Impact of the reform of the Peruvian Arbitration Law following the Odebrecht case

Peru is one of the countries with the highest levels of arbitration per capita, a fact attributable mainly to Law No 26850, of July 30, 1997, which, among other elements, laid down that arbitration was the “mandatory” mechanism for resolving disputes with the government.

Legislative Decree No 1071, of June 27, 2008, governing arbitration in Peru (the “Peruvian Arbitration Law”), included several recommendations provided by the UNCITRAL Model Law, and adopted measures that were innovative for their time, including express provisions on making the arbitration agreement binding on non-signing parties. As a result the Peruvian Arbitration Law gained recognition and respect in arbitration circles.

Driven by the impact of the Odebrecht case, on January 24 the Peruvian government published Urgent Decree No 020-2020, amending several provisions of the Peruvian Arbitration Law.

The amended provisions notably include the following measures, analyzed critically below:

• It determines that arbitration proceedings involving the Peruvian government have to be institutional, unless the quantum of the dispute does not exceed 10 UITs (Peruvian tax units), approximately 43,000 sols, in which case ad hoc proceedings are allowed (article 7.5).  No mechanism is provided however for resolving the possible contradiction between this law and article 225.3 of Supreme Decree No 344-2018-EF, of December 29, 2018, amended by Supreme Decree No 377-2019-EF, of December 14, 2019, which states that ad hoc arbitration proceedings involving the Peruvian government cannot have a quantum greater than S/. 5,000,000.00 (5 million soles). There is no mechanism either for resolving the Urgent Decree’s possible contradiction with the currently in force Government Contracts Law, Law No 30225 (and its 2017 and 2018 amendments). This second law must prevail because it is more specific, although it states that the Government Contracts Regulations will define which cases will have to be settled through an ad hoc arbitration proceeding against the Peruvian government.
• It is laid down that a guarantee letter (carta fianza) needs to be provided as a special type of countersecurity for the enforcement of injunctive relief against the Peruvian government. That guarantee letter cannot be for a lower amount than the performance guarantee (article 8.2.). It is stated moreover that the Arbitral Tribunal resolving an arbitration proceeding involving the Peruvian government cannot have among its members any professionals who have previously had any participation in the specific case to be resolved (article 21). Additionally, challenges of members of the Arbitral Tribunal will have to be resolved by the chosen arbitration institution or, failing that, by the relevant Chamber of Commerce, and any agreement granting that power to the Arbitral Tribunal itself will be null and void (article 29). Some authors consider that this Urgent Decree confuses the transparency that it must promote in arbitration proceedings involving the government, with the predominance of the government’s interests over those of private parties. This second issue would create asymmetry in the arbitration process, directly opposing the principles underlying arbitration, and could affect the merited recognition the Peruvian Arbitration Law has gained by reason of its modern and sophisticated approach.

Lastly, some comments are needed on the material scope of the Peruvian Arbitration law and therefore of the amendments introduced by the Urgent Decree.

Under article 1.1 of the Peruvian Arbitration Law, its material scope is defined by reference to the arbitration proceedings that take place in Peru; as a result of taking place in Peru, however, treaties or specific national laws are applicable, in which case the Peruvian Arbitration Law will be applicable on a secondary basis.

Additionally, under article 4 of the same legislative instrument, the Peruvian government may consent to international arbitration, in or outside Peru, for disputes under the contracts it concludes with Peruvian nationals or foreigners not domiciled in the country.

It may be inferred from this that the amendments described above to the Peruvian Arbitration Law will indeed be applicable to international arbitration proceedings involving the Peruvian government, although only if they take place in Peru[1].

However, under article 1.2 of the Peruvian Arbitration Law, the requirement for the guarantee letter in respect of an amount not below the performance guarantee as countersecurity in the event of injunctive relief ordered against the Peruvian government will also be applicable for any institutional arbitration proceedings taking place outside Peru, unless there is clear contradiction with any treaty or convention signed by Peru. Any disputes arising in this respect will have to be resolved by the Arbitral Tribunal.