Introduction

Originally published in Panama, November 2, 2004.

By Thomas H. Herrera D with the cooperation of Leslie Marin, Esq.

During the month of July, 1999, the Government of the Republic of Panama, through the Executive Branch, that is, the President and the Cabinet Council, exercising the limited legislative authority granted to it by law #27 of July 5, 1999, approved and enacted Decree-Law No. 5 of 1999 (in advance "the Decree-law"), by which a new system of rules concerning arbitration, conciliation and mediation was established.

Paragraph 16 of Article 153 of the Constitution provides that the Legislative Assembly may grant, by law, to the Executive Branch, when so requested and if the situation demands, precise extraordinary faculties to be exercised during the recess period of the Assembly by means of Decree-Laws. And the pertinent part of the last Paragraph of said provision reads as follows:

"Decree-Laws enacted by the Executive in exercise of the authorization so granted, must be submitted to the Legislative Branch to legislate on the matter . . ."

The submission referred to above has to be done at the initiation of the next ordinary period of sessions of the Assembly, in order for the Assembly to legislate on the subject matter. So far, no Decree-Law approved by the Executive has been sent to the Legislative Assembly in compliance with the constitutional obligation of submitting Decree-Laws to the Assembly. Doing a disfavor to the rule of law, the Supreme Court of Justice decided on June 11, 2003,1 in a constitutional action against part of the Decree-law, that Decree-Laws enacted by the Executive Branch based on Paragraph 16 of Article 153 of the Constitution and not submitted to the Assembly continued in existence and their constitutionality could not be disputed on the grounds; consequently, the Court made superfluous that part of the Constitution.

The Decree-law derogated all the existing provisions of the Civil Procedure Code pertaining to arbitration2. The said Decree-law has been praised by some, since it includes, in general, certain principles and guidelines of UNCITRAL and of international conventions on arbitration; however, it has also been critizised by others due to, among other reasons, the awkward, incorrect and imprecise use of the Spanish language, the legal confusions and vacuums it created, as well as its lack of consistency with the rest of the Panamanian legislation; in other words, it has incurred, amongst others, in the vice of incongruity. Thus, the Decree-law is plagued with "pathological provisions".3

And the deficiencies of the Decree-law have been aggravated by the decision of the Supreme Court of Justice to declare unconstitutional two of the three paragraphs of article 174. A majority of five Justices (the Supreme Court is composed of nine Justices), stated that

"...it is evident that [Article 17] is impeding the party that considers necessary to defend its rights, the access to the ordinary courts of justice." 5

The Supreme Court also stated that an auto-limitation to access to the courts of justice, voluntarily agreed, as in the case of arbitration, is in conformity with the Constitution, but article 17 denies such right of access against the will of the person. As seen before (See SUPRA note #5) said paragraphs granted arbitral tribunals authority to examine their own jurisdiction, as well as to decide on the validity, efficacy and existence of arbitration agreements.

Simply put, the Court ignored the new and modern trends in arbitration of the numerous international rules, laws and recommendations, such as the Rules of Arbitration of the International Chamber of Commerce6, the UNCITRAL model law7 suggested by the United Nations, the Rules of Procedure of the Inter-American Arbitration Commission8 and the opinion of foreign jurists9. The decision of the Supreme Court can also be characterized as "pathological".

General contents of the law

The Decree-law has excluded the judicial intervention almost in all matters relative to arbitration; the only exceptions it makes refer to the action of vacatur10, the request for exequatur11 and the petition for enforcement of awards. As per Article 34, the vacatur, annulment or set aside action is requested before the Supreme Court of Justice by the party against whom the award was given; the exequatur, which as said before (See note 11) is reserved to foreign or international awards, is also of the jurisdiction of the Supreme Court of Justice, as provided in Article 42, while the enforcement of domestic arbitral awards is carried out by the Civil Circuit Courts, in accordance with Article 38. However, Article 42 of the Decree-law clearly states that the enforcement of foreign awards is within the jurisdiction of the Supreme Court of Justice12. This provision is, juridically, very awkward, since the magistrates of the Supreme Court are not supposed to carry on with these kind of procedural matters. Such procedural matters are reserved to the Circuit Courts or the Municipal Courts, depending on the subject matter and the amount involved. Apparently, the drafters of the Decree-law were not aware of this and incurred, once again, in a "pathological error".

As indicated in the Introduction, the Decree-law adopted certain principles and guidelines of the modern trends in arbitration, which is commendable, such as the concepts of institutional13 and ad-hoc arbitration14 (Article 4), international commercial arbitration15 (Articles 5, 7, 26, 36, 43), the principle that arbiters shall take into account the practices and usages of commercial international contracts – UNIDROIT- (Article 27), the separation of the contracts, that is, the main contract is one agreement separated from the arbitration agreement, if both are in the same document16 (Article 11, Paragraph 7), the separation of the matters decided in the awards17 (Articles 34, 1, d) and 41, Paragraph 1, c)), the reference to the international arbitration conventions ratified by Panama18 (Article 34, Paragraph a), the recognition that the written form of the arbitration agreements is not limited to formal contracts19 (Article 9), the authority given to arbiters to decide their own jurisdiction (Articles 11 and 17)20, impediments to be an arbiter (Article 13), the prohibition to file incidental motions before the judicial courts during the arbitration proceedings (Article 19), the ample authority given to arbiters during the evidentiary phase (Article 23) and the causes for vacatur of domestic and international awards (Articles 34 and 41).

Consequences of the elimination of almost all judicial intervention in the arbitration procedures

The decision of the Decree-law of putting aside the civil judicial courts almost in all matters relative to arbitration, is not an improvement; to the contrary, it has left an impossible to fill vacuum that is menacing the institution it wanted to modernize. And in this regard it is important to note that it does not go hand in hand with the modern arbitration laws, not even with the UNCITRAL model, since these do not exclude civil judicial courts from having a certain degree of intervention in cases when a party, for example in an ad-hoc arbitration, is recalcitrant to comply with its obligations under the arbitration agreement.

The derogated provisions of the Civil Procedure Code (Articles 1412 to 1444) provided for the intervention of the civil courts, if so requested, to solve the differences between parties that had entered into an arbitration agreement, whether it is an institutional or an ad-hoc arbitration, and one of them did not want to comply with it. The Court had the power to comminate the recalcitrant to comply as agreed (former Article 1421), having authority to fill the gaps (if any) left by the parties in the agreement and appoint arbiter if the comminated party did not do so (Article 1424). In ad-hoc arbitrations where three arbitrators were to be appointed (two by the parties and the umpire by the arbiters) and the arbitrators could not agree in the appointment of the umpire, the judge of the civil court could proceed with it (Article 1425). It was a sound regime, not perfect, but that could have been easily improved.

Moreover, examined attentively, the derogated provisions on arbitration of the Civil Procedure Code followed, in general, the UNCITRAL Model Law. Actually, when a comparison is made between the derogated provisions and Articles 6, 8(1), 11(3)a,b,(4)c and (5), 13(3), 14(1) and 16(3) of the UNCITRAL Model Law, it becomes obvious that there are no significant differences between them. As said by the Secretariat of UNCITRAL:

In this spirit the Model Law envisages court involvement in the following instances. A first group comprises appointment, challenge and termination of the mandate of an arbitrator (articles 11, 13 and 14), jurisdiction of the arbitral tribunal (article 16) and setting aside of the arbitral award (article 34). These instances are listed in article 6 as functions which should be entrusted, for the sake of centralization, specialization and acceleration, to a specially designated court or, as regards articles 11, 13 and 14, possibly to another authority (e.g. arbitral institution, chamber of commerce). A second group comprises court assistance in taking evidence (article 27), recognition of the arbitration agreement, including its compatibility with court-ordered interim measures of protection (articles 8 and 9), and recognition and enforcement of arbitral awards (articles 35 and 36). 21

Thus, at the present time, since the Decree-law did not adopt similar provisions, for example, those from the UNCITRAL Model Law, and the prior ones were just derogated, the result is that Panama has a total legal vacuum in this regard, which makes partially flawed the Panamanian arbitration regime, as will be seen hereinafter.

a) Requisites to have a valid arbitration agreement:

One of the flaws, actually, pathologies, comes from the contents of Article 1022 of the Decree-Law, which indicates the minimum requisites of any arbitration agreement. Those sine qua non requisites are: a) the designation of the arbitrators or of a method by which the arbitrators shall be appointed and, b) the rules of procedure or their adoption by remission to an established procedure. Note that the Decree-law says that those are minimum requisites to have an arbitration agreement. At this point it is fair to ask oneself what happens when parties agreed in a contract an arbitration clause which does not comply with said requisites. Is it null, non-existent? And, can it be enforced? It is clear that arbitration clauses adopted in a contract after the enactment of the Decree-Law will have to comply with the aforementioned requisites, under penalty of nullity. But, does the provision affect simple arbitration clauses inserted in contracts negotiated and in existence before the enactment of the Decree-Law, which do not comply with the new requisites? Since in our legislation the laws do not have retroactive effects (Article 3 of the Civil Code), with the exception of those of public policy and social interest when it is so stated in them (Article 43 of the Political Constitution of Panama), "simple"23 arbitration clauses that pre-date the Decree-Law, are valid.

It is not uncommon to see in many domestic and international contracts very brief arbitration clauses where the parties simply declare their agreement to submit their future dissagreements to the decision of one or more arbitrators, with no reference to any method to follow for the appointment of the arbiters24 or to any procedural rules to conduct the arbitration. This typical ad-hoc arbitration clause, which we name "simple" arbitration clauses, under the previously existing provisions of the Civil Procedure Code would have been effective and enforced; furthermore, without any doubt, such a clause would be effective and enforceable in any other country with an arbitration law with no "pathological errors".

Under the Decree-law it is inescapable to arrive to two different conclusions: the first, that the aforementioned clause will be regarded as null and void, non existent, since it does not comply with the two minimum requisites of the Panamanian law for arbitration clauses to be valid; the second, that consequently, it is impossible to enforce it before any authority of the Republic of Panama. And with the flaw of the Panamanian legislation (that eliminated almost all judicial intervention in the arbitration procedures), it can also be said that such a clause, even if inserted in an international commercial contract where one of the parties would plea in Panama the applicability of the New York Convention,25 could not be granted effectiveness or enforced by any Panamanian judicial court, since this Convention does not refer to any arbitration rules or body to administer the procedure and the Panamanian Courts lack jurisdiction on the matter.

The situation is different in cases when the Panama Convention could be applicable. As said by BOWMAN, John P.:

"But despite the basic similarities between the two Conventions, numerous differences exist. Of greatest importance, the New York Convention concerns itself mainly with the arbitration agreement and award – the starting and end points of the arbitral process – and not with the conduct of the proceedings, except as that conduct may impair the award. In marked contrast, Article 3 of the Panama Convention requires: "In the absence of an express agreement between the parties, the arbitration shall be conducted in accordance with the rules of procedure of the Inter-American Commercial Arbitration Commission."26.

b) The Panamanian courts are not "designating authorities" in arbitrations:

Article 10 of the Decree-Law defines designating authority (see SUPRA note #23) as "...the arbitration institution duly authorized, that is designated by the parties...", which is the authority with legal capacity to appoint arbiters if a party in an arbitration agreement fails to do it.27 In other words, there are no other designating authorities. Panamanian courts of justice are not "designating authorities" since they do not fit in the definition, for the reason that they are not a "...duly authorized arbitration institution..."

To complete the idea of the drafters of the Decree-Law of excluding the Panamanian Courts from almost all intervention in matters relative to arbitration, paragraphs 4 and 5 of Article 11 of the Decree-Law, provide that the Courts shall inhibit themselves of entertaining any cause of action related to an agreed arbitration, stating in addition that the judicial courts have to direct the parties to arbitrate, as agreed by them.

But how are parties directed to arbitrate as agreed by them if their arbitration clause does not provide for the appointment of arbitrators neither adopt any procedural rules?

And note that the reference to "the designating authority" is totally incomplete, as it has no indication of which is it in ad-hoc arbitrations with "simple" arbitration clauses. It is the typical case of a missing authority28, just that it is not parties in an arbitration agreement who incurred in such an error, but the law.

CRAIG, PARK and PAULSSON29 consider the problem in the context of a flawed arbitration agreement and end stating that in domestic arbitrations the matter is solved with the intervention of the local judge. But in Panama the problem is that, due to the error made in the phase of enactment of the law ("the missing designating authority"), simple ad-hoc arbitration clauses, domestic or subject to the New York Convention, have very limited possibility of succeeding, to say the least. Thus, we are facing, once again, "pathological" provisions.

And that pathology affects those valid arbitration clauses which I have named "simple" (for non indicating the name of the arbitrators nor adopting a method for their appointment or rules of procedure), agreed before the enactment of the Decree-Law, since their enforcement is impossible before the Panamanian Courts, due to the fact that newly enacted laws amending the judicial procedure, once approved prevail over the prior ones from the moment of becoming effective (Article 32 of the Civil Code) and as seen, the Decree-Law does not give judicial courts jurisdiction to solve omissions of the parties in an arbitration agreement or clause.

Arbitrable Matters

Article 2 of the Decree-law deals with the aspect of the matters that can be settled by arbitration; however, this is done in a negative manner, that is, specifying those matters that cannot be arbitrable.

In our legislation, the substantive rules concerning arbitration are part of the Civil Code, since arbitration agreements are contracts, as in most countries, and the Civil Code contains the substantive rules of contracts. The general rule of the Civil Code is that matters than can be the subject matter of a contract can be settled or arbitrated (Articles 1500 to 1511), and these matters are regulated in the Civil Code, the Commercial Code and other special laws, such as the Negotiable Instruments Law, the Trusts Law, the General Corporations Law, the Limited Liability Companies Law, the Foundations Law and many others.

The derogated article 1412 of the Civil Procedure Code was, in the aspect concerning arbitrable matters, very simple and straightforward: it indicated that all controversies between parties, with the exception of those regarding arbitration, could be decided by arbiters. The provision barred arbitration to decide a dispute for non compliance of an arbitration agreement, since, following the defunct theory, this was to be decided by the courts. In this particular sense the Code was outdated, as the intention was not to allow arbiters to decide on their own jurisdiction.31 But leaving aside this aspect, by analysis and interpretation of the pertinent provisions of our legislation, Panamanian lawyers could deduce which matters could be arbitrated and which not.

This is not the case any longer, since Article 2 of the Decree-law reads as follows:

"The following controversies cannot be submitted to arbitration:

1.- Those arising of matters of which the parties cannot freely dispose. Such are, amongst others, all those related to the performance of a public authorization or those derived of protection or guardianship of persons or regulated by imperative provisions of law." (The underline is mine).

2.- Matters upon which there is a judicial decision, that is, res judicata. (Free translation).

The underlined sentence has come to my attention since the intention, which I suppose was behind it, was to bar arbitration on matters affecting public policy. However, it has gone much farther, thus affecting situations and matters that as per the former legislation were arbitrable.

The provision states that controversies arising of matters of which the parties cannot freely dispose of, such as those regulated by imperative provisions of law, cannot be submitted to arbitration.

The case is that the Obligations and Contract’s Section of the Civil Code, the Commercial Code, the General Corporations Law, the Trust’s Law, the Foundations’ Law and many other Panamanian laws that regulate private juridical relationships, are full of provisions which Panamanian jurists regard as imperative; yet, disputes regarding those matters were regarded in the past, prior to the enactment of the Decree-Law, as freely arbitrable by the parties.

Now, the text of the last sentence of Paragraph 1 of Article 2 of the Decree-law is clear in the sense that these cannot be submitted to arbitration, thus casting a shroud of doubt on the topic of arbitrable matters in Panama.

Examples abound and I will give some.

a) The appointment of fiduciaries of dissolved corporations:

As per our Corporations Law, when the shareholders agree the dissolution of a corporation, the directors become fiduciaries, that is, liquidators or receivers, since they are granted authority to settle the businesses, collect amounts due, sell assets, pay the creditors, make distribution to shareholders, etc.31 This provision is imperative.

Confronting it with the Decree Law, it can be asked: can a dispute regarding the decision of a majority of shareholders to appoint others, not the directors, as fiduciaries of a dissolved corporation, be submitted to arbitration?

b) Insurance on illicit operations:

The Commercial Code states that the insurance contract on illicit operations is null.32 This is an imperative provision of the law since it affects morality.

Based on the provision, an insurer annuls an insurance contract upon becoming aware that the subject matter of the contract was to cover illicit operations. The insured claims the insurer for damages due to the annullment of the insurance.

Can this dispute between insurer and insured be submitted to arbitration?

c) The case of the second insurance:

The Commercial Code prohibits insurance on assets which entire value was already insured, for the same period of time and covering the same risks. The sanction is the nullity of the contract. The provision is imperative.33

Can a dispute on the matter, between insurer and insured, be submitted to arbitration?

d) The need of written form in the insurance policies:

The law states that to be valid the insurance contract must be in writing34 and it indicates, as well, which are its minimum provisions35. The provision is outdated, since it affects the existence of the contract and the means of evidence which could be used to demonstrate it. But the provision is in existence and is imperative.

Can a claim regarding the existence of an insurance policy which is not in writting or which policy does not contain all the indications required by the commercial law, be submitted to arbitration?

e) The pledge agreement:

The first paragraph of Article 814 of the Commercial Code states that the commercial pledge must be constituted with the same formalities of the contract it secures. This is, as per its contents, an imperative provision.

In a situation where a pledge does not comply with the requisite of the law, since the principal contract was in a public deed while the pledge was only agreed by telefax or an exchange of letters: can a dispute regarding the existence of the pledge be submitted to arbitration?

f) Personal guaranties:

As per article 807 of the Commercial Code, personal guaranties have to be in writing to become effective. This is an imperative provision of law.

Can a dispute on the matter between creditor and debtor be submitted to arbitration when there was no written agreement?

g) Notifications to shareholders of corporations:

The last paragraph of Article 4236 of the Corporations´ Law provides that shareholders’ meetings of corporations with bearer shares have to be notified by publishing the citation in a newspaper. If a meeting was held without complying with the mentioned requisite and a dispute between groups of shareholders arise due to a faulty citation, can it be settled by arbitration?

h) Prohibition to insure acts of the insured:

Article 1002 of the Commercial Code contains the prohibition to insurers to assume the risk of the own acts of insureds, since it affects morality and could give grounds to fraud.

Consider a case where an insurer took such a risk and afterwards cancelled the insurance or refused to pay the amount insured alleging the prohibition. Can the claim brought by the insured against the insurance company be submitted to arbitration as per our legislation or not?

i) Usury:

There are two kinds of usury in Panama: civil and criminal. The latter we have when the interest charged exceeds 24% per annum; the former when, not having the parties agreed on the rate of interest to be charged, the creditor charges an interest in excess of 10% per annum, but which does not exceed 24% per annum.

Can a claim for civil or criminal usury be submitted to arbitration?

I have given some examples of provisions that are imperative or can be regarded as such. Common sense indicates that there is no reason why this type of disputes could not be arbitrated; however, the Decree-law so provides. The consequences may affect the enforcement in Panama of awards rendered abroad in international commercial disputes, such awards the result of arbitrations initiated based on the New York Convention or the Panama Convention37. We are, again, facing a "pathological provision", which was drafted without in depth consideration of its consequences. As said by a group of jurists:

"Some types of disputes cannot be decided by arbitrators. Whether or not such a prohibition applies in a given case is a question of law which may variously confront the arbitrator (inquiring whether he has jurisdiction), the judge at the place of arbitration (asked to set aside the award), and the judge in an execution forum (asked to refuse to recognize the award), as well as judges who are asked to assert inicial jurisdiction of the dispute and thus disregard the agreement to arbitrate."

"To decide the issue of arbitrability, the arbitrator will look to the law determining the validity of the arbitration clause."38

The Supreme Court and the arbitration agreements in which the State of Panama is a party

There is no discussion in Panama as to the possibility that the State of Panama and its autonomous entities be a part in arbitration procedures. There are number of cases where the State has been the claimant or the respondent in arbitration causes due, mainly, to disputes that arose of contracts or concessions. In the last years there have been at least two significant and conspicuous cases submitted to arbitration, where the State was the respondent: the first one, Consorcio Van Dam –vs- The Republic of Panama; the second one, ICA PANAMA, S.A –vs- The Republic of Panama. The first one involved a claim for breach of contract, while the second, compensation claim for excessive costs in the execution of a public work attached to a road concession. Both contracts had a detailed arbitration clause and were entered into before the enactment of the Decree-law.

Paragraphs 3 and 4 of Article 195 of the Political Constitution of Panama provide that one of the functions of the Cabinet Council is:

"to agree entering into contracts, negotiations of loans and sale of national movable or immovable assets, as determined by the law" (Paragraph 3),

and

"to agree with the President of the Republic that he may settle or submitt to arbitration the litigious matters in which the State is part, for which it is necessary the favourable concept of the Attorney General of the Nation." (Paragraph 4). (The underline is mine).

I have made reference to this matter since several paragraphs of Article 7 of the Decree-law deal with the issue of the State of Panama in arbitration. There have been differing opinions amongst jurists in Panama as to whether the State could agree arbitration in anticipation, that is, in a contract (before the dispute arose) and settle such disputes in arbitration without the Cabinet Council authorization and favourable opinion of the General Attorney (since it was part of the contract) or if, regardless of the arbitration clause, when the dispute arose both consitutional requisites were mandatory to initiate arbitration. In other words, the constitutionality and, thus, validity of arbitration clauses in contracts where the State of Panama was a part, was disputed.

Article 7 of Decree-Law #5, referred to arbitration agreements inserted in contracts with the State, by saying:

"The arbitration agreement so established shall have efficacy by itself and shall not require approval of the Cabinet Council and the favourable concept of the Attorney General of the Nation".

I used the past tense due to the fact that a majority of Justices of the Supreme Court of Justice declared that said paragraph of the Decree-Law violated Paragraph 4 of Article 195 of the Political Constitution39.

This judgement of the Supreme Court of Justice is "pathological"; furthermore, it is in direct contradiction with prior precedents of the Supreme Court40 on the matter, where the same aspects were discussed. It is qualified as pathological due to the fact that the constitutional provision regarded as violated is clear in the sense that the agreement of the Cabinet Council and the opinion of the Attorney General are necessary when there is a litigious41 matter. It is also pathological since it goes in detriment of the juridical stability of contracts entered by the State, as in the future, particulars will have no security that arbitration clauses or agreements in their contracts with the Republic of Panama will be honoured.

From a different point of view, if a contract with an arbitration clause was duly authorized by the Cabinet Council in compliance of Paragraph 3 of Article 195 of the Constitution, there is no need to submitt again the issue (arbitration) to the same body (the Cabinet Council) for approval or ratification. The second approval is redundant. Hence, with its last decision the Supreme Court injected confusion in the Panamanian legal environment.

The way to prove foreing legislation

The Decree-Law deals with the matter of the presentation of foreign legislation as evidence in an arbitration proceeding. The last sentence of the last paragraph of Article 23 of the Decree-Law states:

"Foreign legislation may be proven by mean of Law 15 of 1928."

Law 15 of 1928 is an international convention which Panama ratified; it is named The Convention of the Code of Private International Law, also known as the Bustamante Code. It contains the rules to solve the problems of conflicts of laws between the ratiying States and it has been ratified by some countries42 of the American Continent. The problem is that not all the countries of the American Continent have ratified it, particularly the United States of America43, although it participated with nine representatives at the Sixth International American Conference which was held in Habana in February of the year 1928, where the Code was discussed and approved. Needless to say, no other countries from other continents have ratified it, in spite of the fact that it is a great contribution to the solution of the problems of conflicts of laws.

The Second Chapter of the Seventh Title of the Code has rules regarding the presentation of foreign laws as evidences, being the most important of said rules the one contained in Article 409, which states:

"The party invoking the application of the laws of any contracting State in one of the others, or dissents of it, may justify the text, sense and effect by mean of a certification of two practicing lawyers in the country of the subject legislation, that must be filed duly legalized."

This method would be applicable to arbitrations between nationals of countries that have ratified the Code.

But Article 800 of the Civil Procedure Code of Panama has a rule to prove the foreign legislation, which is by supplying copy of the pertinent provisions, decisions of the Courts, scientific studies of jurists or by the testimony of lawyers as expert witnesses. Nevertheless, the provision grants authority to the judge to investigate directly the foreign legislation.

The reference to the Code of Bustamante is not grave as to be pathological, neither is redundant; it was unnecessary.

The International Public Policy

Two provisions of the Decree-Law refer to international public policy, and these are paragraph b) of Article 41 and the third paragraph of Article 43. The first provision states that the recognition and enforcement of a foreign arbitral award shall be denied when the Court finds that such recognition and enforcement violate the Panamanian international public policy. The second provision indicates that in an international commercial arbitration, the public policy to be considered is the international.

At first sight there is no apparent difference between the two provisions; however, there is, and this is substantive, since the Panamanian international public policy is much different to international public policy. And the issue is important since both provisions are directed or related to foreign arbitral awards or international commercial arbitrations.

It is important to take into consideration that if the latter take place in Panama, the award is regarded as foreign, in accordance with the second paragraph of article 40 of the Decree-Law, which states:

"Likewise, it will be regarded as a foreign award the one dictated in the Panamanian territory in the course of an international commercial arbitration, in conformity with the present Decree-Law." (Free translation).

In the prior Section44 I made reference to the Bustamante Code, which is part of the internal legislation of Panama, and several provisions of this law are relative to international public policy. Thus, when the Decree-Law refers to "...Panamanian international public policy" (Article 41 (2) b), the provisions of The Bustamante Code have to be taken into consideration. Thirty one provisions of The Bustamante Code indicate in a very clear manner that the matters therein dealt with, fall within the concept of international public policy. These are, amongst others, the following rules: the constitutional precepts, the rules for individual and collective protection, the rules regarding the effects of the annulment action, the rules of ownership, means of acquiring and disposing of the property, the rule that prohibits the guarantor to obligate himself beyond the obligation of the principal debtor, the rule regarding the urgent sale of the assets by the commissioner.

In contrast, the notion of international public policy is much narrower, considering only the violation of "...the forum state’s most basic notions of morality and justice".45 This concept was defined in the case Seven Seas Shipping Ltd. V. Tondo Limitada.46

The pathology in the present case is that the reference to Panamanian public policy in connection with the recognition and enforcement of foreign arbitral awards, plants the seed of confusion in a matter that should be crystal clear.

Conclusions

The Panamanian arbitration law needs to be amended in order to cure its pathologies. It is important to highlight the fact that the Political Constitution of Panama was recently amended47, including the provisions48 that gave grounds for the much critized pronouncements of the Supreme Court of Justice, by means of which certain articles of the Decree-Law were derogated for being rendered unconstitutional. Now the Constitution states, in connection with arbitration clauses inserted in contracts entered into by the State and its autonomous entities, that same need not the agreement of the Cabinet Council and the favourable opinion of the Attorney General of the Nation. And with regards to the authority of the arbitrators to decide their own jurisdiction, article 199 provides:

"The Judicial Branch is constituted by the Supreme Court of Justice, the tribunals and the courts created by law. The administration of justice may also be exercised by the arbitration jurisdiction as per determined by the law. Arbitration tribunals may know and rule on their jurisdiction."

However, these amendments are not sufficient to revive the derogated provisions of the Decree-Law, due to the fact that article 37 of the Civil Code states that a derogated law shall not revive by simple references made in other laws nor for the abolishment of the law that derogated it, and that a derogated provision shall only recover its force if a new law expressly states that it becomes effective again.

Appreciation note: My deepest appreciation to Leslie Marín, Esq., for his colaboration during the research stage.

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MERKIN, Robert, ARBITRATION LAW, Lloyd’s of London Press Ltd., London, 1991.

PITTÍ G., Ulises. "Reconocimiento y ejecución de laudos arbitrales extranjeros en la legislación panameña". Colegio de Abogados de San Juan, Puerto Rico, febrero de 2001. En http://www.capr.org/index.php?mod=publications&cmd=article&id=13

SCHIZZEROTTO, Gianni, L’ARBITRATO RITUALE Nella Giurisprudenza, Edizioni CEDAM, Padova, 1969.

TAWIL, Guido Santiago "Arbitration in Latin America: Current Trends and Recent Developments" en http://www.bomchilgroup.org/argmar04.html

UNCITRAL Secretariat Explanation of Model Law.

Footnotes

*. The term was coined by Frédéric Eisemann, "La clause d’arbitrage pathologique", cited by CRAIG, W. Lawrence, PARK, William and PAULSSON, Jan, International Chamber of Comerce Arbitration, Oceana Publications, Inc., Dobbs Ferry, N.Y., 1996, p.158.

1. (R.J. Pleno, Junio 2003, p.303 to 317).

2. The derogation is provided in Article 63 of the new arbitration law.

3 On the matter of "pathological errors", but incurred in arbitration clauses, see CRAIG, W. Lawrence, PARK, William and PAULSSON, Jan, Op. Cit., p.157 to 166.

4. The paragraphs are the following:

"The Arbitral Tribunal must decide, sua sponte or at a party’s petition, as to its own jurisdiction and its extent, including deciding as to the invalidity, inexistence or inefficacy of the arbitration agreement"

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"The Arbitral Tribunal shall decide the matters of its own competence in a decision of previous pronouncement, to be issued within a month from the day of its constitution, without prejudice of reproducing same in the award. The decision on the jurisdictional issue may be contested by the parties via annulment action, or in the exequatur and enforcement proceedings." (Free translation).

5. (CSJ, Pleno, 13/XII/2001, R.J. Dec. 2001, ps. 90-100). It is important to note that the Supreme Court did not refer to the Paragraph of Article 11, that states:

"In any case, if a proceeding before a tribunal is filed for that cause [an action in connection with an agreed arbitration], the arbitration shall continue until its end, without prejudice of the authority of the arbitration tribunal to decide its own jurisdiction . ."

6. Article 6, Paragraph 2, of the ICC Rules of Arbitration reads as follows:

"If the Respondent does not file an Answer, as provided by Article 5, or if any party raises one or more pleas concerning the existence, validity or scope of the arbitration agreement, the Court [the International Court of Arbitration of the International Chamber of Commerce] may decide, without prejudice to the admissibiloity or merits of the plea or pleas, that the arbitration shall proceed if it is prima facie satisfied that an arbitration agreement under the Rules may exist. In such a case, any decision as to the jurisdiction of the Arbitral Tribunal shall be taken by the Arbitral Tribunal itself. If the Court is not so satisfied, the parties shall be notified that the arbitration cannot proceed. In such a case, any party retains the right to ask any court having jurisdiction whether or not there is a binding arbitration agreement."

7. Notes 24 and 25 of the UNCITRAL Secretariat Explanation of Model Law refer to the matter. The pertinent part of Note 25 reads:

"The arbitral tribunal’s competence to rule on its own jurisdiction, i.e. on the very foundation of its mandate and power, is, of course, subject to court control. Where the arbitral tribunal rules as a preliminary question that it has jurisdiction, . . ."

8. Paragraph 1 of Article 21 of the Rules of Procedure of the Inter-American Arbitration Comisión states:

"The arbitral tribunal shall have the power to rule on objections that it has no jurisdiction, including any objections with respect to the existence or validity of the arbitration clause or of the separate arbitration agreement."

9. "Spetta agli arbitri, ad ogni modo, in base al principio che ogni giudice é giudice della propria competenza, decidere sulle contestazioni che dovessero insorgere tra le parti circa i limiti della competenza arbitrale." SCHIZZEROTTO, Gianni, L’ARBITRATO RITUALE Nella Giurisprudenza, Edizioni CEDAM, Padova, 1969, p. 48.

10. Vacatur is the action to obtain the annulment of an award (See KNULL, III, William and RUBINS, Noah D., "Betting the Farm on Internacional Arbitration: Is it Time to Offer an Appeal Option?, The American Review of International Arbitration, 2000/Vol. 11 No. 4). Articles 34 and 35 of the Decree-Law regulate the annulment action against domestic awards; articles 36 and 41 regulate the said action against international commercial awards and foreign awards.

11. The exequatur or recognition of an award by the local courts of justice, is limited to foreign and international commercial awards; this is regulated in the Decree Law, in article 38, last paragraph, and article 39. The enforcement of domestic awards is dealt with in Article 38 and that of foreign awards, in Article 42. Panama does not require "a double exequatur", that is, that before recognizing a foreign award it be previously recognized by the Courts of the country where the arbitration took place. On the matter of the purpose of the exequatur procedure, FELDSTEIN DE CÁRDENAS, Sara Lidia, "Convención de Nueva York en materia de reconocimiento y ejecución de laudos arbitrales extranjeros: una nueva mirada desde el derecho internacional privado argentino", http://www.eldial.com/suplementos/privado/doctrina/ip040625-b.asp, said:

"However, it is indicated that coincidentally, for the recognition as well as for the enforcement of a judgment or award given abroad, it is necessary to comply with certain requisites covering formal, procedural and material aspects. Their control tend, more or less, with the first, to verify if the foreign judgments comply with the external formalities necessary to be considered authentic in the State where they come from; with the second, to ensure the regularity of the foreign procedure, the due process by a judge with international competence and the last, to verify that the recognition or execution does not violate international public policy of the required State."

12. The first paragraph of Article 42 of the Decree-law states:

"The Fourth Chamber of General Matters of the Supreme Court of Justice has jurisdiction in connection with the recognition and enforcement of a foreign arbitral award."

The Fourth Chamber of the Supreme Court of Justice is formed by the President of the Court, who is the President of the Chamber to which he was appointed (Civil, Criminal or Administrative) and the Presidents of the other two Chambers.

13. "Institutional arbitration implies the existence of a permanent institution that administres rather than merely promotes arbitration." CRAIG, PARK and PAULSSON, Op. Cit., p. 52.

14. "Parties wishing to provide for arbitration but also to avoid a supervising institution sometimes draft so-called ad-hoc clauses, intended to be self-executing in the sense that they oblige the parties to initiate and proceed with arbitration without the assistance of a permanent institution." Ibid., p. 50.

15. The United Nations Commission on International Trade Law (UNCITRAL) Model Law defines in Article 1(3) arbitration as international if "the parties to an arbitration agreement have, at the time of the conclusion of that agreement, their places of business in different states." See, on the matter, the UNCITRAL Secretariat Explanation of the Model Law, paragraph 10. The Decree-law gives an awkward definition of international commercial arbitration in Article 5. It reads as follows:

"The international commercial arbitration is, as per the present Decree-Law, when the object or juristic act contains alien elements or of connexity sufficiently significative to characterize it as such or when it is qualified as international as per the rule of conflict of the forum."

16. This is a very important issue, since prior to the adoption of this rule, many discussions amongst jurists took place, where some, with a theory now defunct, said that it was one contract and not two; so, the annulment of the main contract carried the annulment of the arbitration clause, of which it was a part. With the modern trend, the survival of the arbitration clause is to be decided, in a first instance, by the arbitration tribunal. On the matter see, UNCITRAL Secretariat Explanation . . . paragraph 24, where it is stated: "For that purpose, an arbitration clause shall be treated as an agreement independent of the other terms of the contract, and a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause." Also, CHILLÓN MEDINA, José y MERINO MERCHAN, José, Tratado de Arbitraje Privado Interno e Internacional, Edit. Civitas, S.A., Madrid, 1978, pág. 573, quoted by BERNAL HERAZO, Lucio, El Arbitraje Comercial, Litografía e Imprenta Lil, San José, Costa Rica, 1983, p. 67.

17. See the cases cited by BISHOP, R. Doak and MARTIN, Elaine, Enforcement of Foreign Arbitral Awards, http://www.kslaw.com/library/pdf/bishop6.pdf, In the case Fiat S.p.A. v. Ministry of Finance and Planning of Suriname, "the court found that the tribunal exceeded its authority when it purported to bind a non signatory not expressly covered by the arbitration agreement when the issue was submitted to arbitration.(86) The court vacated part of an award against one party, while confirming the remainder against a second party." P.21. In another case "...the arbitrators adopted a French legal rate of interest on the amounts due that violated the enforcing forum´s public policy because the interest rate was excessive. (158) The court agreed and refused to enforce that part of the award, holding that an award of interest that is penal in nature clearly violates public policy." P.34. (The underlines are mine).

18. Panama has ratified two international arbitration conventions: The New York Convention of 1958 and the so-called Panama Convention or Inter-American Convention on International Commercial Arbitration, Panama, 1975. Particularly, there are other Inter-American Conventions. One is relative to arbitration, which is the Inter-American Convention on the Extraterritorial Validty of Foreign Judgments and Arbitral Awards, known as the "Judgments Convention", of 1979; the other convention, but not regarding arbitration, but judgments, is the Inter-American Convention on Jurisdiction in the International Sphere for the Extraterritorial Validty of Foreign Judgments, known as the "Jurisdiction Convention", of 1984. Panama has not signed nor ratified these last two.

19. Article II(2) of the New York Convention, reads:

"The term "agreement in writing" shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams."

The last sentence of Article 1 of the Inter-American Convention on International Commercial Arbitration (the Panama Convention of 1975), states:

"The [arbitration] agreement shall be set forth in an instrument signed by the parties, or in the form of an exchange of letters, telegrams, or telex communications."

Commenting on the matter, FELDSTEIN DE CÁRDENAS, Sara Lidia, "Op. Cit.", p.16, said:

"One aspect which merits to be dealt with carefully, is the one related to two terms, arbitration agreement and e-commerce. In effect, as we have seen, the UNCITRAL Model Law regards as valid the agreements formalized with the use of any telecommunication mean that evidences the agreement, text which in some manner encompasses e-commerce and the electronic interchange of data." (Free translation).

20. See Supra notes 5 to 8. The Supreme Court of Justice of Panama said in the Constitutional decision of December 13, 2001 (R.J. Diciembre 2001, p. 90 to 100, by a majority of five, the following:

"The prior paragraphs indicate that Article 17 of Decree-law No. 5 of July 8, 1999, when granted the arbitral tribunal the authority to decide on the motion of jurisdiction that can be pleaded by any of the parties, is unconstitutional, but for different reasons to those alleged by the plaintiff, since said article violates the right to due process, as is evident that it impedes the party that deems necessary to defend his rights, the access to the courts of justice." (Free translation).

21. The UNCITRAL Secretariat explanation of the Model Law, paragraph Delimitation of court assistance and supervision, sub-paragraph 15.

22. The text of Article 10 is the following:

"The arbitration agreement shall contain the following minimum requisites:"

1.The appointment or method of designation of the arbiters."

2.The rules of procedure or their indication by remission to a pre-established procedure."

"The parties may entrust to someone else the appointment of the arbiters or incorporate the formula of agreement adopted by an arbitration institution or, in liew, designate or establish a designating authority."

"The designating authority is the arbitration institution duly authorized that is designated by the parties, which shall be obligated to comply with this Decree-Law with respect to the appointment of arbitrators for the due constitution of the arbitration tribunal or to establish the arbitration procedure, in its case."

"If there be in existence in a given moment several designating authorities and if the parties have not agreed which is the competent one to these effects, the one before which the petition is first made, by any party, shall be the competent."

"In any moment the parties may complete or clarify the contents of the agreement by mean of suplementary agreements." (The underlines are mine).

23. See INFRA note #25.

24. BERNAL HERAZO, Lucío, Op. Cit., p. 63, gives an example of a simple arbitration clause. He says: "The arbitration clause must be drafted clearly, to avoid delays should eventual conflicts arise. Its amplitude and flexibility allows that it be stipulated in simple terms:

"Any controversy or difference that may arise from or is related to the interpretation or the fulfillment of the present agreement, shall be submitted to arbitration." (Free translation).

25. "The NYC does not regulate the whole arbitration procedure; it only deals with the legal validity of arbitration agreements, its obligatoriety and the obligatoriety of the arbitral awards." (Free translation from Spanish). (FELDESTEIN DE CÁRDENAS, Sara Lidia, Convención de Nueva York en materia de reconocimiento y ejecución de laudos arbitrales extranjeros: una nueva mirada desde el derecho internacional privado argentino, Suplemento de Derecho Internacional Privado y de la Integración, elDial.com.

26. BOWMAN, John P., The Panama Convention and Its Implementation Under the Federal Arbitration Act., http://www.texasdr.org.

"First, for agreements falling under the Panama Convention, if the parties failed to designate the site for the arbitration, and cannot agree on it after a dispute arises, under Article 16(1) of the IACAC Rules the arbitral tribunal shall determine the arbitral site. The arbitral tribunal is free to select a site within or outside the U.S., its only express mandate under Article 16(1) to have "regard to the circumstances of the arbitration." By contrast, in the absence of an agreement on the place of arbitration in a non-administered arbitration under the New York Convention, a party must seek court assistance to compel arbitration

27. Paragraphs 4 and 5 of Article 15 of the Decree-Law empower the so-called "designating authority" to appoint arbitrators when the parties fail to do it, taking into account impartiality, independence and specialization in the matter to be arbitrated.

28. "The problem of the missing authority is frequently even more obvious: the parties have failed to make clear who will set the arbitral process in motion. This flaw may not be important in a purely domestic case, where the local judge obviously is the authority to be solicited, but in the international setting an inoperative reference may destroy the possibility of arbitration. (CRAIG, PARK and PAULSSON, Op. Cit., pág. 160). At this point we comment that Messrs. Craig, Park and Paulsson did not take into account the possibility that a law would incur in such a mistake, as it hapenned in Panama with the Decree-Law.

29. (Op. Cit., p. 160)

30. See Supra notes 6 and 21.

31. Article 86 of Law 32 of 1927 reads as follows:

"When the existence of a corporation finishes by elapsement of its term of duration or by dissolution, the directors shall act as Fiduciaries of the corporation .." (Free translation).

32. The first paragraph of Article 999 of the Commercial Code provides:

"The insurance on illicit operations is null." (Free translation).

33. The pertinent part of Article 1010 of the Commercial Code provides as follows:

"It is forbidden, under penalty of nullity of the second contract, to insure for the second time, for the same period and the same risks, assets which entire value was already insured." (Free translation).

34. Article 1013 of the Commercial Code is of the following tenor:

"The insurance contract, to be valid, must be in writing and it shall be constituted by the insurance policy."

35. Article 1016 of the Commercial Code states that the insurance policy must indicate the name of the insurer, its nationality and address; the name of the representative of the insurer; the name of the insured, nationality, domicile; place, date and time of inception of the contract; the insured object, nature and value; the amount of the insurance, place and manner of payment in case of loss; the premium; the risks, etc., and the signatures of the parties.

36. "If the corporation has issued bearer shares, notice of stockholders’ meeting must be published in accordance with the requirements set out in the Articles of Incorporation or in the by-laws."

37. "If the grounds of a dispute cannot be settled by arbitration under the domestic law of the enforcing nation, a court may refuse to enforce an award granted through a foreign arbitration panel. MARTÍNEZ, Ramona, Recognition and Enforcement of Internacional Arbitral Awards Under the United Nations Convention of 1958: the "Refusal Provisions", 24 INTERNATIONAL LAW. 487,506 (1990), cited by BISHOP, Doak R. and MARTIN, Elaine, Enforcement of Foreign Arbitral Awards.

38. CRAIG, W.L., PARK, W.W. and PAULSSON, J., Op. Cit., p.81.

39. The Supreme Court of Justice said, on 11 June, 2003, that the cited and transcribed paragraph of Article 7 of Decree-Law #5, violated the Political Constitution.

40. On the matter, see Judgement of the Plenary of february 19, 1976, where it was said:

"The arbitration authorized by Law 9 of 1976 does not fall within the range of Paragraph 4 of Article 180 [now article 195] of the Constitution, since as clearly indicated by the Attorney General, the authority given to the Cabinet Council operates exclusively in those law suits already initiated in the courts, in which the State is one of the parties." (Free translation). (The underline is mine).

Another precedent of the Supreme Court of Justice (Plenary judgement of December 20, 1996, R.J. diciembre 1996, ps. 117 to 124) follows the same path. The Court said:

"...consequently, that proceeding nor the arbitration fall exactly within the frames described by Paragraph 4 of Article 195 of the Constitution, because the authority given to the Cabinet Council operates exclusively in those law suits already initiated in the courts..."

41. "Litigious. That which is the subject of a law suit or action; that which is contested in a court of law". Black’s Law Dictionary, St. Paul, West Publishing Co., 1990, 6th. Edition p. 934. In Spanish, the same sense: Litigio. Pleito, altercación en juicio. Diccionario Enciclopédico ESPASA 1, Ed. Espasa Calpe, Madrid, Undécima Edición, p. 1014.

42. "The Code has been ratified by the following countries: Brasil, Bolivia, Costa Rica, Cuba, Chile, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Nicargua, Panama, Peru, Dominican Republic and Venezuela. Of these 15 countries, five have subordinated the ratification to reservations of general character, which deprive of importance the ratification and make that actually only in ten countries the Code is in effect." (CAICEDO CASTILLA, José Joaquín, DERECHO INTERNACIONAL PRIVADO, 6ª Ed., Ed. Temis, Bogotá, 1967, p. 32.

43. "The United States of America´s delegation abstained from voting, alleging the constitutional regime of the country, by which the States that are part of the Union have faculty to legislate in civil and commercial matters and consequently the federal government cannot enter into treaties with regards to same." (IBID., p. 34).

44. Supra – The way to prove foreign legislation.

45. BISHOP, R. Doak and MARTIN, Elaine, "Enforcement of Foreign Arbitral Awards", p. 32. These authors also cite van den Berg, who said that there is an:

"...important distinction between domestic and international public policy ... According to this distinction what is considered to pertain to public policy in domestic relations does not necessarily pertain to public policy in international relations. It means that the number of matters considered to fall under public policy in international cases is samlles than that in domestic cases. The distinction is justified by the differing purposes of domestic and international relations."

46. See LAMM, Carolyn B. and SPOORENBERG, Frank, The Enforcement of Foreign Arbitral Awards under the New York Convention, recent developments, http://www.sccinstitute.com/ upload/shared files/artikelarkiv/lamm spoorenberg.pdf p. 12.

47. Legislative Act Nº 1 of July 27, 2004, ratified by the Legislative Act Nº 1 of October 26, 2004.

48. Paragraph 4 of Article 195 and Article 199.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.