Erik Quiñonez
In Nicaragua, it is increasingly common for contracts to include an arbitration clause as an efficient and specialized way to resolve disputes. Arbitration, as a way of resolving disputes, allows the parties, in the exercise of their free will, to choose to submit the resolution of their conflicts to an arbitration tribunal (unipersonal or collegiate), so that it may resolve the dispute. By opting for arbitration, the parties decide not to resort to the traditional judicial process, delegating the resolution of their disputes to an alternative, fast, and qualified process.
Arbitration can be classified as institutional or ad-hoc arbitration. In institutional arbitration, the parties choose to submit to the rules and procedures of an authorized arbitration institution. In contrast, ad-hoc arbitration is conducted without the intervention of an arbitral institution, with the parties deciding the rules of the proceedings or applying the common procedure regulated by the arbitration law (lex arbitri) of the arbitral seat.
In the case of institutional arbitration, the arbitration clause has two essential elements:
- The willingness of the parties to arbitrate, means that the parties involved agree to resolve their disputes through arbitration, excluding the ordinary jurisdiction (State Courts) from hearing such disputes.
- Submission to an arbitration institution, where the parties decide that the process will be administered under the rules of an authorized arbitration institution.
Institutional arbitration is one of the mechanisms preferred by the parties to resolve their disputes, trusting that the arbitral institutions will guarantee stability and continuity in the administration of the process. However, in the face of the imponderables of life and business, arbitral institutions are not exempt from closing their doors. A clear example of this was the closure in March 2023 of the “Antonio Leiva Pérez” Arbitration Center of the Chamber of Commerce and Services of Nicaragua, an event that generated and continues to generate uncertainty among the parties that had opted for this institution to resolve their disputes.
Faced with this eventuality, the question arises: What happens if the arbitration institution to which the parties entrusted the administration of their arbitration unexpectedly closes? Should this event annul or make impossible the execution of the arbitration agreement? Upon the closure of an arbitral institution, some businessmen, litigants, or authorities consider that the right to arbitrate the dispute is automatically lost. However, the essential element of willingness to arbitrate is not affected, so that, if the arbitration institution chosen by the parties closes unexpectedly, the arbitration clause must remain valid, since the parties’ willingness to arbitrate prevails.
Advancing our position, in this case, it will be necessary to redirect the arbitration through ad-hoc arbitration, according to the provisions of Law 540. This is a controversial issue, so in this article, we will explore that the answer is found in the Nicaraguan Mediation and Arbitration Law, hereinafter simply “Law 540” and the guiding principles that inspire it.
In line with the above, the arbitration agreement constitutes a manifestation of the autonomy of the will of the parties, who, in the exercise of their contractual freedom, decide to submit their disputes to an arbitral tribunal, excluding the ordinary jurisdiction (State Courts) from the knowledge of such disputes, in that sense, any natural or legal person, including the State of Nicaragua, has the right to settle their disputes through arbitration (art. 1 of Law 540). The guiding principles of this law constitute a guide of standards for the application and interpretation of its norms, for this article, three principles of interest that are expressly listed in art. 3 of the law in question should be analyzed:
- Principle of preeminence of free will: this principle reflects respect for the parties’ decision on how to resolve a dispute, which in this case involves opting for arbitration instead of ordinary jurisdiction.
- Pro-arbitration principle establishes that, when in doubt, the rules must be applied or interpreted in favor of preserving the agreed arbitration.
- Principle of flexibility: This principle means that arbitration proceedings are dynamic and flexible, allowing their effective processing and execution.
The controversy on this issue arises because Art. 28 of Law 540 establishes that the courts must refer disputes to arbitration, provided that the parties have agreed to such mechanism unless it is proven that the agreement is null, ineffective, or impossible to execute. In our opinion, in Nicaragua, the termination of the arbitration institution does not result in the nullity, ineffectiveness, or unenforceability of the arbitration agreement. On the contrary, the arbitration agreement can be preserved through the supplementary application of an ad-hoc procedure, as regulated by law, for the following reasons:
1- Supplementary application of Law 540.
Arts. 2 and 21 of Law 540 establish that said law shall apply to national and international arbitration when the place of arbitration is the Republic of Nicaragua unless otherwise agreed. Throughout the same, it is established that the special agreement of the parties shall prevail in the first order, and in the absence of agreement, the Law shall apply, this can be easily deduced from the recurrent application of the formula “Unless otherwise agreed by the parties”.
This means that the principles, burdens, and procedural rules of Law 540 constitute rules of integration and application to the arbitration agreements to which the law is applicable, in other words, Law 540 is of supplementary application to the special rules of the arbitration agreement and procedure.
2- The principle of preeminence of the autonomy of the will and the flexibility of arbitration
Based on the foregoing, Art. 3 of Law 540 establishes the preeminence of party autonomy as one of its guiding principles. This principle guarantees that the parties, under their agreement, have the power to determine how they wish their disputes to be resolved. The flexibility and informality of arbitration, also recognized by law, allow the arbitration procedure to be adjusted to the needs of the parties, even when the chosen institution ceases to function. When an arbitration agreement is signed, the essence of the agreement rests on a basic idea: to exclude the ordinary jurisdiction from hearing the dispute.
The key here is that the choice of a specific arbitration institution is not an end, but a means to implement the arbitration agreement. Because of this, the question arises: Does the closure of the arbitral institution result in the arbitration agreement being unenforceable? In our opinion, the answer is no. In any case, it would be “more enforceable”. In any case, it would be of “more complex” execution, since the provisions of Law 540 for the conduct of the ad-hoc arbitration process would have to be integrated, but in no way can it be stated that it would be impossible to conduct the arbitration process. Nor can it be said that the agreement becomes null and void if at the time it complied with all the requirements for its validity. Finally, neither can it be said that the agreement is ineffective since it can produce all its effects against the parties with the application of the provisions of Law 540.
For the reasons, when the arbitration institution ceases to exist, it should not be interpreted that the agreement as a whole collapses. In light of the pro-arbitration principle, which favors the interpretation or application of the rules to lead to out-of-court dispute resolution, the application of the “preservation of the arbitration agreement” standard is postulated as a manifestation of this principle (otherwise there would be no practical application of the pro-arbitration principle), except for exceptional situations that are insurmountable (as we saw, this is not the case of the closure of the arbitral institution).
The ad-hoc procedure is presented as a natural solution that preserves the enforcement of the agreement. This is deduced from the final part of Art. 27 of Law 540, which establishes the possibility that in the absence of specific rules on arbitration, such agreement may be supplemented or modified by means of a special agreement, i.e., in the event of the closure of an Arbitration Proceedings Administration Center to which the parties have submitted, the agreement in no way collapses, but may be preserved by special agreement or, in the absence of such agreement, by the supplementary application of Law 540.
3- Ad-hoc procedure: Supplementary in the event of institutional closure
Law 540 not only enshrines principles in favor of arbitration but also establishes the ad-hoc mechanism as a supplementary means. The law establishes an ad-hoc procedure that is sufficient on its own since it establishes rules regarding the arbitration agreement, the composition of the arbitral tribunal, the competence of the arbitral tribunal, the powers of the tribunal, and the procedure to be followed until the issuance of the arbitral award and its possible challenge through an appeal for annulment.
Therefore, the sudden closure of an institution administering arbitration proceedings should not be interpreted as an insurmountable obstacle, since the ad hoc procedure regulated by Law 540 is precisely the tool made available to the parties to ensure that the arbitration can continue in the absence of specific rules or in situations such as the one under study, to avoid the need to resort to the ordinary jurisdiction which the parties expressly decided to exclude.
4- The pro-arbitration principle: Excluding state jurisdiction
The recognition of the pro-arbitration principle, is also enshrined in Art. 3 of the law, reinforces the thesis that the closing of the institution does not result in the agreement becoming null and void. This principle seeks to prevent disputes, which were agreed to be settled by arbitration, from ending up before the ordinary courts, except in strictly exceptional cases. The purpose is clear: to avoid the judicialization of matters that the parties have decided to submit to arbitration. In this context, resorting to ad-hoc arbitration not only preserves the arbitration agreement but also respects the will of the parties to resolve their disputes through arbitration.
5- Recommendation to sign an addendum to the arbitration agreement in the event of the closure of the arbitration administration center.
Because of the likelihood that a judicial authority may consider that the closure of the arbitration institution to which the parties have submitted themselves may result in the ineffectiveness or unenforceability of the arbitration agreement, it is suggested that the parties involved consider signing an addendum to the original arbitration agreement to avoid this risk and establish the submission to a new arbitration institution or, if applicable, the decision to opt for ad-hoc arbitration.
By the foregoing, the supervening closure of an arbitration institution should not be understood as an event that nullifies or renders the arbitration agreement unenforceable. The principles of preeminence of free will and pro-arbitration, together with the flexibility that characterizes arbitration, allow the agreement to remain valid and enforceable through an ad-hoc procedure, as established in Nicaraguan Law 540. In this way, not only the integrity of the arbitration agreement is preserved, but also the will of the parties to resolve their disputes outside the ordinary courts is respected.
The Litigation & Arbitration Department of Consortium Legal is at your disposal to provide you with an integral accompaniment in the negotiation, structuring, revision, and adjustments in arbitration agreements or its case, with the representation in the conduction of arbitration processes, to preserve and assure the execution of the agreement to arbitrate your controversy. You can contact us at contact@consortiumlegal.com to receive more information about our services.