Panama

Panama is no stranger to arbitration. It has been a dispute resolution mechanism generally accepted in our country since the late 1970’s. Moreover, Panama is a party to the Inter-American Convention on International Commercial Arbitration,¹ the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards,² and the Convention on the Settlement of Investment Disputes between States and Nationals of other States.³

In 1999, Panama enacted its first special act on arbitration, the Law Decree No. 5 of 1999 on Arbitration, Mediation and Conciliation (the Arbitration Act),⁴ which remains the current law applicable to arbitration.

Since the enactment of the Arbitration Act, and especially between 2001 and 2003, the Panamanian Supreme Court issued a series of decisions that raised doubts as to the practicality of arbitration as a private dispute resolution mechanism in Panama.

However, the Panamanian approach towards arbitration took a positive change of direction in 2004 when the Panamanian Constitution was modified to recognise arbitration as a valid system for the resolution of disputes separately from the Panamanian Courts, and to include the Kompetenz-Kompetenz principle in the Constitution. Also included expressly in the constitution was the capacity of the government to be a party in arbitration proceedings without the need for any further authorisation, provided that an arbitration clause is included in the contract to which the government is party. These amendments were perceived as a clear pro-arbitration message that Panama was sending to the international arbitration community.

Since then, the Supreme Court of Justice has played a relevant role in building arbitral jurisprudence through its decisions, which at times may be controversial. Panamanian Supreme Court decisions are final, binding and definitive when deciding constitutional issues or issues of legality of governmental administrative resolutions. They are persuasive and of ‘probable doctrine’ when issued three or more times on a same issue and applied to the same or a similar series of fact, in civil and commercial matters.

The latest controversy raised by the Supreme Court of Justice in the Panamanian arbitration forum was caused by a decision rendered on 9 June 2011 in the case of HEBE Corporation, SA (the Claimant) v Vent Vue, SA (the Defendant) and Innovaciones de Vidrios, SA (the Third Party).⁵ Here, the Supreme Court of Justice decided a special action for the protection of constitutional guarantees (writ of amparo) filed by the Claimant against an Arbitral Tribunal.

The question faced by the Supreme Court of Justice in the HEBE case was whether or not the decision of an Arbitral Tribunal to abstain from hearing and deciding on claims brought through arbitration against the Third Party - assignee of certain credits of the Defendant - violated the Claimant’s constitutional guarantees.

In a divided decision (six to three), the Supreme Court of Justice granted the writ of amparo and, as a result, the interim award of the Arbitral Tribunal was revoked. The Supreme Court of Justice concluded it was necessary that all the parties involved in the dispute, including the Third Party, appear and be brought into the arbitration proceedings in order to preserve the right to due process of law.

In this article, we will analyse the HEBE decision, as well as its potential effects regarding arbitration in Panama.

Understanding the HEBE decision

Factual background of the HEBE decision

In the HEBE case, the Claimant entered into a contract with the Defendant, for the supply and installation of construction materials for a building in Panama City (the Contract). The Contract included an arbitration clause for the resolution of all disputes arising out of or in connection with the Contract, requiring the parties to submit their request for arbitration pursuant to the rules of a Panamanian arbitration centre.

In this case, the Defendant had assigned a series of credits to the Third Party. The Claimant considered that such an assignment of credits constituted a fraudulent conveyance prejudicing its rights under the Contract and, pursuant to the arbitration clause, it submitted a request for arbitration against both the Defendant and the Third Party.

The Arbitral Tribunal concluded that the Third Party could not be joined as defendant in the arbitration as only an assignment of credits had taken place and not an assignment of the Contract that contained the arbitration clause. As a result, the Arbitral Tribunal found that it only had jurisdiction to decide the claim against the Defendant, thus excluding the Third Party from the arbitration. The Arbitral Tribunal also stated that its decision did not result in a denial of justice, as the Claimant could always bring a claim against the Third Party before the ordinary courts.

The Claimant considered that this interim award of the Arbitral Tribunal violated its constitutional right of due process (debido proceso), as the Claimant argued that the action seeking to revoke the allegedly fraudulent assignment of credits required the submission of a claim against both the Defendant and the Third Party, and the arbitration clause prevented the Claimant from pursuing such action against the Defendant before the ordinary courts. The Claimant therefore submitted a writ of amparo (seeking protection of its constitutional guarantee of due process) before the Plenary of the Supreme Court of Justice.

Legal content of the HEBE decision

The HEBE decision deals mainly with two legal issues: the availability of writs of amparo against arbitral awards, and the necessary appearance of all parties in interest in the arbitration proceedings, as a means to extend the effects of arbitration clauses to non-signatory third parties.

The availability of writs of amparo against arbitral awards

The writ of amparo is an independent action seeking protection against orders from the authorities or public servants that violate constitutional guarantees. In the context of ordinary judicial proceedings, an amparo is conceived as an extraordinary remedy to be accessed whenever all other ordinary available remedies have been used and decided.

The Panamanian courts have, on different occasions and with different results, discussed the issue of whether or not a decision from an Arbitral Tribunal should be the proper subject of a writ of amparo, mainly because this action was conceived as a means to review decisions issued by public servants. There has been much debate as to whether, in this context, arbitrators should be considered public servants.

In several 2010 decisions,⁶ the Plenary of the Supreme Court of Justice of Panama concluded that arbitrators and Arbitral Tribunals were not public servants, and therefore their decisions could not be subject to writs of amparo. This position was further supported by the Kompetenz-Kompetenz principle, which prevents the courts from reviewing preliminary decisions of arbitrators (mainly as they relate to their capacity to decide the dispute), and the availability of the writ to set aside (or annul) the arbitration award, as a means to judicially control the final arbitration award once the arbitration proceedings have concluded. In the HEBE decision, the Supreme Court of Justice has moved away from this criterion and admitted a writ of amparo against an interim award issued by an Arbitral Tribunal. Under the position set in the 2010 decisions, such writ of amparo would have been dismissed without entering into further consideration of the merits.

Thus, the HEBE decision has reignited the debate on the availability of writs of amparo against awards rendered by arbitrators and Arbitral Tribunals.

The necessary appearance of all parties with interest in the arbitration proceedings as a means to extend the effects of arbitration clauses to non-signatory third parties

The Arbitration Act does not regulate the joinder of third parties to the arbitration proceedings. The traditional position of Arbitration Tribunals in Panama has been to only admit as parties to arbitration those who have entered into an arbitration agreement or who otherwise have clearly expressed their consent to arbitrate a dispute. This position has changed in recent times through the development and application by Arbitral Tribunals in Panama of the ‘principle of attraction’ to the arbitration clause, which has gained relevance in the national arbitration forum.

Pursuant to the principle of attraction to the arbitration clause, it is possible to attract third parties that have not expressly consented to or executed an arbitration clause, but that are closely related or connected to the effects of the agreement or underlying transaction containing an arbitration clause. This is the case of a guarantor of obligations of a contract that contains an arbitration clause, claims against related companies, joint venture disputes and construction contract disputes involving contractors and sub-contractors.

The HEBE decision goes a step further in the development of this principle of attraction of third parties to arbitration, as in order to consider that the Third Party was bound to be heard in the arbitration, the Supreme Court of Justice applied a statute of the Panamanian Code of Civil Procedure, which provides that, for proceedings before the ordinary courts, parties that participate in the events or transactions leading to the dispute are to be incorporated as defendants.

The position of the Supreme Court of Justice of Panama regarding the joinder of a third party to the arbitration is summarised in the following extract of the HEBE decision:

The conflict has arisen by way of an alleged breach of contract by Vent Vue, SA [the Defendant] regarding Hebe Corporation, SA [the Claimant], and relates to the assignment of credit in favour of Innovaciones de Vidrios, SA [the Third Party]. Therefore, it is necessary that Innovaciones de Vidrios, SA [the Third Party] appears in the arbitration proceedings in order to help in the resolution of this matter, as the award that will be issued could also affect its interests.

As the alleged infringement arises because of the assignment, it is necessary for both the assignor and the assignee to appear in the arbitration proceedings in order to elucidate the conflict and, pursuant to the constitutional guarantee of due process and the right to an effective defence, it is also necessary that the procedural opportunity to clarify the facts be given to the parties.

After these considerations, and quoting article 678 of the Code of Civil Procedure of Panama,⁷ the Supreme Court of Justice decided that:

This court must grant the motion for the protection of constitutional guarantees because it is necessary that all parties involved in the conflict appear in the proceedings especially to defend their rights, which can be affected by the award that will be granted by the Arbitral Tribunal.

From the excerpts of the HEBE decision, in considering that the Third Party was bound to the arbitration agreement, the Supreme Court of Justice took into consideration that:

• the alleged breach (the assignment of credits in fraud of the Claimant’s rights) of the contract containing the arbitration clause involved the participation of the Third Party;
• the intervention of the Third Party would be necessary for a proper and complete resolution of the dispute;
• the award to be rendered by the Arbitral Tribunal could affect the interests of the Third Party;
• a provision of the Code of Civil Procedure of Panama can be applied in support of an application to join a third party to the arbitration; and
• pursuant to the constitutional guarantee of due process and the right to an effective defence, it is also necessary that the procedural opportunity to clarify the facts be given to all the parties involved.

Potential legal consequences of the HEBE decision

The HEBE decision could have two relevant impacts on arbitration in Panama: it could become a source of reference in support of writs of amparo to be used as a means to restrict or impose limits to the principle of Kompetenz-Kompetenz, and it could create an additional argument favourable to claimants seeking to join non-signatory third parties to arbitration proceedings.

The writ of amparo as a means of restricting or imposing limits to the application of the Kompetenz-Kompetenz principle

As we mentioned above, in its origins, the Kompetenz-Kompetenz principle was not always kindly treated by Panamanian judiciary. However, in 2004 the Panamanian legislative bodies decided to to send a pro-arbitration message to the international arbitration community by raising the Kompetenz-Kompetenz principle to constitutional level via an amendment to the Panamanian Constitution.

Thus, the Supreme Court of Justice in 2010 resolved as follows:

It is worth pointing out that the claim regarding the Arbitral Tribunal’s jurisdiction is an issue that must be raised before the Arbitral Tribunal itself, which pursuant to the principle of Kompetenz-Kompetenz should resolve this issue and decide for itself and in light of the arbitration agreement (Article 202 of the Constitution), if it has jurisdiction over the dispute, notwithstanding that this point can be reviewed later in the annulment proceedings.⁸

However, in the HEBE decision, by reviewing through an action for the protection of constitutional guarantees, an interim award of an Arbitral Tribunal regarding its own jurisdiction, the Supreme Court of Justice of Panama denied the autonomous scope of the of the Kompetenz-Kompetenz principle in favour of the protection of constitutional guarantees.

The HEBE decision could serve as future reference for the submission of writs of amparo, not only to challenge the jurisdiction of an Arbitral Tribunal, but also for challenging other interim awards that may be issued by Arbitral Tribunals within the course of the arbitration proceeding. If this were the case, it could cause significant delays in the development of arbitration proceedings, given the considerable workload and restrictions of the judiciary.

It would be desirable for the Supreme Court of Justice of Panama to revisit this issue and to favour the position that arbitral awards are not subject to writs of amparo. This would not mean that Arbitral Tribunals or arbitrators would be able to blindly violate Panamanian constitutional guarantees, but that Panamanian courts will only review these issues through the available annulment proceeding once a final award has been rendered.

An additional argument to bind third parties to arbitration agreements

As a general rule, the decision to arbitrate a dispute stems from the autonomy of the will of the parties. Parties that have not expressly agreed to submit a dispute to arbitration should only be brought exceptionally to the arbitration proceedings. This could be the case when such parties have a strong connection to the matter subject to arbitration and it could be inferred that this was the will of all the parties involved in the dispute. This seemed to be the reasoning behind the HEBE decision where although the Supreme Court of Justice acknowledges the material relevance of the principle of the autonomy of the will of the parties to submit a dispute to arbitration, it adopted a rather flexible approach for joining the Third Party to the arbitration. The Supreme Court of Justice did not go into detail as to why the Third Party needed to be brought as a party to the arbitration proceeding as it merely concluded that the participation of the Third Party in the allegedly fraudulent assignment was sufficient to bind it to the arbitration proceeding, and that such Third Party would, in any case, have an interest to participate in the arbitration proceeding in defence of its rights.

Finally, the application by the Supreme Court of Justice of a statute of the Panamanian Code of Civil Procedure, traditionally conceived for civil litigation before ordinary courts, to the resolution of a matter dealing with arbitration, may lead to a less stringent application of the principle of attraction of the arbitration clause. This reasoning may open the door for additional arguments, based on provisions applicable proceedings before ordinary courts, to attract third parties to arbitration.

The arbitration community in Panama looks forward to signs that would clarify whether or not the HEBE case will be an isolated case or a trendsetter that may result in litigants being able to limit the effects of the Kompetenz-Kompetenz principle, or to bind non-signatory third parties to arbitration agreements.

For the moment, the relevance of the HEBE decision regarding these issues remains to be seen.

Notes

1. Law No. 11 of 23 October 1975.
2. Law No. 5 of 25 October 1983.
3. Law No. 13 of 3 January 1996.
4. Law Decree No. 5 of 8 July 1999.
5. Decision dated 9 June 2011, issued by the Supreme Court of Justice’s Plenary in the writ of amparo (motion for protection of constitutional guarantees) filed by HEBE Corporation, SA against the minutes of the hearing of an Arbitral Tribunal dated 18 November 2010, in the arbitration proceedings filed by HEBE Corporation, SA against Vent Vue, SA and Innovaciones De Vidrios, SA.
6. Decision of 24 August 2010, issued by the Plenary of the Supreme Court of Justice. Writ of amparo filed by Las Brisas de Amador, SA against the decision of 4 February 2010, issued by an Arbitral Tribunal in the proceedings filed by Palliser Holdings, Inc. against Las Brisas de Amador, SA; decision of 13 August 2012, issued by the Plenary of the Supreme Court of Justice. Writ of amparo filed by Moisés David Mizrachi Russo against the decision of 4 February 2010, issued by an arbitrator in the proceedings filed by Palliser Victoire Universal, SA against Fernando Alvarez.
7. This is a provision applicable to judicial proceedings, and not to arbitration proceedings, which provides that when the grounds for a claim are acts or transactions in which several persons have been involved or participated or that, by their nature or on account of a legal requirement, cannot be solved on the merits without all parties involved in such acts or transactions appearing in the proceedings, the claim must be directed against all those involved.
8. Decision of 24 August 2010, issued by the Plenary of the Supreme Court of Justice. Writ of amparo filed by Las Brisas de Amador, SA against the decision of 4 February 2010, issued by an Arbitral Tribunal in the proceedings filed by Palliser Holdings, Inc against Las Brisas de Amador, SA.