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As globalization continues, the interrelationship of economies is becoming the norm. One consequence of this growing integration is that Latin American countries have had to reconsider their views and procedures regarding international dispute resolution, including arbitration.

Chile's Supreme Court recently broke with tradition by affirming the right to select a foreign dispute resolution forum in a contract, even when one of the companies in the potential dispute is Chilean. The decision¹ is likely to boost international arbitration because it sends a strong signal to the international business community that international arbitration agreements and awards are legitimate and will be enforced by the Chilean courts.

The Chilean Decision

The decision by the Chilean Supreme Court on January 22, 2008 concerned a claim by a Chilean mining company, Mauricio Hochschild, that its dispute with Germany’s Ferrostaal, a metals producer, should not be resolved by a court in Essen, Germany, even though the companies’ contract had provided for the resolution of disputes in that court. Hochschild argued that the forum selection clause in the agreement was unenforceable because Chilean law required Chilean courts to resolve disputes involving Chilean companies. Ferrostaal, on the other hand, sought to enforce the provision as agreed between the parties.

In reaching its decision, the Chilean Supreme Court relied on a 2007 ruling in which the Chilean Supreme Court had held that a foreign arbitral award could be enforced in Chile. This was despite the objections of a Chilean company, Inversiones Errazuriz , who had been required to pay US$136 million to settle a dispute over loans it received from the State Street Bank. This latest decision by the Chilean Supreme Court extends that ruling by explicitly recognizing the validity of contractual provisions that provide for foreign courts to rule on disputes concerning Chilean companies.

The decision also clarifies the significance of Chile’s Civil Code, which states that all goods located in the country will be governed by Chilean law. In the past, the Civil Code had been interpreted to mean that foreign courts could not pass judgment on disputes involving Chilean goods and companies. The Chilean Supreme Court’s decision is a clear departure from this previous interpretation. Now, the court has held that a Chilean company can be subject to dispute resolution in a foreign court when that company has so contracted.

Impact of Decision

This decision has positive implications for foreign investment in Chile, as well as for the acceptance and use of international arbitration generally. It means that foreign companies interested in doing business with Chilean companies can have increased confidence that the parties can include arbitration provisions in their agreements and that these provisions—even if they call for a foreign court to rule on disputes concerning the Chilean company—will be enforced in Chile.

The decision also emphasizes the growing and meaningful acceptance of international arbitration in Chile. Parties can now be more certain that disputes, when they arise, are more likely to be resolved efficiently, without having to use local courts during the initial stages of the dispute resolution process.

Chile’s acceptance of international arbitration is an example to other Latin American nations and it goes a long way in further enhancing the international arbitration process.