Arbitrating construction disputes in Latin America

Introduction

The manifold nature of Latin America, with its vast cultural, linguistic and economic diversity, presents unique challenges and opportunities in the realm of construction arbitration. The region encompasses a multitude of ecosystems, languages and economic conditions, making any generalisation about construction disputes and their resolution mechanisms particularly complex. Latin America’s diversity extends to its construction projects, ranging from multibillion dollar infrastructure undertakings to smaller, locally funded ventures. Navigating this rich tapestry demands a thoughtful approach to arbitration – one that recognises the distinct characteristics of each project and the specific legal, cultural and economic contexts in which they occur. Arbitration has become the preferred mechanism for resolving these disputes, providing a flexible and efficient alternative to traditional litigation, particularly in countries such as Mexico, Chile and Brazil. However, the arbitration process in Latin America is far from homogeneous, shaped by the varying scopes of projects, types of parties involved and sources of project funding.

Construction and arbitration in Latin America

Generalisations regarding Latin America are, to say the least, difficult. The region is unimaginably diverse. Despite evident links, such as its colonial past, dominant religion and shared languages, Latin America is enormous and enormously diverse. It comprises over 20 countries and states, including much of the Caribbean, and has a total land area of almost 20 million square kilometres.^[2] All of the world’s major ecosystems,^[3] and 60 per cent of the planet’s terrestrial, freshwater and marine species,^[4] are present in Latin America. It is home to almost 700 million people^[5] (approximately 8 per cent of the world’s population), who, despite the predominance of Spanish and Portuguese, speak over 500 languages.^[6] GDP, economic development and inequality also drastically vary within the region.^[7] Public policy varies from country to country, and individual policies tend to shift drastically from one administration to another.

In such a diverse region, construction projects and the disputes that tend to arise from them are equally diverse and dynamic. Nonetheless, or perhaps because of this, arbitration has found fertile soil in the region as the preferred mechanism for the settlement of complex disputes in general and of construction disputes in particular. For instance, in 2020, approximately 14.5 per cent of all parties in ICC arbitration were Latin American or Caribbean.^[8] More significantly, the International Centre for Settlement of Investment Disputes (ICSID) reported that 46 per cent of all cases registered in 2023 originated in Latin America.^[9]

The fact that arbitration is increasingly popular in the region by no means represents that arbitration proceedings within the region are similar, not even when it comes to construction arbitration. In our view, the specific characteristics of any given construction arbitration in the region greatly depend on the specific circumstances of the construction project itself. We therefore do not believe it is possible to define the characteristics of construction arbitration in Latin America nor identify uniquely Latin American aspects of construction arbitration.

Types of construction and impact on the nature of arbitration

Despite all being Latin American construction cases, the Panama Canal expansion arbitrations or the Impregilo’s highway arbitration^[10] cannot be compared to arbitration arising from suburban housing projects. Likewise, an arbitration arising from the construction of a state-commissioned power plant or motorways cannot be compared to an arbitration concerning the construction of a privately owned skyscraper. Arbitration of a locally funded project tends to be drastically different to a project that involves foreign direct investment (FDI). Two arbitrations involving FDI will almost certainly look very different depending on where the investment comes from. Given the ample scope of construction arbitration in Latin America, trying to find common ground between different cases in the region is exceptionally difficult.

Therefore, the best way to identify the unique features of Latin American arbitration is to make distinctions between construction arbitrations within Latin America. An exhaustive distinction of features is outside the scope of this chapter. Therefore, we focus on the most salient points:

• the scope of the construction project;
• the type of parties involved; and
• the sources of project funding.

In our view, depending on these key features, one can begin to identify general characteristics of construction arbitration in Latin America. In the following sections, we develop what we find to be the main characteristics and features to be expected in these broad categories of construction arbitration.

Scope of the construction project

The merits of construction disputes tend to be complex and require deep technical analysis and preparation from parties, experts and adjudicators. Judicial proceedings normally do not guarantee that the stakeholders will have the time, depth and resources to adequately settle these disputes. This may be why arbitration has become the preferred mechanism to settle construction disputes in countries such as Mexico, Chile^[11] and Brazil.^[12] Arbitral institutions solely devoted to construction arbitration have emerged across the region.^[13] While it is true that arbitration is the preferred mechanism for these disputes in the region, the characteristics of each arbitration depend chiefly on the scope of the project, from large-scale and giga projects to medium-sized and small projects.

Large and giga projects

Over the past few decades, Latin America has seen the rise of multibillion-dollar projects, such as the expansion of the Panama Canal, the planned and then cancelled new airport for Mexico City, the Metro systems of Bogota and Quito, and the construction or expansion of port infrastructure in places such as Callao in Peru, Lazaro Cárdenas in Mexico, Porto Sul Bahia in Brazil and Cartagena in Colombia.^[14] There have already been several arbitrations from these construction projects. Some of these are commercial in nature and others are investor-state disputes. Most notably, some of these arbitrations have been among the lengthiest and largest in the world.

The arbitration proceedings from large and giga projects are truly international. Hence, there is very little to distinguish them from any other large international arbitration, be it commercial or investor-state. These arbitrations are normally handled in English, seated outside Latin America and administered by major international institutions, such as the International Chamber of Commerce, the London Court of International Arbitration, ICSID or the Permanent Court of Arbitration. The tribunal is made up of one or more members who are not Latin American, the parties’ counsel are typically international firms based in New York, London and Paris, and the experts involved tend to belong to large international firms with little or no physical presence in Latin America. In short, there is little specific to Latin America when it comes to the handling of these arbitrations, as they typically mirror large project arbitration anywhere in the world. That being said, some merits issues are typically present in these cases.

The merits of the case can be considerably more complex than those that occur in smaller projects. In our view, the reason for this complexity is typically twofold: the projects tend to be unique, so the issues that appear can create uncharted territory for all the stakeholders, and there are many more stakeholders in larger projects (for instance, parent companies, subcontractors, independent experts and dispute boards).

Medium-sized and small projects

Construction arbitration arising from medium-sized and small projects tends to be more local than that of large projects; therefore, it is less likely to be exposed to practical and cultural diversity. Due to the vastness of the region, it is beyond the scope of this chapter to list these subtle differences. Nevertheless, we believe that contrasting construction arbitration between a large and medium-sized or small project may provide useful guidance to readers.

Although not always the case, construction arbitration for smaller projects in Latin America tends to be handled domestically. Accordingly, the firms that represent the parties are rarely international. It is more likely that some or all tribunal members are Latin American or even nationals of the country in which the construction is taking place. Also, it is not uncommon for these arbitrations to be seated in the country of the construction and administered by a local or specialised institution.

By the same token, we have observed that in smaller construction arbitrations, it is common to see parties or arbitrators whose primary practice is not arbitration or who have no prior experience in arbitration. This usually results in proceedings in which the parties present their case, arguments and evidence as they would before a state court. This situation is suboptimal, as the parties to these cases may not be taking advantage of the benefits that arbitration can provide as a bespoke dispute resolution mechanism. Similarly, it is not uncommon to find cases in which one of the parties or members of the tribunal has arbitration knowledge and experience while the other stakeholders do not. These cases tend to generate frustration between the parties and the tribunal and routinely cause delays and procedural discussions normally not seen where parties and tribunals have more arbitration experience. Examples of clashes include disputes over document production practices, challenges regarding authentication of evidence and debates over burden of proof.

In contrast with large project construction arbitration, arbitration from small and medium-sized projects seldom have more than two parties, and the disputed issues tend to concern delays, disruption and cost overrun claims. This, however, is typical in any construction arbitration, not only those in Latin America.

Type of parties involved

In addition to the scope of the construction project, construction arbitration in Latin America will differ depending on the type of parties involved in the construction project. In this regard, the main possible scenarios are:

• public works, in which one of the parties is a sovereign state or state-owned enterprise, while the other party is a private entity;
• cases in which both parties are nationals of the country in which the construction is taking place; and
• cases in which either the owner or the contractor are from a different country than the one in which the construction is taking place.

Public works construction arbitration

Construction arbitration involving a sovereign state or state-owned entity is, in itself, complex. This complexity usually increases in Latin America due to several factors. The following are, in our opinion, the most salient of these. First, public works are governed by extensive regulatory and legal frameworks, including procurement laws, environmental regulations and specific contractual obligations imposed by the state. The arbitration process must navigate these regulations effectively.

Second, even when a state agrees to arbitration, issues of sovereign immunity and arbitrability limitations can arise. While states may waive immunity to allow arbitration, enforcement of arbitral awards against state assets can still be problematic, especially if the state invokes immunity from execution.

Third, public works projects have substantial political and public interest implications. Arbitrations in these contexts can be influenced by public opinion and political pressures, potentially affecting the behaviour and decisions of the state parties and, in some cases, of the adjudicators.

Fourth, contracts for public works are often complex, involving multiple layers of subcontractors and suppliers. Disputes can arise not just between the primary parties but also among the different stakeholders involved in the project, making arbitration more intricate and resulting in a decision in one dispute impacting other disputes.

Finally, in our experience, construction disputes against a government or state-owned enterprises are less likely to settle, particularly if the settlement involves a waiver of rights of the government or entity, as this may result in administrative liability of the public official who agrees to settle.

Fully domestic construction arbitration

When both parties involved in the construction project are nationals of the country in which the construction is taking place, the arbitration has distinct characteristics that are primarily dependent on the legal and arbitration culture of that country. Given the cultural diversity in Latin America, it is impossible to fully identify these specific characteristics. However, as a general rule, it is not uncommon for local cultural and business practices to significantly influence the arbitration process. This includes negotiation styles, communication norms and expectations regarding dispute resolution. Likewise, fully domestic construction arbitration may be subject to a higher degree of judicial intervention compared to international arbitration. This can include judicially granted interim relief, challenges to arbitral awards and the enforcement process within the national legal system. This complexity is evident where there is a clear divergence between strict adherence to contractual terms and the exercise of engineering judgement to advance projects efficiently.^[15]

Cases involving one international party

In scenarios in which either the owner or the contractor is from a different country to where the construction is taking place, the arbitration takes on an international dimension that can impact both the contract from which the arbitration arises and the arbitration proceeding itself. For instance, it is not uncommon for European companies active in construction in Latin America to require the use of International Federation of Consulting Engineers contracts, which is a practice that is not generally followed by US, Canadian or Asian construction firms. Construction arbitration with at least one internationally owned or controlled party may imply that there will be a parent company involved in the arbitration, usually as a guarantor of a local corporate vehicle. Another critical issue in international construction arbitration is the choice of law and the forum for arbitration. Parties often negotiate these terms rigorously to ensure a neutral and fair arbitration process. Normally, this results in agreeing to a seat of arbitration in a different country and the application of a different substantive law, including soft law instruments.

Additionally, in projects involving parties from different cultures, it is common to find cultural clashes during the execution of the works that end up morphing into disputes in the arbitration, as it is common for construction practices, contractual interpretation principles and other issues to deeply differ from one place to another.

Construction project funding sources

The final distinction to be made between types of construction arbitration in Latin America is the source of funding, which can have a profound impact on specific characteristics of the arbitration or even the nature of the arbitration itself. As explained above, in construction cases in which one of the parties is a foreigner, there are certain characteristics to be considered. This is particularly true in FDI-funded public works projects.

In these cases, and depending on the treaty policy of the country in question, a construction dispute can turn into an investor-state arbitration. The United Nations Conference on Trade and Development’s Investment Policy Hub reports the existence of at least 75 known investment arbitrations directly related to construction. Many of these cases arise from private and public construction projects in Latin American countries (except in Brazil, which is not a party to any international instrument that requires it to arbitrate disputes with investors).^[16]

Investment arbitration arising out of construction projects in Latin America is a whole arbitration sector in itself. However, in the past few years, there has been a notable increase in these cases (not only in Latin America), particularly in projects that combine construction with other substantive aspects, such as mining or energy projects. Although the state measures from which these cases arise are varied,^[17] there is a growing link between this type of arbitration and measures that states claim to have adopted for environmental protection reasons.^[18] We believe that this trend will continue to expand in the near future.

Common grounds for construction dispute arbitration

As discussed above, Latin America is a complex and diverse region. Thus, it is not possible to provide or adopt a one-size-fits-all approach when it comes to identifying the unique aspects of Latin American construction arbitration. There are, however, common aspects of construction arbitration around the world. In construction arbitration, delay, disruption and cost overruns are often the issues at stake and Latin American construction arbitrations are no exception.

The root cause of delays, disruption and cost overruns is unique to each case. However, in many Latin American countries, social protests and local community interference, often triggered by concerns over environmental impact, labour disputes or displacement issues, are common. These protests can lead to substantial delays and disruptions to construction projects. For instance, large infrastructure projects such as motorways, dams and pipelines frequently face opposition from local communities or activist groups, resulting in work stoppages and increased security costs. These occurrences are evident in projects such as Chicoasén II, a hydro project in Chiapas, Mexico, which commenced in 2014 and remains unfinished to this day.^[19]

In arbitration, proving the extent and impact of these disruptions can be challenging. Contractors must provide detailed documentation to demonstrate how social protests have affected the project timeline and costs. Arbitrators need to assess whether these disruptions were foreseeable and if adequate mitigation measures were in place.

Another prevalent issue in Latin American construction projects is underbidding. Contractors often submit low bids to win projects in competitive bids, sometimes underestimating the actual costs involved. This practice can lead to significant cost overruns when the project’s true complexity and costs become apparent. Underbidding claims usually involve a detailed examination of the initial bid, the project’s scope and the reasons for cost escalations. Contractors may argue that unforeseen circumstances or changes in project scope led to the overruns, while employers might claim that the contractor should have anticipated these issues. Resolving disputes requires a thorough analysis of the contract terms, project documentation and expert testimonies.

Given these common causes of disputes, it is crucial for parties involved in construction projects in Latin America to adopt strategies for effective dispute resolution. Some key strategies include robust contract drafting and clear allocation of responsibilities within the contract; employing early dispute resolution mechanisms such as dispute boards; and maintaining comprehensive records of project progress, communications and financial transactions. Transparent documentation can provide crucial evidence in arbitration proceedings, as well as help establish the facts of the case and interpret the contract in light of the parties’ conduct.

Conclusion

In conclusion, it is not feasible to generalise about arbitrating construction disputes in Latin America. Disputes vary significantly, and analysis demands a keen understanding of the region’s inherent diversity and the specific intricacies of each case. The contrast between complexities arising from large-scale infrastructure projects and those arising from smaller, locally funded constructions highlights the importance of tailored arbitration strategies. The prevalence of issues such as social protests, underbidding and the involvement of sovereign states adds layers of complexity to the arbitration process. Despite these challenges, arbitration remains a robust and adaptable mechanism for dispute resolution in the region, offering parties a means to address their conflicts efficiently and effectively. As Latin America continues to evolve and develop, the role of arbitration in managing construction disputes will undoubtedly expand, necessitating ongoing adaptation and expertise from practitioners. Understanding the unique elements of Latin American arbitration is essential for navigating this dynamic and multifaceted landscape successfully.

Footnotes