.P.R.A. § 3249a.
While arbitration seems the easier, flexible alternative to dispute resolution, the decision to proceed and the process of redacting the clause is essential and can be complex given the multiple factors that are in play when conflict arises. An initial decision is to determine whether it is advisable to proceed through arbitration. There are pros and cons in both litigation and arbitration. You need to weight in all the factors. It may not be best option, particularly if cost is an issue. Arbitration can be expensive. If you decide to do so, it is advisable to negotiate these issues before they arise. Avoid simplistic, generic clauses and ambiguity. It is your opportunity to lay down the rules but stay away from overly complicated clauses. Strike a balance between flexibility and thoroughness. If you are not sure, consider using rules of established organizations.
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