In this article, we wish to address the importance and viability of arbitration clauses in contracts with the State, understanding them as an opportunity to reduce costs and time for both the contractor and the contracting entity.

First, it is important to identify that public procurement is the set of principles, processes, and procedures by means of which the State contracts and acquires goods, works, or services, using the public contract as an instrument which, according to the definition of J.R. Castro Montilla, “is a bilateral administrative act involving the public administration, with a view to satisfying the collective interest, and another entity or natural person or legal entity, responsible for providing the service, good, or work required by that subject.”

Since public interests are involved in public procurement, the State has established a body of regulations to govern the matter.

To this end, Law 22 of 2006, which was enacted through Law 153 of 2020, published in Official Gazette No. 29107-A, (hereinafter the Public Procurement Law), by means of its latest amendment, recognized in its Consolidated Text, Article 95, the legal power of public institutions to include arbitration as a method of resolving disputes arising in the context of a public contract, but only with respect to its subject matter and execution. 

However, it is foreseeable that when the Public Procurement Law was conceived in 2006, arbitration was not immediately included, since it gave rise to the special jurisdiction for reviewing administrative acts of public procurement within the government’s purview, which is made up of the Administrative Court of Public Procurement, which has exclusive jurisdiction to hear appeals against acts of award, declaration of abandonment, or the administrative act by which proposals are rejected; it also has jurisdiction to review appeals against administrative decisions on contracts and penalties imposed on contractors accused of non-compliance, as well as the disqualification of contractors for abandoning the work.

This leads us to ask why the latest amendment includes the power to include arbitration clauses in public contracts?

In this regard, on July 8, 1999, through Decree 5, the Panamanian State recognized its intention to promote and regulate the institution of arbitration as a means of dispute resolution. This stems from the fact that Panama, as an attractive and competitive commercial forum, needed to offer investors a more agile mechanism that would allow merchants to resolve conflicts effectively and in less time. This was based on the understanding that, due to the expeditious nature of commerce, it is not favorable to settle disputes in the ordinary courts, which, due to procedural bureaucracy, allow disputes to be delayed, almost as if it were a national legal sport.

Thus, despite the issuance of Decree 5 of 1999, it was necessary to strengthen the institution; therefore, through Legislative Act No. 1 of July 27, 2004, “Which amends the Political Constitution of the Republic of Panama, as amended by the Reform Acts of 1978, the Constitutional Act of 1983, and Legislative Acts No. 1 of 1993 and No. 2 of 1994,” recognizing for all intents and purposes that arbitration is a jurisdiction, which allows public entities, despite having a specialized jurisdiction in public procurement matters, to include an arbitration clause in their contracts so that, based on the efficiency of this justice system, they can attract proposals and investments. Therefore, since 2004, regardless of the fact that the Public Procurement Law did not include the arbitration clause, as the Constitution is the framework for recognition, the resolution of disputes through this mechanism is admissible.

Now, what are the advantages for the State in choosing arbitration as a means of dispute resolution?

In principle, the Public Procurement Law sought not only to establish the applicable law but also the procedure to be followed, recognizing that “Arbitration arising from public procurement shall be governed by the provisions of Law 131 of 2013, which regulates national and international arbitration. The seat of arbitration shall be in the Republic of Panama and the proceedings shall be conducted in Spanish.” Although this limits a fundamental characteristic of arbitration, which is the choice of procedure in light of the autonomous will of the parties, due to the public nature of the State as a party, it allows the contractor to have greater clarity on the procedural rules.

In this type of proceeding, the State will be represented by a special unit of the Attorney General’s Office, without any impediment to hiring private counsel who, together with the representation of the Public Ministry, can fully represent the interests of the State.

On the other hand, we should remember that, in principle, arbitration allows disputes to be resolved in less time, significantly reducing costs for the State, understanding that in the case of construction works, currently in the administrative process (Administrative Court of Public Procurement), this type of conflict allows for the suspension of the work for long periods of time (until the appeal is resolved), which translates into more time for its completion and generally increases the cost of the works for the State, all of this makes arbitration an attractive option for the State and contractors, not to mention the perception of impartiality and balance of powers that this figure effectively generates.

In arbitrations with the State, the arbitral tribunal shall consider that the contracting entity may not be ordered to pay costs, as indicated in the Judicial Code, which may not be disregarded under the pretext of the powers of the Arbitral Tribunal.

Once the dispute has been resolved, the only means of challenge, as recognized by Law 131 of 2013, shall be an appeal for annulment, provided that a violation recognized in Article 67 Lex. Cit. has occurred.

On the other hand, it should be noted that not all contracts with the State may be subject to arbitration. This is because, according to Law 131 of 2013, Article 4 establishes that “disputes over matters freely available to the parties in accordance with the Law, as well as those authorized by law or international treaties or agreements, may be submitted to arbitration.” This means that entities must carry out a preliminary analysis of the subject matter to be contracted in order to avoid including arbitration clauses that could prove futile, as they are considered matters not subject to arbitration.

Given the advantages of arbitration, it is worth noting that, when entering into a public contract, the State is not necessarily obliged to resolve the dispute directly through arbitration. It is possible to include escalation clauses or multi-level clauses that allow for prior dispute resolution mechanisms that contribute to the effective resolution of the conflict, and if it is not resolved, then the possibility of arbitration is activated, such as Dispute Boards.

Dispute Boards allow the parties, through their technical staff, to reach agreements without interrupting the works, in order to resolve their dispute without generating further delays or costs, on the understanding that the decision reached by the parties in the Dispute Board will be binding on both parties and, if no agreement is reached, arbitration may be activated.

In conclusion, we recommend arbitration as an effective means of dispute resolution and share the experience of Peru, which, despite having a special jurisdiction for public procurement, has recognized as mandatory, as of Legislative Decree 1017, the obligation to include an arbitration clause in consulting and public works contracts, which has resulted in the effective resolution of these disputes in approximately one year, significantly reducing costs for the State, unfinished works, and promoting greater security for investors.

Magister Alexs Sugasty.