Last year’s Peru chapter provided a general overview of the Peruvian arbitration law (Legislative Decree 1071) issued in 2008. This year we present a more detailed review of the application of some of the main provisions of the arbitration law and recent developments in the arbitration practice.
In this year’s Peru chapter we provide an introduction to the 2008 statute’s application in practice by reviewing the most recent decisions at the superior court level, as well as the Peruvian Supreme Court, issued in 2012, 2013 and 2014.1 Notably previous judicial decisions are not binding in the Peruvian legal system as they have no precedential value. However, a careful study of the courts’ decisions on setting aside awards should become a valid instrument of guidance and analysis for the benefit of the Peruvian arbitration community.
Accordingly, we briefly comment on the current interpretation by the courts of the different grounds for setting aside arbitral awards under the Peruvian arbitration law, as well as the procedural requirements to file a set-aside request, the applicability of the law to non-signatories, and findings of possible corruption or criminal behaviour in arbitration, among other matters.
We further focus on the efforts currently underway to modernise arbitration practices in Peru, aimed at bringing Peruvian arbitration practice to international standards.
Set-aside requests under Peruvian law
The grounds for a set-aside request
Article 63.1 of the arbitration law states that an award may only be set aside on the following grounds:
(i) the arbitration agreement does not exist or is not valid;
(ii) a party was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings, or was not able to present its case;
(iii) the composition of the tribunal or the arbitral procedure was not in accordance with the agreement of the parties or the applicable arbitration rules, unless such agreement or rule is contrary to a mandatory provision of Legislative Decree 1071;
(iv) the award deals with a matter that was not submitted to the tribunal’s decision;
(v) in a domestic arbitration, the subject matter of arbitration is evidently impossible to settle by arbitration according to law;
(vi) in an international arbitration, the subject matter of arbitration is impossible to settle by arbitration under the laws of Peru or the award is in conflict with international public policy; and
(vii) the dispute was solved exceeding the deadlines the parties agreed to or stipulated in the applicable institutional rules.
An arbitration award may only be challenged under grounds (i), (ii), (iii) and (iv) if such grounds were raised by the affected party during the arbitration and were rejected. In the case of grounds (iv) and (v), the setting aside decision will only affect the matters that were not the subject of the arbitration submission or that cannot be subject to arbitration, as long as they can be separated. If it is not possible to separate them, the award will be set aside in its entirety. Ground (vii) may only be invoked if the affected party raised such violation during the arbitration and it is not contrary with its own conduct in the arbitration.
Although the set aside grounds provided in article 63 are exclusive, courts have admitted requests for setting aside an award that are not based in any of the grounds provided in article 63. For example, the Second Commercial Chamber of the Lima Superior Court has stated:
a request for set aside of an arbitral award may be filed not only on the basis of the grounds contained in article 63, but also on the basis of allegations related to the breach of constitutional rights…2
More generally, however, the courts have understood that the breach of a constitutional right (commonly the right to due process) is not a separate ground for set aside, but is contained within article 63.1(b).
Our review of recent court decisions reveals that the most frequently alleged grounds for setting aside arbitration awards have been those provided in article 63.1 (b), on the basis that there was a failure to due process and a party was not able to adequately present its case; and 63.1 (d) on the basis that the award deals with a matter that was not submitted to the tribunal’s decision.
Article 62 of the arbitration law forbids judges from reviewing the substance of matters decided in the arbitration or to review the reasoning of the arbitration tribunal. The review of recent court decisions from the Commercial Chambers of the Superior Court of Lima shows, generally, a consistent application of this provision. When the set aside request was clearly not based on any of the grounds listed article 63, the request was dismissed by the courts. When interpreting the arbitration law, the Court stated:
the annulment process has not been designed by the legislator as a way to reopen a discussion that has been already solved by the Tribunal, and much less as a way to evaluate if the criteria of the arbitrator has been the best; but as an instrument to determine if the award has been issued validly. If this was not the case, the annulment would affect the award’s ‘res judicata’ nature, that article 61 attaches to it.3
the arguments presented to support the application of the grounds for setting aside the award, are not related to such grounds, because they do not refer to the arbitrators lack of respect for the procedural rules [...], instead, they question the criteria of the arbitrator for deciding the dispute, alleging it was not correct, with the clear intention of carrying out a review which is not permitted: the review of the substance of the matters subject of arbitration4
Deficient or insufficient reasoning in the award
The most frequently argued ground for setting aside is article 63.1(b), which provides that an award should be set aside when ‘a party was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings, or was not able to present its case’. The last phrase, referring to the inability of a party to present its case, has been construed by the courts in an expansive manner, to cover breaches to the right to due process. Under Peruvian law, the right to a reasoned decision is included within the concept of due process. Thus, requests for set aside are frequently based on allegations of deficient reasoning or lack of reasoning in the award.
However, these allegations are generally not successful since, as previously mentioned, courts limit their analysis to formal issues, without reviewing the substance of the arbitrators’ decision.
The Second Commercial Chamber of the Lima Superior Court has stated that:
a difference of opinion with respect to the interpretation that may be given to the applicable law is not within the ground of deficient or defective reasoning, since that is forbidden, since this action is not a means to review the merits of the controversy5
Courts have found that an award has sufficient reasoning when it refers to a different document containing such reasoning. They have also accepted that a certain length or a detailed answer to each and every argument raised by the parties is not required.
Lack of proper reasoning has been found when there is a contradiction in the tribunal’s decision. For example, in a 2013 decision, the Second Commercial Chamber of the Lima Superior Court found contradiction in an award that, on the one hand, expressly rejected awarding the claimant compensation on the basis of certain tax expenses and, on the other hand, based the amount awarded on the total amount proposed by an expert report, which included in its calculations such tax expenses.
In another decision, the First Commercial Chamber of the Lima Superior Court found motivation to be only ‘apparent’ in an award that awarded an amount for currency conversion adjustment when the law and the contract expressly prohibited readjustments.
Peruvian courts have recognised that arbitral tribunals have the authority to deny the application of a legal provision to a specific case if they consider such provision is unconstitutional. However, such decision must be properly reasoned, following parameters set by the Constitutional Tribunal on the matter which include explaining that the legal provision cannot be interpreted in accordance with the Constitution and how its application would cause prejudice to one of the parties. The Lima Superior Court has set aside an award for failing to include such reasoning.
In another case, the First Commercial Chamber of the Lima Superior Court found that the award’s reasoning was not sufficient with respect to the determination of damages and that the award had not adequately explained the different items included in the damages determination. The court considered that the award had not explained the link between the amounts awarded and the injury caused.
Validity of the arbitration agreement
Requests for set aside are not commonly filed under article 63.1(a), which refers to the existence or validity of the arbitration agreement. However, there are a few recent cases on the matter.
For example, this ground has been raised with respect to awards issued in cases where arbitration was mandatory pursuant to Peruvian law. In such cases, the courts have found that the legal provision mandating arbitration replaces the agreement by the parties. As explained in last year’s Peru chapter, the State Procurement Act (Legislative Decree 1017) provides for mandatory arbitration in all disputes related to contracts by state entities to acquire goods and services. The scope of the law mandating arbitration must be considered carefully. The Lima Superior Court has set aside an award that disregarded a contractual clause referring to the jurisdiction of local courts and applied the mandatory arbitration provision in Legislative Decree 1017. The court found that a state-owned company was not under this provision and thus could validly agree to settle its disputes before the courts.
In another case, the Lima Superior Court found that a valid arbitration agreement did not exist when the arbitration agreement had been identified as a disputed issue in the minutes of conciliation proceedings, but no agreement was reached in such conciliation.
The Superior Court of Lima set aside an award for lack of arbitration agreement considering the claims were not based on the contract in which the agreement was contained. In that case, the parties had arbitrated with respect to a breach of the agreement. After the arbitration had concluded, one of the parties maintained that the other party had acted improperly during the arbitration and alleged to have suffered damages as a result. A second arbitration was commenced under the same agreement and the arbitration tribunal decided on the parties’ procedural conduct. The court set aside the second award, considering that the arbitration clause in the contract was not applicable to the dispute because the claims did not derive from the contract, but from the exercise of the parties’ procedural rights during the arbitration.
Matters not subject to arbitration under Peruvian law
Domestic awards may be set aside under article 63.1(e) when ‘the subject matter of arbitration is evidently impossible of settlement by arbitration according to law’. This ground has been strictly interpreted by the courts.
For example, claimants have argued that a tribunal may not address issues that had already been decided by a previous arbitration award. Such issues could not be subject to arbitration under the principle of res judicata. The courts, however, have been satisfied confirming that the tribunal had considered the previous award. If the arbitration tribunal had made a determination on the scope of the previous award and had issued its decision accordingly, the courts have not questioned such determination finding this was within the tribunal’s authority.
In public works arbitration, courts have consistently found that arbitration tribunals cannot decide claims regarding additional works over the legal limit. Pursuant to a legal provision, the only authority that may allow additional works over such limit is the government’s internal control office. Thus, courts have consistently found that under a mandatory law this matter may not be subject to arbitration. Courts have set aside awards based on claims for unjust enrichment when the substance was related to additional works over the legal limit. The Supreme Court has confirmed this position.6
Also with respect to government contracting arbitration, tribunals are not prevented from addressing issues related to administrative acts that have been challenged before the courts. Such issues may be subject to arbitration under Peruvian law.
The setting aside of extra petita decisions
Under article 63.1(d), awards that go beyond the claimant’s submissions (extra petita) may be set aside. This provision states that awards may be set aside when ‘the award deals with a matter that was not submitted to the tribunal’s decision’.
The courts have set aside awards that decide on issues not requested by the claimant that were thus not debated in the proceedings. For example, courts have also set aside an award for extra petita when it awarded damages on the basis of lost profits (lucrum cessans) when the claim was made for direct losses.
An arbitral decision awarding damages when the claim was referred to specific performance only was set aside for extra petita. It was argued that the tribunal had acted according to its authority by applying the iura novit curia principle. The court did not deny the arbitral tribunal had the authority to apply this principle; however, it found such principle ‘consisting in the application of the pertinent law to the case, does not allow going beyond the petitions submitted by the parties’.7
In another case, the court decided to partially set aside a tribunal’s additional award. After the final award had been issued, a party requested an additional award arguing that the final award had not addressed certain matters. The tribunal concluded those matters had not been presented in the proceedings and that the issues were beyond the scope of the arbitral agreement. The court set aside this last part of the additional award for extra petita because the tribunal had not been asked to analyse whether those issues were within the scope of the arbitral agreement, which should be decided by a new tribunal if and when such claims were presented.
In some cases, set aside requests for extra petita have been assimilated to those for deficient reasoning. Courts have considered that an award that addresses issues not presented in the proceedings lacks consistency and therefore has defective reasoning.
When the issue has already been debated in the arbitral proceedings, set aside is not granted under extra petita. For example, in a 2013 decision, the Superior Court found that a claimant attempted ‘to reopen a discussion apparently introducing new arguments [...] This is not possible before the courts [within this set aside proceeding] because it would imply a review of the concepts used and developed by the award.’8
Compliance with the requirement of having raised grounds a), b), c) and d) of article 63.1 before the Tribunal for admitting an application for setting aside
Under the Peruvian arbitration law, grounds (a), (b), (c) and (d) of article 63.1 of the arbitration law can be the basis for a set aside application only if those grounds were raised during the arbitration by the affected party and were rejected. Pursuant to this provision, Peruvian courts consistently dismiss set aside applications that fail to demonstrate that the arguments that support each alleged ground were raised before the tribunal.
The courts explain that the arbitration process has mechanisms to solve the issues that may appear during arbitration. This is why a set aside request will be dismissed if the same arguments could have been made through a request for rectification, interpretation or integration of the award.
However, in some cases – such as deficient reasoning of the awards – the courts have understood that the mechanisms regulated in the arbitration law are inadequate to solve such issues. In those cases, the courts have interpreted that it was not necessary to comply with the requirement of having raised the issue before the Tribunal.
The setting aside of preliminary decisions
The arbitration law provides that the tribunal may decide on objections to its jurisdiction in the final award or by a preliminary decision. However, this decision may only be challenged by a set aside request against the final award. The courts have been clear in enforcing this provision. The First Commercial Chamber of the Lima Superior Court recently dismissed a request to set aside a preliminary jurisdictional award when the arbitral proceedings were still ongoing, considering it premature. Any such request must be filed at the time the arbitration is concluded, and jointly with a request referred to the final award.
Opportunity for set aside requests
Under Peruvian arbitration law, set aside requests must be filed within 20 business days from when the award, or any supplementary decision, was notified. The Supreme Court has found that if the award is not properly notified, the legal term previously referred to shall be counted from the date when the interested party had knowledge of the content of the arbitral award, including constructive knowledge pursuant to the publicity principles applicable to the information contained in the public registry.9
Kompetenz-Kompetenz principle and parties bound by the arbitration agreement
Peruvian law accepts that under the Kompetenz-Kompetenz principle, an arbitral tribunal has the authority to rule on its own jurisdiction. Recent court decisions in a case in which arbitral tribunal extended the arbitration agreement to non-signatories have confirmed this includes a determination on whether a party is bound by an arbitration agreement.
In Peru SAC v Langostinera Caleta Dorada SAC and others, the arbitral tribunal found there was a fraudulent scheme by a group of companies and applied the principle of lifting the corporate veil of the companies involved in the scheme. As a result, the tribunal decided to extend the arbitration agreement to non-signatories and issued an award against all the defendants.
The First Commercial Chamber of the Lima Superior Court initially set aside the award upon a request filed by the non-signatory parties. The court found that under Peruvian law there was no basis to extend the arbitration agreement beyond its signatories, rejecting the application of the doctrine of piercing the corporate veil.
TGS challenged this decision before the Supreme Court by an appeal request. The request was granted and the Supreme Court annulled the Superior Court’s decision. The Supreme Court found the Superior Court had erred in finding that the arbitral tribunal could not make determinations on situations such as fraud and piercing of the corporate veil, by placing the arbitral jurisdiction in an inferior position to judicial jurisdiction, which is incorrect under Peruvian law.
In addition, the Supreme Court considered that, in applying the Kompetenz-Kompetenz principle, the courts may not question the substance of the arguments on the basis of which a tribunal has determined its own competence. As a result, in 2013 the Superior Court issued a new decision confirming the award.
As described in last year’s Peru chapter, the new Peruvian arbitration law contains a provision pursuant to which the arbitration agreement extends to non-signatories (article 14).10 Even when this case refers to an award issued before the new arbitration law entered into force, we believe it will be useful to support the position that the tribunal’s analysis with respect to the extension of the arbitration agreement to non-signatories (under this new legal provision) is a matter covered by the principle of Kompetenz-Kompetenz and thus the substance of such decision may not be questioned by the courts.
Since the approval of the new arbitration law, few cases have referred to the application of article 14. In recent cases, the courts have not questioned the substance of the arbitrators’ determination with respect to the incorporation of non-signatory parties. However, in a case in which the tribunal had applied article 14, the Lima Superior Court evaluated whether the party applying for set aside on the basis of lack of an arbitration agreement had implicitly accepted the arbitration agreement during arbitration proceedings.
The Thirteenth Complementary Provision of the arbitration law establishes that the arbitration law is applicable ‘in whatever corresponds’ to the expert decisions that solve technical issues or factual issues. It also states the expert’s decision is binding for the parties, the judicial authorities and arbitral tribunals, unless otherwise agreed by the parties.
In a recent case, the Lima Superior Court concluded that an expert decision will be deemed an arbitral award and therefore may be subject to set aside. The Court stated the expert decision was an arbitral award because it complied with all the legal requisites of an arbitral award contained in articles 54 (solves a dispute), 55 (must be written and signed by the arbitrator), 56 (expresses the reasoning followed by the arbitrator, unless otherwise agreed by the parties) and 59 (is definitive and not subject to appeal) of the arbitration law.
The Court also stated that the parties could not validly waive their rights to a set aside request because that is only possible in the case regulated in article 63.8 of the arbitration law; that is, when none of the parties is Peruvian or none of the parties is domiciled in Peru.
Possible bad faith and corruption issues in arbitration
The current arbitration law has faced recent criticism because a number of cases were brought to light in which fraudulent awards were issued in order to transfer property and register transfer titles in the public registries.
In Case No. 00166-2012-0-1817-SP-CO-02, the Superior Court set aside an arbitration award that decided the transfer of property based on grounds a), b) and d) of article 63 of the arbitration law. The Court concluded there was no arbitration agreement between the parties after reviewing the award and the contracts supposedly entered into by the parties. The Court also concluded that the defendant was not notified with the arbitration proceedings, deeming a notification in an incorrect address not valid. In addition, the Court set aside the award based on ground d) because the sole arbitrator had ordered the registration of the property transfer when such matter had not been part of the issues subject to arbitration by the parties.
The Court considered that the sole arbitrator had been so negligent in handling the arbitration proceedings that it had to notify the national prosecutor and the Lima Bar, and an investigation for possible criminal behaviour was carried out.
Current developments in Peruvian arbitration practice
There is currently an ongoing discussion regarding the modernisation of certain arbitration customs or practices. The arbitration centre of the Lima Chamber of Commerce is currently working on a new set of arbitration rules that will possibly enter into effect this year.
The Peruvian arbitration law explicitly establishes that customs or practices of arbitration are a supplementary source in case the statute is silent on any specific matter. This rule is generally understood to make certain generally applicable principles contained in matters such as the IBA guidelines and rules that have been approved by international entities such as the ICC or ICSID. As a result, we believe there are certain issues that are expected to change in Peurvian arbitration practice or that are generally recommended by many practitioners, include the following:
Allowing for electronic notification of orders and submissions during the arbitration
Currently, hard copies of every submission or order need to be filed. The arbitration centres also notify each submission or order by hard copy, consuming time and resources.
Limiting the number of submissions by the parties
Parties are currently not used to agreeing on a calendar for a limited number of submissions during the arbitration or to request the tribunal for permission to file briefs after the claim and response has been filed. Parties therefore end up filing numerous documents with their positions and allegations, prolonging the duration of the arbitration unnecessarily.
The set of rules for the arbitration should be negotiated by the parties to adapt the rules to the case
Currently, procedural rules are usually decided in an ‘installation hearing’ which can be eliminated if the parties start to negotiate the applicable rules privately and submit the agreed rules to the Tribunal for approval.
Organising more effective hearings
Currently, tribunals organise hearings on non-consecutive dates and for several purposes: the installation of the tribunal, the determination of the ‘disputed matters’ in the arbitration, hearing on the merits and so on. Parties should negotiate and agree with the tribunal on the necessary days to carry out the hearings and try to eliminate hearings for procedural acts that can be handled by phone or with no hearing at all.
- The authors have reviewed a total of 253 decisions on setting aside applications issued on applications filed on 2012, 2013 and 2014 before the first and second Commercial Chambers of Lima’s Superior Court.
- Decision in Case No. 00233-2012-0-1817-SP-CO-02.
- Decision in Case No. 00033-2012-0-1817-SP-CO-01.
- Decision in Case No. 00101-2012-0-1817-SP-CO-01.
- Decision in Case No. 201-201-0-1817-SP-CO-02.
- Case No. Cas. 02391-2013.
- Case No. 00108-2013-0-1817-SP-CO-02.
- Case No. 00205-2012-01817-SP-CO-02.
- Case Cas. No. 4671-2012-Lima.
- Article 14: ‘The arbitration agreement shall extend to those parties whose consent to arbitration, in good faith, may be determined by their active and decisive participation in the negotiation, execution, performance or termination of the contract that contains the arbitration agreement or to which the arbitration agreement relates. It also extends to those parties who intend to derive rights or benefits from the contract.’