Whenever considering whether or not to export into a foreign jurisdiction, one always starts by weighing the risks against the potential rewards. When it comes to Latin America, this is particularly true. Even with the numerous steps being taken to lower trade barriers and reduce legal risks occurring in the region, there remain many inherent risks.
For instance, one ongoing legal concern for US exporters is the Latin American legal system, which utilizes a civil law system (as opposed to the US common law system). A civil system makes it difficult to predict the outcome of disputes, as previous decisions by the courts that apply a given law to a certain fact situation do not, as a matter of law, set a precedent for future applications of the same law to a similar fact situation. Unlike the common law system, the Code is the sole basis for legal decisions. If the code is silent on an issue, the judge will depend on customs and general principles of law – which will often require a local foreign language translation for a US exporting company to understand.
What does this mean for a US exporter? As an example, you contract with a Latin American importer, agreeing that all purchase orders will be transmitted via EDI. However, due to a poor connection, during the transmission data is wrongly transmitted which causes a late delivery. As the codes in both the US and Latin America are silent on this situation, in the US the courts would base their decision on previous court decisions (precedent). In Latin America, however, the court would turn to local custom, which is very difficult for a foreign legal team to understand and prepare an argument for. This is why it is essential to always negotiate a choice of laws clause in any contract.
Choice of Laws
As can be concluded from the example above, an ongoing legal concern for exporters is which jurisdiction’s law will govern the contract. Typically this concern can be alleviated via a choice of laws contract where the contracting party contractually agrees on which jurisdictions’ laws will apply to any contractual disputes. However, in Latin America, many countries have historically not recognized the parties’ right to negotiate a choice of law clause. Thus, even if the contract contains a clause that all disputes will be resolved under US law, the Latin American court will often ignore the clause or, in a worse-case-scenario, deem the clause invalid and thus invalidate the contract entirely. There is also the issue of enforcing a US judgment in a Latin American country, which a Latin American court will ignore and thus not recognize the foreign judgment.
In cases where litigation is unavoidable, it is important to understand how dispute resolution works in Latin America. For example, whereas international commercial arbitration is the dispute resolution method of choice in the import/export world, it is not a common platform in Latin America – mainly because many Latin American companies refuse to enforce arbitral awards obtained outside their jurisdiction. Exceptions to this include Argentina, Chile, Columbia, Costa Rica, Ecuador, Guatemala and Mexico.
When drafting an export contract, it is important that you include an arbitration clause that use the rules of the Inter-American Commercial Arbitration Commission, with the site of the arbitration set in a neutral, third-country located in Latin America. Typically including these factors will make the arbitration binding throughout Latin America. Other things to consider including is the number of arbitrators and details on the method for choosing them. Many successful arbitration clauses choose three arbitrators, with each party choosing one and the two nominated arbitrators choosing the third. Further, it is essential that all arbitration rules are followed, that there is no evidence of bias and that the award does not contradict any public policy. Following these rules and steps will increase the chances that an arbitration clause will be recognized.