Panama: rapid increase in arbitrations with the state and state entities

In summary

The past few years have seen an exponential increase in the number of arbitrations with the state and state entities, particularly in major infrastructure contracts. This article provides an overview of recent legal developments regarding the use of arbitration as an alternative to litigation in public procurement and public–private partnership contracts. It also addresses the use of dispute boards in infrastructure projects and the need for more transparency in arbitrations involving states and state entities, and highlights Panama’s participation in UNCITRAL Working Group III.

Discussion points

• Arbitration under the public-private partnership regime
• Arbitration under the Public Procurement Law
• Disputes boards in infrastructure projects
• Transparency in arbitrations involving states and state entities
• Investor-state dispute settlement reform

Referenced in this article

• Panama’s Political Constitution (as amended by Legislative Act No.1 of 2004)
• Law 131 of 31 December 2013
• Law 93 of 19 September 2019
• Unique Text of the Law on Public Procurement
• Executive Decree No. 840 of 31 December 2020
• Sacyr SA v Republic of Panama
• Webuild SpA (formerly Salini Impregilo SpA) v Republic of Panama

Panama’s Constitution recognises the power of the state to submit a dispute to arbitration through contractual arbitration agreements. Additionally, since 2004, the Constitution expressly admits the competence-competence principle, according to which arbitral tribunals may determine their own jurisdiction under the arbitration agreement.

Panama’s arbitration system is governed by Law 131 of 2013 (the Arbitration Law). Regarding the matters that may be submitted to arbitration (objective arbitrability), article 4 of the Arbitration Law provides:

When the arbitration is international and one of the parties is a state or a company, organisation or enterprise controlled by a state, that party shall not invoke the prerogatives of its own laws to avoid its obligations arising from the arbitration agreement.

Although Panama’s Arbitration Law is modelled on the UNCITRAL Model Law, this provision is rooted not in the Model Law but in the international principle by which a state shall not invoke provisions of its internal law to justify its failure to perform an international obligation.^[1]

Furthermore, article 14 of the Arbitration Law states:

The Panamanian state will submit to international arbitration the disputes arising from treaties or international agreements to which it is a party, and which have been duly ratified, in cases in which arbitration has been agreed as a method of dispute resolution.

. . .

The submission to arbitration agreed with the Panamanian state, as well as with the Panama Canal Authority, is valid, regarding the contracts that they enter into. The arbitration agreement shall be effective by itself, in accordance with the provisions of this Law.

Panama’s Arbitration Law provides that the state may submit its contractual disputes to international arbitration.^[2] This has been recognised by the Supreme Court on multiple occasions.^[3] However, when the seat of the arbitration is Panama, the Public Prosecutor’s Office must be notified in addition to the state entity involved in the dispute. The public prosecutor has the constitutional role of defending the interests of the state.^[4]

Two recent laws reaffirm the power of the state to be a party in arbitration proceedings: the Public-Private Partnership (PPP) Law and the Public Procurement Law. These are not, however, the only ways that the state may participate in arbitration. In fact, each of the investor-state dispute settlement (ISDS) proceedings where Panama is or was a party is grounded on an international investment agreement (IIA), and not an investment contract.

Arbitration under the public-private partnership regime

In 2019, the National Assembly passed Law 93 establishing the PPP regime in Panama. Before its enactment, Panama had adopted laws that privatised state-owned entities, and developed infrastructure and public services projects through joint ventures with private capital. The basis for the administrative concession system for the execution of public work of public interest was Law 5 of 1988,^[5] applicable to construction, improvement, maintenance and exploration of roads or other works classified as of public interest.

Law 93 of 2019 defines PPPs as a long-term contract between one or more public entities,^[6] and a legal person from the private sector, for the ‘design, construction, repair, expansion, financing, exploitation, operation, maintenance, administration or supply of a good or service to the public entity contracting party or the end users of any public service’ (article 3). As such, PPPs are commonly seen as a way of structuring public infrastructure investments, enabling the government to transfer costs and liabilities to the private sector.

PPP contracts must include a phase of amicable dispute resolution between the contracting parties for disputes of a technical or economic nature during the execution of the PPP contract. If an amicable solution between the parties cannot be reached, disputes may be submitted to a dispute board (technical panel) or directly to arbitration. This is a major change in Panama’s public policy as it expressly allows for arbitration in PPP agreements.

According to article 77 of Law 93 of 2019, the technical panel must be composed of two attorneys, two engineers and one economist or financial expert. Any of the parties may submit any technical or economic controversy to the technical panel, which will issue a technical recommendation. This recommendation must be duly reasoned, but it will not bind the parties. A party who disagrees with the decision of the technical panel may submit a claim to arbitration for a final decision.

Parties to the PPP contract may submit to arbitration the controversies or claims due to the interpretation or application of the PPP contract or its execution (article 78). The PPP contracts must include not only the arbitration clause but also the rules applicable to the arbitration procedure. However, the Law includes three requirements: the applicable law to the process must be that of Panama; the seat of the arbitration must be Panama; and the language of the proceedings must be Spanish. The arbitration is subject to Panama’s Arbitration Law, as modified by the PPP Law and the arbitration clause incorporated in the PPP contract.

Pursuant to Executive Decree 840 of 2020 (article 83), the following matters may not be subject to the dispute resolution system set in Law 93 of 2019: non-contractual disputes; resolutions that affect the company holding the PPP contract; and situations where the PPP contract mandates the settlement of disputes by the contracting public entity. However, contractors may seek compensation through the dispute resolution provisions in Law 93 of 2019 if it does not agree with the contracting entity’s decision.

One interesting point covered by Law 93 of 2019 is the participation in the arbitration procedure of secured creditors under the PPP contract, which will be without transfer of possession of the pledged rights and assets. In other words, arbitral tribunals must admit the creditors as independent third parties in the arbitration proceedings. It is expected that these creditors will have independent claims in the arbitration.

Arbitration under the Public Procurement Law

Public procurement is regulated in Panama by Law 22 of 2006, as restated by Law 153 of 2020,^[7] which applies to concessions and other agreements not regulated by a specific law and provides guidelines for public procurement agreements and the bidding process (article 1). Bidding processes are monitored by the Public Procurement Directorate.

The 2020 Law restatement, at article 95, expressly provides for arbitration as a way to resolve the controversies that may arise in the execution of a public procurement contract. In this sense, public entities may include an arbitration clause in their contract specifications or their contracts.

Arbitrations arising from public contracting are subject to the rules of Law 131 of 2013, which regulates national and international arbitration in Panama. As for the arbitration clauses under the public-private association contract regime, the seat of the arbitration must be Panama and the language must be Spanish. At the time of writing, the government had not yet regulated for arbitration proceedings under the Public Procurement Law. However, one can infer certain rules that may apply in the arbitration involving public entities.^[8] For instance, the existence of an administrative contract termination clause, which is required by the Public Procurement Law, must not constitute a waiver of arbitral jurisdiction.

Furthermore, under article 17 of Law 131 of 2013, the arbitration clause generates substantive and procedural effects. The substantive effect obliges the parties to comply with the arbitration agreement, submit the controversy to arbitration and formalise the constitution of the arbitral tribunal. The procedural effect consists of the declination of jurisdiction by the contracting entity, the administrative authority, the judicial court or the administrative court of public procurement, and the immediate referral of the case to the arbitral tribunal without further processing or assessing the claims.

Another advantage of submitting a public procurement agreement to arbitration under Law 131 of 2013 is that the tribunal’s decision may only be challenged in an annulment proceeding. According to article 66, annulment is the most appropriate recourse to the protection of a constitutional right that might have been threatened or violated in the course of the arbitration or by the award.

Article 67 provides the grounds for annulment, which are rooted in those of the New York Convention^[9] and the Panama Convention,^[10] and are summarised below:

• one of the parties to the arbitration agreement was under some incapacity, or the agreement is not valid, under the law to which the parties have subjected it, or in accordance with Panamanian law;
• one of the parties was not given proper notice of the appointment of an arbitrator or the arbitration proceedings, or was otherwise unable to present its case;
• the award deals with a difference not contemplated by or failing within the terms of the arbitration agreement or contains decisions that go beyond its terms;
• the appointment of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or the applicable law;
• the arbitrators have decided on matters not capable of settlement by arbitration; and
• the international award is contrary to international public policy.

The execution of the award will be suspended until the Supreme Court decides on the request for annulment.

Dispute boards under infrastructure projects

Although Panama has not adopted the use of dispute boards in its procurement law, several contracts with state entities follow the International Federation of Consulting Engineers (FIDIC) model contracts and include the establishment of a dispute board accordingly. This is explained by the fact that some of those contracts are financed by multilateral organisations such as the Inter-American Development Bank and the World Bank.

Perhaps the most emblematic example of the use of dispute boards that Panama has had to face is the case against the Panama Canal Authority (ACP), where five ICC arbitrations were preceded by a dispute adjudication board (DAB) decision. Work on the Canal expansion began in 2009, but by late 2013 the project exceeded the budget by at least US$1.6 billion.^[11] The contractor (GUPC Consortium) submitted several claims against the ACP under the dispute resolution process provided for in the contract for the design and construction of the third set of locks. Specifically, on 30 September 2013, GUPC filed a claim for US$498,000 to the DAB for evaluation and conclusion. The DAB recognised US$265 million to the contractor related to some cost overruns. However, one of the ICC arbitral tribunals ordered the return of the amount paid by the ACP.^[12]

This dispute is also interesting because two members of the Consortium filed two separate investment arbitrations. On one side, Sacyr SA, a Spanish company, sued the Republic of Panama in 2018 under the UNCITRAL Arbitration Rules for the alleged TBI Panama–Spain violation.^[13] On the other side, Webuild (formerly Salini Impregilo SpA) also sued Panama in 2020, this time under the Investment Promotion and Protection Agreement between Panama and Italy.^[14] Both were in parallelto the pending ICC arbitrations filed by the GUPC Consortium against the ACP for alleged cost overruns arising from the Panama Canal expansion project.

Taking into account the importance of the use of dispute boards in infrastructure projects, the Conciliation and Arbitration Centre of Panama (CeCAP) recently worked on the development of Dispute Boards Rules.^[15] The Rules give preference to a standing board with a dispute avoidance role, encouraging the parties to solve their problems as soon as a problem arises.

Transparency in arbitrations involving states and state entities

Arbitral institutions have recently amended or committed to amend their arbitration rules to include provisions on transparency and to make preliminary objections to non-meritorious claims.^[16] These amendments respond to criticisms that call into question the legitimacy of cases involving states and state entities, and more generally, the investor-state dispute settlement (ISDS) system.

In the ISDS world, there have been several attempts to improve transparency. One example is the new ICSID Arbitration Rules, of which the new Chapter X on publication, access to the proceedings and non-disputing party submissions opens a whole new world for ISDS cases and the duty of the parties on transparency.^[17] In practice, ICSID has included transparency provisions in its 2022 Arbitration Rules and implemented a draft procedural 2 on transparency, where the disputing parties can agree on transparency matters. But perhaps the most important initiative to improve transparency is the UNCITRAL Rules on Transparency in Treaty-based Investor–State Arbitration.^[18] These Rules are focused on procedural aspects, such as the publication of information and documents, submissions by third parties and by non-disputing parties to the treaty, and the publicity of the hearing. The Rules intend to be flexible and to guarantee the due process of law. Moreover, the United Nations Convention on Transparency (the Mauritius Convention) was adopted by UNCITRAL to fill the gap in thousands of existing IIAs to which the Rules on Transparency do not apply.^[19]

An opinion issued by the Attorney General’s Office on the advisability of the Mauritius Convention highlighted the importance of Panama’s participation in the Working Group III discussions.^[20] The future adoption of the Mauritius Convention represents a willingness of the state to improve transparency in ISDS, contributing to the legitimacy of the ISDS system.

Transparency is important for a country like Panama aiming to attract more direct investments. In this regard, Panama has strict rules on transparency where most of the information about the state and state entities needs to be public.^[21] In addition, the Constitution establishes that any transactional agreement must first be submitted to the Attorney General for approval and then submitted for authorisation by the Council Cabinet.^[22] In addition, the agreement must be endorsed by the Comptroller after its execution to enter into force.^[23] In this regard, Panama has published settlement agreements with investors, as is mandated by law.^[24] In this same vein, Panama has opted to make public not only investment awards but also procedural documents and hearings even when it is not mandated by the investment treaty.

This need for transparency should also be reflected in infrastructure contractual cases, in the sense that they involve the public stake; still, it would depend on the applicable rules and the willingness of the parties.

Panama’s input into UNCITRAL ISDS reform

In 2017, UNCITRAL Working Group III on ISDS reform received the mandate to focus on the reform of procedural aspects of ISDS, with the mission of: ‘(i) identifying and considering concerns regarding ISDS; (ii) considering whether reform was desirable in the light of any identified concerns; and (iii) if so, developing any relevant solutions to be recommended to the Commission’.^[25] Possible solutions, as proposed by some states, include the development of soft law instruments, the establishment of an appeal mechanism and the creation of a multilateral investment court.^[26]

Panama is currently a member of the Commission^[27] and participates in the discussions of Working Group III, through the office in charge of investment arbitrations at the Ministry of Economy and Finance. Panama has made submissions on different topics, including comments on the different versions of the Draft Code of Conduct for Adjudicators in International Investment Disputes (approved by the Commission in 2023), and the establishment of an Advisory Centre on International Investment Law (approved by the Commission in 2024). However, Panama, like many other countries, has not taken a stance on some of the proposals under discussion, including the options for establishing an appellate mechanism (ie, standing or permanent body versus roster model), or the establishment of a standing multilateral mechanism. More discussion is needed to take a position on some of the topics.

^*Many thanks to Margie-Lys Jaime for her contributions to the article.

Endnotes