Puerto Rico: legal and practical aspects of international arbitration
Puerto Rico adopted the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration in 2012, through PR Act No. 10-2012. In addition, the Federal Arbitration Act also applies to Puerto Rico as a US commonwealth. Although there continues to be no significant international commercial arbitration in Puerto Rico, parties have benefited from this legal framework to solve their disputes when conducting business in Puerto Rico.
Arbitration clauses in public-private partnership agreements
As a result of the economic crisis that Puerto Rico has experienced over the last several years, the government is seeking to attract private investment – particularly, foreign capital – by developing public-private partnership (P3) projects related to critical infrastructure and services. The Public-Private Partnership Act, PR Act No. 29-2009, in Article 10(b)(vii) provides that P3 agreements may include a clause establishing that commercial arbitration will be used as the means for dispute resolution.
Because the government has traditionally preferred to litigate in state courts, it has agreed to submit only certain engineering and technical disputes to arbitration or to experts through procedures similar to arbitration. However, litigation in state courts is not statutorily required, and government contracts may include an arbitration clause and establish the rules that will guide the procedure in different scenarios, based on the UNCITRAL principles adopted in PR Act 10-2012. Indeed, Puerto Rican courts have enforced arbitration agreements with state entities.
It is worth mentioning that most official documents in Puerto Rico are in Spanish and the government is not required to assume the burden of translating them, so it is usually required that arbitrators or experts for this type of dispute understand Spanish and that documents in Spanish are admitted without translation even if the arbitration is conducted in English.
Arbitration clauses in distribution contracts
Like many other jurisdictions throughout the region, Puerto Rico’s distribution laws (the Distribution Act) are highly protective of local distributors. Once a distribution relationship starts, even if there is no written contract, the relationship cannot be terminated, impaired or not renewed except for just cause, as defined in the Act and applicable case law. Act 75 provides for injunctive and specific remedies favoring the distributor, states that the distributor’s rights cannot be waived because they are provisions of public order, and declares choice-of-law clauses in distribution contracts void.
Notably for parties seeking to enter the market, the Distribution Act says that a clause which provides for arbitration outside Puerto Rico or under another substantive law is void. However, the Puerto Rican courts have refused to enforce this provision because they have found that it violates the Federal Arbitration Act and its policy favoring arbitration agreements. The Puerto Rican legislature responded by amending the Distribution Act to require that a Puerto Rican court determine that the arbitration clause was voluntarily approved by both parties before they may proceed to arbitration. The legislature also established a presumption that such clause constitutes an adhesion clause imposed by the principal. Although this issue was litigated about a decade ago, it was never decided and remains an open question, which will likely be subject to future litigation.
Arbitration clauses in consumer contracts
As has been the case more broadly, arbitration agreements in consumer contracts have also become controversial, most prominently in the residential solar power industry, which has experienced a significant boom in Puerto Rico over the last decade as a result of high energy prices on the Island. On February 15, 2019, the Puerto Rico Energy Bureau issued a resolution which found that arbitration clauses in certain consumer contracts with solar energy companies excluded recourse to the Bureau for consumers and, as a result, violated Puerto Rican law, which gives the Bureau exclusive jurisdiction to review claims related to energy invoices. While consumers may elect to voluntarily participate in arbitration – by expressly consenting – they must be advised that they also have the option of filing a claim with the Bureau.
Similar arbitration agreements have also been addressed by other government agencies in Puerto Rico. For example, such agreements were held to be unenforceable by the Bayamón Office of the Department of Consumer Affairs (DACO), even though they were enforced by DACO’s San Juan Office. Nevertheless, in a judgment issued by the Court of Appeals in October 2018, an arbitration clause was upheld and the court determined that DACO had no jurisdiction over controversies brought by the consumer regarding the green energy contract because they were subject to the arbitration agreement. The Supreme Court of Puerto Rico has not yet addressed the issue.
Notwithstanding the controversies outlined above, many which are still to be decided by the Puerto Rican courts, arbitration clauses are recommended and have broadly been enforced in Puerto Rico. Indeed, commercial contracts in Puerto Rico involving foreign entities commonly include arbitration clauses in which other jurisdictions are selected for the choice of law and choice of forum provisions.
