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Political economy of private commercial arbitration in Colombia

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Political economy of private commercial arbitration in Colombia

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Content POLITICAL ECONOMY OF PRIVATE COMMERCIAL ARBITRATION IN COLOMBIA by Javier Mauricio Sanabria ______________________________________________________________ A Dissertation Presented to the FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirements for the Degree DOCTOR OF PHILOSOPHY (POLITICAL ECONOMY AND PUBLIC POLICY) December 2009 Copyright 2009 Javier Mauricio Sanabria ii Epigraph Coco: “I’m learning about how to raise a walrus; she is an orphan.” Baba: “What’s an orphan?” Coco: “Let me give you an example, like Annie, her parents died in a fire. Annie was an orphan and grew up in a children’s pond -she smiles- but not in a cage.” Excerpt from a conversation with my daughter, Coco, May 20, 2008, when she was 7. iii Table of Contents Epigraph ii List of Tables iv List of Figures vii Abstract ix Introduction 1 Chapter 1: Changes in Economic Laws: The Appeal of Alternative 8 Dispute Resolution Mechanisms Chapter 2: Shifting Lenses: From the Macro Rankings of Domestic 32 Institutions to the Working of Institutions Chapter 3: Alternative Dispute Resolution: Definition and Context 109 Chapter 4: Reforming the Judiciary: Public and Private Support for 136 ADRMs in Colombia Chapter 5: Empirical Research: Examining Colombian Private Commercial 165 Arbitration Chapter 6: Conclusions 249 Bibliography 269 Appendices 290 A: World Bank’s Worldwide Governance Indicators (WGI) Data 290 Sources for Regulatory Quality and Rule of Law B: Milken Institute’s Opacity Index Table Data Sources for Legal 293 and Judicial Environment C: The 12 Variables and 3 Sub-indices of the Global Competitiveness 295 Index D: List of Codes 296 E: Code Book 302 F: Arbitration Cases 313 G: International Investors Directly or Indirectly Involved in Private 319 Commercial Arbitration H: NAFTA Investor-State Arbitration Duration in Months 322 iv List of Tables Table 1. WGI Indicators for Colombia, 1996-2006 43 Table 2. Regulatory Quality Comparison across the 10 Largest Economies in 45 Latin America, 2006 Table 3. Rule of Law Comparison across the 10 Largest Economies in Latin 46 America, 2006 Table 4. Fraser Institute of Economic Freedom Comparison across the 10 49 Largest Economies in Latin America, 2008 Table 5. Economic Freedom in Colombia, 1970-2006 50 Table 6. Economic Freedom in Colombia, 2005: Variable Scores and Rankings 51 Table 7. Legal Structure and Security of Property Rights in Colombia, 51 1980-2006 Table 8. Colombian Component Scores for Legal Structure and Security 55 of Property Rights, 2005-2006 Table 9. Heritage Foundation Economic Freedom Comparison across the 57 10 Largest Economies in Latin America, 2008 Table 10. Heritage Foundation Economic Freedom Variable Scores, Colombia, 58 2008 Table 11. Economic Freedom, Property Rights in Colombia, 1995-2008 59 Table 12. Corruption Perception Index (CPI), Comparison across the 63 10 Largest Economies in Latin America, 2007 Table 13. Corruption Perception Index (CPI), Colombia, 2005-2007 64 Table 14. Opacity Index Scores, Comparison across the 10 Largest Economies 69 in Latin America, 2001-2009 Table 15. Opacity Index Ranking of Latin American Economies among the 70 48 Countries Studied Table 16. Opacity Factor Scores for Colombia: 2004, 2008 and 2009 71 v Table 17. Colombia’s Competitiveness: A Comparison across the 10 Largest 75 Economies in Latin America 2007-2008 Table 18. Colombia’s Global Competitiveness Index, 2007-2008 77 Table 19. The Relative Weight of Institutions for Competitiveness 78 Table 20. Colombia’s Doing Business Rank Compared to Other Countries in 92 the Region, 2008 & 2009 Table 21. Colombian Doing Business Indicators 2009 and 2008 93 Table 22. Enforcing Contracts, 2009 99 Table 23. Enforcing Contracts in Colombia 99 Table 24. Enforcing Contracts in Colombia: Civil Court vs. Arbitration Tribunal 102 Table 25. Comparison of Mediation, Conciliation and Arbitration 119 Table 26. History of Accession to the UN Convention on the 126 Recognition and Enforcement of Foreign Arbitral Awards for Latin America Table 27. Percent of GDP by Economic Sector, Colombia 177 Table 28. Arbitration Users according to the North American Industry 179 Classification System Table 29. Foreign Participation in Arbitration Cases 181 Table 30. Size of Companies Using Arbitration 182 Table 31. Types of Legal Contracts 185 Table 32. Content of Contractual Obligation Controversy by Economic Sector 186 Table 33. Length of Business Relationship 187 Table 34. Time of the Conflict within the Economic Interaction 194 Table 35. Effect of Arbitration on the State of the Business Relationship 195 Table 36. Sample Topics of Contract Interpretation 201 vi Table 37. Sample Topics of Contract Implementation and Liability 203 Table 38. Number of Declarative Claims by Type 204 Table 39. Defendants’ Exceptions of Merit 205 Table 40. Number of Defenses by Type and Percent of Total Cases 207 Table 41. Duration of the Pre-Arbitral Phase 210 Table 42. Duration of the Arbitral Phase 212 Table 43. Overall Duration of Arbitration Cases 214 Table 44. Process Suspensions Agreed Upon by Both Parties 217 Table 45. Evidence Introduced in Arbitration 221 Table 46. Monetary Value of the Disputes 227 Table 47. Cost of Arbitration 230 Table 48. Monetary Amount of Arbitral Awards 231 Table 49. Allocation of Arbitration Cost between Parties 235 Table 50. Demand for Arbitration, 1987-2007 239 Table 51. Demand for Arbitration in CAC, 1999-2006 242 Table 52. American Arbitration Association Commercial Cases Filed 1997-2002 243 Table 53. World Bank’s Worldwide Governance Indicators (WGI) Data 290 Sources for Regulatory Quality and Rule of Law Table 54. Milken Institute’s Opacity Index Table Data Sources for 293 Legal and Judicial Environment Table 55. Disputes Involving the Government of Canada 322 Table 56. Disputes Involving the US Government 322 Table 57. Disputes Involving the Government of Mexico 323 vii List of Figures Figure 1. WGI Indicators for Colombia, 1996-2009 44 Figure 2. Colombia’s Economic Freedom Score, 1970-2006 50 Figure 3. Colombia’s CPI Score, 1995-2007 64 Figure 4. Colombia’s Opacity Index Score, 2001-2009 69 Figure 5. Comparison of Opacity Index Rankings among Latin American 70 Economies, 2007-2009. Figure 6. Overall and Institutions Ranks for Latin American Countries, 76 2007-2008 Figure 7. Starting a Business in Colombia Compared to Other Countries in the 82 Region, 2008 & 2009 Figure 8. Obtaining Construction Permits in Colombia Compared to Other 83 Countries in the Region, 2008 & 2009 Figure 9. Employing Workers in Colombia Compared to Other Countries in the 84 Region, 2008 & 2009 Figure 10. Registering Property in Colombia Compared to Other Countries in the 85 Region, 2008 & 2009 Figure 11. Obtaining Credit in Colombia Compared to Other Countries in the 86 Region, 2008 & 2009 Figure 12. Protecting Investors in Colombia Compared to Other Countries in the 87 Region, 2008 & 2009 Figure 13. Paying Taxes in Colombia Compared to Other Countries in the 88 Region, 2008 & 2009 Figure 14. Trading Across Borders for Colombia Compared to Other Countries in 89 the Region, 2008 & 2009 Figure 15. Enforcing Contracts in Colombia Compared to Other Countries in the 90 Region, 2008 & 2009 Figure 16. Closing a Business in Colombia Compared to Other Countries in the 91 Region, 2008 & 2009 viii Figure 17. Number of Latin American Countries Joining UNCITRAL by Decade 127 Figure 18. Parties by Economic Sector 177 Figure 19. Foreign Participation in Arbitration Cases 181 Figure 20. Size of Companies Using Arbitration 183 Figure 21. Length of Business Relationship 188 Figure 22. Contractual Obligations Performance Categorization 191 Figure 23. Effect of Arbitration on the Continuation of the Business Relationship 195 Figure 24. Defendants’ Exceptions of Merit 205 Figure 25. Merit Defenses, Dilatory Defenses and Counterclaims 207 Figure 26. Duration of the Pre-Arbitral Phase 210 Figure 27. Duration of the Arbitral Phase 213 Figure 28. Overall Duration of Arbitration Process by Percent of Cases 216 Figure 29. Process Suspensions Agreed Upon by Both Parties in Months 218 Figure 30. Number of Cases Utilizing each Means of Proof 222 Figure 31. Use of Expert Witnesses by Field 223 Figure 32. Percent of Cases for each Monetary Value of the Dispute 229 Figure 33. Cost of Arbitration 230 Figure 34. Monetary Distribution of Arbitral Awards 232 Figure 35. Distribution of Arbitration Cost to the Complainant Party 236 Figure 36. Arbitration Demand by Lustrum 240 Figure 37. Demand for Arbitration in CAC, 1999-2006 242 Figure 38. Number of Commercial Cases Filed with American Arbitration 244 Association, 1997-2002 ix Abstract This dissertation analyzes legal and institutional responses to economic liberalization in Colombia. The main hypothesis is that the increasing use of alternative dispute resolution mechanisms (ADRMs) by economic agents is the consequence of global economic pressures, as well as an attempt to address the crisis of the national judicial system. ADRM’s reduce transaction costs, and offer more efficient, predictable, and independent venues for resolving litigation. Consequently, they create a more stable environment for investors. This, in turn, suggests that the relationship between law and economics is rapidly changing at the structural level in Colombia; this latter point constitutes a secondary hypothesis, wherein market-friendly governance structures guided by private interests are displacing those dominated by the state. This study criticizes and transcends macro-regional analyses of the economic model and indices of institutional reform as the main indicators of economic “success.” The analysis favors a micro case studies approach to better comprehend the interconnection between legal institutions and the development of the private sector. It analyzes 112 actual arbitration cases heard before the Center for Arbitration and Conciliation of the Bogotá Chamber of Commerce, between 1985 and 2007. The cases are organized by parties to the arbitration, commercial transaction in dispute, legal pretensions and defense mechanisms of the litigants, length of the arbitration process, means of proof or evidence requested, costs, and demand trends for arbitration. In sum, this dissertation offers a more informed understanding of the relationship between law and economics at the practical level from a specific Latin American x domestic standpoint. At the same time, it creates a framework for analysis applicable to other Latin American countries, and developing and transition economies in general. 1 Introduction My dissertation analyzes legal and institutional responses to economic liberalization in Colombia. My main hypothesis is that the increasing use of alternative dispute resolution mechanisms (ADRMs) by economic agents is the consequence of global economic pressures, as well as an attempt to address the crisis of the national judicial system. ADRM’s reduce economic transaction costs, and offer more efficient, predictable, and independent venues for resolving litigation. Consequently, they create a more stable environment for investors. This, in turn, suggests that the relationship between law and economics is rapidly changing at the structural level in Colombia; this latter point constitutes a secondary hypothesis, wherein market-friendly governance structures guided by private interests are displacing those dominated by the state. In other words, settling business controversies through private arbitration is the preferred means for cases once channeled through the state’s judicial system. In the last 25 years, Latin America has faced three major changes: the economic model, the role of the state in that model, and the heightened pressure that these first two changes have placed for reform of the legal structure. This dissertation concentrates on the latter phenomenon. I relate changes in the legal system and public policy to the role of institutions reducers of transaction costs, wherein new legal norms are seen as supporting private economic initiative. Specifically, I argue that the use of ADRMs (particularly arbitration) in commercial matters is emblematic of the new relationship between law and economics, in which private initiative guides the search for more efficient governance structures and lower transaction costs. 2 I assume that the main objective of legal reform is to build an environment where low transaction costs attract capital, improve economic efficiency, and bolster economic development. Consequently, the risks of backsliding on legal reform would reduce the chances for economic growth and development, as economic inefficiency economy and high transaction costs would deter any possible gains. Why are ADRMs important? This study is important because it transcends macro-regional analyses of the economic model and indices of institutional reform as the main indicators of economic “success.” Rather, my purpose is to identify linkages and/or gaps between micro-national institutional behaviors and macro-regional initiatives. In other words, my dissertation goes beyond the international rankings approach to national legal institutions and their interplay with economic development. A study of this nature provides a better understanding of the importance of the domestic context: the role of economic institutions, an identification of costly institutional gaps and incongruencies among institutions, and the need for more cohesive linkages between legal economic institutions operating at different levels (sectorial/local, national and international). Most importantly, I seek to understand how Colombia’s changing legal/economic institutions have shaped commercial practices at the domestic level. This focus on ADRMs offers insight into the legal institutional framework that has evolved around private commercial arbitration, as well as the types of cases brought before this mechanism. How have private actors utilized ADRMs? Have investors’ interests and institutional legal preferences changed as a result of ADRMs? What role 3 have ADRMs played in overcoming Colombia’s severe judicial crisis and in modernizing the judiciary? Answers to these questions are crucial for identifying sound public policies in relation to commercial law and the judicial system in general. In sum, this study offers a more informed understanding of the relationship between law and economics at the practical level from a specific Latin American domestic standpoint. At the same time, it will create a framework for analysis applicable to other Latin American countries, and developing and transition economies in general. Since the 1980s, statist economic models in the developing world and the “inefficiencies” these have created have been heavily criticized. The privatization process argues against the monopoly of the state in certain economic sectors, including the creation of law and the administration of justice in economic relations. Such criticism has targeted the state’s role in the definition and creation of contractual relations, their implementation and execution, and the resolution of eventual disputes. This legal scenario based on strong state involvement, it is argued, increases the transaction costs of economic relations. These inefficiencies need to be overcome in order to maximize the interests of the parties to an agreement and to create, consequently, more beneficial social outcomes by reducing transaction costs. Although this is not the only justification for legal reforms, it is a vitally important one. As mentioned at the outset of this chapter, in the past two decades, many countries in Latin America have faced complex changes in three major arenas: the economic model, the role of the state, and the legal structure. The first could basically be understood as taking place within the internationalization of the economy, and an 4 increasing role for the market. Specific policies include the privatization of state-held companies, the liberalization of trade and investment, and the opening of financial markets. The second type of change hinges on the need to reduce state intervention in the allocation of resources, in favor of a subsidiary role to that bolsters more efficient market forces in the development process. Finally, changes in regulatory bodies have been introduced as part of the simultaneous liberalization of politics and economics in Latin America. 1 Constitutional and judicial reforms, and revision of civil, commercial, customs, administrative and criminal codes are some of the specific forms these changes have taken. It is this third level of transformation I will elaborate on in this dissertation. However, instead of approaching these legal reforms from the point of view of political democratization, I intend to relate the changes in law and the judicial system to the increased privatization and use of alternative dispute resolution mechanisms. More specifically, I will focus on the role of institutions as reducers of transaction costs and on the broader context of greater legal flexibility and international harmonization of justice systems. 2 These private legal mechanisms now being used to settle business differences appear to be more efficient, predictable and amenable to conflict resolution. 1 For a comprehensive discussion on democratic transition and democratic consolidation see: Anderson, Lisa, ed. Transitions to Democracy (New York: Columbia University Press, 1999), Diamond, Larry. Developing Democracy (Baltimore, MD: The Johns Hopkins University Press, 1999); Gunter, Richard, P. Nikiforos Diamandouros, P. Nikiforos Diamandouros, and Hans-Jurgen Puhle, eds. The Politics of Democratic Consolidation (Baltimore, MD: The Johns Hopkins University Press, 1995), O’Donnnell, Guillermo, Philippe Schmitter and Laurence Whitehead. Transitions from Authoritarian Rule: Prospects for Democracy (Baltimore, MD: The Johns Hopkins University Press, 1986). 2 The reduction of transaction costs is precisely one of the main objectives of institutional reform. It is in this sphere that Oliver Williamson (1983, 1985) and Douglas North (1990) argue that the task of an institution is to bring the transaction costs of a given investment as close as possible to the maximizing point. The concerns of Robert Ellickson (1991) regarding the effects state law has on social relations and application in relation to economic interests should also be mentioned here. 5 My interpretation is that this new pattern of law and economic justice based on private arbitration and conciliation holds promise for the deeper institutionalization of changes in the market and state spheres. The deconstruction of legal and judicial institutions can be approached from different theoretical angles, such as dependency theory, the regulation school, the theory of legal pluralism, sociological discussions about new subjectivities, or scholarship on democratic consolidation. I plan, however, to introduce the “new law,” exemplified by the expanding demand for ADRMs, as the kind of legal framework demanded by [international] economic agents when deciding where to engage in contractual relations; and at the same time, these are regulatory structures that are useful for attracting and retaining [foreign] investment. It is important to note that this is an evolutionary economic paradigm, one which draws attention to the context where decision-making takes place and to interrelations between various institutions. Economic globalization and institutional legal transformations are mutually effecting each other, yet individual states are exhibiting an array of legal approaches to economic conflict (Alchian 1950). In Colombia, the changes are moving in the direction of alternative forms of governance meant to lower transaction costs and reduce economic inefficiency. Stated differently, in Colombia, institutional reform in the realm of the conciliation and arbitration of commercial issues is symptomatic of the adaptive process of a business community now closely engaged with the world economy. The dissertation contains 6 chapters. Chapter 1 is divided into four parts. The first introduces the school of “modern political economy” as defined by the New Institutional 6 Economics. The second part highlights the relationship between legal and judicial institutions and transaction costs. The third reviews Colombia’s legal institutions and the crises that have beset them. The final section assesses how far along, legally speaking, Colombia has come with regard to institutional reform. Chapter 2 focuses on the dominant approach employed by the most relevant international indices to examine the interplay between legal institutions and economic relations. It introduces the indices, analyzes their [lack of] understanding of legal institutions, identifies the specific place for Colombia’s economy, and emphasizes their limitations. Chapter 3 addresses the relationship between legal institutions and economics, focusing on the alternative dispute resolution mechanisms as one class of legal institutions that merits specific attention with regard to its relationship to economics and economic development. It begins with a definition of alternative dispute resolution (ADR) and continues with brief descriptions of some of the main forms of ADRs, including mediation, conciliation and arbitration. In Chapter 4 Colombia’s constitutional and legal framework for alternative dispute resolution mechanisms, ADRMs, is examined. The advancements and international recognition on this front contrast with the diagnosis of the international rankings. This part sets the stage for the study and analysis of actual private commercial arbitration cases. Chapter 5 contains the analysis of 112 private commercial arbitration case studies heard before the Center for Arbitration and Conciliation of the Bogotá Chamber of Commerce. The cases are organized by parties to the arbitration, commercial transaction 7 in dispute, legal pretensions and defense mechanisms of the litigants, length of the arbitration process, means of proof or evidence requested, costs, and demand trends for arbitration. Chapter 6 presents the findings of the cases and overall conclusions of the dissertation. My hypothesis will be developed and tested: The increasing use of alternative dispute resolution mechanisms (ADRMs) by economic agents is the consequence of global economic pressures and ties. This, in turn, suggests that the relationship between law and economics is rapidly changing at a the structural level; this latter point constitutes a secondary hypothesis, wherein market-friendly governance structures guided by private interests are displacing those dominated by the state. 8 Chapter 1 Changes in Economic Laws: The Appeal of Alternative Dispute Resolution Mechanisms This chapter is divided into four parts. The first introduces the school of “modern political economy” as defined by the New Institutional Economics. 3 The second part highlights the relationship between legal and judicial institutions and transaction costs. The third reviews Colombia’s legal institutions and the crises that have beset them. The final section assesses how far along, legally speaking, Colombia has come with regard to institutional reform. There is one difficulty that needs to be mentioned. In many cases the multifaceted objectives of legal reform make it difficult to pinpoint which problem is being tackled and how far the changes have gone. 4 However, we can proceed by looking at common and dominant trends, leaving the necessary identification and evaluation of particular norms in specific economic relations for future field research. For now, let us focus more generally on how a more efficient legal framework can help to foster a more efficient economy. 3 According to Frieden, modern political economy synthesizes early perspectives, introduces sectorial analysis and relegates state’s intervention to the role of minimizing rent-seeking. Additionally, it uses “advanced [methodological] tools, meticulous logic: mathematical models, econometric techniques and qualitative case studies.” (2000, xvi). The “old” institutional economics of Thorstein Veble, John Commons, and Wesley Mitchell has been characterized and “abandoned” as essentially descriptive and anti-theoretical according to the positivist standards of the “new institutionalism.” Old institutional economics fails to offer a systematic and viable approach to economic theory (Hodgson, 1998). 4 For instance, changes such as the creation of alternative conflict resolution mechanisms are introduced as tools for empowering civil society and guaranteeing access to justice for the poor. There are also different interpretations of the effects of reform under the “Access to Justice” program. 9 The second Phase of Reforms or Institutional Modernization Larry Diamond states that in order to stabilize and consolidate a new democracy the regime must perform. The successful legitimization of the regime greatly depends on the success of its economic policies. “The better the economic performance of a democratic regime the more likely it is to endure.” (1999,78). He is partial to the centrality of market-oriented reforms as a way to consolidate democracy. “Good growth and low-to-moderate inflation are generally produced by macroeconomic policies and institutions that protect property rights liberalize trade and financial markets” (ibid., 79). He is not particularly concerned about the economic inequality associated with market reforms. In this framework, Adam Smith’s invisible hand of the market is ostensibly at work: a belief that trickle down will benefit the poor. “To the extent that a rising tide lifts all boats, economic gains for the rich should not be resented”(ibid., 80). In discussing the interplay between democratic consolidation and economic performance, Diamond echoes the modern political economy paradigm as it applies to trade, capital mobility and macro economic policy. This perspective on economics holds that economic development thrives on comparative economic advantage (abundant/scarce endowments) and the international division of labor; the rational individual actor would support market liberalization as the most beneficial means to increase income gains. Even the short-term losers (the economic sector that invariably supports protectionism) will enjoy allocative market efficiencies in the long run (Frieden and Rogowski 1996; Milner and Keohane 1996; Garret and Lange 1996). In an institutions-free scenario, the mechanisms of the market suffice. Thus, institutions rationally emerge as a function of the market. However, in the real world, this economic model faces the periodic need for 10 institutional direction, as we are seeing as the 2008 global financial crisis continues to wreak havoc on the world economy. For developing countries, one crucial cycle of institutional reforms lies in the implementation of policies known as structural adjustment. These focus mainly on macroeconomic concerns, and the standard Bretton Woods package that favors market remedies that are best kept out of the reach of politicians. A clear summary of this package or tools is found in John Williamson’s classic monograph entitled “What Washington Means by Policy Reform” (1990). Williamson lays out ten policy instruments that are essential to a sound economic reform program in Latin America. These policy instruments are: 1) Fiscal overhaul: the need to find an equilibrium between revenues and expenditures; 2) Public expenditure rationalization: from subsidies to investments in human capital (health and education) and infrastructure; 3) Tax reform: a larger tax base and moderation on regressive taxes; 4) Interest rates: positive and market determined; 5) Exchange rates: market determined. “A competitive real exchange rate is the first essential element of an ‘outward-oriented’ economic policy.” (1990, 20). This would increase the competitiveness of domestic goods in the international market; 6) Trade policy: import liberalization and barrier-free trade; 7) Foreign direct investment: national treatment for foreign investors; 8) Privatization of state enterprises to balance the public budget, and more importantly, to achieve greater efficiency; 9) Deregulation of economic activities to create certainty (of costs and opportunities), transparency and to reduce corruption; and 10) Property rights enforcement, as this is a core institution of capitalism (Williamson 1990). In short, 11 prudent macroeconomic policies, outward orientation, and free-market capitalism are the recipe for adjustment. The second stage of reforms, the post-structural adjustment or institutional modernization phase, emphasizes and develops the last four instruments of this so-called “Washington Consensus.” Foreign investment, privatization, deregulation, and property rights are at the heart of the next reform phase. Institutional, legal and administrative reforms are also part of this second phase package. Although there is not a “consensus” on the specific definition, dimension, and content of this next round of changes, they are still referred to as the “second phase” of reforms (Frieden 2000). Erratic progress and results related to this model over the past two decades drives home the urgent need for new institutions to guide and consolidate this market-oriented economic model. Under this framework, the irrationalities of the “political market” where the winners and losers battle it out over the distribution of the adjustment burden, obstruct the success of the market from the standpoint of both neoclassical economics and the rational choice paradigm. Stated differently, rather than blame the market- dominant economic model, its proponents instead question the poor mediation of local institutions that interfere with clear price signals and destabilize politics along with it (Milner and Keohane 1996, Frieden and Rogowski 1996, Garret 1996, Frieden 1996 and 2000). But surely economic development entails more than the maximization of private interests or the optimization of firms’ profits with the support of a “rational” institutional context. My main point is that institutional reforms are needed because the market is not totally perfect. It is wrought with failures, a main cause being the asymmetric information 12 that is inherent in the economic system. Most of the time, all parties to a contract or investment are not equally informed about all aspects of the transaction; thus an efficient outcome rarely occurs, as the missing information does not allow a truly rational assessment of individual preferences and investment opportunities. Therefore, a less- than-optimal transaction has transpired. 5 The actor with full information is in a position to engage in opportunistic behavior, “which introduce the possibility of self-interest seeking of a more strategic kind (to include self-interest seeking with guile)” (Williamson 1996, p.49). This self-interested guile clouds the legitimacy of the subsequent results. It is no longer believed that the market price offers the necessary data for buyers to buy and for sellers to sell. 6 How, then, should this asymmetry be dealt with? Some theorists contend that the efficiency promoter should be none other than the government. Yet, according to theories of modern political economy, this institution is guilty of its own failures: state policies that have consistently undermined social welfare. The discourse about excessive state intervention is again revived, and this was a main mantra during the lost decade of the 1980s (Krueger 2000). In short, the failures of the government outweigh those of the market, meaning asymmetrical information must be dealt with in other ways. For now, 5 A simple example might help to clarify the informational issue. The seller of a car in the used-car market has more knowledge about the real condition of the automobile. The insecurity leads the buyer not to take the given price for the car and to offer a price below the range of the transaction, so the sale does not take place and one more opportunity to create value is wasted (Akerlof 1970). 6 In neoclassical economics, relative price intrinsically transmits all the required information. The hypothetical case of general market equilibrium represents an economy where quantity demanded equals quantities supplied in all markets (goods and services, labor, and financial). Where/when the demand exceeds supply the price mechanism “moves simultaneously” into all markets, adjusting quantities demanded and supplied and bringing the system back to equilibrium. Needless to say this only happens in economic textbooks. In reality, prices for a large number of goods are rigid and the rigidity varies substantially across industries and markets. In many cases market transactions are not based on “price signals” alone. As Furubot and Richter argue, “The simple model of price clearing [general market equilibrium] is inapplicable to a number of markets” (2000, 287). 13 government efforts ought to be limited to the provision of infrastructure and other public goods. Law, security and defense, basic services, and public information are the main duties of the state. However, it would also be a big mistake to assign to the state an ancillary role of complementing the market without any control. The subsidiary or supportive role of the state must be undergirded by a clear, efficient, secure, and “apolitical” legal framework replete with the active participation of economic agents. The means to settle private business controversies, isolated from the state’s usual modes of intervention is one promising legal institution that could penetrate asymmetrical information. As Williamson reminds us, “Transactions that are subject to ex post opportunism will benefit if appropriate safeguards can be devised ex ante.” (1985, 48). As I will establish in chapters three and four, parties to a contract can decide a priori not only to submit their contractual differences to an arbitration tribunal, but also to the procedure of the arbitration. To some extent, opportunism is reduced and so is uncertainty in economic dealings, along with the usual transaction costs. It is in this context that reflections about the “New Institutions of Capitalism” take on meaning. The unrealistic assumptions of standard economic analysis, such as the predictability of individual behavior, accurate anticipation, complete information and the profit maximization motive (that have come to be known as neo-liberalism), have proved insufficient and (using its own vocabulary) inefficient for both understanding how an 14 economy works and for satisfying social necessities and wants. To obtain efficient outcomes, the market demands the hand of the law 7 . Many theorists agree that most of the Latin American countries are still operating in the second wave of reform regardless of the relative position of each in the process of economic reform and restructuring, the particular effects of the adjustment measures, and/or the specific content of democracy. Now is the time for the consolidation of these reforms, although the how to do so is still in dispute. Some think that governments in Latin America should create institutions and regulations to overcome market failures in the new liberalized economies (Levy 2000). Others believe that the region must now remedy the inequalities that the first wave of reform neglected, perhaps by improving education and investing in the poor (see IDB 2003a, Summers 1998, and UNTACD 1995). Still others insist that the second phase should focus on good governance: more transparent politics and lower levels of corruption (Reed 2003, Pradhan 2000). To achieve these ends, countries must also strengthen their legal systems (Frieden 2000, Shihata 1990, 1996). My focus is not on the motives for the demanding legal changes, nor their fulfillment in practice. Rather my sights are set on underlining and elaborating on what legal reforms actually imply: the birth, re-definition or reformulation of the laws that govern economic relations. That is, “the new institutions of capitalism,” where dispute 7 The common tendency is to think of legal institutions and private economic interest as recent subject of study. Yet in the 19th century Max Weber refered to the interconnection between law and capitalist economy in the following terms: “[T]he rationalization and sistematization of the law in general and the increasing calculability of the functioning of the legal process in particular, constituted one of the most importan conditions for the existence of capitalist enterprises, which cannot do without legal security.” Cited by Peter Hamilton 1991, p. 140. For a comprehensive analysis of Weber’s reflexions on law and capitalism, see Trubek 1972. 15 settlement through increased private and alternative mechanisms emerges as a compelling legal option. Reducing Transaction Costs through New Legal Institutions A large number or researchers agree on the importance of institutions for economic development, including the role of domestic/national legal and judicial institutions. “Current research suggests that the capacity of national institutions to protect property rights, reduce transaction costs, and prevent coercion may be decisive in determining whether economic development takes place.” 8 In this discussion, legal regimes and economic development are linked by growth in the private sector (World Bank 2008a, 2008b, 2009). The absence of this capacity of the domestic institutions slows the growth of private businesses and limits economic development (Holden and Rajapatirana 1995, IDB 2004). However, as I argue in chapter two, the dominant approach to the study of legal institutions and economic relations has favored reasoning informed by little more than performance indices based on macro-variables. This has encouraged inductive generalizations concerning the quality of domestic institutions (legal included) and their contribution to economic development. This approach overshadows studies which rely on observations and experiences, and are constantly reviewed under new realities. The latter approach allows not only for a more precise and refined understanding of the interaction between law and economics, but also the design and formulation of more realistic policies. This underlines the need for the in depth study of and immersion in the legal 8 Stephenson, Matthew. n.d. Economic Development and the Quality of Legal Institutions. World Bank. http://siteresources.worldbank.org/INTLAWJUSTINST/Resources/LegalInstitutionsTopicBrief.pdf 16 field, something that I do in chapters four and five. For now some introductory background is presented. The formal structure of law and economic relations is defined by different legal hierarchies, including statute and common law, and laws with diverse content such as substantive, procedural or evidentiary laws. In his example of the exchange of a residential property in the United States, North (1990) analyzes these diverse laws and makes explicit the relation between institutions and transaction costs in economic relations. We can apply these ideas to the larger scenario of a nation-state and elaborate on the relevance of legal and judicial institutions in the development of a country or its economic growth. A main departure point concerns the legal definition of property rights (as well as of the obligations and constraints that the exercise of rights entitles), as well as the mechanisms and bodies charged with protecting, administering and resolving disputes regarding these rights. The latter comprises the judicial system, and ADRMs, such as arbitration, are increasingly seen as a crucial to the security of contractual obligations. Even assuming clear, certain, and efficient laws and judicial systems, investors still need to spend some time (and capital) studying and understanding these institutions. That is, they must gather and research legal information. Thus we can think of laws, the judicial system, ADRMs, and the data on their content and implementation as some of the parameters that define transaction costs. In other words, transaction costs are the time, effort and resources used in the transfer of rights, including the prior costs of establishing and maintaining those rights (Commons 17 1994). Paraphrasing Arrow’s definition of transaction costs, legal and judicial expenditures are part of the costs of running the economic system (1970). 9 According to standard economic theory, transaction costs are irrelevant since economic endeavors take place within perfect-information-markets and among rational subjects. According to this neat picture, everything is arranged for economic agents as a result of market competition. Thus, there are no transaction costs, which implies that there is no prospect of legal uncertainty or insecurity of property rights (North 1990). However, in the real world, market imperfections impinge on this neoclassical ideal. At a more abstract level, according to institutionalist economics, economic actors are unable to gather and digest all of the required information in order to prioritize preferences and predict outcomes. The conditions of rationality are simply not present. Instead the agents act within the contours of bounded rationality (Commons 1994). Furthermore, those economic actors with privileged information tend towards opportunism, and take advantage of those with less economic insight (Williamson 1985). The implication of rationally bounded and opportunistic economic actors is that the market model is not a function of supply and demand alone, which in turn points to the presence of transaction costs as part of the equation. There are other irregularities that distance economic relations even farther from the theory of the perfect market. First, is the fragile and contradictory definition of property rights (Haggard, MacIntyre and Tiede 2008), the sin equa non condition of market relations. Second, a state like Colombia is still a work in progress, with highly 9 Arrow, K. “The Organization of Economic Activity: issues pertinent to the choice of market versus non- market allocation,” in Public Expenditure and Public Analysis, edited by R.H. Haverman and J. Margolis. Chicago: Markham, 1970, cited by Pitelis,1993. 18 chaotic and disperse social groups and state’s legal systems (and institutions in general) full of contradictions and unpredictable outcomes. With particularities and different intensities, these are features of many developing and transitional societies. Still, even when a developing country has crafted appropriate legal institutions these are susceptible to change due to structural limits and contradictions within the prevailing economic model (Poulantzas 1974; Holloway and Picciotto 1977; Picciotto 1990; Campbell and Picciotto 1998). For instance, the globalization of the productive process and stronger presence of transnational corporations has prompted the higher use of commercial arbitration to resolve controversies over trade and investment (Dezalay and Garth 1996; Craig, Park and Paulsson 1990). But the revitalization of private legal mechanisms to settle disputes is a trend that cannot be taken for granted; these institutions must be nurtured and fortified. Finally, the potential effects of these realities on rational behavior and the respective transaction costs levels of economic relations cannot go without mention. My main point is that in developing countries the ideal of an economic environment free of transaction costs is unrealistic given the inherent human characteristics of bounded rationality and opportunism. Moreover, these countries have to deal with systemic or structural factors that further widen the distance between the real economy and the neoclassical market paradigm. Clearly, within these contexts the transaction costs are higher and the institutions in charge of managing and hypothetically lowering these costs need, in many cases, not only to be reformed, but also reconstructed entirely. With this in mind, we can now move to the characterization of those institutions that are responsible for supporting the market and economic development (growth) in 19 Latin America, particularly in Colombia. The reflections that follow are limited to the role of law and the judicial system as institutions with the important role of carrying out the changes between state and market in the region. One central concern is the expectations or demands that investors (including foreign) have regarding ex-ante contractual relations. Before establishing any economic relation, interested parties want to know all aspects of the contract: the objects and subjects involved, the content of rights and obligations, instruments and the authorities that assess compliance, penalties and sanctions, dispute resolution processes, and enforcement bodies and procedures. Answers to these questions must come from the specific legal code and judicial structures governing the contractual obligation. Economic agents also demand information on the exogenous aspects that will impact the development of the contract. These would include laws related to taxes, commercial relations, real estate, labor relations, environment, intellectual property, capital markets, trade and investment, and even criminal norms, to mention only a few. These regulations address the minimal institutional context in which an economic venture would take place. It is after an assessment of the clarity, certainty and predictability of these legal institutions that investors decide on the type of business (if any) that they are willing to undertake in a given economy. The institutional framework, again, is a variable in defining the value of the investment, the transaction costs, and the amount and type of capital to risk, as well as the duration of an agreement. As North puts it: the higher the uncertainty, the higher the transaction costs and the lower the value of the property. Thus 20 the investor will not have the incentive to commit fixed capital and enter into long-term agreements (North 1990). Today the importance of legal and judicial reforms to the development process is clear. Governments are expected to provide (sometimes by stepping aside) the legal institutions that complement a competitive market, in recognition of the crucial linkages between economic development and the legal system. One of these legal institutions, I argue, is the alternative dispute resolution mechanism. For governments in emerging markets, offering better and more reliable legal tools plays a role in attracting inflows of capital and new technologies (Webb 1999). How has Colombia responded to the challenges of modernizing its laws and legal institutions so as to succeed in international markets? I answer this question in two stages, but prior to doing so I will first provide a general overview of legal and judicial institutions in Latin America. Second, I will review the most relevant aspects of Colombia’s legal and judiciary system; and third, I will focus on the reform progress that has been made. 10 The Crisis of Legal and Judicial Institutions in Latin America Since the 1970s the crisis of the judiciary and legal systems in Latin America has been acute. An early approach to reform was launched under the banner of “Law and Development.” With the financial support of the United States, this strategy promoted the 10 We should be aware that in many instances the building of new and effective legal institutions takes place in times of deep crisis that opaque the ongoing institutional modernization. For example, the urgency of a peace process in Colombia with its leftist guerrillas is an important exogenous factor that impacts the outcomes of the changes. 21 creation of legal and judicial institutions as part of the overall economic development effort in the region (Trubek 1996). 11 During the 1980’s, the widespread transition to democracy stoked a stronger interest in the role the law and the judicial system in the region. Despite earlier reform drives, legal institutions were still characterized by obsolete norms and regulations, long backlogs, weak or nonexistent enforcement institutions, high inefficiency, and precarious judiciary independence. There were also criticisms about unequal access to the justice system, unclear organizational structure of the institutions and their jurisdictions, and excessive and costly use of the justice system for irrational or unnecessary cases. Since the late 1990’s, this topic has again become a point of debate because of the failure of these structural adjustment reforms that I reviewed previously in this chapter. For some analysts, the small positive impact of neoliberal reforms and policies in the region is the result of the domestic institutional framework. It was partly the legacy of institutional unreadiness that prompted a second set of follow-up reforms. These second phase reforms targeted political and legal institutions mostly within the state (eg. Central Banks, other financial entities, taxing agencies, trade and commerce regulations, congress, and the justice administration). These more recent discussions on legal and judicial reforms are different in that there is now a strong belief that legal institutions either facilitate or obstruct economic development. The central questions regarding legal institutions are expressed within the framework of economic integration, competition in the international marketplace, and the 11 For a detailed presentation of diagnostics of the justice crisis in most of the Latin American countries within the Law and Development approach see: La Administracion de Justicia en America Latina, published by the Consejo Latinoamericano de Desarrollo (Lima, 1984). Articles presented at the V Conference of Law and Development, San Jose de Costa Rica. 22 ability to attract foreign investment (Hallward-Driemeier, 2003, Rodrik, Subramanian and Trebbi 2002, Neumayer and Spess 2005, Perry 2000). In the mid-1990s, the United Nations Conference on Trade and Development (UNCTAD) reported that international investment had superseded trade to become the most important mechanism for global economic integration. 12 In a context of increasing contractual relations taking place beyond national boundaries, attention to the regulation of the economy rose as well. Agents tried to not only avoid legal institutions featuring inefficiencies, slowness, and uncertainty, but also to encourage the standardization of the legal framework (Pistor et al. 2002; Santos 2002), toward one more closely related to business matters like dispute resolution mechanisms (Dezalay and Garth 1996). Another change related to this current wave of legal and judicial institutional reform is that public actors are encouraging the change. Multilateral development banks (MDB) have displaced the United States Agency for International Development (USAID) in this mission. As of July 1999, the World Bank (WB) and the Inter-American Development Bank (IDB) between them had approved judicial and legal reform projects in 17 countries in Latin America and the Caribbean. 13 With this shift, the focus has changed as well. USAID’s focus on criminal law has been replaced by the MDB’s legal and judicial reforms that have as a core objective the enhancement of property and 12 According to UNCTAD, world FDI inflows had increased 19 percent in 1997, to $400 billion (almost double the total of 1990). For the same year, the FDI outflows were $424 billion, a 27 percent gain (World Investment Report 1995, 1998). 13 World Bank and IDB sources. The establishment of legal institutions closer to the security interests of economic agents is not exclusive to this region. The WB is conducting these initiatives in the following regions: Africa, East Asia and the Pacific, Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa, and South Asia. Initiatives in Legal and Judicial Reform (World Bank Group 2002). 23 contract rights to favor market relations (Posner 1998). 14 Some have cautioned that the bank’s interest in institutional modernization is limited to concerns about economic efficiency and stability (Faundez 1997). Thus, the equation between legal and judicial institutions and economic development is explained in the following terms for the region. The poor functioning of the systems of justice constrains the development of the private sector. This situation creates high transactions costs and risks for economic relations, which in turn hampers the market and the competitiveness of economies (Dakolias 1996, Holden 2003). Following this argument, a World Bank study affirms that the quality of legal and judicial institutions could explain 23 percent of the variability of per capita growth in a given country (Brunetti and Weder 1997, Brunetti, Kisunko and Weder 1998). Furthermore, the relative failures of structural adjustment in the 1990s are explained, to some degree, by the inefficiencies of legal institutions. We can see that the meaning and content of judicial and legal reform goes beyond the need to escape the shadow of the past. Economic forces now require impartial entities that function well and are able to interpret, apply and enforce laws and regulations in a predictable and efficient fashion (Alvarez 1996). Carlos Peña (1997) argues that the state is ill-equipped to deal with the globalization of legal demands/needs. For him, the inefficiency of the courts in administrating justice requires investing in alternative mechanisms (ibid.). Private commercial arbitration might be seen as meeting the legal needs of the productive 14 In reality the projects supported by multilateral development banks cover issues including legal education and curriculum reforms, training of judges, judicial independence, alternative resolution of conflicts, and access to justice and these demonstrate a more comprehensive view of legal and judicial institutions. Yet we should keep in mind the relevance of these spheres to the building and permanence of private property and contract rights. 24 process without relying on the state as protagonist. This topic is discussed further in chapters four and five. To comply with their obligation to support economic growth in Latin American countries, law and justice systems shall offer clear definitions of property and contract rights, permit free entry and exit of private economic agents, enhance competition, enforce obligations, and reduce the margin of negative effects from opportunism and bounded rationality. Clearly, the creation or expansion of alternative dispute resolution mechanisms such as arbitration and conciliation fall within realm of institutional modernization. ADR mechanisms give the parties the required flexibility to amend their contracts/obligations and settle any other disputes according to changing circumstances. Businesspeople using ADRMs would no longer be at the mercy of lengthy and uncertain processes, which are highly formalized and centered on lawyers and take place in a judicial system congested with a large number of unresolved cases. Yet, the core feature of the relationship among legal-judicial institutions, private investors, and economic prosperity is the limitations of states’ real or potential abuse in the market. International transactors still have in mind the policies of expropriation and nationalization that defined the economic role of the state during the 1970s and part of the 1980s in many countries of the region. In this terrain, legal institutions should be seen as the guardian and guarantor of market oriented economic policies, and the safety mechanism against arbitrary changes in privatization and liberalization obligations, for instance, coming from short-term interests of the executive or the legislative state powers. How formalized, legally speaking, are these new institutions? Or, how far have states gone in demonstrating their commitment to the current legal trends? Answering 25 this question for the entire region and in relation to every point requires a more elaborate analytical framework which lies beyond the scope of this project so I will focus on the legal details with regard to two trends in the Colombian case: 1) flexibility in legal institutions and 2) technocratic modernization and internationalization of justice. The Legal Expression of the Changing Law Flexibility in Legal Institutions Flexibility is clearly one of the most dominant characteristics of free-market oriented economies. The rigidity imposed by the welfare state in the economic process up through the 1970’s led to an inefficient allocation of resources. Flexibility in the production and distribution stages of economic relations is seen as a precondition for market forces to function properly. The ultimate aim is the reduction to the lowest possible point of the frictions that the law (and state) can create in contractual relations of economic agents, and, as a final outcome, in the level of growth or economic development of a country. In short, a flexible legal environment enhances contractual subject autonomy or, said in another way, it reduces third party intervention and reduces the difficulty they may have with ex post inferences when they are asked to intervene in a conflict (Williamson 1985). This point is well illustrated by the existence and current expansion of alternative dispute resolution mechanisms, ADRM, to settle private commercial controversies. It is precisely here where the role of institutions as a minimizer of transaction costs is better understood. Economic actors spend less time and money and face fewer risks under legal institutions that provide contracts with internal mechanisms for adapting them to 26 changing conditions without the need to inform exogenous parties. Yet when this need is dominant due to serious disagreements or unfulfilled responsibilities, contractors want the chance to appeal to alternative dispute resolution mechanisms and efficient enforcement institutions, respectively. 15 Within this framework extended contractual commitments are more plausible. In Colombia, the most recent normative incorporation of the concept of flexibility for legal institutions finds its highest level in the 1991 new Constitution. 16 First, the regulation and adaptiveness of the judiciary gave way to an ordinary and flexible legal framework that replaces the historically lengthy, inefficient, and most of the time aborted constitutional amendment procedure. Second, the constitution created the Consejo Superior de la Judicatura (CSJ), an independent institution in charge of governing the sector with responsibilities similar to those of a CEO. It was established that one of the CSJ’s goals was to rationalize the judiciary spatially and functionally (Colombian Constitution, Art. 257). What these two changes mean is that legal institutions that are highly sensitive and adjustable to changing contexts hold sway over constitutional rigidity. Third, the constitution also becomes more flexible at the enforcement law level by establishing the supremacy of substantive over procedural law and the agility of the former (ibid. Art. 228). The target here is to minimize form over the substance when 15 For a discussion on alternative -to those of the state- dispute resolution forms such as arbitration, conciliation and mediation to resolve commercial disputes see: Santos 1995 and Trubek et. al. 1984. 16 Previous attempts, with clear governmental support, to formalize the commitment to flexible legal institutions started in the first half of the 1970s, coinciding with the global economic crisis, during the presidency of Alfonso Lopez (1974-1978); it continued with Belisario Betancur (1982-1986) and Virgilio Virgilio Barco (1986-1990). These initiatives, however, only reached ordinary law level and never succeeded in the judicial system. See: Castro and Reyes Echandía 1978; Ministerio de Gobierno 1984, Presidencia de la Republica 1988. 27 interpreting and enforcing contractual relations, and conflicts in general. The constitution seeks to avoid troublesome and tricky instrumental norms for economic agents in routine procedures such as requesting licenses or filing complains or opening a bank account. This reduces red tape, transaction costs, and opportunities for bribery. The fourth sphere is that of private venues to resolve disagreements. The Constitution promotes the de-judicialization of many disputes by authorizing strong administrative and private mechanisms (ADRMs), outside the judiciary to decide conflicts (ibid. Art. 116). This encourages more attention to the will of the parties to a contract than to a third person’s (e.g. judge’s) help, signaling a tendency toward private criteria in the governing of obligations. Technocratic Modernization and the Internationalization of Justice Just as crucial as flexibility is the quest for efficacy and efficiency for legal and judicial institutions. When talking about the Consejo Superior de la Judicatura the Colombian authorities have affirmed through the years: “Efficacy is going to be the dominant signal of its actions” (Castro and Reyes Echandía 1978, 74). They add, “Important and urgent public security issues [common crimes, guerrillas and paramilitaries] demand a more rational and efficient organization of the judicial institutions” (Ministerio de Gobierno 1984, 38). In relation to criminal justice “the second most important line of justice reform is the modernization of criminal justice making it more prone to efficacy” (Giraldo 1992, 38). These public official speeches in the last fifteen years reflect the aim of building new legal and judicial institutions based on efficiency and efficacy concepts. 28 Some critics argued that these reservations rendered the judiciary more like a corporation concerned with productive outcomes (Moncayo and Rojas 1989). However, the governmental and mainstream take on this private firm-like reorganization of the judicial institutions is that it offers the advantage of controlling (keeping a better account of) the assignments of judicial and legal actors. This, in turn, affords a space to implement opportune changes in response to both endogenous and exogenous factors. In other words, the efficacy and efficiency that define the new institutions support the nation’s interest in becoming more market-friendly for [foreign] capital in the sense that economic agents benefit from dynamic entities doing their job in the different legal jurisdictions – criminal law included. Another crucial modernizing element in the judicial institutions is the budgetary/financial autonomy given to these bodies. This helps limit the ever-present possibility of executive or legislative intervention in judicial power. 17 This, it is hoped, will end the eternal waiting of a given sector for the government or/and the legislature to approve any expenditure. Finally, these reforms also incorporate technical features such as the automatization of files, data, and procedures, and the generalized use of video technologies (Santos 1991). 17 For details see Justice Statutory Law, especially Ministerio de Justicia Ley 30 of 1987 and Ley 270 de 1996. 29 As mentioned earlier, these changes are not exclusive to Latin American countries or to developing or transition countries 18 . The deconstruction of legal and judicial institutions is not only international (with the recognition of national specific needs), but also the internationalization itself of law and justice expressions is a trend. The most relevant examples come from commercial and capital interdependencies through the establishment of bilateral and multilateral free trade agreements, common markets, and supra-national economic units, as well as investment agreements. 19 Despite (or as a result of) the different legal traditions that the parties to these agreements come from, they have adopted alternative dispute mechanisms such as arbitration and mediation (Buhring-Uhle, Kichhof and Scherer 2006; Santos 1995, 2002). Final Remarks For years Colombia, and Latin American countries in general, have analyzed the need for and tried to initiate (without too much success) legal and judicial changes. However, the latest wave of institution-building seems to be taking hold. The momentum gained by market oriented economies, the absence of alternative projects, and increasing international interdependence have instilled a sense of urgency to think about the kinds of 18 In the case of the United States, Joseph Biden, current vice president, led as senator in 1990 the approval of the Civil Justice Reform Act (CJRA), which “is rooted in more than a decade of concern that cases in federal courts take too long and cost litigants too much. As a consequence, proponents of reform argue, some litigants are denied access to justice and many litigants incur inappropriate burdens when they turn to the courts for assistance in resolving disputes” (Kakalik et al. 1996, 1). In Europe, on September 18, 2002, the Committee of Ministers established the European commission for the efficiency of justice (CEPEJ), after “Recognizing that the rule of law on which European democracies rest cannot be ensured without fair, efficient and accessible judicial systems” (Council of Europe 2003, 2). 19 The number of bilateral FDI agreements is significantly expanding. By mid-1995, over 900 such treaties existed (a 60 percent increase since 1990), By the end of 1997 there were 1,974 double taxation agreements covering 178 countries (UNCTAD 1995, 1998). 30 legal and judicial institutions that will enable economic agents within the global race to attract and retain capital. And, in the case of developing countries to advance with development goals. It is precisely this sort of economic conditionality that has pushed Latin American governments to pursue compliance with non-explicit international legal and judicial institutional standards. However, the dominant reference point for measuring the success of domestic economic institutions in a given country has been a series of international rankings such as Economic Freedom of the World Index, The Index of Economic Freedom, The Global Competitiveness Index, Doing Business Index or the Corruption Perception Index, among others. As I will show in the next chapter, this indices approach to the interplay between legal institutions and economic relations is limited. Today most countries understand that institutions such as the protection of property and contractual rights and the level of transaction costs are important variables for deciding the place, time, and mode for contractual relations. Colombia has taken steps towards constructing a more competitive economic legal framework, although the international rankings might draw the opposite conclusions. Why might legal support for ADRMs and their increasing use to resolve private commercial differences be emblematic of the kinds of legal institutions demanded by the new economic order? Because, in many Latin American countries there are more than economic reasons to demand legal and justice reforms. These include access to justice, protection of human rights, executive accountability, and violence reduction, among of many others, which people want the legal and judicial system to handle. The motivational impetus for these 31 reforms makes the mapping of any changes and the evaluation of their actual implementation and impact very difficult. Yet is it a very interesting challenge. In Colombia there are reasons and objectives beyond the economic sphere for strengthening arbitration, and other forms of alternative dispute resolution mechanisms. I limit my analysis not only to private commercial arbitration, but also to cases heard before the Center of Arbitration and Conciliation of the Bogotá Chamber of Commerce, whose experience and fitness has been recognized for the Inter American Development Bank by using it as model in other Latin American countries. There is much left to be done in studying and analyzing the connections between transaction costs economics and legal and judicial institutions in Colombia. The place to start is by describing the actual incorporation of constitutional mandates in different legal fields such as commercial, investment, tax, and trade law. Also, a legal economic sector analysis would be pertinent. That is, how legal trends are manifested in particular investment agreements. Another important step is the comparison between pre-reforms and post-reforms and the reaction/behavior of economic agents. For now I will conclude by saying that in Colombia the current transformation of legal and judicial institutions has incorporated many of the concerns of transaction costs economics. Colombia is working on building institutions that could make it more competitive in the international capital market. Like many countries, Colombia is on a quest to craft more efficient law for an “efficient” economy where global and domestic forces challenge the state’s monopoly over the production of law. 32 Chapter 2 Shifting Lenses: From the Macro Rankings of Domestic Institutions to the Working of Institutions When exploring the relationship between domestic institutions and private economic interests, there is recurrent mention of international rankings (these cross- national data sets are taken as evaluations of national economies) which purport to measure: the compatibility of national institutions and market-based policies; confidence of entrepreneurs in national institutions; development of private sector; and the levels of economic growth. 20 This chapter probes these mainstream assumptions about the interplay between legal institutions and economic performance. In doing so I compare and contrast the perceptions about Colombia’s legal institutions reproduced in these rankings and the actual ability of these institutions to support investors. Finally, I address the most relevant international rankings and elaborate on the place that Colombia’s legal institutions occupy within them, as well as the reality they create about the country. Principal Users of the Rankings The rankings of domestic institutions have influenced academic studies that consider the extent to which local institutions and practices have changed, as well as comparative institutional economic analyses. In many cases, such studies lead to policy recommendations in institutional matters. Along with academic researchers, the rankings have been used by international development agencies (in many cases the same ones 20 Some of these rankings include: the Economic Freedom of the World Index, Index of Economic Freedom, Global Competitiveness Index, Doing Business, World Competitiveness Yearbook, World Business Environmental Survey, Corruption Perception Index, Bribe Payers Index, Global Corruption Barometer Freedom in the World, and Freedom of the Press, among many others. 33 funding the creation and updating of the data bases), domestic policy-makers, and international investors. Each of these principal users of institutional indices is examined in turn below. International Development Agencies The rankings of domestic institutions can affect the funding of international organizations for reform programs that encompass a wide range of development and institutional issues. Accordingly, these rankings play a clear role when international development agencies decide on recipient parties and the amounts to allocate. Although this method is seen as a transparent means to assign international funds, and it allows for the monitoring of institutional performance and resource management, Kaufmann (2003) warns against the excessive reliance on rankings. He argues that the margin of error in these indices can be significant, and this could lead to faulty and costly decisions. My work builds upon this argument. Domestic Policy-Makers Due to the existence of these rankings and their use at the international level (by researchers and funding agencies), national governments may formulate public policies around institutional changes in order to improve and better compete for better funding. Consequently, for national leaders and international consultants, moving up in the rankings arguably becomes the new goal. However, I question whether this strategy would actually lead to higher levels of international investment. 34 International Investors The political economy literature suggests that investors use these scores provided by international rankings when deciding where and how much to invest. The idea is that better rankings are assigned to economies with legal institutions that approximate the ‘ideal paradigm” of a highly predictable and efficient legal system. Yet, empirical studies that confirm this hypothesis are scarce. On the contrary, Perry’s (1999, 2000) work on foreign direct investment in Sri Lanka, for example, questions the validity of this thinking. She shows that investors pay little attention to paradigmatic legal institutions when deciding on investments. In fact, they are still willing to invest in economies with theoretically “unattractive” legal systems, that is, systems that are unpredictable and inefficient (Perry 1999, 2000). The bottom line is that economies with low scores on legal institutions are capable of attracting a good deal of investment. Perry (1999, 2000) offers two explanations for the flow of investments into economies with sub-optimal legal institutions: investors do not know about or are not deterred by the potentially negative effects of inefficient and unpredictable legal systems; and, while perhaps far from the ideal model, some legal systems offer predictability and efficiency to those investors who can interfere and work the system to their advantage. I venture a third explanation that highlights the deficiencies of the international rankings: the indices aggregate variables to represent the entire legal system without a rigorous explanation of those factors and their effects on economic decisions. In other words, the rankings are built upon perceptions of state-centered legal institutions. In the case of Colombia, for example, scores of the whole legal system are hypotheticals that can overlook the kinds of friendly legal practices that are directed towards investors and 35 the market. The means to settle commercial disputes beyond the formal legal system and through private commercial arbitration are one instance of this flexibility. 21 In sum, the rankings (or cross-national data sets) have both strengths and weaknesses. Among the strengths of this strategy are: the signaling of a perceived problem, the creation of awareness among domestic leaders, and the ability to compare among countries. We can see these positives as closely matching the interests of investors and some researchers. A ranking might justify investments or conversely, the decision not to invest. In terms of weaknesses, ranking can sometimes rely less on data and more on perceptions. Information can be too vague and the conclusions drawn can portray the past rather than the present. Stephenson 22 alerts us to the potential problems in relying on this type of data, “[f]irst, the evaluations are highly subjective, and it’s not clear what a survey respondent’s point of reference is when he rates a country "high" or "low" on a particular dimension. This is especially true when the evaluators only have experience in that country and their home country. Second, the methods of data collection and the construction of the indices is often opaque. Third, there is a danger of picking a measure that proxies more for the dependent than the independent variable. For example, countries thought by foreign investors to be bad investment risks may grow more slowly, but it’s hard to infer anything more than that, when there’s little investment, there’s little growth.” (ibid.). 21 Excluded in this study is the use of informal and non-legal mechanisms such as community, reputation, networks of trust, and co-operation in economic relations. With regard to the settlement of disputes through informal rules rather than formal law, see Ellickson (1991). 22 Stephenson, Matthew. n.d. Economic Development and the Quality of Legal Institutions. World Bank. http://siteresources.worldbank.org/INTLAWJUSTINST/Resources/LegalInstitutionsTopicBrief.pdf 36 Furthermore, these cross-national quantitative works do not feature a rigorous explanation of the aggregated indicators that measure legal institutions and their effect on economic decisions. 23 This has led to debate the empirical foundations of the apparently robust findings of the legal institutions and economic growth literature based on rankings’ data sets. Haggard, MacIntyre and Tiede (2008) put it in these words: [The] different rule-of-law and legal institutions indicators measure different facets of a country’s legal system and are less tightly correlated than might be thought. Moreover, these measurements are not closely correlated with some of the institutions deemed central to the rule of law, such as checks and balances. These problems are not trivial; prominent empirical findings might not be robust to alternative specifications using different rule-of-law measures (2008, 206). For Colombia, this may be the case should actual well functioning alternative legal institutions were included in the measurements. This could unveil the discussion about the endogenous (or complementary) condition of property and contractual rights for economic growth and development to some other underlying factors: human capital or skilled labor, factor endowments, distortion of domestic and international markets, political environment, other underlying institution, to name some. Perceived Legal Institutions vs. Actually Existing Ones: Alternative Dispute Resolution Mechanisms in Colombia According to the international rankings for those national institutions that best support a market economy Colombia invariably receives a very low score in this 23 Influential researchers like Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert Vishny have consistently used this sort of data in their analyses. Consider how two key legal concepts are measured: Efficiency of the judicial system (Business International Corporation) is the efficiency and integrity of the legal environment as it affects businesses, particularly foreign firms. It may be taken to represent investors’ assessment of conditions in the country in question. The Rule of Law is the law and order tradition in the country (from International Country Risk Guide). See La Porta et al. (1996, 1998, 2000, 2006), among others. For a review of how definitions of rule of law became central to decision- making at the World Bank and for an examination of the contradictory uses of this concept in the Bank’s analyses see Trubek and Santos (2006). 37 category, creating the perception that the whole legal system is inadequate for private economic relations. As Poster (1998) notes, the legal system deviates substantially from the capitalist rule-of-law ideal. This puts the existence of legal enforcement and protection of property and contract rights in doubt as well as whether the country has the appropriate mechanisms to settle commercial disputes. The negative perception about Colombia’s system of legal institutions contrasts with observations at the field level where one sees evidence of commercial laws and a legal structure that has historically been characterized as market friendly, among the most modern in the continent, and exemplary when compared with many Latin American countries (IDB 2002). A recent legal change that favors the strengthening of the private sector is the consolidation and expansion of alternative dispute resolution mechanisms, ADRMs. Colombia’s success in this realm was acknowledged by the World Bank’s own senior Vice President and General Counsel, Ibrahim Shihata, who claimed that in Colombia 80% of disputes in the business community are decided by conciliation centers (Shihata 1996, 60). This fact was mentioned within a discussion about the role of the judiciary in a private sector-led market-based economy. Shihata concluded that what Colombia needs is a court system where rapid, impartial, and efficient litigation could enable the enforcement of property rights and commercial contracts (Ibid.). Implicit in Shihata’s positive statement about ADRMs in Colombia is the existence in the country of: 1) an adequate legal framework to support ADRMs both in terms of national judicial policy and substantive and procedural laws; 2) the political support of national leaders; and, 3) support of the private sector. ADRMs are 38 symptomatic of a court system that defends market and investors, and enables property rights and commercial contract enforcement. In Colombia, although ADRM Centers are not part of the judicial branch, they have judicial functions within the court system. The public function of settling controversies by alternative means is carried on outside of the judicial branch by civic organizations such as universities, professional associations, grassroots based groups, and in the case of the local business community, by chambers of commerce. The latter have enjoyed significant success. In fact, the Arbitration and Mediation Center of the Bogotá Chamber of Commerce has been held up as a prototype by the Multilateral Investment Fund (MIF) of the Inter-American Development Bank (IDB). 24 The following excerpts state the MIF’s interpretation of the condition of justice systems across the region, the role of the judiciary in empowering the private sector under the current market model, the strategic place of ADRMs in modernizing legal institutions, and the recognition of the virtues of the Arbitration and Mediation Center of the Bogotá Chamber of Commerce: Toward the end of the 1980s, the judicial branches in the countries of the region were in an alarming state...[T]he administration of justice suffered greatly from problems of congestion, lengthy delays and lack of access to courts... [L]ack of independence and corruption undermined the credibility and image of the judicial branch in the eyes of society... [T]he private sector suffered from constraints on its access to efficient, transparent, independent and predictable justice, which increased its transaction costs and discouraged business... The ADR [Alternative Dispute Resolution Mechanisms] portfolio was established to mitigate the shortfall in justice services and to improve the conditions for private sector development. The strategy consisted of setting up arbitration and mediation centers to offer entrepreneurs an alternative for the settlement of their commercial disputes. The MIF’s first ADR operation was approved in Peru in 24 The Center was created in 1983, well before the current thrust toward arbitration and conciliation in settling commercial and investment differences. 39 1995. After the experience in Peru, the MIF approved an operation to consolidate and expand the Arbitration and Mediation Center of the Chamber of Commerce of Bogotá (Colombia). This operation was a turning point for the portfolio since the Colombian project was taken by the MIF as a model for its future operations. It was followed by 16 more operations that, with nuances, replicated the Colombian experience (IDB 2002, 6). There is, it seems, a puzzling disparity between the dominant negative perception of Colombia’s commercial legal institutions that is reinforced by the international rankings and the positive view perpetuated by particular institutions in the multilateral community. As I have argued from the start, this disparity comes largely from the aggregate way in which the items in the rankings are built. The information gathered ends up in macro data sets which ignore micro realities. For instance, this includes dissimilar variables in the evaluation of the totality of the legal framework without weighing or distinguishing the different legal institutions and classifications (criminal, commercial, administrative, etc.), not to mention their relationship to economic matters. It is at this juncture where a closer look at the some of the most relevant international rankings that include legal institutions, and a field study on private commercial disputes and arbitration is required. The former shows the limits of macro lenses for studying and capturing the actual nature and effect of market-supportive domestic institutions; the latter sheds light on the ideas about the interaction of law and economic interests at a more practical level. This last point is taken up in Chapters 5 and 6. I turn now to a closer look at international rankings on Colombia. 40 Situating Colombia in the International Rankings The international rankings dominantly measure factors like civil and political rights, protection of property, corruption, governability, competitiveness, and economic freedom. The portrait that these indices paint of a country like Colombia has been used in limitless studies to explain certain aspects of economic performance based on these institutional scores. 25 These studies argue that the negative/positive behavior of a given dependent variable is explained by the negative/positive behavior of the kinds of explanatory variables just mentioned. The main indices can be grouped as follows: 1) Grading economic freedom. This group includes Economic Freedom of the Word Index (Fraser Institute) and The Index of Economic Freedom (Heritage Foundation). 2) Evaluating domestic business risks and opportunities. These are the competitiveness indices such as The Global Competitiveness Index (World Economic Forum), Doing Business (World Bank), The World Competitiveness Yearbook (Institute For Management Development, IMD), and World Business Environmental Survey (World Bank’s International Finance Corporation). 3) Assessing corruption. Corruption Perception Index, The Bribe Payers Index, Global Corruption Barometer (All by Transparency International), 26 Opacity Index (Milken Institute and PricewaterhouseCoopers). 25 See works by Scully (1988), Knack and Keefer (1995), Clague et al. (1999), Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert Vishny (1996, 1998, 2000, 2006), Robert Barro (1998), Acemoglu et al. (2001), Keefer and Knack (2002), Barro and Sala-I-Martin (2003) Juan Carlos Botero et al. (2003), Acemoglu and Johnson (2005), Dam (2006), and, Keefer (2007), for instance. 26 For a complete list of local and regional instruments measuring corruption and governability in Latin America see Herramientas para medir la corrupcion y la gobernabilidad en los paises Latinoamerianos. Departamento de Politicas e Investigacion de Transparency International. April 2006. 41 4) Scaling governability and civil and political freedoms. The Worldwide Governance Matters Indicators, Freedom in the World, Freedom of the Press (all by the World Bank). It is important to point out the confluence of variables in the indices. Most indices have regulatory, legal framework and institutional stability variables. Furthermore, even indices not centrally concerned with corruption, contain variables on this subject. This interdependence of variables among indices leads to the circular treatment of issues, especially when certain indices are used to construct others. Incorporating variables (or the whole index) uncritically, without evaluating reliability, runs the risk of spreading inconsistencies and furthering faulty interpretations. Clearly, these rankings are not meant to provide a solid understanding of a national economy or the domestic politics and institutional framework of a country. What they offer is a very general description, which is synthesized in scores and the subsequent rankings. This permits for comparative and historical (since the 1990s) snap- shots of countries’ economic conditions and institutions. Also, the different gradings point to possible research paths regarding the relationship between economic and legal institutions. However, the content of these rankings has prompted mostly macro level studies that favor regression modeling, and keep the analysis at a general level. Missing are relevant micro empirical data, case studies or research to establish the relationship between economic agents (firms) and their actual dealings with the legal institutions. The latter point is taken up in the next chapter. In evaluating Colombia’s place in some of the rankings, the main indices are: Worldwide Governance Indicators, Economic Freedom of the World, Index of Economic 42 Freedom, Corruption Perceptions Index (CPI), Opacity Index, Global Competitiveness Index, and Doing Business. A. Governance According to the World Bank, Governance consists of the traditions and institutions by which authority in a country is exercised. This includes the process by which governments are selected, monitored and replaced; the capacity of the government to effectively formulate and implement sound policies; and the respect of citizens and the state for the institutions that govern economic and social interactions among them (http://info.worldbank.org/governance/wgi2007/). The World Bank’s Worldwide Governance Indicators (WGI) is composed of 6 aggregate variables: Voice and Accountability Political Stability Government Effectiveness Regulatory Quality Rule of Law Control of Corruption The index is built from an extensive and diverse data set that measures perceptions of these elements of governance (Kaufmann et al. 2007). These perceptions come from either experts or surveys, and the agencies responsible for collecting the data are multilateral organizations, private companies, and non governmental organizations (NGOs). 27 WGI data are presented in percentile increments (0-100%); all countries in the world are ranked according to this scale where 0 corresponds to the lowest positions and 100 to the highest. 27 Actual variables, data sources, and providers vary by continent. See Kaufmann et al. (1999 a,b 2002, 2004, 2005, 2006, 2007). 43 According to this index, Colombia scores below the international median, which indicates a decidedly negative position. Colombia ranks the lowest in Political Stability, Rule of Law, and Voice and Accountability. Remaining variables are slightly more positive (Government Effectiveness, Regulatory Quality, and Control of Corruption), but the overall gist of Colombia’s ranking on the WGI scale is far from favorable (Table 1). Table 1. WGI Indicators for Colombia, 1996-2006 Year V/A* PS GE RQ RL CC 1996 38.3** 10.1 66.4 70.2 28.6 33.0 1998 35.1 7.7 39.8 48.3 24.8 25.2 2000 30.3 3.8 43.6 56.1 20.0 31.6 2002 33.7 1.9 37.0 56.1 20.5 36.4 2003 33.7 1.4 49.8 53.7 20.0 41.3 2004 39.9 3.4 53.6 52.7 23.8 50.5 2005 40.4 3.8 53.1 54.6 29.5 52.9 2006 41.8 7.7 55.9 55.1 29.5 51.9 *V/A- Voice and Accountability, PS- Political Stability, GE- Government Effectiveness, RQ- Regulatory Quality, RL-Rule of Law, CC- Control of Corruption. ** Percentile rank 0-100. Percentile rank indicates the percentage of countries worldwide that rate below the selected country. Source: Kaufmann, Kraay, and Mastruzzi (2007). 44 Figure 1. WGI Indicators for Colombia, 1996-2009 0 10 20 30 40 50 60 70 80 1996 1998 2000 2002 2003 2004 2005 2006 Regulatory Quality Rule of Law Regulatory Quality and Rule of Law The two variables that relate most closely to legal institutions and their relationship with economic agents are regulatory quality and rule of law. The former measures the ability of a given government to implement sound policies and regulations that permit and promote private sector development. The latter measures the extent to which agents have confidence in and abide by the established rules, in particular the quality of contract enforcement, the police, and the courts, as well as the incidence of crime and violence (Kaufmann et al. 2007). With regard to regulatory quality, in 2006 Colombia ranked 4th among the 10 largest countries in the region. For example, it fell behind the performance of Chile, Mexico and Peru in terms of regulatory quality, but out-performed Brazil, Guatemala, the Dominican Republic, Argentina, Ecuador and Venezuela. However, Colombia, Mexico, 45 Peru, Brazil, Guatemala and the Dominican Republic still fell into the 50th-75th percentile in the 2006 WGI rankings. At the global level, there are 55.1% of countries with worse and 44.9% with better regulatory quality than Colombia (Table 2). Table 2. Regulatory Quality Comparison across the 10 Largest Economies in Latin America, 2006 Country Percential Rank (0-100) Governance Score (-2.5 to +2.5) Argentina 22.9 - 0.74 Brazil 54.1 +0.00 Chile 91.7 +1.41 Colombia 55.1 +0.10 Dominican Republic 49.8 - 0.12 Ecuador 15.1 - 1.06 Guatemala 51.2 - 0.09 Mexico 63.4 +0.43 Peru 55.6 +0.11 Venezuela 8.8 - 1.35 Source: Kaufmann, Kraay, and Mastruzzi (2007). In relation to rule of law (Table 3), Colombia occupies the 6th place, higher than Peru, Ecuador, Guatemala and Venezuela, but lower than Argentina, the Dominican Republic, Mexico, Brazil and Chile. For this variable, six countries fell into the 25th-50th percentile: Colombia, Mexico, Peru, Brazil, Argentina and the Dominican Republic. Colombia’s score indicates that only 29.5% of the countries performed more poorly. Consequently, and taking into account the definition of rule of law in this index, we might conclude that a majority of developing countries have more efficient “rule of law” institutions than does Colombia; this is particularly so with respect to contract enforcement, courts, and the police. However, I want to re-emphasize that Colombia’s ranking refers to an “agent’s confidence” in those institutions, and this itself is hardly a scientific measure. 46 Table 3. Rule of Law Comparison across the 10 Largest Economies in Latin America, 2006 Country Percentile Rank (0-100) Governance Score (-2.5 to +2.5) Argentina 35.7 - 0.58 Brazil 41.4 - 0.48 Chile 87.6 +1.15 Colombia 29.5 - 0.64 Dominican Republic 39.5 - 0.50 Ecuador 16.2 - 0.96 Guatemala 14.3 - 1.02 Mexico 40.5 - 0.49 Peru 26.2 - 0.75 Venezuela 5.7 - 1.39 Source: Kaufmann, Kraay, and Mastruzzi (2007). The above table clearly suggests that 70.5% of the economies in the world enjoy a better ranking on rule of law than does Colombia. Unfortunately, the lack of clarity and precise definition throws these rankings into question. The only strong commonality among the variables is that somehow they relate to legal issues. Yet, the content of the legal issues and the composition of the variables are subject to any number of different interpretations. In the specific case of the “rule of law” cluster (see Appendix A), it includes such dissimilar legal realities as violent and non-violent crime, the effectiveness and predictability of the judiciary, money laundering, access to land, trafficking of people, strength and impartiality of the legal system, and enforceability of contracts (state and private), among many others. Based on this grab bag, the authors make quite a claim: “Together, these indicators measure the success of a society in developing an environment in which fair and predictable rules form the basis economic and social interactions.” (Kaufmann et al. 1999b, 11). 47 The importance of rule of law and its positive relation to economic development is not in question here. Rather, I’m calling attention to the fact that in the governance index, the “rule of law” (also in quotation marks by the authors) cluster is not very rigorously defined. Further, these measures do not tell us anything about which legal institutions are weighting the score down and how critical those institutions are in advancing development. The casual observer might head the index as indicating that all legal institutions in the country are not capable of bolstering the economy. In a county like Colombia, this is a very partial insight. Rather than including uncritically in the “rule of law” cluster every single data set on legal issues, the index needs to regroup the sources according to the substance of the legal interaction those sources are evaluating, and probably disaggregate the cluster. Legal theory would be handy here as a basic and crucial distinction should be made between private and public law. Following this would be groupings by civil law, commercial law, criminal law, administrative law, and so on. There is also a clear difference between procedural and substantive law and between regular and alternative dispute resolution mechanisms. In short, we would gain a better sense of a given country’s fairness and predictability on abiding by rules and how this bears on economic interactions. In all fairness, as the authors of the report note: “We also caution users that the aggregate indicators can in some circumstances be a rather blunt tool for policy advice at the country level.” (Kaufmann et al. 2007, 23). Policy advice certainly has a greater chance to succeed when based on more refined and empirical research on law and economics. The authors concur: “We also encourage using these aggregate and individual indicators 48 in conjunction with a wealth of possible more detailed and nuanced sources at the country-level data...” (ibid.). B. Economic Freedom. For this category two indices are analyzed, Economic Freedom of the World and the Index of Economic Freedom 1. Economic Freedom of the World (EFW) The authors of the Fraser Institute’s index of Economic Freedom of the World refer to economic freedom in the following terms: Individuals have economic freedom when property they acquire without the use of force, fraud, or theft is protected from physical invasions by others and they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others. An index of economic freedom should measure the extent to which rightly acquired property is protected and individuals are engaged in voluntary transactions (Gwartney and Lawson et al. 1996 freetheworld.com). We cannot say that the definition limits economic freedom to a particular economic model within the capitalist mode of production. 28 By looking at five major areas through which “economic freedom” is measured one can see that this measure is not just about economic freedom. The five variables implicitly measure components/policies of the neoliberal economic model. The aggregated variables are: 1) Size of government: expenditure, taxes, and state-held enterprises; 2) Legal structure and the security of property rights; 3) Access to sound money; 4) Freedom to trade internationally; and 5) Regulation of credit, labor and business. 28 In fact, this definition could easily apply to the socialist economies. 49 Table 4. Fraser Institute of Economic Freedom Comparison across the 10 Largest Economies in Latin America, 2008 Country Score LSSPR* Argentina 5.9 (114)** 4.35 (106)** Brazil 6.2 (96) 5.19 (85) Chile 8.1 (6) 6.99 (31) Colombia 5.8 (115) 4.49 (105) Dominican Republic 6.3 (94) 4.63 (101) Ecuador 5.9 (113) 4.06 (116) Guatemala 7.1 (53) 5.22 (83) Mexico 7.0 (58) 5.45 (77) Peru 7.2 (47) 5.00 (90) Venezuela 4.8 (136) 3.08 (132) * Legal structure and security of property rights ** Rank among 141 economies Source: Fraser Institute’s index of Economic Freedom of the World: 2008 . In the 2008 index of Economic Freedom of the World, Colombia occupies 115th place among 141 countries. It was given a 5.8 score on the zero to ten scale for that year. The country falls in the lower third of Latin American countries, well below Chile, which has captured the 6th place in the world with a 8.1 rating (Table 4). Although the 5.8 rating is the highest historically for Colombia, the country has not shown significant progress since the first index ranking in 1970, when its score was 5.0 (Table 5, Figure 2). 50 Table 5. Economic Freedom in Colombia, 1970-2006 Year Score* Rank among countries 1970 5.0 41 of 54 1975 4.9 51 of 72 1980 4.7 74 of 105 1985 5.1 69 of 111 1990 5.0 76 of 113 1995 5.4 83 of 123 2000 5.3 106 of 123 2001 5.5 105 of 123 2002 5.3 110 of 123 2003 5.5 108 of 127 2004 5.5 112 of 130 2005 5.7 117 of 141 2006 5.8 115 of 141 * Scale 0 to 10; higher numbers indicate more economic freedom. Source: Fraser Institute’s index of Economic Freedom of the World, various years. Figure 2. Colombia’s Economic Freedom Score, 1970-2006 0 1 2 3 4 5 6 7 8 9 10 1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 Score The variable most related to this dissertation is “legal structure and security of property rights.” In 2005, Colombia has the most gains on this variable. It went from a score of 3.4 in 2004 to a score of 4.0 to tie the 1980’ s historically highest (Table 7). 51 However, this rating is the second lowest among those of the 5 variables. Only size of government scores lower (Table 6). However, in 2006, the score went down to 3.6 to become the lowest of all 5 variables (Table 6). Table 6. Economic Freedom in Colombia, 2005: Variable Scores and Rankings Variable 2004 2005 2006 Size of government 4.2(108) 3.9(123) 4.4(112) Legal structure & security of property rights 3.4(101) 4.0(100) 3.6(105) Access to sound money 7.7(78) 7.8(77) 7.8(79) Freedom to trade internationally 5.8(103) 5.5(107) 6.0(99) Regulations of credit, labor and business 29 5.55(90) 5.80(96) 5.93(94) Source: Fraser Institute’s index of Economic Freedom of the World, 2008. Table 7. Legal Structure and Security of Property Rights in Colombia, 1980-2006 Year Score 1980 4.0 1985 3.4 1990 3.4 1995 2.8 2000 3.5 2001 3.4 2002 3.3 2003 3.2 2004 3.4 2005 4.0 2006 3.6 Source: Fraser Institute’s index of Economic Freedom of the World: 2007 and 2008. The authors see the legal structure and security of property rights as “the most important function of government.” (ibid., 3), whereby the government plays a protective role over private property and the market. It exercises this function through the legal system, which secures property rights, enforces contracts, and settles disputes. Failures “undermine the operation of a market-exchange system” (ibid., 5). However, upon 29 Along with the cumulative score and rank, the index contains scores and ranks for each type of regulation: Credit market 7.5 (92), Labor market 5.0 (102), and Business 5.8 (59). 52 examining the sources and sub-variables used to construct this component we see a high level of generalization and imprecision regarding the definition of legal structure and property rights, the functioning of courts, and the resolution of conflicts. Consequently, assessment of the failures and successes of legal institutions in their role of complementing economic exchange is not on firm ground. Each of the seven sub-variables that compose legal structure and security of property rights is examined, in the following order: 1) judicial independence, 2) impartial courts, 3) protection of property rights, 4) military interference in the rule of law and the political process, 5) integrity of the legal system, 6) legal enforcement of contracts, 7) and regulatory restrictions on sale of real property. 1. Judicial independence (GCR) 30 The Judicial independence score comes from answers to the following question: “Is the judiciary in your country independent from political influences of members of government, citizens, or firms? No—heavily influenced (= 1) or Yes—entirely independent (= 7)” (Global Competitiveness Report, various issues). 2. Impartial courts (GCR), The Impartial courts score comes from answers to the following statement: “The legal framework in your country for private businesses to settle disputes and challenge the legality of government actions and/or regulations is inefficient and subject to manipulation (= 1) or is efficient and follows a clear, neutral process (= 7). (Ibid.). 3. Protection of property rights (GCR), 30 The letters in parenthesis indicate the data sources for building the index: GCR: Global Competitiveness Report; ICRG: International Country Risk Guide; DB: World Bank’s Doing Business. 53 The protection of property right score comes from answers to the following statement: “Property rights, including over financial assets are poorly defined and not protected by law (= 1) or are clearly defined and well protected by law (= 7).” (ibid.). 4. Military interference in the rule of law and the political process (ICRG) 5. Integrity of the legal system (ICRG) Military interference and integrity of the legal system come from the International Country Risk Guide’s political risk component G, military in politics, and component I, law and order, respectively. Component G measures military involvement in politics. Component I assesses law as “the strength and impartiality of the legal system,” and order as “popular observance of the law” (PRS Group, 2008). There is no further information about how the two assessments are measured. However, the inclusion of integrity of the legal system seems redundant and misleading. It is redundant because impartiality of the judicial system is already assumed as a component of “impartial courts.” Thus the legal institutions of a country could be twice punished or rewarded for the same characteristic. Moreover, assessing obedience to the law is not by extension an evaluation of the legal system. By lumping together car hijackings, illegal strikes, and breach of commercial contracts, this dilutes the specific potential effects of such varied behavior on the economy and economic relations. The terms “military interference” and “law and order” are categories that refer to the larger context of political regime, state legitimacy and civil society. Inclusion of these sub-variables makes the composition of the legal structure and protection of property rights variable broader and less useful for the analysis of legal institutions and economic 54 exchange. In the specific case of Colombia, for instance, advances in private law and institutions governing disputes may pass unrecognized due to the emphasis on Colombia’s sociopolitical reality. Thus, in Colombia, economic freedom (as defined by this index) is highly affected and negatively so by its political regime imperfections. 6. Legal enforcement of contracts (DB) The variable “legal enforcement of contracts” is based on the World Bank’s Doing Business estimates for the time and money required to collect a clear-cut debt. The debt is assumed to equal 200% of the country’s per-capita income where the plaintiff has complied with the contract and judicial judgment is rendered in her/his favor (World Bank 2009a). 7. Regulatory restrictions on sale of real property (DB) The component “regulatory restrictions on the sale of real property” is based on the World Bank’s Doing Business data on the time, measured in days and monetary costs, required to transfer ownership of property that includes land and a warehouse (Ibid.). 55 Table 8. Colombian Component Scores for Legal Structure and Security of Property Rights, 2005-2006 Sub-variables 2005 2006 Judiciary independence 4.4 4.6 Impartial courts 4.6 4.5 Protection of property rights 6.2 5.8 Military interference 3.3 3.3 Integrity of the legal system 1.7 2.5 Legal enforcement of Contract 6.6 1.8 31 Regulatory restrictions on the sale of real property 8.4 8.7 Source: Fraser Institute’s index of Economic Freedom of the World: 2007 and 2008 Contrary to the other variables that are part of legal structure and security of property rights, variables 6 and 7 come from micro data. They are the closest to my approach to law and economics analysis in Colombia, which focuses on the actual functioning of the legal system. However, as I will show, my research goes further in at least two aspects: First, it studies legal institutions within the context of real and diverse commercial disputes, not just hypothetical scenarios. Second it examines alternative means for deciding commercial disputes instead of relying solely on the regular judicial system (The Doing Business index is analyzed ahead). In Colombia the recent revitalization of arbitration and conciliation by the state and its increasing popularity among economic agents can be seen as an answer to the crisis of the judicial system. The crisis of the judiciary is characterized by the accumulation of large caseloads, long dispute resolution delays, excessive formalism, and 31 Notice the abrupt change in the score for legal enforcement of contracts from one year to the next. Unfortunately, the report does not offer any explanation. After studying carefully the Doing Business reports from 2004 to 2009, this EFW’s scores variation may be relate to the methodological changes that Doing Business made for the enforcing contracts variable in the 2007 report. Colombia’s overall ease of doing business moved down in the rankings to 79 from 66. Yet Colombia recovered the 66 rank in the 2008 report and moved up to 53 in the 2009 report, without reforms to the enforcement of contracts (World Bank 2004, 2005, 2006, 2007. 2008, 2009). 56 high costs. These exact characteristics are the determinants in the Doing Business’ evaluation of enforcement of contracts within the regular judicial system. Consequently, I will focus here on one of the legal reforms that Colombia pursued in order to cope with its judicial crisis in enforcing contracts. In the next chapters I explore whether Alternative Dispute Resolution Mechanisms (ADRMs) could enable Colombia to improve its world ranking on the enforcement of commercial agreements, given that Doing Business now ranks it 149 among 181 economies in the world (World Bank 2009a). To conclude, the Economic Freedom of the World index has a confusing composition legal and institutional variables that obscures any conclusions concerning the support of Colombia’s legal order for the economy. In particular, commercial laws and those structures that govern commercial conflict are lost within a macro variable that combines the larger questions of Colombia’s political stability and the division of state powers, and the political regime in general. 2. Index of Economic Freedom The 2008 Index of Economic Freedom of the Heritage Foundation and the Wall Street Journal assigns Colombia a score of 61.9 out of 100 possible points. 32 In the words of Beach and Kane, The definition of economic freedom therefore encompasses all liberties and rights of production, distribution, or consumption of goods and services. The highest form of economic freedom provides an absolute right of property ownership, fully realized freedoms of movement for labor, capital, and goods, and an absolute absence of coercion or constraint of economic liberty beyond the extent necessary 32 Hong Kong is ranked first with a 90.3 score. In the next to last position, 156, is Cuba, with a 27.5 score. North Korea is last with a 3.0 score. 57 for citizens to protect and maintain liberty itself. In other words, individuals are free to work, produce, consume, and invest in any way they please, and that freedom is both protected by the state and unconstrained by the state (Beach and Kane. 2008, 40). Table 9. Heritage Foundation Economic Freedom Comparison across the 10 Largest Economies in Latin America, 2008 Country Score Rank among 162 Countries Property Rights Score Argentina 55.1 108 30 Brazil 55.9 101 50 Chile 79.8 8 90 Colombia 61.9 67 40 Dominican Republic 58.5 87 30 Ecuador 55.4 106 30 Guatemala 60.5 78 30 Mexico 66.4 44 50 Peru 63.3 55 40 Venezuela 45.0 148 10 Source: Kane, Holmes, and O’Grady, 2008. (Index of Economic Freedom) Colombia’s 2008 grade is just above the global economic freedom score of 60.3, but below the Americas’ average of 62.3. The country is ranked 67th among 162 countries (Table 9); and the economy barely falls under the category of “moderately free,” countries with grades between 60 and 69.9. Economies with a score between 50 and 59.9 are “mostly unfree” (Kane, Holmes, O’Grady 2008). The index comprises 10 variables, or “freedoms” to use its own terms: business freedom, trade freedom, fiscal freedom, government size, monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption, and labor freedom. The most recent (2008) scores for each of the variables are listed in Table 10 below. 58 Table 10. Heritage Foundation Economic Freedom Variable Scores, Colombia, 2008 Variable Score Business freedom 72.5 Trade freedom 70.8 Fiscal freedom 72.8 Government size 71.2 Monetary freedom 71.4 Investment freedom 60 Financial freedom 60 Property rights 40 Freedom from corruption 39 Labor freedom. 61.4 Overall 61.9 Source: Kane, Holmes, and O’Grady, 2008. (Index of Economic Freedom). Again, the property rights variable is of paramount interest here. 33 The authors of the index state that the property rights variable “is an assessment of the ability of individuals to accumulate private property, secured by clear laws that are fully enforced by the state” (Kane, Holmes and O’Grady 2008, 41). In the description of methodology for this item, they continue: “It [the variable] assesses the likelihood that private property will be expropriated and analyzes the independence of the judiciary, and the ability of individual and businesses to enforce contracts” (ibid. 51). 33 The authors of the index use the following sources for information on property rights: Economist Intelligent Unit, Country Commerce, Country Profile, and Country Report; U.S. Department of Commerce, Country Commercial Guide; and the U.S. Department of State, Country Reports on Human Rights Practices. 59 Table 11. Economic Freedom, Property Rights in Colombia, 1995-2008 Year Score Ranking Property Rights 1995 64.5 26 50 1996 64.3 42 50 1997 66.4 35 50 1998 65.5 42 50 1999 65.3 44 50 2000 63.3 58 50 2001 65.6 52 50 2002 64.2 55 30 2003 64.2 55 30 2004 61.2 65 30 2005 59.3 72 30 2006 60.1 73 30 2007 59.7 79 30 2008 61.9 67 40 Source: Index of Economic Freedom. Various years. Table 11 shows Colombia’s economic freedom score and rank, and the particular score of “property rights.” The scores, ranging from 0 to 100, reflect very general insights as to the certainty of laws that protect private property rights, the efficiency of and delays within the courts enforcing those laws, the independence and corruption in the judiciary, and the odds of expropriation. However, although is it mentioned in the introduction to this index, there is no reference to the “ability of individuals and businesses to enforce contracts” within the criteria (ibid.). In the 2008 report Colombia scores just 40 on the property rights variable (Table 11). According to the index, this score belongs to a country where “The court system is highly inefficient, and delays are so long that they deter the use of court system. Corruption is present, and the judiciary is influenced by other branches of the government. Expropriation is possible” (Kane, Holmes and O’Grady 2008, 52). 60 From the 2008 table (Table 10) we see that the overall score of economic freedom in Colombia is greatly affected by specific scores on property rights and freedom from corruption. The Heritage Foundation explains Colombia’s 40% grade on property rights in the following terms, [In Colombia] Contracts are generally respected. Arbitration is complex and dilatory, especially with regard to the enforcement of awards. The law guarantees indemnification in expropriation cases. Despite some progress, the enforcement of intellectual property rights is erratic. Infringements, especially the unauthorized use of trademarks, are common. In areas controlled by terrorist groups, property rights cannot be guaranteed. (Heritage Foundation 2008b, n.p.). There is still an analytical gap a mile wide between the broad elements that inform the grade of 40% and the still very general assessment of Colombia’s 40% on property rights. The legal issues mentioned are different in each level of analysis and if there is a connection among them, they are not established. The legal language is extremely imprecise. The Heritage Foundation continues, Colombia scores moderately well in business freedom, investment freedom, and financial freedom but is average in most respects. That it maintains relatively robust institutions in spite of a violent subculture is a sign of promise for the future. Business contracts are generally respected, but judicial corruption makes legal transparency difficult (ibid.). Citing Transparency International, the Heritage Foundation refers again to corruption, “Despite significant advances in fighting corruption, criminal narcotics organizations influence the military and the lower levels of the judiciary and civil service” (ibid.). 61 The Index of Economic Freedom is not very clear about what is really been measured under property rights. The index implies that it is measuring rights over property in general (real property, personal property, and intellectual property), which “give citizens the confidence to undertake commercial activities, save their income, and make long term plans because they know that their income and saving are safe from expropriation.” (Heritage Foundation 2008a). Moreover, when elaborating about Colombia’s property rights, there is a positive reading: robust institutions, indemnification is guaranteed in the event of expropriation, contracts are respected. However, the negative references are explicit and directed specifically to intellectual property rights (immaterial property) and the lack of property protection in rural areas where criminal narcotic organizations and “terrorists” hold sway. Consequently, the variable “property rights” is measuring just two unrelated extremes: protection of intellectual property rights and the weak state presence in rural zones that are dominated by political conflict. Definitively this would not be an ideal market place for trademarks and copyright owners; nor would it favor those economic actors who want to invest in specific rural and jungle areas. But in the index, commercial transactions around real property and personal property, and the legal institutions that support these exchanges, are not accounted for. The index does not touch on the effect of most commercial laws on the country’s economic freedom. In other words, the vast majority of property rights are not truly incorporated into this index. I have to emphasize that the right to own property and enter 62 into contracts is exercised by most people on both real and personal property. 34 These rights are completely ignored by the index. My research seeks to fill in this blank. Those institutions governing private commercial controversies (property rights included) and their relationship with private economic agents lies at the heart of this study. Using the terminology of the Fraser and Heritage indices, mine is a study about the effects of private commercial ADRMs on economic freedom. C. Corruption Two indices are elaborated upon for this category: Transparency International’s Corruption Perceptions Index (CPI) and PricewaterhouseCoopers’ Opacity Index. 1. Transparency International’s Corruption Perceptions Index (CPI) Corruption in Colombia is perceived as significant. In Transparency International’s Corruption Perceptions Index (CPI) for 2007, Colombia ranked 68th out 179 countries, with a score of 3.8 (Table 12). The CPI measures perceptions of the degree of corruption as seen by business people and country analysts. The scale runs between 10 (highly honest) and 0 (highly corrupt). 35 The sources of information are surveys that assess country performances. At 34 In common law, personal property is also called chattel. Personal property can take the form of negotiable instruments, securities, goods, and intangible assets. Real property is also called real estate. In the civil law tradition, personal property is called movable property or movables (bienes muebles) as opposed to immovable property or immovables (bienes inmuebles). 35 The highest score belongs to Denmark, with 9.4 and the lowest to Somalia, with 1.4. 63 least three surveys are required for a country to be included in the CPI. For the Colombian case, 7 surveys were used. 36 Table 12. Corruption Perception Index (CPI), Comparison across the 10 Largest Economies in Latin America, 2007 Country Score Rank among 179 Countries Argentina 2.9 105 Brazil 3.5 72 Chile 7.0 22 Colombia 3.8 68 Dominican R. 3.0 99 Ecuador 2.1 150 Guatemala 2.8 111 Mexico 3.5 72 Peru 3.5 72 Venezuela 2.0 162 Source: Lambsdorff 2007. (Corruption Perception Index) The index defines corruption as “the misuse of public power for private benefits, e.g. the bribing of public officials, taking kickbacks on public procurement or embezzling public funds. The index tries to assess the degree to which public officials and politicians in particular countries are involved in corrupt practices” (Lambsdorf 2007, 4). 36 The index uses 13 data sources in total: the Asian Development Bank’s Country Performance Assessment Ratings; the African Development Bank’s Country Policy and Institutional Assessments; the Bertelsmann Foundation’s Bertelsmann Transformation Index; the World Bank’s (IDA and IBRD) Country Policy and Institutional Assessment; the Economist Intelligence Unit’s Country Risk Service and Country Forecast; the Freedom House’s Nations in Transit; the global Insight’s Country Risk Ratings; the IMD International’s, Switzerland, World Competitiveness Center, IMD World Competitiveness Yearbook; the Merchant International Group’s Grey Area Dynamics; Political & Economic Risk Consultancy, Asian Intelligence Newsletter; the United Nations Economic Commission for Africa’s Africa Governance Report; the World Economic Forum’s Global Competitiveness Report. 64 Table 13. Corruption Perception Index (CPI), Colombia, 2005-2007 Year Rank Score 1995 n/a 3.44 1996 42/54 2.73 1997 50/52 2.23 1998 79/85 2.2 1999 72/99 2.9 2000 60/90 3.2 2001 50/91 3.8 2002 57/102 3.6 2003 59/133 3.7 2004 60/145 3.8 2005 55/158 4.0 2006 59/163 3.9 2007 68/179 3.8 Source: Lambsdorff 2007. (Corruption Perception Index) Figure 3. Colombia’s CPI Score, 1995-2007 0 1 2 3 4 5 6 7 8 9 10 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Score The author of the index, Johann Graf Lambsdorff, makes the following disclaimer concerning the methodology, “To the extent that any country has a problem with its ranking, this lies not with the index but rather with the perception that contributors polled apparently have of that country. This may not always be a fair reflection of the state of 65 affairs” (ibid., 10). By looking at the history of Colombia’s corruption rating, clearly in the eyes of the people surveyed, the problem of corruption in Colombia has not improved since 1995 (the first year of the index) and is far from a good score (Figure 3). One can conclude that the apparent perception is that public officials and politicians are involved in corrupt practices. That is, they are using public power for private benefits. Note then that the perception is proclaimed over a generic entity (public servants and politicians). This does not give any indication of the particular agents or practices, or at least perceptions of corrupt actions by specific branches of the government. One is left with the idea that the judiciary (as the rest of the state apparatus) is involved in corruption and the search for non-corrupt entities or actors is deemed futile. In this approach, criminal courts dealing with drug traffickers or paramilitary members, administrative courts deciding on state contracts, family courts hearing divorce or family assistance cases, civil courts deciding on private dealings, are all thrown into the same bag. Furthermore, the corruption blanket could be extended even to alternative dispute resolution mechanisms. This type of analysis is a barrier to the understanding of the interconnection between legal institutions and economic interests. The Heritage Foundation’s Index of Economic Freedom incorporates International Transparency’s 3.9 score of 2006 into its own index as a 39% “freedom from corruption” rating in Colombia. The Foundation explains the percentage, “Despite significant advances in fighting corruption, criminal narcotics organizations influence the military and the lower levels of the judiciary and civil service” (Lambsdorf 2007, 142). The number thus can be read in a more alarming way, i.e. that 61% of Colombia is hostage to corruption. 66 The Heritage Foundation’s reflections about corrupt behavior in Colombia highlight the need to study Colombian legal institutions beyond the reach of the criminal narcotics organizations, whose influence stretches mainly to the military and minor agents in the judiciary and civil service. This is not to say that the narcotics mafia is not present in Colombia, But it does mean we must attempt to better specify the kind of corruption these indices might be referring to. One may certainly think of surveyed people (business people and country analysts) as having narco-politics, paramilitarism, guerrillas, and violence in mind when expressing their perceptions of corruption in Colombia, without necessarily thinking of the daily functioning of most legal institutions involved in dispute resolution. The original measure of the perception of corruption taken by Transparency International (TI) places a strong emphasis on public servants and their actions to obtain private advantage. “Corruption is operationally defined as the misuse of entrusted power for private gain” (Transparency International n.d.). Despite some references to the judiciary, the report approaches administrative and political corruption at the state level as one unit of analysis. 2. The Milken Institute’s Opacity Index (Opacity Index of PricewaterhouseCoopers). 37 Another ranking of the world economies is the Opacity Index of PricewaterhouseCoopers. The authors define opacity as “the lack of clear, accurate, formal, easily discernible, and widely accepted practices in the world’s capital markets” (Kurtzman Group 2001, 13). Kurtzman and Yago (2007) revised their definition of 37 The index was originally known as PricewaterhouseCoopers’ Opacity Index. Although the authors have not changed, Joel Kurtzman and Glenn Yago, it is now only published under the Milken Institute name. 67 opacity as “The lack of clear, accurate, formal, clear-cut practices in the broad arena where business, finance, and government meet” (2007, 5). The index measures the impact of corruption and other "non transparent" forces on the costs and risks of doing business globally. In other words, it estimates the effects of the lack of transparency on the cost and availability of capital in a country. It offers a composite opacity-factor (O-Factor) score for each country, based on data in five different variables that affect capital markets: 1) Corruption in government bureaucracy that allows bribery or favoritism; 2) Ineffective legal systems. That is, unclear, conflicting, or incomplete laws governing contracts or property rights; 3) Economic policies -- fiscal, monetary, and tax related--that are vague or change unpredictably; 4) Weak, inconsistent, or un-enforced accounting standards and governance practices; and, 5) Unclear, inconsistent, or irregularly applied business regulations - regulatory structures (Kurtzman, Yago and Phumiwasana 2004). The 2007-2008 Opacity Index refers more succinctly to the 5 factors: (C) corruption, (L) legal systems, (E) enforcement policies, (A) accounting and disclosure standards, and (R) regulatory quality (Kurtzman and Yago: 2008). For forty-eight countries, the index measures “the costs and preponderance of high-frequency, low- impact risks resulting from corruption, a lack of due process, poor regulatory enforcement, and non-standard reporting practices, each of which adds substantial costs to global business” (ibid., 1). The Opacity Index grades each factor independently, and all together creates the country’s overall opacity rating in a scale of 1 to 100 (Table 14). Thus the five aspects are also identifying the causes of economic risks, and knowing them enables companies to make better investment decisions, and allows 68 governments to make their economies more appealing to investors and helps them measure their progress (Kurtzman, Yago and Phumiwasana 2004, Kurtzman and Yago 2007, 2008, 2009). The Opacity Index analyzes the capital market from two angles: as a form of hidden tax on foreign direct investment (FDI) and as a risk premium when countries borrow through sovereign bond issuances in international or domestic capital markets. 38 Specifically, for example, in 2001 the index gave Colombia a score of 60. 39 A higher score indicates a greater degree of opacity. Lower numbers signify a greater degree of transparency (Table 14). The score is equivalent to a risk premium of 632 basic points or a 6.32% interest rate above LIBOR on credits requested by the country. In other words, to match the risk, for an American investor to do business in Colombia, she or he would need to have a return 6.32% higher than in the United States. 40 Back in 2001, when the idea of the index was launched, President Jimmy Carter commented, "We commend PricewaterhouseCoopers for initiating this public/private initiative. Moving from perception to empirical measures is vital to diagnosing corruption, designing strategies against it, and creating the willpower to improve transparency around the world" (Cited by Business Wire 2000). One must agree with 38 According to estimates, a O-Factor of 60 has the same negative effect on investment as an increase of 25% on companies’ rent taxes. In relation to the risk premium, an O-Factor point increase leads to an increase of 25.5 basic points (0.255%) in the interest rate lenders demand to acquire public bonds. 39 The first index, 2001, had a scale of 0 - 150. The score were based on telephone and in-person interviews with four different groups of respondents: chief financial officers (CFOs) of medium and large firms based in the countries; equity analysts familiar with the countries; bankers in the countries; and PricewaterhouseCoopers employees residing in the countries. Responses were aggregated and re-expressed by statistical procedures to obtain a comprehensive O-Factor score for each country. 40 The scores indicate a risk premium/discount when they are translated into interest rates. The premium/discount is calculated by finding the numerical difference in opacity between a given economy and the U.S and then multiplying it by 0.2213 (Kurtzman, Yago and Phumiwasana 2004). 69 President Carter on the importance of empirical data to evaluate a country’s institutions and how they operate. Kurtzman and Yago (2009) affirm: “Unlike other analysis [based on] expert opinions of academics, analysts, former government officials, and the media, the Opacity Index is based entirely on empirical observation” (2009, 1). Table 14. Opacity Index Scores,* Comparison across the 10 Largest Economies in Latin America, 2001-2009 Country 2001-02 2003-04 2005-06 2007-08 2009 Argentina 61 44 44 43 42 Brazil 61 40 40 46 43 Chile 36 29 32 26 25 Colombia 60 43 42 48 44 Dominican Republic ** ** ** ** ** Ecuador 68 42 44 42 42 Guatemala 65 ** ** ** ** Mexico 48 44 43 37 37 Peru 58 ** ** ** ** Venezuela 63 51 50 48 48 *From 1 to 100. Higher scores signal more opacity or less transparency. ** Country is not in the index. Source: Opacity Index various years. Figure 4. Colombia’s Opacity Index Score, 2001-2009 0 10 20 30 40 50 60 70 80 90 100 2001-02 2003-04 2005-06 2007-08 2009 Colombia 70 Table 15. Opacity Index Ranking of Latin American Economies among the 48 Countries Studied C L E A R Rank 2009 Rank 2007-08 Chile 28 24 31 26 17 18 19 Mexico 60 47 43 21 12 33 31 Argentina 63 53 47 32 17 38 38 Ecuador 63 57 43 22 24 38 37 Brazil 64 49 47 36 20 42 42 Colombia 57 49 53 44 15 43 45 Venezuela 76 72 60 5 25 47 45 C-corruption L-legal systems with limited protections E-economic policies that hinder sustained growth A-accounting and governance standards that make it difficult to see inside companies R-regulatory systems that fail to protect investors Source Opacity Index 2007-2008 and 2009. Figure 5. Comparison of Opacity Index Rankings among Latin American Economies, 2007-2009. 0 5 10 15 20 25 30 35 40 45 50 Chile Mexico Argentina Ecuador Brazil Colombia Venezuela Rank 2007-08 Rank 2009 The data for the 5 factors comes from sources that include the World Bank, International Monetary Found, International Securities Services Association, International Country Risk Guide, The Political Risks Service Group, IAS Plus, and 71 individual country regulators and exchanges (Kurtzman, Yago and Phumiwasana 2004, Kurtzman and Yago 2008). 41 In the 2009 Opacity Index, Colombia’s scores are in the high end (more opacity or less transparency), except for that of regulatory system (Table 15). This has been a historical constant (Table 16) that has given Colombia overall opacity scores over 42 and rankings over 43 among the 48 economies included in the index (Tables 16 and 15). In fact, Colombia tied Venezuela for the last place in the region during 2007 and 2008, and it just moved to the second to last place in this year’s report (Table 15 and Figure 5). Table 16. Opacity Factor Scores for Colombia: 2004, 2008 and 2009 Year C L E A R Opacity 2004 57 61 45 29 21 43 2008 57 52 68 44 17 48 2009 57 49 53 44 15 44 C-corruption L-legal systems with limited protections E-economic policies that hinder sustained growth A-accounting and governance standards that make it difficult to see inside companies R-regulatory systems that fail to protect investors Source: Opacity Index 2004 and 2008. According to the researchers, the assessment of the legal system probes the legal protections for sources of capital (businesses and investors) and the effectiveness of the legal system to settle business disputes. Dissimilar factors (not only in terms of their content but also their specificity vs. their vagueness) such as bankruptcy procedures, shareholders’ rights, degree of judicial independence, and strength of property rights are considered (Kurtzman, Yago and Phumiwasana 2004). (emphasis added). 41 Actually, the sources of information are very extensive, but uncritically included in the index (See Appendix B). 72 The first two factors more closely evaluate the protection of investors, and are easily found by checking on the existence of certain written laws (content of commercial codes, for instance). The last two factors are more problematic. They may pretend to assess the effectiveness of the legal system in handling economic controversies. However, neither the index nor the sources used offer a clear and precise understanding of property rights, business disputes, or even the legal system. Furthermore, the Opacity Index does not use the World Bank’ s Doing Business data on enforcing contracts for grading legal and judicial environment. Instead the Opacity Index uses independently the three sub-variables of contract enforcement in Doing Business (“Average days of legal procedure from filing to enforcement,” “Contract enforcement index: how inefficient (formalism) is contract enforcement?,” and “Enforce contracts: cost -GNI per capita-) for grading the effectiveness of economic policy However, it incorporates Heritage Foundation’s Index of Economic Freedom property rights variable; which, incidentally, also contains the Global Competitiveness Report’s data on judicial independence. Thus judicial independence is twice in the Opacity Index (See above for the analysis about the limits of what is really measured under property rights by the Index of Economic Freedom), and empirical information on legal institutions and property and contractual rights enter in two variables of the Opacity Index: legal and judicial environment and effectiveness of economic policy. The specificity of the stated objectives in these indices contrasts with the general and imprecise approach to legal institutions reflected in the data sources used: the Global Competitiveness Report, the International Country Risk Guide, and the Index of 73 Economic Freedom 42 (ibid.). This is not a minor point. On a practical level, the Opacity Index scores translated into interest rates may assist investors in determining the risk premium and their expected returns for conducting business in Colombia, for instance. Structurally sound information about legal and regulatory complexity and enforceable contracts, among others, is a condition for optimal business decisions. A more precise and specific approach to legal institutions in the index, would translate into more accurate degrees of opacity and representative costs of opacity for national economies, and better information to improve capital access. Appendix B lists the sources the Opacity Index uses to measure a country’s legal and judicial environment. D. Competitiveness In the context of globalization, the pressures to become more competitive are intense. In the last two decades, developing countries have embraced market reforms with the objective of achieving higher levels of competitiveness and hence better integration into the world economy. This quest to be more competitive in the global economy, which is tied to higher levels of economic development and living standards is widely accepted. Competitiveness refers to decisions and policies that influence a country’s ability to create and maintain a context that supports firms’ economic productivity, achieves sustained economic growth and promotes individual prosperity (Garelli 2003, Sala-I- Martin et al. 2008). Since it is argued that the ultimate goal is economic growth and more favorable returns on per capita income, the question driving the competitiveness 42 These indices are analyzed in other sections of this chapter. 74 index is to specify why some countries are able to create a positive context for economic and human development while others have not. The indices that rank countries according to competitiveness recognize that there is no one formula for becoming so. Thus, models of competitiveness utilize economic, legal, and political variables. In these analyses, competitiveness is a national attribute where the state plays the role of fostering the conditions for the productive growth of firms and the economy as a whole. Put another way, competitiveness is a public good that is developed and sustained by the state. The most well-known and influential competitiveness indices are the World Economic Forum’s Global Competitiveness Index (GCI), the World Bank’s Doing Business, the World Competitiveness Year Book, and the World Business Environmental Survey. Only the 2 first indices are analyzed here. 1. World Economic Forum Global Competitiveness Index The World Economic Forum’s Global Competitiveness Index was first published in 2002 by the Global Economic Forum and it is part of the Global Competitiveness Report (GCR). In general terms, the index measures a country’s ability to sustain short and long term economic growth. In doing so, it looks at the impact of critical factors, like macroeconomic context and institutions on economic growth. The index is the result of 12 pillars (variables) organized in 3 sub-indices. See Appendix C for the sub-index categorization of variables. Some data for the CGI come from available resources (the other indices previously analyzed), but this index is based primarily on the annual executive opinion survey, which captures the perceptions of the business sector. The authors state: 75 Besides hard data from leading international sources, these indicators include the results of the Executive Opinion Survey carried out by the World Economic Forum annually. The Survey captures the perceptions of several thousand business leaders across the countries covered on topics related to national competitiveness (Porter, Schwab and Sala-I-Martin 2008, 1). They combine the survey results and other data to create a competitiveness scale from 1 to 7. Seven represents a high competitiveness score and 1 no competitiveness at all. In the Global Competitiveness Report, 2007-2008, Colombia is ranked 69th among 131 counties, with a score of 4.04. According to the scores in the sub-indices plus the level of GDP per capita, the report also classifies economies into three stages of development, with “transition” phases in between stages. 43 Colombia falls into the category of “Transition from state 1 to stage 2 of development” (ibid.). Table 17. Colombia’s Competitiveness: A Comparison across the 10 Largest Economies in Latin America 2007-2008 Country Rank (out of 131) Score (out of 7) Institutions Rank/ Score Argentina 85 3.87 123/2.99 Brazil 72 3.99 104/3.32 Chile 26 4.77 29/4.83 Colombia 69 4.04 79/3.67 Dominican Republic 96 3.65 107/3.23 Ecuador 103 3.57 125/2.93 Guatemala 87 3.86 91/3.49 Mexico 52 4.26 85/3.62 Peru 86 3.87 106/3.28 Venezuela 98 3.63 131/2.41 Source: Porter, Schwab and Sala-I-Martin 2008. (Global Competitiveness Report 2007-08) 43 The report uses Michael Porter’s definition of stages of development: stage one is factor-driven, stage 2 is efficiency-driven, and stage 3 is innovation-driven. Given a country particular stage of development there are variables or pillars that are relatively more important. In a factor driven economy countries compete based on unskilled labor and primary resources. The most important pillars are 1 to 4. In efficiency driven economies competitiveness is based on efficient production processes and product quality. The most important pillars are 5 to 10. Finally, as countries move into the innovation-driven stage the competition is based on new and unique products. Then, pillars 11 and 12 are the most important (Table 18). 76 Figure 6. Overall and Institutions Ranks for Latin American Countries, 2007-2008 0 20 40 60 80 100 120 140 Chile Mexico Colombia Brazil Argentina Peru Guatemala Dominican Republic Venezuela Ecuador Overall Rank Institutions Rank The general report contains a short analysis of the numbers according to region and country. Remarkably, it does not include a single word about the Colombian case. Among the largest economies in the region, Colombia’s overall economic competitiveness is below that of Chile and Mexico and above that of Brazil, Argentina, and Peru (Table 17 and Figure 6). Certainly this position warrants some specific analysis. 77 Table 18. Colombia’s Global Competitiveness Index, 2007-2008 Rank (out of 131 countries) Score (out of 7) Overall Competitiveness 69 4.04 Subindex A: Basic requirements 73 4.23 1 st pillar: Institutions 79 3.67 2 nd pillar: Infrastructure 86 2.87 3 rd pillar: Macroeconomic stability 63 4.92 4 th pillar: Health and primary education 64 5.47 Subindex B: Efficience enhancers 63 3.96 5th pillar: Higher education and training 69 3.88 6th pillar: Goods market efficiency 85 3.93 7th pillar: Labor market efficiency 74 4.25 8th pillar: Financial market sophistication 72 4.22 9th pillar: Technological readiness 76 2.98 10th pillar: Market size 30 4.52 Subindex C: Innovation and sophistication factors 66 3.61 11th pillar: Business sophistication 65 4.10 12th pillar: Innovation 72 3.11 Source: Porter, Schwab and Sala-I-Martin 2008. (Global Competitiveness Report 2007-08) The pillar closest to the main theme of this dissertation is institutions, under subindex A. The report recognizes the importance of institutional frameworks, both public and private, for economic growth and development. Indirectly, the authors mention institutions like private property, enforcement of contracts, independence of the judiciary system (dispute resolution mechanisms) and conclude that their lack creates high economic costs to investors, hinders competitiveness, and retards the economic development process (Sala-I-Martin et al. 2008). However, the report does not elaborate on those aspects of institutions that are crucial for economic development. Furthermore, institutions as a whole, public and private, legal and not legal, are all thrown together under a single score, which is placed alongside the scores of infrastructure, macroeconomic stability, and health and primary 78 education - the other three variables in subindex A. Together they all account for the “basic requirements” grade in the “process” of economic development. A closer look into the index illustrates the composition and relative weight of the institutional framework, one of twelve variables, in determining a given economy’s level of competitiveness. We also see the relative weight of the different components that comprise the institutions pillar. Table 19. The Relative Weight of Institutions for Competitiveness 1 st pillar Institutions Total 25% A. Public institutions 75% 1.Property rights Property rights Intellectual property protection 20% 2.Ethics and corruption • Diversion of public funds • Public trust of politicians 20% 3.Undue influence • Judicial independence • Favoritism in decisions of government officials 20% 4.Government inefficiency • Wastefulness of government spending • Burden of government regulation • Efficiency of legal framework • Transparency of government policymaking 20% 5. Security • Business costs of terrorism • Business costs of crime and violence • Organized crime • Reliability of police services 20% B. B. Private institutions 25% 1.Corporate ethics Ethical behavior of firms 50% 2.Accountability • Strength of auditing and reporting standards • Efficacy of corporate boards • Protection of minority shareholders’ interests 50% Source: Porter, Schwab and Sala-I-Martin 2008. (Global Competitiveness Report 2007-08) The percentage next to each category represents its weight within the larger parent category. The computation of the GCI is based on successive aggregations of scores, 79 from the variable level (i.e., the lowest level) all the way up to the overall GCI score (i.e.,the highest level),using certain weights. 44 The score a country earns in the first pillar, institutions, accounts for just 25 percent of this country’s score in the Basic Requirements subindex. Similarly, the score achieved on the subpillar “Public institutions” accounts for 75 percent of the score of the first pillar (Table 19). Colombia’s institutional framework, with a score of 3.67 (Table 18), occupies the 79th rank among 131 economies in the world (Table 18), and the 2nd place among the 10 largest economies in Latin America (Table 17 and Figure 6, red bars). There are a couple of things that make the index difficult to use when studying the relationship legal institutions and economic relations. First, more than looking at public and private institutions, the “institutions” pillar apparently is more concerned with state intervention in private economic relations and the organization and actions of public servants. Second, the weight of actual legal institutions in the competitiveness of the economy is not clear since trust in the police and politicians are in the same category as intellectual property rights, for instance. Furthermore, given that Colombia is classified as “in transition” from the first to second stages of development (from factor driven stage to efficiency driven stage), the weights of the subpillars and pillars are not clear for this particular point of the development process. That is, the index does not identify which pillars are more critical at that specific “transitional” stage of development. 44 Weights Factor driven Efficiency driven Innovation driven stage (%) stage (%) stage (%) Basic requirements 60 40 20 Efficiency enhancers 35 50 50 Innovation and Sophistication factors 5 10 30 Source: Porter, Schwab and Sala-I-Martin 2008. (Global Competitiveness Report 2007-08) 80 Lastly, there is no evidence or information on the impact of private legal institutions (commercial law, civil law) during the various stages of development. It could be argued that there is some tangential mention of these if we stretch our understanding and assume that somehow these private legal institutions are incorporated into property rights, efficiency of the legal framework and judicial independence. However, it is probably more appropriate to assume that commercial laws and resolution mechanisms for private disputes are ignored in the institutional pillar of the index. It seems rather odd that the private component of the legal system does not receive higher consideration in determining a country’s economic competitiveness, especially if we think of the crucial interaction between commercial law, dispute resolution mechanisms, and private economic interests or market relations. Yet it may be that for the index, legal institutions (and institutions in general) play such a limited role in improving competitiveness that a more judicious incorporation of property and contractual rights would have an insignificant effect. 2. World Bank’s Doing Business: Measuring Business Regulations The World Banks’ Doing Business report started in 2003 with the goal of “[Providing] an objective basis for understanding and improving the regulatory environment for business” (World Bank 2009a, v). The index relies on a survey that includes the following 10 variables: starting a business, dealing with construction permits, employing workers, registering property, obtaining credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and closing a business. 81 The 10 variables depict the regulatory context that domestic small to medium-size firms face from start to finish in a given country. All the variables are built based on micro data which “measures regulations affecting just 10 phases of a company life’s cycle through 10 specific sets of indicators” (ibid., vi). The data is gathered around a simple business case that assumes the legal form of the business, its size, its location, and the nature of its operations. For each indicator, a standardized case scenario is chosen and then it is followed through the regulatory journey. The result is a quantitative measure of each regulatory process that, when added together, results in an overall score about the quality of the rules for conducting economic activities in that country by small to medium-size enterprises. Economies are ranked accordingly. The methodology underlying Doing Business is certainly an improvement over other indices and is the closest to the one used in this dissertation: for both the focus is on the actual functioning of institutions. However, for the Doing Business index the focus is on a simple economic transaction with a standardized hypothetical case scenario. 45 The understanding of institutions in Doing Business seems to fall in the arena of theories of regulation, in the sense that institutions are taken as regulatory mechanisms in the relationship between the government and business (the economy). Thus, the focus is on the efficiency of state regulatory intervention in economic transactions. Efficiency is measured by time and the motions required to obtain the end-result of the regulation (e.g. getting a construction permit). Consequently, the index’s only focal point is the state and its public servants. It is a very state-centered analysis in which only formal mechanism 45 Doing Business researchers identify five limitations in the methodology: 1) data refers to the economy’s largest business city; 2) data focuses on a specific business form; 3) transactions are described in a standardized case scenario; 4) measures of time involved are judgments by survey respondents; and 5) it assumes a business has full information and does not waste time in procedures (World Bank 2009a, 61). 82 are evaluated. It leaves out not only informal practices, which is understandable, but also alternative mechanisms like arbitration, which although it is not subordinated to state control, enjoys a very strong state support. In the following paragraphs I describe the 10 variables and present Colombia’s place in each of them according to Doing Business 2009 Report, which covers 181 economies. The overall ranking closes this section. 1. Starting a Business This indicator scores the regulations for incorporating a firm (entry regulation). Rankings are based on the average of the economic rankings of the number of procedures, the time and cost required to complete each procedure, and the minimum capital that the investor must make. Figure 7. Starting a Business in Colombia Compared to Other Countries in the Region, 2008 & 2009 0 20 40 60 80 100 120 140 160 Chile Colombia Dominican Republic Mexico Peru Brazil Argentina Venezuela Guatemala Ecuador 2008 2009 Source: Doing Business database 2009. 83 2. Dealing with Construction Permits This indicator is based on number of procedures needed to receive a license, the duration of the process in days, and the cost as a percentage of income per capital, according to the respective regulation. Rankings are the average of the economic rankings on the procedures, time and cost to comply with formalities to build a warehouse. Figure 8. Obtaining Construction Permits in Colombia Compared to Other Countries in the Region, 2008 & 2009 0 20 40 60 80 100 120 140 160 180 Mexico Colombia Chile Dominican Republic Ecuador Venezuela Brazil Peru Guatemala Argentina 2008 2009 Source: Doing Business database 2009. 3. Employing Workers This variable measures the rigidity of labor regulations. The rank for this variable comes from grades on the following three sub-indices: difficulty of hiring index, rigidity of hours index, difficulty of firing index, and also from estimates of non-wage labor costs as percentage of salary, and firing costs as weeks of wages. The rankings are the average 84 of the economic rankings on the difficulty of hiring index, the rigidity of hours index, the difficulty of firing index, and the firing cost. Figure 9. Employing Workers in Colombia Compared to Other Countries in the Region, 2008 & 2009 0 20 40 60 80 100 120 140 160 180 Chile Colombia Dominican Republic Guatemala Brazil Argentina Mexico Peru Ecuador Venezuela 2008 2009 Source: Doing Business database 2009. 4. Registering Property This rank is based on three sub-indicators: time as measured in days needed to transfer property between to companies in main city, cost as a percentage of property value, number of procedures required until property can be sold again or used as collateral. The ranking is the average of the economic rankings on the procedures, time and cost to register property. 85 Figure 10. Registering Property in Colombia Compared to Other Countries in the Region, 2008 & 2009 0 20 40 60 80 100 120 Guatemala Chile Peru Ecuador Colombia Mexico Venezuela Argentina Dominican Republic Brazil 2008 2009 Source: Doing Business database 2009. 5. Getting Credit This variable is based on two sub-indicators: 1) strength of legal rights index (0- 10), which refers to regulations on non-possessive security interests in movable property, and 2) depth of credit information index (0-6), which refers to the scope, quality and accessibility of credit information though public and private credit registries. The rankings on the ease of getting credit are based on the sum of the two sub-indicators, which are weighted 62.5% and 37.5% respectively. 86 Figure 11. Obtaining Credit in Colombia Compared to Other Countries in the Region, 2008 & 2009 0 20 40 60 80 100 120 140 160 180 Peru Guatemala Argentina Colombia Mexico Chile Dominican Republic Brazil Ecuador Venezuela 2008 2009 Source: Doing Business database 2009. 6. Protecting Investors The indicator for protecting investors comes from three, equally weighted sub- indicators: 1) extent of disclosure index, which evaluates the requirements on approval and disclosure of related-party transactions; 2) extent of director liability index, which measures the liability of the CEO and board of directors in related-party transactions; and 3) ease of shareholder suits index, which refers to the type of evidence that can be collected before and during trial. 87 Figure 12. Protecting Investors in Colombia Compared to Other Countries in the Region, 2008 & 2009 0 20 40 60 80 100 120 140 160 180 Peru Colombia Chile Mexico Brazil Argentina Dominican Republic Ecuador Guatemala Venezuela 2008 2009 Source: Doing Business database 2009. 7. Paying Taxes This variable depends on three sub-indicators: 1) time, as the number of hours per year to prepare, file returns and pay taxes; 2) total tax rate, firm tax liability as percentage of profits before all taxes borne; and 3) payments, as number of tax payments per year. The rankings are the average of the economic rankings on the number of payments, time and total taxes rate. 88 Figure 13. Paying Taxes in Colombia Compared to Other Countries in the Region, 2008 & 2009 0 20 40 60 80 100 120 140 160 180 Chile Ecuador Dominican Republic Peru Guatemala Argentina Colombia Brazil Mexico Venezuela 2008 2009 Source: Doing Business database 2009. 8. Trading Across Borders Three sub-indicators are equally weighed in this variable: documents to export and import, time to export and import, and costs to export and import a 20-foot container. The rankings are the average of the economic ranking on these 3 sub-indicators. 89 Figure 14. Trading Across Borders for Colombia Compared to Other Countries in the Region, 2008 & 2009 0 20 40 60 80 100 120 140 160 180 Dominican Republic Chile Mexico Brazil Peru Colombia Argentina Guatemala Ecuador Venezuela 2008 2009 Source: Doing Business database 2009. 9. Enforcing Contracts This variable is composed of three equally weighted elements: 1) time, days to resolve a commercial claim sale dispute before a court in main city; 2) procedures, steps to file claim, obtain and enforce judgment; and, 3) cost, attorney, court and enforcement costs as percentage of claim value. The rankings are the average of the country ranking on the three sub-variables. 90 Figure 15. Enforcing Contracts in Colombia Compared to Other Countries in the Region, 2008 & 2009 0 20 40 60 80 100 120 140 160 Argentina Chile Venezuela Mexico Dominican Republic Brazil Ecuador Guatemala Peru Colombia 2008 2009 Source: Doing Business database 2009. 10. Closing a Business Rankings for this variable are based on the recovery rate: how many cents on the dollar claimants (creditors, tax authorities and employees) recover from an insolvent firm. 91 Figure 16. Closing a Business in Colombia Compared to Other Countries in the Region, 2008 & 2009 0 20 40 60 80 100 120 140 160 Mexico Colombia Argentina Guatemala Peru Chile Brazil Ecuador Dominican Republic Venezuela 2008 2009 Source: Doing Business database 2009. Overall Rankings The rankings in each of 10 indicators assigned to the economy are aggregated to create an overall ranking of the regulatory framework governing the business life-cycle of a small to medium firm in that economy. The ranking on each topic is the simple average of the percentile rankings of its component indicators. After the simple average of each economy’s percentile rankings on all topics is determined, the countries are ordered by their average percentile ranking. The countries in the world are ranked accordingly from 1 to 181. 92 Table 20. Colombia’s Doing Business Rank Compared to Other Countries in the Region, 2008 & 2009 Country 2009 2008 Change in Rank Argentina 113 102 - 11 Brazil 125 126 - 1 Chile 40 36 - 4 Colombia 53 66 +13 Dominican Republic 97 100 +3 Ecuador 136 133 - 3 Guatemala 112 116 +4 Mexico 56 42 - 14 Peru 62 53 - 9 Venezuela 174 175 +1 The World Bank said of Colombia in 2008, “Colombia, represented by Bogotá, defeated the regional trend to become one of the top-10 global reformers this year. This is no accident. It is the second time in five years that Colombia has been among the 10 most reformist countries in the world -and the top reformer in the region” (2008b, 2). The economy seems to continue on the path towards improvement according to the 2009 rankings. Colombia gained 13 spots in the “ease of doing business,” more than any other country in the region (Tables 20, 21). Obviously, this positive move is the result of regulatory improvements in most indicators (Table 21). 93 Table 21. Colombian Doing Business Indicators 2009 and 2008 Indicators 2009 2008 Change in Rank Doing Business 53 66 + 13 Starting a Business 79 91 + 12 Construction Permits 54 62 + 8 Employing workers 80 88 + 8 Registering Property 78 74 - 4 Getting Credit 59 51 - 8 Protecting Investors 24 19 - 5 Paying Taxes 141 169 + 28 Trading Across Borders 96 112 + 16 Enforcing Contracts 149 150 + 1 Closing a Business 30 28 - 2 Critical Comment on Doing Business Index In the ease of doing business index, higher rankings indicate simpler regulations. Additionally, the 2009 Doing Business report claims that higher rankings also represent stronger protection of property rights (World Bank 2009b, 79). However, the jump from “understanding and improving the regulatory environment for business” 46 to making conclusions about the level of protection of property rights may not be sufficiently supported. It is certainly easier to follow the assessment about simpler/more complicated or efficient/inefficient regulations for 9 of the 10 stages the index examines for a small to medium local investor in a given economy. Administrative simplification (simpler regulations) could be used as proxy for property rights protection, but this would be an oversimplification. I say 9 indicators, because I consider enforcement of contracts, which is the only indicator clearly related to property and contract rights, to be in a different 46 This is the stated objective of the index (World Bank 2009a, v). 94 league. Inclusion of this indicator in the index’s regulatory-framework objective is somewhat forced. Below I elaborate on what makes enforcement of contracts different from the other 9 indicators. After the succinct presentation of the 10 variables of the Doing Business index, the usefulness of the information that it provides for (and about) domestic small to medium-size, companies transacting in the largest business cities is evident. First, the index offers a standardized road map of the different state regulatory segments an entrepreneur would face from the decision to enter the market to the decision to exit it. Second, the journey through the regulation scheme gives a realistic estimate of the time and monetary cost of each procedure. Third, local businesses can better assess the costs and benefits of their project by incorporating the regulatory burden. Fourth, states can pin-point reforms to alleviate this burden by regulating the indicators more efficiently, with the expectation of increasing the number of competitors and the competition in the market place. That is, they can stimulate higher levels of local investment. Fifth, the methodology of the index is a very significant step forward in the study of the domestic institutional context investors may face. The journey of a particular type of domestic firms going through 10 hypothetical and standardized scenarios moves allows the collection of micro data closer to the actual functioning of legal institutions and economic interests. However, one of the indicators seems to have its own unique identity different from the others: enforcing contracts. If one follows the logic of the business case, along the assumptions about the firms or businesses, there are assumptions about whom they are dealing with throughout their life cycle. They assume that entrepreneurs deal with 95 central state regulations and public servants. In this context, once the regulatory bottlenecks are identified, it is assumed that the solution rests in the regulatory powers of the government, which eventually would lessen the red tape and create more efficient regulations. This logic fits nicely for 9 variables, but not to the measurement of enforcing contracts. In this part of the business journey a business dispute is assumed. A dispute indicates three things: First, the interaction is no longer solely between an investor and the state bureaucracy. Now there is an additional party: a second investor who is both the counterpart to a contract and either plaintiff or defendant in a business dispute. Second, although the two investors seem to share the objective of resolving the controversy before a state court, they are adversaries who each have a unique recall of events, have antagonist interests and want to maximize their individual legal claims. They are not a unit simply applying for a license. Third, the interaction with the state is not with a civil servant or bureaucrat under the control of the executive branch. Instead, the interaction is with the judicial branch of the state. Consequently, the enforcement of contracts indicator in Doing Business is not about the efficiency of the public administration of the regulatory business framework, but rather of the administration of justice in general, and its capacity to settle commercial disputes in particular. Without acknowledging the qualitative differences of this variable with the other 9, the report corroborates this point. It affirms, “[The indicators] measure the efficiency in achieving a regulatory goal (such as granting the legal identity of a business)” (World Bank 2009a, v). It also affirms, “Indicators [procedures, time, and cost] on enforcing contracts measure the efficiency of the judicial system in resolving 96 commercial disputes.” (World Bank 2009c, n.p.). Thus, while most variables measure regulations as procedures, enforcing contracts intend to measure regulation as a system, a much more complex dynamic. In this sense, for enforcement of contracts both the indication of its malfunctioning and the potential remedies go beyond government regulations. They are in the field of the overburdened judiciary system and cannot be successfully remedied by decree. In democratic systems, the executive cannot alter the (mal)functioning of one court without affecting the entire judicial system. This situation demands more complex reforms. In brief, there is a difference between regulating the registration of property, for instance, and the settlement of disputes. It would be unrealistic to suggest or expect solutions at the same level as those for the other indicators’ deficiencies: reducing procedures, accelerating time, and lowering cost by new government regulations. This may explain the negligible change between years for this variable for most economies. Failure to incorporate the uniqueness of the enforcing contracts indicator by treating it as any other variable, plus the fact that data collection of the index is limited to formal sector (albeit understandable so 47 ) limit to the index’s usefulness to understand and compare countries’ mechanisms to settle commercial disputes in particular and the protection of property and contract rights in general. The index focuses on traditional courtroom procedures, “[T]he data are built by following the step-by-step evolution of a commercial sale dispute before local courts” (World Bank 2009c, n.p.). Thus, Doing Business does not capture other venues governing investment controversies outside the state courts. I’m not referring to informal techniques, but to formal mechanisms that are 47 Doing Business studies the ease with which one can do business in the formal sector by looking at state regulations (World Bank 2009a, vi). 97 alternative to the judicial processes, such as arbitration and conciliation in the case of Colombia. Although these mechanisms do not belong organically to the judiciary branch (to the courts system) and are not state-centered, they do carry out administration of justice functions when they settle business disputes. The implications of limiting the resolution of disputes to state courts are substantial. The efficiencies in time, cost, and procedures created by private commercial arbitration (and other alternative methods) are ignored. The overall efficiency in resolving commercial controversies might increase significantly despite the poor efficiency of the particular formal court under surveillance. This is not to say that the inefficiencies of the courts are not real, nor to deny that these inefficiencies create obstacles for doing business. Indeed, judicial systems in many countries are inefficient and this may discourage private investment. Yet, the search for solutions cannot be –and has not been-- limited to reforms in the traditional court arena. In Colombia, the development and strengthening of alternative resolution mechanisms were part of the answer to the inefficiencies of the judiciary. According to the Doing Business 2009 report, countries that score well on the ease of enforcing contracts “keep courts efficient by introducing case management, strict procedural limits, and specialized commercial courts or e-courts; by streamlining appeals; and making enforcement and judgment faster and cheaper” (World Bank 2009c, 49). I argue that alternative methods to settle disputes share those characteristics. For instance, the arbitration tribunals fulfill the same objectives of specialized commercial courts, the proceedings have strict procedural limits, the arbitral awards are final and can be appealed only on very strict and limited grounds, judgment is faster, and although the 98 costs of arbitration in Colombia is higher, conciliation is cheaper. 48 Moreover, centers of arbitration and conciliation are offering tailored arbitration for micro, small and medium size companies at low cost. 49 The principal difference is that arbitration (and other alternative mechanisms) are not within the court system. In conclusion, maintaining the methodology as it is for enforcing contracts in Doing Business will keep assessments attached to information that does not tell the whole story. This in turn may distort the overall grade for ease in doing business in certain countries. The index would benefit from complementing the data on efficiency of the judicial system with the efficiency of alternative mechanisms to settle disputes. This might require a re-definition of the standardized case scenarios of the index, particularly that of enforcing contracts. If Doing Business “functions as a kind of cholesterol test for the regulatory environment for domestic business,” what the such a test can tell about the overall health of the investment environment for small and medium size firms would be more accurate, and the suggested treatments more appropriate, if looking beyond the courts. (World Bank 2009a, vi). Treatment for the inefficiencies in enforcement of contracts may not be found in administrative simplification (as is the case for the other 9 indicators). The treatment may be outside the formal judicial system, in alternative (but not informal) dispute resolution mechanisms. To illustrate the point, let me compare the efficiency of contract enforcement in Colombia between the Bogotá Civil Municipal Court (the court assessed in the Doing 48 Please see chapters 4 and 5 of this dissertation for in-depth discussion about commercial arbitration in Colombia. 49 See Center for Arbitration and Conciliation of Bogotá Chamber of Commerce (http://www.cacccb.org.co). 99 Business index study) and arbitration tribunals under the Center for Arbitration and Conciliation of the Bogotá Chamber of Commerce. The Doing Business standardized scenario specifies these characteristics: 1) the contract is for the sale of goods, 2) the goods are worth 200% of Colombia’s income per capita, 3) the two businesses are located in Bogotá, 4) the dispute is decided by the Bogotá Civil Municipal Court, 5) time is measured from the moment the plaintiff files the lawsuit in court to the moment of payment, 6) number of procedures include those that demand interaction between the parties and or between them and the judge or court officer, and 7) cost is expressed as percentage of the claim. Table 22. Enforcing Contracts, 2009 Table 23. Enforcing Contracts in Colombia Colombia Argentina U.S. Villavicencio* Number of procedures 34 36 32 34 Duration (days) 1,346 590 300 422 Filing and service 68 150 30 42 Trial and judgment 913 320 180 200 Enforcement of judgment 365 120 90 180 Cost (% of claim)** 52.6 16.5 9.4 21.9 Attorney cost (% of claim) 23.2 11 8 17.4 Court cost (% of claim) 12.6 4.5 0.4 1.56 Enforcement cost (% of claim) 16.8 1 1 2.92 *A medium sized city in Colombia. **Claim is assumed to equal 200% of per capita income. According to the Doing Business index, Colombia ranks 149 out of 181 countries in enforcing contracts, while Argentina ranks 45, the best in the region. A comparison of Indicator Colombia Region OECD Procedures (number) 34 39.7 30.8 Duration (days) 1,346 710.1 462.7 Cost (% of claim) 52.6 31.3 18.9 100 the Colombian and Argentine cases illustrates that the differences in rankings can be explained in large part by the sub-indicators time and cost. The effect of the number of procedures seems to be insignificant. As seen in Table 4, there is a difference of two procedures between the countries, 34 in Colombia and 36 in Argentina. Data about the United States 50 and Villavicencio is included to confirm this point. For this reason, the actual number of procedures used in private commercial arbitration will not be included in the comparative analysis. 51 In the 112 private commercial arbitration cases I collected for this dissertation (see Chapter 5), none mimic all the characteristics of the hypothetical scenario of the commercial dispute of the Doing Business index. The closest matches differ in the value of the dispute or the object of the contract. That is, there is no case about a contract for the sale of goods worth 200% of Colombia’s the national income per capita. However there are two sets of arbitration cases that allow comparisons: First there are several cases with disputes valued around 200% of per capita income, but which have more complex contracts than sales of goods. Second, there are several sale of goods contracts, but the disputes are valued well over the 200% mark. I average the data from both of these groups to compare them to the data about enforcing contracts in the Doing Business index for Colombia. 50 Enforcing a contract takes 32 procedures in the United States, which ranks 6 in the world in ease of doing business. 51 However, given the nature of this method to settle disputes, we can assume that it requires less procedures. For instance, the fact that arbitral awards are final and cannot be appealed (something agreed upon by the parties) eliminates one procedure. Moreover, private commercial arbitration features not only more expedite procedures, but parties who prefer private commercial arbitration over traditional courts have the power to jointly tailor procedures to their needs of their transaction. This is included in the arbitration clause. 101 To simplify the comparison, for the sub-indicator time, the required days for filing and service, and trial and judgment are aggregated. For the sub-indicator cost, attorney costs and court costs are combined. Finally, information about the enforcement of judgment, both time and cost, keeps the same numbers for both civil court and arbitration tribunals. The reason being that independently of where the dispute is heard and settled (traditional courts, domestic arbitration or international arbitration), should the losing party choose to ignore the judgment, the other party can initiate an “executive process” (proceso ejecutivo) to enforce the settlement. Attempts to sabotage decision settlements are not exclusive to any one mechanism of settling commercial controversies. They all may face recalcitrant defeated litigants. The solution for all of them is one and the same: an executive process as described by Doing Business under the sub-indicator enforcement of judgment (World Bank 2009d, 46). However, the likelihood of needing an executive process to enforce the decision can be expected to be lower for arbitration tribunal awards than for court judgments. The less adversarial nature of the former and its higher collaborative involvement of the parties support this expectation. 102 Table 24. Enforcing Contracts in Colombia: Civil Court vs. Arbitration Tribunal Court* Tribunal 1** Tribunal 2*** Number of procedures 34 33 33 Duration (days) 1,346 680 740 Filing, Service, Trial and Decision 981 315 375 Enforcement of Decision 365 365 365 Cost (% of Claim) 52.6**** 45.8 21.7 Attorney and Forum cost (% of Claim) 35.8 29.0 4.9 Enforcement cost (% of Claim) 16.8 16.8 16.8 *Bogotá Civil Municipal Court (Juzgado Civil Municipal de Bogota). **Arbitration tribunals with disputes valued around 200% of Colombia’s income per capita, but the disputes are not from sale of goods contracts. 52 ***Arbitration tribunals for disputes arising from sale of goods contracts, but with disputes valued over 200% of Colombia’s income per capita. 53 ****Claim assumed to equal 200% of per capita income. According to the World Bank, Colombia’ s gross national income per capita in 2007 was US $4,100. Thus, the assumed cost of the claim is for the Doing Business index data is $8,200 dollars. Table 24 suggests that, in Colombia, private arbitration tribunals are more efficient than state courts in commercial enforcing contracts. Only the appeal procedure was eliminated from arbitration proceedings as it is not permitted, lowering the number of procedures from 34 to 33. However, the actual number of arbitration procedures is expected to be much lower as the procedures to follow in some of the stages of arbitration are up to the parties themselves. The days that pass between the filing of the case until the final decision is substantially reduced in both sets of arbitration cases: from 1,346 to 680 52 The numbers correspond to the average from 4 arbitration tribunals, with disputes arising from 4 different economic transactions and contracts: construction, sale of professional services, promissory sales agreement, and rental of real estate. For complete information on the disputes see case numbers 21, 44, 47, and 59 in my files. 53 The numbers in the table correspond to the average from 6 arbitration tribunals with disputes arising from sale of goods contracts. The value of the claims were well above the 200% per capita income equivalent (US$8,200 in 2007). The lowest claim was US$69,400 and the highest, $3 million. For complete information on the disputes see case numbers 17, 43, 82, 88, 91, and 93 in my files. 103 days in cases with disputes valued around 200% of Colombia’s income per capita, but not concerning sale of goods contracts, and from 1,346 to 740 in disputes arising from contracts of sale of goods, but where the value of the disputes is much greater than 200% of Colombia’s income per capita. The difference comes from the time needed for filing and service, and trial and decision. The number of days were more than halved: from 981 for courts to 315 and 375 for each group of arbitration, respectively. This is not surprising since speed and efficiency are two of the advantages of private arbitration over formal courts. 54 Finally, the less adversarial nature of arbitration and the higher collaborative involvement of the parties in settling commercial disputes may make the procedures and cost of enforcement of the decision unnecessary, bringing procedures, time and cost to even lower numbers. Arbitration awards may have higher levels of voluntary compliance than court judgment. Should the Doing Business index include arbitration (and other alternative dispute resolution mechanisms) instead of (or as a complement to) the civil municipal court to measure the efficiency in enforcing contracts in Colombia, we could expect a significant jump of its ranking on the ease of doing business. Furthermore, a comparison between courts and conciliation in commercial disputes would render even greater positive results as this mechanism is better fit than arbitration for the standardized scenario that Doing Business works with to establish efficiency in enforcement of contracts. In Colombia, 54 See discussion in Chapters 3 and 4, and empirical evidence in Chapter 5 of this dissertation for support of this statement. 104 conciliation is as fast as arbitration and has a much lower cost. 55 Obviously, there is no substitute for a well-oiled and efficient judicial system settling contractual economic disputes and positively affecting the business environment. Yet ignoring the mechanisms that may be working better than the courts, even if they are considered no more than a side component, limits the array of solutions. The strengthening of alternative forms to settle commercial controversies does not have to be (or to be seen as) a weakening of the court system. Rather, as in the Colombian case, it could be part of the system’s retooling towards lower levels of transaction costs (specifically of a contracting nature) for investors. This would encourage more firms to enter the market (and/or to get into more complex investments) instead of moving towards vertical integration (in the case of large and medium size firms) or remaining in family and neighboring economic dealings. Both of the latter options stifle competition, the optimal allocation of resources, and growth of the economy. Surprisingly, the World Bank seems to be aware of the weakness of its proposed judicial reforms and of the benefits of arbitration and other alternative means of conflict resolution. Richard Messick (2004) affirms that judicial reform projects cannot be developed with information limited to the impressions of legal actors; rather, quantitative data on system performance is required. Moreover he notes that alternative means of 55 In fact, World Bank 2008 suggestions to improve enforcement of contracts efficiency in Colombia are reflected in the alternative dispute resolution mechanism reforms (which had been in place for more than a decade), particularly the goals for specialized courts. The big difference is the place of the third party in the state structure. Specialized commercial courts would be an integral part of the judiciary (the state) while ADR are not necessarily functionally submitted to the judicial branch of the state. The World Bank recommended: the introduction of specialized commercial courts to free up civil courts; reduction of backlogs in courts by forcing the conclusion of old cases; and the expansion of performance-based incentive models for small claims courts (2008b, 20). 105 resolving disputes received little attention in the reforms backed by the World Bank. Arbitration and mediation can channel disputes away from the courts, “yet many reforms ignored the obstacles parties wishing to arbitrate or otherwise turn to an alternative to the courts faced” (Messick 2004, 11). Clearly Doing Business embraces the challenge of going beyond perceptions and favors empirical information for understanding and improving the regulatory environment for business. Unfortunately, the call for greater attention to arbitration and other means to settle differences without the direct intervention of state courts is left untouched. Thus, the result may be better information about (and to ease) the regulatory domestic framework for economic transactions, but not necessary about (and to improve) property and contract rights and the settlement of business disputes. After all, the focus of Doing Business’ empirical data is on the regulatory powers of the state, not on the judicial system. The empirical data may improve the content of and refocus business regulations, but is not likely to alter that of the role of dispute resolution mechanisms in the context of judicial reforms and their relationship with economic growth. In brief, the information about the number of procedures, duration, and cost of resolving a commercial dispute before a state court suggests the need to improve the “performance” of the civil court. This conclusion begs the question, what if investors are not settling their commercial controversies in the public courts? Hammergren’s empirical study of five Latin American countries finds that not only large firms prefer to take their disputes to arbitration over courts, “[d]omestic firms may use the same mechanisms, [thus] the growing number of national mediation centers, or less formal arrangements. Even for 106 them, courts are intrinsically too formal, too unspecialized, and too slow under the best circumstances” (Hammergren n.d., 7). Ibrahim Shihata, general counsel and senior vice president of the World Bank from 1983 to 1998, confirms that over 80 percent of commercial disputes in Colombia are resolved through conciliation (Shihata 1996, 60). Thus, in the aspect enforcement of contracts, the empirical data of Doing Business may not be that relevant or at least complete. Messick (2002) refers to the importance of solid empirical information: “It offers answers to questions such as: What kind of cases are the courts receiving? Who is bringing them? Individuals? Business? Government? Who are the defendants? How long are the cases taking to resolve?” (Messick 2002, 8). These types of questions are raised and answered in Chapter 5 of this dissertation in relation to the centrality of private commercial arbitration in settling business disputes in Colombia. Initial conclusions In the search for answers as to how institutional arrangements affect economic performance, the dominant tendency in the last two decades has been to create and utilize international rankings of national economies based on some measurement of a given set of institutions grouped into certain variables. Among those variables we find governance, economic freedom, corruption and transparency, and competitiveness. The “evaluation” of these aspects “defines” the quality of domestic institutions and “explains” countries’ economic competitiveness and development. The final result is a series of rankings that allow for the grading of national economies, their tracking, and comparisons among them. In this approach, both the indices and the comparative institutional analysis based 107 on these index scores implicitly legitimize certain institutional combinations while discrediting others. In other words, the score is not just a number; it is the “evaluation” of domestic institutions compared to an ideal, mainstream model. However, the score comes with little to no detail about particular domestic institutions. This approach certainly has some shortcomings. First, given the problem of accessing to high quality information and statistics, these indices might still be in their infant state and unable to allow for an objective, in-depth comparison of national economies. Second, most of the indices use the same sources of information and borrow variables from each other. This could lead (and indeed may be leading) to the repetition of inconsistencies. Moreover, their creation is subject to national data availability, meaning the veracity of the result is compromised. Third, and on a deeper academic level, reducing the relationship between institutions and economic performance to a score certainly limits a real understanding of this interaction, the evaluation of institutions, and our ability to formulate appropriate policy recommendations based on these analyses. We must recall that many of the indices create macro variables based on some institutions. For instance, in ranking legal institutions or the protection of property rights, the indices group together dissimilar institutions such as intellectual property rights, crime levels, and judicial independence, among others. This method seems to grab institutions by name, not by essence, without at least an initial screening/ questioning of the relationship between the individual institution and economic interests. I would argue that the form and substance of legal commercial institutions (laws and courts) should have relatively more weight in identifying and evaluating institutions and private economic initiatives. In more 108 comprehensive terms, public and private law relates differently to the economy and economic performance. 56 For all their faults, however, the indices are important. They have been accepted and have even won a central role in economic decision-making at the multilateral agency level. At the same time, despite their weakness, they do coincide in the diagnosis of Colombia (and basically most countries). Some may argue that this is no surprise given their shared data collection methods and the inter-borrowing of variables. Yet other approaches arrive at similar conclusions. Corruption, an inefficient judiciary and public institutions are definitively problems that must be addressed in Colombia. Certainly insights into the interaction between law and economics would shed light on why the business community prefers arbitration over the regular justice system, and legal institutions that settle disputes. Indices cannot be the final word for explaining and understanding the role of legal institutions (and institutions in general) in promoting economic development. 56 Think of the position of both 2008 democratic presidential candidates on the proposed free trade agreement between the US and Colombia. They did not support the initiative because of Colombia’s shameful record in human and labor rights. No economic arguments were used. The agreement may have been beneficial or detrimental for both economies. Neither free trade nor the Colombian institutions in charge of it were evaluated. What was criticized was the political regime in the very important area of human rights. Yet, these are different types of legal institutions. (See Barack Obama’s speech at a meeting of the Pennsylvania AFL-CIO in Philadelphia, April 2, 2008 and Hillary Clinton’s comments at a meeting of the Communication Workers of America, CWA, on April 8, 2008). 109 Chapter 3 Alternative Dispute Resolution: Definition and Context This chapter addresses the relationship between legal institutions and economics, focusing on the alternative dispute resolution mechanisms as one class of legal institutions that merits specific attention with regard to its relationship to economic development. It begins with a definition of alternative dispute resolution (ADR) and continues with brief descriptions of some of the main forms of ADRs, including mediation, conciliation and arbitration. Arbitration is examined in depth, as it is the principal type of ADR used by commercial entities and the focus of this dissertation. Following a definition and description of arbitration, I review its recent history and use relating to economics internationally, in the United States, in the Latin American region and finally in Colombia. What are Alternative Dispute Resolution Mechanisms? Alternative Dispute Resolution ("ADR") refers to any means of settling disputes outside of litigation through the public judicial system. Types of ADR include arbitration, mediation, fact-finding, partnering, early neutral evaluation, dispute resolution boards, and conciliation. Alternative dispute resolution can be voluntary or mandatory. The three most common forms of ADR are mediation, conciliation and arbitration and will be discussed further below. 110 Mediation Mediation is an ancient activity that occurred in early Grecian commerce. In some cultures the role of mediators were regarded as sacred, or overlapped with other duties such as being a chief or advisor, while in other cultures mediation was forbidden. In mainstream legal culture, mediation is a form of dispute resolution that aims to assist two (or more) disputants in reaching an agreement. Mediation may be used alone or in conjunction with other forms of dispute resolution (in particular with arbitration) at any point in the dispute resolution process. Unlike a court proceeding, no record is made of the mediation and only parties to the dispute, or mutually agreed upon outsiders, may attend. Indeed, most mediation processes are confidential. Whether an agreement results or not, and the content of that agreement is determined by the parties themselves —rather than something imposed by a third party or a court. Mediators use appropriate techniques and/or skills to open and/or improve dialogue between disputants, aiming to help the parties reach an agreement (with concrete effects) on the disputed matter. Normally, all parties must view the mediator as impartial. Mediated disputes may involve states, organizations, communities, individuals or other representatives with a vested interest in the outcome. Mediation can apply in a variety of disputes, commercial or otherwise, including legal, diplomatic, workplace, community, divorce or other family matters. As mentioned above, mediation can be used in commercial disputes. Moreover, agreement to use mediation as a dispute resolution mechanism can be stipulated in commercial contracts. Even if not stipulated in a contract, the parties in the dispute can voluntarily decide to use it. There are multiple reasons parties to a commercial dispute 111 may chose mediation for dispute resolution beyond the confidentiality of the proceedings and limited access mentioned above. Before mediation begins the parties agree to the procedures that will be used. They can use existing procedures or mutually determine specific procedures that they will use (American Arbitration Association 2007b). There is no cost for filing a mediation request, which lowers transaction costs associated with filing costs for court cases. The only costs are the hourly rate of the mediator, for which parties are billed equally (American Arbitration Association 2007b, 5). Finally, the mediation process can take place within any venue, which can also cut down on the costs associated with dispute resolution. Conciliation Conciliation is an alternative dispute resolution mechanism whereby the parties to a dispute (including future interest disputes) agree to utilize the services of a conciliator, who then meets with the parties separately in an attempt to resolve their differences. Conciliation differs from mediation in that the main goal is to conciliate, most of the time by seeking concessions. Put differently, a conciliator tries to help or guide the people in a dispute to resolve their problem. In some conciliation schemes, the process is dealt with over the phone or in writing, rather than through a face-to-face meeting. Conciliation differs from arbitration (discussed below) in that the conciliation process, in and of itself, has no legal standing, and the conciliator usually has no authority to seek evidence or call witnesses, usually writes no decision, and makes no award. As in mediation and arbitration, the conciliator should be impartial, that is, she/he should not take one party's side. The parties to the dispute generally share equally in the cost of the conciliation. As 112 in mediation there are no filing costs and the only costs are the hourly rate for the mediator. A venue is not even always needed, as mediation can be conducted via telephone. Conciliation is a less frequently used form of ADR, and can be described as similar to mediation. Indeed, some disagree whether conciliation is different from mediation. Conciliation also overlaps with negotiation. In the latter, however, the negotiator usually represents one side in the dispute. In conciliation, the person trying to resolve the dispute through negotiation is independent and impartial, and does not take sides. All conciliation processes have the following three elements in common: They are voluntary (the parties choose to conciliate or not); they are private and confidential; and the parties are free to agree to the resolution or not. In some processes, the parties must decide in advance whether they will be bound by the conciliator's recommendations for settlement. Conciliated agreements, like mediated agreements, are usually non-binding. However, as with mediation, if both parties agree, the agreement can be turned into a consent order through the court (American Arbitration Association 2007, 2007b). Arbitration Arbitration is the submission of a dispute to one or more impartial persons for a final and binding decision, known as an "award." Through contractual provisions or some other agreement, the parties may control the range of issues to be resolved, the scope of relief to be awarded, and many procedural aspects of the process. The arbitrator’s decision/award is made in writing. In most jurisdictions and cases, arbitration awards are 113 final, legally binding on the parties in the case, and enforceable. However, parties may also agree in advance that awards will be advisory only. An agreement to arbitrate can be included in contracts for future dispute resolution. Agreement to arbitrate clauses are becoming standard in many kinds of contracts, including employment, medical and dental services. In a situation in which the parties did not agree to or provide for arbitration in advance, they can still use an arbitration process by simply submitting an existing dispute to arbitration. A standard arbitration clause found in contracts might look like the following: Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof (American Arbitrators Association 2007, 17). Clients turn to arbitration to attempt to resolve disputes economically, promptly and privately. The arbitration process tends to offer parties cost-effectiveness due to its relative speed. The reduced emphasis on evidentiary processes, such as discovery, speeds up the dispute resolution process, resulting in lower attorney fees and other expenses. Expert witness fees are also eliminated, as are costs associated with filing motions or appeals. There are also reduced costs due to no lost work time (Bonn 1972). Usually, with the use of arbitration, less time needs to be spent on a particular dispute. Since many courts are faced with significant backlogs, crowded docket delays mean a typical court case might take years to close, while arbitration might take only a few weeks or months. The timeliness issue has sometimes discouraged shareholders from exercising their rights to take private actions to ensure that they receive a fair return on their investments, 114 knowing that any challenge will take at least 2-3 years, or even up to 6 years or longer when appeals continue to the Supreme Court (Latin American Corporate Governance Roundtable 2007). Although an arbitration process can be speedier and less costly than using state law, this is not always the case (Dixit 2004). Confidentiality or secrecy is a key component to arbitration. In arbitration, the hearing is private and the outcome of arbitration can be confidential. Arbitration, mediation, conciliation, and other forms of ADR are generally not open to public scrutiny like disputes settled in court. No records or transcripts need to be made public. Indeed, unless specifically requested by the parties themselves, neither records nor transcripts of hearings are maintained. Even the type of procedures utilized can remain secret. Since the hearings and awards are kept private and confidential, this may help to preserve positive working relationships, as can the speed, economy and flexibility of the process (Bonn 1972, Domke 1968, Lazarus et al.1965, and Coulson 1965). If only a limited aspect of disputants’ long-term or complex commercial interaction is touched upon, and these relations are highly valued by both partners, then they may both prefer arbitration in order to avoid that controversies over one issue cast a shadow over their entire interaction. The privacy afforded by arbitration helps to better protect commercially important information. Finally, this secrecy also provides protection against unfavorable publicity for private firms (Bonn ibid.). In some ways, arbitration is more collaborative and less antagonistic than litigation. Alternative dispute resolution is conducted in a manner that is more businesslike than litigation. For example, each party tells its side of the story to the arbitrator in an atmosphere that is less formal than are court proceedings. While a court of 115 law must apply complex rules of evidence, and the decision of the trial judge can be overturned for admitting evidence that should have been excluded, arbitrators may admit any evidence which might be relevant. These relaxed rules of evidence allow each side to present their case in a more informal manner. The parties may understand the process better and feel more confident that their view was presented adequately and correctly. There is also greater flexibility in the logistical aspects of arbitration dispute resolution. For example, hearings can take place at the site of the dispute or during evening hours. Testimony might be taken by telephone. The place of the hearing can be fixed ahead of time in the contracts. The parties to the dispute also control the range of issues to be resolved by arbitration, the scope of the relief to be awarded and many of the procedural aspects of the process, some of which are discussed further below. Another reason many parties turn to arbitration is that they can better control the context. Parties decide to use arbitration, and as mentioned above, they have procedural flexibility over the location of the dispute resolution, they can predetermine the qualifications and experience of an arbitrator within the contract, and once a dispute has arisen parties also choose a mutually acceptable arbitrator. Both parties can influence the choice of the three arbitrators generally required, since each may name at least one of them. Major multi-million dollar arbitration cases even turn into so-called “beauty contests” in which each party conducts interviews with possible candidates prior to nominating its arbitrator. The third arbitrator is then chosen by the first two arbitrators, or in some other manner (Bernstein et al. 2003, Berger 2006). Arbitrators can be, and usually are, carefully chosen for their knowledge and experience. Arbitrators are experts 116 in the subject matter of their disputes. For example, they may be attorneys or business people with expertise in a particular field. This “subject matter expertise” of the arbitrator usually reduces the time involved on the case. In a court case, time is needed to attempt to inform a judge or jury about the technical elements of a dispute. In contrast, “subject matter expertise” raises the confidence level of the parties that the result of the process will be well-informed. Because of arbitrators’ specialized knowledge and experience, the parties are not required to spend time being educated about relevant industry practices and customs, for example: Arbitration tribunals run by trade associations are staffed by industry experts who are either active or retired members of the same trade. They have specialized expertise that enables them to understand technical complexities of the transaction, and have knowledge of accepted customs of the trade that may constitute implicit terms for a contract even when these are not explicitly written down. In contrast, the government’s courts have to cover the entire range of civil law and do not possess expertise or detailed knowledge of any particular trade. Courts have access to expert witnesses, but many of these are hired by the parties to the dispute. Even when experts are brought in as unbiased consultants, the courts must interpret their findings in their own minds and constrained by their lack of specialized knowledge. The issue is not one of the amount of information available. The process of discovery, whereby one party can gain access to pertinent records in the other’s files or emails, can bring before a court as much information as either party to the dispute finds it desirable to present. Rather, the issue is one of interpreting that information and using it correctly to adjudicate the dispute in that forum. Arbitrators do not generally permit such discovery (Dixit 2003, 2). Williamson says that arbitration has “the capacity to evaluate disputes in a more knowledgeable way than the courts. ... Many agreements which, were it not for arbitration, would be regarded as excessively hazardous can, in this way, be reached and implemented” (Williamson 1996, 131-2). Bernstein (2003, 1741) states this more precisely: “[B]y providing for the appointment of industry-expert arbitrators, who can 117 make many factual determinations more accurately and less expensively than a judge or jury can, the rules greatly expand the ‘contractible’ aspects of an exchange.” A final aspect of arbitration that can be viewed as an advantage over the courts is its certainty because of the absence of the possibility of legal appeal, with the exception of the small possibility of appealing an award rendered by arbitration. In contrast, in the court system, the possibility of appeal introduces a substantial measure of uncertainty into the dispute resolution process. For example, appeal is widely used by private business corporations, some of which are quite manipulative with respect to the manner in which they use the appeal system (Hazard 1965, Bonn 1972). Of course, arbitration has its drawbacks. To begin, the awards may ignore important rules of substantive or procedural law and yet the parties have no recourse to court action. Kronstein (1963) argues that arbitration systems have enabled private groups to acquire vast amounts of power by formulating and promulgating rules of their own (Bonn 1972). Consider, for example, the question of which substantive law will govern the agreement. Factors such as the parties’ sophistication and relative bargaining power usually determine which choice of law wins the day. It is common for large Latin American state-owned companies (e.g. energy, oil and gas, mining companies, and utilities) entering into joint ventures or other international deals with foreign parties to insist that their national laws govern the relevant agreements. Their monopolistic control over the relevant natural resources or services usually affords them the leverage to negotiate away foreign laws that are unfamiliar to them or that they distrust. The possibility of subjecting international transactions to the domestic laws of these state-owned companies has allowed these 118 entities, formerly hostile to international arbitration, gradually to accept international arbitration and even foreign venues of arbitration. In contrast, other Latin American companies lacking the bargaining power of those few state-owned giants find themselves more likely to face an arbitration proceedings with which they are significantly less familiar. The financing of Latin American projects, for example, is commonly governed by the substantive laws of the United Kingdom or the State of New York (Gonzalez et al. 2003). More experience or power can win the day in many decisions regarding the use of arbitration, including the following considerations: 1) Will arbitration be ad hoc or administered by an arbitral institution? 2) What rules of procedure will be adopted? 3) What will be the scope of the matter referred to arbitration? 4) How many arbitrators will preside over the proceeding and how will they be selected? 5) Where should the arbitration take place? 6) What substantive law will govern the agreement? 7) In what language should the arbitration be conducted? 8) Will discovery be available and, if so, what type? 9) Will the arbitration award be subject to appellate or other review and in which country? 10) How will the award be enforced? Although the private system of arbitration developed outside the public legal system is often used as a device to avoid formal court action, its effectiveness depends on the public legal system (Kronstein 1963). Moreover, courts guarantee the effectiveness of 119 the arbitration process by making it virtually impossible for the loser to amend an arbitration award, especially on the grounds that its substantive merits are defective (Domke 1968). Albeit indirectly, the use of arbitration still relies on public legal institutions. Lehmkuhl (2003) examines arbitration as a duplication of government services. He notes "At the heart of this process (arbitration) lies not only the autonomy of contracting parties to choose the rules of law they deem appropriate for their exchange relationship, but also their autonomy to delegate the authority to resolve their potential conflicts to a transnational arbitral tribunal." As mentioned above, more experience and power affords greater ability to influence and ultimately effect the outcomes of arbitration proceedings. To summarize, arbitration differs from litigation in three main ways. First, in arbitration, parties mutually select a “neutral” arbitrator from a list of individuals with expertise in the area in dispute. Second, arbitration is less formal than litigation and the evidentiary process is limited. Finally, arbitration is private and the parties can agree to make the process confidential. Table 25 (below) captures the principal elements of the three alternative dispute resolution processes described above. Table 25. Comparison of Mediation, Conciliation and Arbitration Mediation Conciliation Arbitration Its use can be stipulated in contracts Yes Yes Yes Process and results can be confidential/private Yes Yes Yes Context can be determined by the parties (procedures, venue, intermediaries, time) Yes Yes Yes Results are binding and enforceable No No Yes Intermediaries are considered neutral Yes Yes Yes/No 120 Now that the main types of alternative dispute resolution mechanisms have been defined and briefly compared, with a focus on arbitration, a brief history of their development and use in relation to economics is in order. A History of Arbitration: The International Level Commercial activities are embedded in a number of national provisions and multilateral agreements that also provide the regulatory framework within which arbitration institutions have evolved and private dispute settlement now takes place (Lehmkuhl 2003). In this context, arbitration complements public litigation at the international level, as public and private conflicts address different actors. Whereas the dispute settlement procedure of the World Trade Organization addresses disputes between states, and the Washington Convention of 1965 settles disputes in which one party is a state or a state entity, private commercial arbitration handles disputes deriving from private cross-border economic exchange (Lehmkuhl 2003). Before looking more closely at private commercial arbitration, a brief discussion of the wider institutional context at the international, regional and national levels is needed. In April 1976, the United Nations Commission on International Trade Law (UNCITRAL) adopted uniform arbitration rules. 57 These uniform rules resulted from 57 The rules are available at: http://www.uncitral.org/pdf/english/texts/arbitration/arb-rules/arb-rules.pdf. The UNICTRAL also adopted and published uniform Conciliation Rules in 1980. The UNCITRAL Conciliation rules provide a comprehensive set of procedural rules upon which parties may agree for the conduct of conciliation proceedings arising out of their commercial relationship. The Conciliation Rules provide a model conciliation clause, define when conciliation is deemed to have commenced and terminated and address procedural aspects relating to the appointment and role of conciliators and the general conduct of proceedings. The Conciliation Rules address issues such as confidentiality, admissibility of evidence in other proceedings and limits to the right of parties to undertake judicial or arbitral proceedings whilst the conciliation is in progress. I limit my discussion to rules governing arbitration. 121 negotiations between governmental representatives over ADR practices already in use by private parties. The forerunner to the UNCITRAL is the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, 58 also known as the “New York Convention.” The New York Convention is widely recognized as a foundational instrument of international arbitration. As of 2008 there were 142 parties to the New York Convention. Today the UNICTRAL embodies the objectives of the New York Convention. For the sake of parsimony, I take entry into force of the New York Convention as the beginning date of the consolidation of the use ADR for commercial use at the international level. The adoption of uniform arbitration rules by UNCITRAL was a step forward in the consolidation of the use of ADR for commercial disputes. The UNICITRAL arbitration rules provide a comprehensive reference upon which parties may agree to conduct arbitral proceedings should a dispute arise in their commercial relationship. The UNCITRAL rules are used in ad hoc arbitration as well as in administered arbitration. The rules cover all aspects of the arbitral process -- they provide a model arbitration clause, set out procedural rules regarding the appointment of arbitration and the conduct of arbitral proceedings, and establish guidelines in relation to the form, effect and interpretation of the award. The UNCITRAL arbitration rules were up-dated in 1982 and 1996 with specific recommendations for dispute proceedings. In 1985, UNCITRAL published a model law (amended in 2006) on international commercial arbitration to promote its use. The UNCITRAL model law provides a framework that law-makers in 58 The Convention on the Recognition and Enforcement of Foreign Arbitral Awards entered into force in 1959. 122 national governments can adopt as part of their domestic legislation on arbitration. The UNCITRAL arbitration rules can be selected by parties either as part of their contract, or after a dispute arises, to govern an arbitration proceeding intended to resolve a dispute. In synthesis, the model law is directed at governmental actors, while the arbitration rules are directed at potential parties to a dispute. Casella (1996) offers a general equilibrium model that examines the relationship between the expansion of international trade and the adoption of arbitration. Her central argument is that the demand for legal services, the requirements in terms of formalism, sophistication, rapidness of enforcement, and cost depend on the economic role of each individual, not on his or her country of origin. She concludes that, through international trade, individuals in different countries engaged in the same economic activity come into contact and develop a system of laws attuned to their needs, and in large part these are independent of national laws. International commercial arbitration is a concrete and important example of the link between economic transactions and the creation of international coalitions of private individuals, and the emergence ‘bottom-up’ of international jurisdictions. In a similar vein, Mattli argues that “the various forums of dispute resolution can be understood as indirect products of rational selection where actors select those institutions that are most effective and appropriate for given disputes” (Mattli 2001, 921). For example, he found that firms engaged in ongoing, mutually beneficial relationships were more likely to prefer ad hoc arbitration because they did not need centralized information and were less concerned about defection. On the other hand, firms that had more uncertainty about either the other firm with which they were dealing or the business 123 environment in general would seek out the information and enforcement capacity offered by more institutionalized settings such as a court of arbitration (Davis 2003). Arbitration at the international level fora (e.g. through the International Chamber of Commerce, or the American Arbitration Association) can be quite costly and the outcome somewhat unpredictable. However, they are often used in international trade because at least one party does not have enough knowledge of the other country’s laws, or fears that the other country’s courts may be corrupt or biased in favor of the home party (Dixit 2003). At the heart of the ADR process lies not only the autonomy of contracting parties to choose the rules of law they deem appropriate for their exchange relationship, but also their autonomy to delegate the authority for resolution of potential conflicts to a transnational arbitral tribunal (Lehmkuhl 2003). One can find ample evidence that the autonomy of private transnational dispute settlement has increased significantly in the past two decades. This increase of autonomy implies that, with respect to all aspects in which the settlement of transnational disputes potentially touches national provisions, this self-regulatory mechanism has become increasingly detached from national law and from the control of national institutions (Lehmkuhl 2003). Paralleling the continuing increase in foreign trade, private commercial arbitration has become a growth industry and a distinct market in and of itself, a market which follows its own rules of supply and demand (Dezalay and Garth, 1996). A review of the International Chamber of Commerce (ICC) arbitration services gives an illustration of the increasing role played by private commercial arbitration in recent years. As of 1976, only 3,000 requests for arbitration had been filed with the ICC, 124 while in 1998, the ICC Secretariat received its 10,000th case. More than two-thirds of all arbitration cases brought to the ICC arose in the last 20 years of its 75-year existence (Craig et al. 2000, 2). It is estimated today that about 90 per cent of all cross-border contracts contain an arbitration clause (Bernstein et al. 1998, Guzman 2000,128). This indicates the growing dominance of private transnational dispute settlement over state- centered forms of litigation (Dezalay and Garth 1996). When switching the lens from the global level to specific groups of countries, we find that a different story begins to emerge. For example, in examining the use of arbitration and the value of law in transitional economies, Peter Murrell (2001) notes that broad generalizations, whether verbal or statistical are usually unhelpful, and finds critical detailed knowledge of a particular society’s legal system. He calls for more focused studies, which this dissertation addresses by examining the Colombian case, to fill this void. In order to better understand the Colombian case, information on the recent history (1990 to present) of the use of arbitration in the US and the Latin American region at large is presented to establish a comparative context; the use of arbitration in the US is examined due to its importance as a trade partner for the region. A History of Arbitration: A US Perspective In the United States, arbitration is enforceable in court under state and federal statutes, as mandated by the Federal Arbitration Act of 1925. The Federal Arbitration Act provides for enforcement of arbitration agreements and awards in both interstate commerce and international contracts. In 1970, the United States joined the UN 125 Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958. Internally, at the federal level, Title 9 of the U.S. Code 59 establishes federal law supporting arbitration. Title 9 is based on Congress's plenary power over interstate commerce. Where it applies, its terms prevail over state law. In addition to federal legislation, there are also numerous state laws on ADR. Forty-nine states have adopted the 1956 version of the Uniform Arbitration Act as state law. The Uniform Arbitration Act was revised in 2000 and subsequently adopted by twelve states. Thus, an arbitration agreement and a decision or award of the arbiter may be enforceable under both state and federal law in the US, and the US recognizes the use of arbitration for international commercial disputes. A History of Arbitration: A View from Latin America While a number of Latin American and other developing countries were original signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) of 1958, ratification and entry into force has varied greatly within the region. As of 2008, Belize, French Guiana, Guyana, Suriname, and a number of smaller Caribbean countries were not parties. 60 As seen in Table 26, the 1980s saw an increase in new members with nine Latin American states joining between 1983 and 1989. Note that four Latin American countries were original signatories to the Convention, but did not immediately ratify or enforce it. 59 See http://www.law.cornell.edu/uscode/html/uscode09/. 60 Non-member Caribbean nations include Anguilla, Aruba, Bermuda, British Virgin Islands, Cayman Islands, Grenada, Monstserrat, Netherlands Antilles, Saint Kitts and Nevis, Saint Lucia, and Turks and Caicos Islands. 126 Table 26. History of Accession to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards for Latin America State Signature Ratification, Accession or Succession Entry into Force Antigua and Barbuda (a), (b) 2 February 1989 (a) 3 May 1989 Argentina (a), (b), (d) 26 August 1958 14 March 1989 12 June 1989 Bahamas 20 December 2006 (a) 20 March 2007 Barbados (a), (b) 16 March 1993 (a) 14 June 1993 Bolivia 28 April 1995 (c) 27 July 1995 Brazil 7 June 2002 (c) 5 September 2002 Chile 4 September 1975 (c) 3 December 1975 Colombia 25 September 1979 (c) 24 December 1979 Costa Rica 10 June 1958 26 October 1987 24 January 1988 Cuba (a), (b), (e) 30 December 1974 (c) 30 March 1975 Dominica 28 October 1988 (a) 26 January 1989 Dominican Republic 11 April 2002 (a) 10 July 2002 Ecuador (a), (b) 17 December 1958 3 January 1962 3 April 1962 El Salvador 10 June 1958 26 February 1998 27 May 1998 Guatemala (a), (b) 21 March 1984 (c) 19 June 1984 Haiti 5 December 1983 (a) 4 March 1984 Honduras 3 October 2000 (c) 1 January 2001 Jamaica (a), (b) 10 July 2002 (a) 8 October 2002 Mexico 14 April 1971 (c) 13 July 1971 Nicaragua 24 September 2003 (c) 23 December 2003 Panama 10 October 1984 (c) 8 January 1985 Paraguay 8 October 1997 (c) 6 January 1998 Peru 7 July 1988 (c) 5 October 1988 Saint Vincent and the Grenadines (a), (b) 12 September 2000 (a) 11 December 2000 Trinidad and Tobago (a), (b) 14 February 1966 (c) 15 May 1966 Uruguay 30 March 1983 (c) 28 June 1983 Venezuela (a), (b) 8 February 1995 (c) 9 May 1995 Source: 2008 UNCITRAL http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status.html 127 Figure 17. Number of Latin American Countries Joining UNCITRAL by Decade Figure 17 shows that the trend to accept the use of arbitration is continuing. In 1933, the Organization of American States (OAS) created an Inter-American Commercial Arbitration Commission with the mission of providing an international commercial dispute settlement system (SICE 2007). In 1975 the OAS approved the Inter- American Convention on International Commercial Arbitration, which came into effect on June 16, 1976. As of March 1996, the Inter-American Convention had been ratified by Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Panama, Paraguay, Peru, the United States, Uruguay, and Venezuela. The perceived hostility that governments and private parties in Latin America once had towards international arbitration has given way to an increasingly “arbitration friendly” environment in the region. In fact, when analyzing what actually has happened 128 since 1995 (as opposed to residual perceptions based on prior history) it is difficult to perceive much hostility at all (Gonzalez et al. 2003). Since 1995, eleven Latin American countries have ratified or acceded to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Today, all major Latin American countries are parties to the New York Convention. Since its inception, 24 Latin American and Caribbean countries have become parties to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“Washington Convention” or “ICSID Convention”). The ICSID is considered to be the leading international arbitration institution devoted to investor-State dispute settlement. In a pattern similar to that of the UNCITRAL, three Latin American countries joined in the 1960s, eight in the 1980s, nine in the 1990s, and four in the 2000s. Notably Bolivia, which had enforced the ICSID Convention in 1995, denounced and effectively exited its purview in 2007 (ICSID 2007). During the 1990s, Latin American countries also entered into a number of bilateral investment treaties (BITs), most of which provide for international arbitration in the event of disputes between a contracting state and a national of the other contracting state (usually an ICSID arbitration or an ad hoc arbitration pursuant to UNCITRAL rules). Also in the realm of international treaties, in 1994 the North American Free Trade Agreement (NAFTA) entered into force among the U.S., Canada, and Mexico. The NAFTA provides that nationals of member states can resort to international arbitration to resolve certain disputes with a member state. The 2002 U.S.-Chile Free Trade Agreement 129 and the 2009 U.S. -Peru Free Trade Agreement followed the steps of NAFTA with regard to the design of dispute resolution mechanisms. Also beginning in the early to mid 1990s, at least 13 countries from the region passed new legislation modernizing their domestic arbitration laws by either entirely replacing or modifying existing statutes. These new laws were passed in Mexico in 1993; Guatemala in 1995; Brazil and Peru in 1996; Argentina, Bolivia, Costa Rica, and Ecuador in 1997; Colombia and Venezuela in 1998; Panama in 1999; Honduras in 2000; and Paraguay in 2002. Three of these countries (Mexico, Guatemala, and Peru) have incorporated the rules of the model law on International Commercial Arbitration of the United Nations Commission on International Trade Law (“UNCITRAL rules”) into their new arbitration laws, a very large step towards promoting international arbitration. Other countries, such as Argentina and Chile, are considering the adoption of UNCITRAL- based arbitration laws. In addition to the official policies reflected in conventions, treaties, and domestic legislation, this trend towards arbitration is also revealed in related developments involving certain Latin American institutions and businesses. In recent years, local chambers of commerce and other entities have either created or revitalized numerous local alternative dispute resolution institutions that successfully administer arbitration proceedings and provide arbitration rules for commercial and other disputes (Gonzalez 2003). 130 History of Arbitration in Colombia Where does Colombia fit into this international and regional trend toward the increased use of arbitration as an alternative dispute resolution mechanism? Colombia began enforcing the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1979, the same year it became a member of the agreement. With respect to national legislation, Colombia also enforces domestic arbitration awards. If a party to an arbitrated dispute does not voluntarily pay, the courts may intervene. The courts limit their intervention to formal control, that is, establishing that a proper arbitration process has been conducted according to national law, and they do not interfere in the decision itself (Casella 1996). Colombia follows the international trend in this regard. Operating on the assumption that an arbitration framework is favorable for domestic industry in Colombia and internationally, nation-states have steadily amended their domestic regulations to expand autonomy and restrict the scope of judicial review of arbitrational agreements and awards (Carbonneau 2000). By increasing the contractual prerogatives of the parties (and not limiting it to selecting the procedural and substantive laws governing the resolution of conflicts), the changes in laws for arbitration allows parties to largely avoid having the awards reviewed nationally. If review is allowed, it is generally restricted to procedural rather than to substantive matters (Lehmkuhl 2003). At the start of the 1990s, the use of alternative dispute settlement methods was practically unknown in most Latin American countries. Except for a few countries where arbitration was carried out on a very small scale, these methods were a highly unusual practice. When the Inter-American Development Bank’s Multilateral Investment Fund 131 (MIF) launched its portfolio of ADR projects in 1995 with the approval of the Peruvian project, it took a risk by entering into an area that did not appear on the agenda of any international organization and was not included in the judicial reform plans of the countries of the region (IADB 2002). In most cases, these countries had no experience with ADR for commercial disputes. Because of the MIF’s pioneering work in the field of ADR in Latin America, I examine its efforts in the region in depth. Colombia plays a unique role within its portfolio. Beginning in 1995, the MIF began awarding loans for the promotion of ADR in Latin America under the rubric of support for judicial reform. The rationale for the loans came from the congestion and weaknesses in the respective judicial branches, which became painfully apparent in the 1980s. The IADB cited lengthy delays, a lack of access to the courts, and corruption as undermining the credibility and image of the judicial branch across the region. “Given this situation, the private sector suffered from constraints on its access to efficient, transparent, independent and predictable justice, which increased its transaction costs and discouraged business” (IADB 2002, Executive Summary, 1). The MIF used statistics 61 to justify the need for alternative dispute resolution mechanisms, pointing to the high levels of inefficiency in the region’s justice systems. This was chiefly due to severe problems with congestion and delay. One of the MIF’s objectives for establishing arbitration and mediation centers was to create a private space where individuals could settle their disputes, filling the void left by public justice services (IADB 2002). The MIF argued that “The absence of an efficient, independent, accessible and transparent judicial branch was a fundamental obstacle for private sector 61 See Annex VI for statistics relating to ADR in the region. 132 development and higher investment” (2002, 17). Among MIF stated goals in financing judicial reform was the improvement the legal climate for investors and commercial relations. Note the emphasis on economic development. The MIF goes on to identify the absence of reliable mechanisms for the settlement of disputes as a specific obstacle to the development of commerce and private investment. No precise objectives for the use of ADR were stipulated by the MIF. However, for the most part, the loans covered initiatives to set up arbitration and mediation centers which would offer entrepreneurs an alternative for the settlement of their commercial disputes. After the first two projects were approved for Costa Rica and Peru in 1995, a loan was granted to consolidate and expand the Arbitration and Mediation Center of the Chamber of Commerce of Bogotá, Colombia. This operation was a turning point for the MIF’s judicial reform portfolio in that the Colombian project was used as a model for MIF’s future operations. The Bogotá Chamber of Commerce project was followed by 16 more loan operations that, with nuances, replicated the Colombian experience. Subsequent to the Colombian experience, the MIF adopted a model for its future projects that basically consisted of establishing an arbitration and mediation center that would operate from inside a given country’s chamber of commerce. According to an internal evaluation of its portfolio on alternative commercial dispute resolution methods between 1994 and 2000 the MIF “was able to extend its ADR model to almost all the countries of the region”(IADB 2002, 6). As of 2002, half of the portfolio was still in execution, even though no new projects had been approved since 2000 when the MIF ended its work in the field of ADR. The internal report also stated 133 “There was no process of institutional internalization and learning. The achievements of the projects were not compiled and lessons were not learned from the problems facing ADR. After nearly 18 projects and more than US$14 million, the Bank/MIF does not know much more today than it did when it launched the portfolio” (IADB 2002, 7). Concerns were also noted with respect to the economic sustainability of the loan projects for every case except the Colombian one, which was self-sustaining. Despite this self-critique, the MIF also acknowledged that the arbitration and mediation center model it had promoted is now known throughout the region. Legislation on arbitration and mediation was modernized and harmonized in almost all of the Latin American countries, which have up-to-date (revised) laws that reflect dominant international norms on ADR. The MIF internal report noted the importance of having a successful model that originated in Latin America, since this fact was very influential when it came time to duplicate the experience in the other countries of the region. As mentioned earlier, many directors and officials from the Bogotá Arbitration and Mediation Center participated actively in other ADR projects. For example, two former directors of the center acted as consultants in Uruguay, Guatemala, Brazil and Peru. There was also an extensive exchange of experiences among the projects. In some cases, such as Mexico and Panama, financing was made available to the directors of the AMCs for study visits to the Bogotá center (IADB 2002, 41). The model for commercial arbitration was also perfected. Ever since the Colombian project, successive operations have improved and fine-tuned the original model. Specialized human resources were cultivated in nearly all the countries in the region. Today, well-prepared arbitrators and mediators are available, which was not the case in the early 1990s (IADB 2002). Besides influencing the use of ADR in the region, the MIF loans also offered a defined methodology and know-how for project execution, 134 which resulted in homogenous “modern” ADR clauses and usage throughout the region. The MIF financing also contributed to the consolidation of the Inter-American Commercial Arbitration Commission (IACAC), since many of the ADR centers that received MIF financing went on to become national chapters of the IACAC. Moreover, authors of the MIF report argue that the use of ADR became an irreversible trend in a number of Latin American countries, namely, Colombia, Peru, Chile and Brazil, and is being used for commercial purposes in the region. In Peru, for example, there are more than 500 mediation centers that processed more than 30,000 cases from 1999 to 2002. In Brazil, the project has exceeded its goals for the number of centers affiliated with the national network and more than 6,000 negotiations have already taken place. In Colombia, the Chamber of Commerce of Bogotá continues to grow and has expanded its work in the country and internationally. In the last two years, it has provided training for more than 400 people from abroad (IADB 2002,7). The statements of the MIF internal report are upheld by Latin American experts. For example, at a Latin American Corporate Governance Rountable in 2004 the participants (Argentina, Bolivia, Brazil, Canada, Chile, Colombia, Panama, Peru Spain. Sweden, Turkey, the United Kingdom, the United States, and Venezuela) recommended that “The legal framework should contemplate and remove obstacles to effective use of private arbitration and other potentially efficient mechanisms 62 for the settlement of shareholder disputes” (2004, 33). Moreover, the participants recognized that “most courts in most countries in the region lack the technical expertise and experience to fairly and efficiently settle shareholder suits. Where qualified judges or specialized courts exist, they are unlikely to have sufficient resources to handle the caseload” (2004, 33). 62 Specialized courts for commercial matters were examined as potential alternatives. These courts have been created in Brazil and Peru. 135 The Latin American Corporate Governance Roundtable also discussed limitations on arbitration in the region, and suggested recommendations based on those limits. The Roundtable recommended that Latin American courts create streamlined procedures for enforcement of arbitral awards. However, the Roundtable emphasized that private arbitration is not a substitute for strong judicial institutions, and noted that arbitrators can encounter the same problems as the judicial system in identifying and interpreting the law. They advocated for an active and consistent judiciary that contributes to the interpretation of the law through its rulings, and in this way, indirectly re-enforces the effectiveness and reliability of private dispute resolution mechanisms. In conclusion, they stressed that the execution of arbitration decisions depends on the effectiveness of the judicial system (Latin American Corporate Governance Roundtable 2004, 2005, 2007). In short, the Colombian context provides an important window on the regional and international trend towards the use of arbitration as an alternative dispute resolution mechanism. In response to one of the main ideas in the book edited by Peter Murrell: broad generalizations, whether verbal or statistical are usually unhelpful, and detailed knowledge of a particular society’s legal system is critical (Murrell 2001). The next chapter responds to this lacuna by providing a thorough examination of the Colombian legal context for arbitration proceedings. The following two chapters can be seen as more focused studies on the Colombian case, as a possible exemplar for other countries in the region. 136 Chapter 4 Reforming the Judiciary: Public and Private Support for ADRMs in Colombia In this chapter I introduce and elaborate on the role that alternative dispute resolution mechanisms (ADRMs) have played in Colombia. First, I review and bring up to date the debate over the use of ADRMs, a main goal being to show how the latest legal reforms in Colombia, and its approach to commercial controversies in particular, obey the current international trend of institutional and legal “modernization.” This trend is not something limited to a country or group of countries. However, local conditions play a role in how reforms take place and the depth with which they are implemented. Second, I concentrate on the public and private support that has been provided for private arbitration in Colombia. Here, I analyze the constitutional and legal bases of arbitration to elucidate on how the strengthening of ADRMs has become embedded in the Colombian policy agenda. Thus, the last part of this chapter refers to arbitration proceedings as they have been written into national legislation, including the procedural rules of the Center for Arbitration and Conciliation within Bogotá’s Chamber of Commerce. Colombia’s Reforms: Part of an International Trend The legal modifications that have been undertaken in Colombia are less the result of “caching up” policies and more a reflection of a changing relationship between law and economics. In other words, it is not that the country neglected to utilize arbitration sometime in the past or that legislators and policy makers opposed institutional changes; 137 rather, the role of the law in the national economy was characterized by a more centralized approach led by the state, wherein economic growth was spurred by the public sector. The time for arbitration had not yet arrived. The main backdrop for the use of arbitration around the globe coincides with the market oriented economic polices embraced under the banner of the “Washington Consensus” in the early 1990s. Since the 1980s, a number of countries have passed laws that incorporate arbitration into the domestic legal system, thus making the use of ADRMs acceptable and favoring the enforcement of arbitral decisions. For instance, England passed the Arbitration Act in 1979, France approved two decrees on arbitration in 1980 and 1981, Italy created a new law in 1983, the Netherlands and Portugal in 1986, Switzerland in 1987, and Spain in 1988. 63 In 1998, the United States Congress enacted the Alternative Dispute Resolution Act of 1998, which amended United States Code’s title 28 - Judiciary and Judicial Procedure - with respect to the use of alternative resolution processes in United States district courts (United States Congress 1998). The American Congress favors ADRMs in the following terms: “[A]lternative dispute resolution [...] has the potential to provide a variety of benefits, including greater satisfaction of the parties, innovative methods of resolving dispute, and greater efficiency in achieving settlements [...] [V]oluntary arbitration, may have potential to reduce the large backlog of cases now pending in some Federal courts throughout the United States, thereby allowing the courts to process their remaining cases more efficiently” (ibid.) Also beginning in the early to mid-1990s, at least 13 countries in Latin America passed new legislation modernizing their domestic arbitration laws by either entirely 63 For a review of developments on European arbitration law over recent years see International Commercial Arbitration in Europe. A special Supplement (The ICC Institute of World Business Law 1994). 138 replacing or modifying existing statutes. Such new laws were passed in Mexico in 1993; Guatemala in 1995; Brazil and Peru in 1996; Argentina, Bolivia, Costa Rica, and Ecuador in 1997; Colombia and Venezuela in 1998; Panama in 1999; Honduras in 2000; and Paraguay in 2002. 64 In this context, the crisis of the Colombian judicial system, as discussed in chapter one, is hardly unique to Colombia or to the developing economies. However, in Colombia the crisis of the justice system has persisted despite the implementation of market reforms and it still requires some adjustment. In line with the argument of this dissertation, increasing the use of ADRMs for private commercial disputes represents one such adjustment. The worldwide importance of alternative dispute resolution mechanism goes hand-in-hand with increasing international trade and, more generally, a more globalized world economy. Legal scholars agree and state that one important aspect is that, parallel to the continuing increase in foreign trade, private commercial arbitration has become a growth industry and a distinct market, which follows rules of supply and demand (Dezalay and Garth 1996). Craig et al. (1990, 294) further argue that “Usages in the world of international commerce may frequently develop more rapidly than the law, forcing wider acceptance of arbitration.” Casella (1996) formalizes the relationship between the expansion of international trade and the adoption of international arbitration. The model predicts that the share of traders using arbitration expands as market grows. The World Bank’s web site on Law and Justice Institutions states the following about private commercial arbitration: “Private arbitration services and centers have an 64 Mexico, Guatemala, and Peru have incorporated the rules of the Model Law on International Commercial Arbitration of the United Nations Commission on International Trade Law (“UNCITRAL Rules”) to their 1990s arbitration laws, a very positive step towards promoting international arbitration. Argentina and Chile are also considering the adoption of UNCITRAL-based arbitration laws. 139 established role in the United States for commercial dispute resolution, and are spreading internationally as business, and the demand for harmonization, expands” (World Bank 2008). However, particular to developing economies is the fact that legal and judicial reforms took place within deeper reforms towards political democratization and market dominated economic models (Buscaglia 1998). This was exactly the case for Colombia, where both economic and political reforms were included in the promulgation of the 1991 constitution. 65 Since 1991, Colombia, like many in developing and transition economies, 66 underwent serious soul-searching when diagnosing the origins of the country’s judicial crisis. Hence, the implementation of reforms supported by such multilateral development institutions as the World Bank and the Inter-American Development Bank, cooperation agencies like United States Agency for International Development (USAID), European Governments including Germany, and international human rights organizations and foundations, like the Ford Foundation. 67 65 During the late 1980s and early 1990s, Colombia faced the bloodiest drug cartel violence ever. This included the assassination of three presidential candidates for the 1990 election: Luis Carlos Galan, the official Liberal presidential candidate, was murdered on August 18, 1989; Bernardo Jaramillo Ossa, the Patriotic Union candidate, was murdered on March 22, 1990; and M-19 presidential candidate Carlos Pizarro was murdered on April 26, 1990. In 1991 Colombia produced a new constitution, the result of a National Constituent Assembly. 66 For a presentation of legal and judicial reforms in Central and Eastern Europe and the Baltics and the Commonwealth of Independent States see James Anderson et al. Judicial Systems in Transitions Economies: Assessing the Past, Looking to the Future (2005). 67 For a discussion of the classification of the different legal and judicial reforms according to their main objectives and funding sources see Thomas Carothers’ (2001) “The Many Agendas of Rule-of-Law Reform in Latin America.” For a recent review of the different reforms in Latin America see “A Brief Overview of Judicial Reform of Latin America: Objectives, Challenges, and Accomplishments” by Mariana Sousa (2007). 140 The reforms promoted by the World Bank focus on the judiciary’s efficiency, particularly in civil and commercial cases, by guaranteeing rules and the means to settle disputes among private parties in ways that are predictable and supportive of economic exchange (Dakolias 1996, Rowat et al. 1995). In assessing the judicial reform and economic growth projects financed by the World Bank in several countries, Richard E. Messick of the World Bank argues that their failure is the result of information based on perceptions. “Because of cognitive biases and other quirks in how humans perceive the operation of large, complex systems, reliance on perception data produces a highly skewed picture of court operations” (2004, 7). As recent work in Argentina and Mexico has shown, what “everyone knows” about how the courts are performing is often wrong (Hammergren 2002). Messick arrives at the following conclusions: 1) Judicial reform is much harder than initially predicted; 2) Projects cannot be developed with low resources and information limited to the impressions of legal actors; rather, quantitative data on system performance is required; 3) If the objective is to change the behavior of legal actors (judges and lawyers), altering the incentives they face is crucial; 4) Speedier case disposition is not a reform; and 5) Alternative means of resolving disputes received little attention in the reforms backed by the World Bank. Arbitration and mediation can channel disputes away from the courts, “yet many reforms ignored the obstacles parties wishing to arbitrate or otherwise turn to an alternative to the courts faced (ibid., 11, my emphasis). However, in Colombia, ADRMs have had a clearly different trajectory. 68 The introduction of alternative dispute resolution mechanisms in Colombia was partly a result of the judicial crisis and their implementation has gone far beyond initial intentions. The current Minister of Justice, Carlos Holguin Sardi, reflects on the standing of ADRMs in 68 Ibrahim Shihata, general counsel and senior vice president of the World Bank from 1983 to 1998, confirms that over 80 percent of commercial disputes in Colombia are resolved through conciliation (1996, 60). 141 Colombia: “The ADRMs were created as a response to the judicial crisis in Colombia … characterized by tribunals’ excessive case congestion, courts decision delays and high cost to access to justice for the average citizen.” (Ministry of Interior and Justice 2007c, 1). 69 He continues, “Today after more than 16 years of constitutional status of ADRM, we can affirm that conciliation and arbitration are a reality within Colombia’s justice administration structure.” (ibid.). Holguin stresses the virtues of arbitration, “[It] is an effective, reliable tool; it essentially is a specialized justice in many legal fields. Its development has gone beyond an instrument to decongest tribunals. Given the technical nature of certain disputes, arbitration is a means that allows better access to justice and offers a better solution than the regular justice” (ibid.,2). The Minister also affirms that the current legislation on arbitration helps Colombia to comply with international norms and criteria, which is an additional attraction for potential international investors or contractors (ibid). In a larger context, not only in the case of Colombia, we can identify some positives about ADRMs in general and arbitration in particular. First, ADRMs reinforce the independence of the judiciary from the executive branch. These mechanisms reach beyond the state’s monopoly on supplying legally binding resolutions around economic conflicts. Second, ADRMs can be seen as competing with and offering a choice to the standard legal system. They help to increase judicial efficiency by both taking controversies outside the realm of the ordinary justice system and offering more expedited processes. Third, ADRMs decrease opportunities for corruption, disenabling the ordinary justice system from extracting rents from litigants. Thus ADRMs are 69 Author’s translation. 142 assisting in modifying public servants’ rents and power. Fourth, ADRMs enhance citizens’ access to justice since they are another means to peacefully resolve controversies. Fifth, arbitration and conciliation offer a predictable setting where the law is stable, accessible and clear. In this way the discretionary powers of the state are limited and the arbiters appointed by the parties themselves are the expression of an independence from the judiciary. This is also reinforces the low opportunities for corruption and facilitates the detection of attempts at rent-seeking should they occur. Sixth, arbitration and other ADRMs are emerging as examples of effective legal institutions. That is, they create relatively low transaction costs compared to those of an ineffective ordinary judicial system. Seventh, ADRMs tend to increase investors’ perceptions of predictability within the legal system. Their existence counter balances the perception of hopelessly corrupt judicial institutions and indicates positive change. In other words, alternative mechanisms suggest that the state is moving towards the protection of entrepreneurs. Lastly, given human bounded rationality and moral hazards (Williamson 1985), it is impossible to have a complete picture of the legal system. Arbitration, which is embedded in a contract, emerges as a rational alternative for investors who do not need to invest in understanding the whole legal system. They can limit their legal transaction costs to ADRMs, and arbitration in particular. In explaining why investors select host countries with inefficient and unpredictable legal systems, Amanda Perry argues that the problem with the dominant normative understanding of legal institutions is that it fosters the notion that the whole legal system 143 be predictable and stable. She also posits that investors’ sense of their ability to influence their own destiny provides them with a micro level of certainty. “Investors may be satisfied with the certainty of knowing they can affect the outcome of their own case, and less concerned about the consistent application of rules to other cases.” (2000, 790). One of the advantages of arbitration is precisely that economic agents are actively participating in the resolution of commercial disputes by electing arbitrators and the particular procedures and material laws that will be followed in the proceedings. In other words, they perceive that they can affect the outcome. Although there are particularities in national arbitration processes and in international arbitration, investors can draw on their own experiences involving other cases in different contexts. They are also less concerned with how the host country regulates similar situations under a country’s regular law. The only past cases entrepreneurs need to look after are their own. When establishing the relationship between legal institutions and economic interests, the judicial and legal reform agendas of multilateral organizations like the World Bank advocate an “ideal” legal system to attract investors. The ideal system reduces the costs of doing business (transaction costs). In the model, investors want: system efficiency and certainty or predictability (which refers to stable, accessible and clear laws); limited state discretionary powers; low corruption; and separation of state powers, or more precisely, an independent judiciary. 70 70 This analysis can be found in Rudolf Van Puymbroeck, ed. (2001) Comprehensive Legal and Judicial Development; Edmundo Jarquin and Fernando Carrillo (1998) Justice Delayed. Judicial Reform in Latin America; and Alberto Alesina ,ed. (2002) Reformas Institutionales en Colombia.. For a critical understanding see Yves Dezalay and Garth Bryant, eds. (2002) Global Prescriptions. The Production, Exportation and Importation of a 3ew Legal Orthodoxy and Katharina Pistor (2002) “The Standardization of Law and Its Effects on Developing Economies.” 144 However, as mentioned above, the World Bank recognizes the failure of those judicial reforms it promoted with respect to the whole legal system (Messick 2004). My argument is that an analysis of how alternative mechanisms are able to solve economic controversies sheds light on how the legal system supports market interactions. The following sections present and elaborate on the commercial arbitration process in Colombia. I introduce the constitutional and legal roots of ADRMs, as well as their links with economic interests and the judicial crisis. In the last section, in order to highlight the success of Colombia’s private commercial arbitration practices, I draw on its application in other national contexts. Constitutional and Legal Bases of Arbitration in Colombia The Economist Intelligence Unit’s report (2008) on Colombia makes the following references to arbitration. Law 315 of October 2000 (sic) 71 allows contracts between foreign investors and domestic parties to have clauses providing for the use of binding international arbitration over investment disputes; indeed, most contracts now include them. The investment statute stipulates that Colombian legislation and arbitration norms will apply where such arbitration has not been agreed on or where international treaties and conventions signed by Colombia do not apply. 72 However, a more commonly used mechanism for resolving investment disputes is a local arbitration panel (Centro de Arbitraje y Conciliación de la Cámara de Comercio de Bogotá) that operates in Bogotá’s 71 Actually Law 315 was promulgated on September 1996 (Colombian Congress 1996b). 72 Colombia is a member of the New York Convention on Investment Disputes and the Multilateral Investment Guarantee Agency, a World Bank institution that provides political-risk insurance. It has also joined the International Council for the Settlement of International Disputes, which offers access to international conciliation and arbitration mechanisms for resolving investment disputes. 145 chamber of commerce and has established a sound reputation for fairness (Economist Intelligence Unit 2008). To be clear, arbitration is a private, consensual, binding method of dispute resolution, which provides the opportunity to resolve disputes without resorting to litigation in national courts. Arbitration has these characteristics: (1) it arises from a voluntary contractual agreement between parties who choose to have an actual or potential dispute decided by a third party, called an arbitrator; (2) the parties choose the arbitrator or a method for his or her selection; (3) the arbitrator hears the dispute; (4) the arbitrator makes a binding award; (5) the arbitrator's decision is, subject to very limited grounds for review, final and enforceable by state law in the same manner as a judgment (MacNeil 1992); (6) the issue under discussion is of a private commercial nature; 73 (7) the process is governed by Colombian law. 74 Arbitration in Colombia has developed over the years and the current system is fairly sophisticated. A new arbitration law was introduced in 1989, and in 1991 alternative dispute resolution mechanisms gained constitutional status. Arbitration has become a common method of dispute resolution between members of the business community, whether Colombian or foreign agents. The Arbitration and Conciliation Center (Centro de Arbitraje y Conciliación, CAC) of the Bogotá Chamber of Commerce has effectively promoted arbitration and conciliation. It can safely be said that arbitration has become a method regularly used in Colombia; a method that has very clear legal, doctrinal, and political support. 73 Arbitration processes in which the Colombian state is a party are not the subject of this study. 74 As opposed to international commercial arbitration governed by international law. 146 Parties to any commercial contract, whether domestic or international, must consider factors such as quality control, compliance with government regulations, protection of intellectual property rights, and dispute resolution (Shippey 2003, v). Dispute resolution refers to the right to use the justice system. In Colombia, access to justice is a constitutional right (Colombian Constitution, Article 229). The Colombian Constitutional Court views access to justice as the state’s real and effective guarantee that individuals can appear before a judge to resolve controversies resulting from relations with other individuals or organizations and with the state itself (Colombian Constitutional Court 1998, Sentence 478). Access to justice and due process are also guaranteed to foreigners (ibid. 1999, Sentence 600). One of the means of access to the justice system is alternative dispute resolution mechanism, ADRMs, which include conciliation and arbitration, among other mechanisms. In the previous Colombian Constitution of 1886, the administration of justice was seen as a public service conducted strictly by the judicial branch (Article 58). There were no references to arbitration tribunals or to any other means of solving controversies beyond the regular justice system. However, that was not an obstacle to the ability of the Colombian Supreme Court to find constitutional grounds for arbitration as a way of offering a solution to conflicts among private parties, since arbitration was not prohibited by the Constitution. The court stated: “If the abitration is private, it cannot be considered unconstitutional. Every time that this form of resolving controversies is only about addressing issues pertaining to private law, it is not explicitly nor tacitly prohibited by the Constitution.” (Colombian Supreme Court Sentence of May 29, 1969). 75 75 Author’s translation. 147 Thus, while arbitration was not contemplated in the former Colombian constitution, it was still allowed as it was not expressly or implicitly prohibited. ADRMs reached constitutional status under the current 1991 Constitution. The Constitution maintains the principle of public function for the administration of justice (Article 58). That is, the service of justice is the state’s responsibility. However, this function is not limited to the state judicial branch. Article 116, second paragraph, of the 1991 Colombian Political Constitution states who has the power to administer justice beyond the judicial branch: “[...] Individuals can be temporarily invested by the parties with the ability to administer justice as conciliators or arbitrators, who shall decide in equity or pursuant to the law.” Accordingly, the Colombian Constitutional Court concludes that not only the judicial branch of government, which is composed by entities that permanently and habitually administer justice, 76 has jurisdictional functions. Private citizens can exercise temporary judicial powers as conciliators or arbitrators when the parties to a conflict agree on removing their dispute from national litigation channels and into arbitration (Colombian Supreme Court Sentence No. C-226/1993). In the same sentence, the Constitutional Court affirms that arbitration is one of the most solid, established legal institutions, which has always been considered an effective means for deciding controversies and which has practical advantages for its users, and civil order in general (ibid). 76 This consists of the Constitutional Court (Corte Constitutional), the Supreme Court of Justice (Corte Suprema de Justicia), the State Council (Consejo de Estado), the Supreme Council of Judicature (Consejo Superior de la Judicatura), the Attorney General’s Office (Fiscalia General de la 3acion), tribunals and judges. 148 Referring to civil and commercial arbitration, the Constitutional Court states that arbitration is regulated by decree 2279 of 1989. The Court affirms that those facing a civil or commercial difference must agree to submit the controversy to the decision of one or more individuals appointed by the interested parties themselves, directly or by a designated third party. The Court sees arbitrators as judges since they must follow a predetermined procedure to assess facts and evidence, and then arrive at a definitive decision. The latter is on par with a judicial sentence since it is a declaration of legal certainty (Colombian Constitutional Court Sentence No. 42/1991). The law is explicit in this regard. Article 114 of Law 23 of 1991 states that arbitrators have the same responsibilities, powers and faculties as those of judges. Consequently, arbitrators, have the following powers: 1) Decision-making powers (poder de decisión). The resolution of a dispute (the arbitration award) has the force of law (fuerza de ley). That is, it creates binding legal obligations. 2) Coercive power (poder de coerción) Arbitrators can take the necessary measures for the fulfillment of an award. 3) Documentation or investigative power (poder de documentación o investigación). Arbitrators are entitled to gather and examine evidence to be able to arrive at legal decisions. 4) Execution or enforcement power (poder de ejecución). This relates to the imposition of a clear and explicit mandate, which could come from a sentence or debtors document (Presidencia de Colombia 1970, Code of Procedural Civil Law, Article 488). 149 However, the execution power of arbitrators is limited because the enforcement of decisions (arbitral awards) falls to the ordinary justice system (Presidencia de Colombia 1989, Decree 2279, Article 40 and Colombian Congress 1991, Law 23, Article 40). For reasons of peace and “public order” (orden público), the Constitution does not authorize the Congress to delegate enforcement powers to private individuals. Thus, arbitrators cannot enforce awards on their own. Only the state can mobilize the coercive forces of the nation (Colombian Constitutional Court Sentence T-057 of 1995). The enforcement of awards is an instance of the state’s participation in the arbitration process. It must be mentioned that the capability of private individuals to decide disputes does not mean the administration of justice is being “privatized.” Although arbitrators’ judicial powers derive from the decisions of private people, they are strongly rooted in the state’s public function of justice administration. It is the Colombian Constitution that permits the exercise of “private” justice through arbitration. As was mentioned above, Article 116 of the Colombian Constitution explicitly authorizes individuals to administer justice transitorily 77 as arbitrators (Colombian Constitutional Court Sentence No C- 431/1995). Moreover, the Colombian Congress ceded to the President of the Republic extraordinary powers to “...implement jurisdictional systems of conflict resolution among private parties, such as conciliation, arbitration, judicial processes on equity (juicios en equidad)...” (Colombian Congress 1987, Law 30). In this way the executive branch of the government has normatively developed the arbitration process. In 1989, President Virgilio Barco (1986-1990) signed the Decree law 77 Once the controversy is resolved, the arbitration tribunal no longer exists. 150 (Decreto ley) 2279 of 1989, which established arbitration as a mean for solving disputes among private parties. His successor, Cesar Gaviria (1990-1994), launched the state’s policy to deal with the crisis of the justice sector, with the decongestion of courts as one of the main components. Law 23 of 1991 created dispute resolution mechanisms to clear up the case backlog within the courts. Chapter 8 of that law provides specific guidelines for arbitration. Decree 2651 of 1991 elaborates on the creation and functioning of conciliation and arbitration centers to resolve differences among private parties. Thus, in Colombia, private commercial arbitration is a concrete expression of the constitutional right to access to justice. It has constitutional status as a means to administer justice and is regulated by lawmakers. Moreover, the state grants citizens the right to exclude themselves from the jurisdiction of its courts. At the same time, the actual use of arbitration is only possible by way of private agreement between the parties. Finally, the state regards arbitral awards as a final, binding decision and lends its powers to the enforcement of the arbitral decision (Casella 1996). In the following section I describe the actual arbitration process in Colombia according to legal mandates. The Legal and Institutional Framework for Arbitration Private individuals are empowered by conflicting parties to transitorily administer justice as arbiters to decide controversies according to the law or equity principles (Constitución Política de Colombia 1991, Article 116, 4th paragraph). Arbitration is a mechanism to decide disputes alternative to the judicial process of the state (Colombian Congress 1996a, Law 270, Article 8). For arbitration to take place, the object of the 151 dispute needs to be amenable to negotiation; 78 and both parties must have the right to transact 79 (ibid. Article 13). This rule pertains to all material goods, objects or legal rights than can be monetarily valued, and over which we have the capacity to dispose, to assign or to negotiate. In other words, the object of the arbitration must be something over which the parties have the right to dispose. 80 Thus, the dispute cannot center on issues of public interest like civil status, for instance. Definition and Types of Arbitration The Colombian law defines arbitration as a mechanism through which the parties to a transactionable conflict (conflicto transigible) appeal to an arbitration tribunal whose decision or award brings the conflict to an end (Presidencia de Colombia 1998, Decree 1818, Article 115 and Colombian Congress 1998, Law 446, Article 111). There are three kinds of arbitration, depending on the foundation for the decision. When the decision is based on material law and jurisprudence, arbitration shall be decided based on the law (en derecho); when the decision is based on rules of common sense and fairness, the arbitration is decided on equity (en equidad); when the decision is based on arbitrator’s specific knowledge in a certain field, the arbitration is a technical decision (técnico). The parties agree to the competency of the arbitration tribunal and the type of arbitration in two ways: First, by inserting a commitment clause (cláusula 78 For instance, parents’ legal obligations to their children cannot be part of legal transaction, as they are not negotiable. 79 For instance, a person who does not have property or contract rights over the object of a dispute cannot decide on what to do with it. 80 Or exercise the power of control over that right. 152 compromisoria) into the contract, or in a separate document, (Presidencia de Colombia 1998, Article 118 and Colombian Congress 1998, Article 116). Second, the parties can assign a dispute to an arbitration tribunal once the dispute has arisen by entering into a legal contract called a commitment (compromiso) (Presidencia de Colombia 1998, Article 119 and Colombian Congress 1998, Article 117). 81 The commitment clause and/or the commitment form the arbitral agreement (pacto arbitral). Having an arbitral agreement means that the parties are obligated to submit their differences to the decision of the arbitration tribunal and that they give up their rights to seek resolution before a judicial court (Presidencia de Colombia 1998, Article 117 and Colombian Congress 1998, Article 115). In short, the parties to a commercial transaction may provide in their contract that any disputes about interpretation or performance of the agreement will be resolved through arbitration. They may also agree to arbitrate after the dispute has arisen. The parties can specify the law that should regulate the dispute, or leave the decision to the arbitrator. For instance, the parties may decide that the law governing their arbitration process is that of a specific arbitration center, such as the Center of Arbitration and Conciliation of Bogotá Chamber of Commerce. According to the procedures, there are three major institutional settings in which commercial arbitration appears as a mechanism for the settlement of disputes: independent, institutional, and legal (Presidencia de Colombia 1998, Article 116 and Colombian Congress 1998, Article 112). The simplest setting is when parties in a contract delineating a business relationship agree to settle any disputes that may arise 81 This might be the situation when a judge transfers a legal case to an arbitration tribunal for the parties in the conflict to enter into an arbitration contract. 153 under the contract by resorting to arbitration before named arbitrators or persons to be named at the time of the dispute. In this, “independent” (independiente) setting all arrangements, including the procedures for arbitration, rest entirely with the parties concerned. This is also called ad hoc arbitration. The second setting for commercial arbitration is found in administrative collectivities, such as universities, professional associations, and chambers of commerce. 82 These entities run arbitration centers that provide rules, facilities, and arbitrators for anyone desiring to settle a dispute by arbitration. 83 The parties in a contractual relationship agree to present the controversy before a particular arbitration center and under its rules. This is called institutional arbitration. It is worth noting that there can be arbitration centers without their own particular arbitration procedures. In these cases, arbitration follows the procedures contained in the law. The third setting, legal arbitration, occurs when the parties cannot reach an agreement about the arbitration procedures and fail to agree to subject themselves to the procedures established by an arbitration center. In this case, the arbitration is conducted according to the procedures established by current legislation. 84 82 This last setting corresponds to that of the International Chamber of Commerce or the American Arbitration Association, for instance. 83 Arbitration centers must be approved by the Ministry of Interior and Justice (Ministry of Interior and Justice 2004, Resolution 1342, Article 2). 84 Legal arbitration is ruled by Decree 1818 of 1998 Estatuto de los mecanismos alternativos de solución de conflictos, Law 446 of 1998, Law 23 of 1991, Decree 2651 of 1991 and Decree 2279 of 1989 (Ministry of Interior and Justice 2005a). 154 The Appointment of Arbitrators It is the right of the counterparts to jointly decide on the number of arbiters and to appoint them. The number must be odd and if it is not stipulated, there will be three. They can also delegate the decision to a third party, like the arbitration center (Presidencia de Colombia 1998, Article 122 and Colombian Congress 1998, Article 118). The Pre-Arbitral Phase There are some steps the parties to a contractual dispute must follow in order to activate the arbitration tribunal. One of the parties or both must request the formation of the tribunal to a mutually agreed upon center. They must provide a copy of the arbitral agreement so that the center can verify that the arbitrators have accepted their nomination, or proceed to notify them. Should appointments of arbitrators be needed, a hiring will take place for this purpose (Presidencia de Colombia 1998, Article 129). The centers have a list of arbitrators to appoint from when the center is given this function by the parties (Ministry of Interior and Justice 2007a, and Presidencia de Colombia 1998, Article 131). The law anticipates how to overcome disqualification and challenges nominated arbitrators (impedimentos y recusación) 85 and it limits the replacement process to 15 working days from the day the reason for impediment or challenge is made known (Presidencia de Colombia 1998, Articles 130, 132, 133, 134, and 137; and Ministry of Interior and Justice 2005b). These issues will be resolved by the arbitration center director (Presidencia de Colombia 1991, Decree 2651, Article 19). 85 The causes for disqualification and impeachment of arbitrators are the same as those of judges. They are listed in Article 150 of the Civil Procedural Code. 155 Given that the focus of field research for this study is arbitration cases heard before the Center of Arbitration and Conciliation (CAC Centro de Arbitraje y Conciliación) of the Bogotá Chamber of Commerce, all of the cases examined here are instances of institutional arbitration. The CAC has its own arbitration procedures. Remember that the procedure the arbitration follows depends on the type established in the arbitral agreement. Thus, should it be institutional, the CAC procedure will govern the case. Should it be legal, the arbitration will be conducted under prevailing state norms at the moment the tribunal is formed. The most recent procedural rules of the CAC for arbitration cases to be heard before it (Reglamento de procedimiento del Centro de Arbitraje y Conciliación (CAC) de la Cámara de Comercio de Bogotá para los arbitrarmentos que se surtan ante el mismo) were approved by the Ministry of Interior and Justice on January 18, 2007. 86 The most relevant aspects for this study are those that cover the actual arbitration process, as summarized below. The Tribunal’s Integration and Installation Hearing Once the CAC receives the “lawsuit” or request to initiate the arbitration tribunal, it verifies the existence of the arbitral agreement (Bogot’a Chamber of Commerce, Article 2) and arbitrators’ appointment, and then informs the other party of the arbitration process (ibid. Article 3). Should the appointment of arbitrators fall to the CAC, it invites the parties to witness the public, random selection of arbitrators from the CAC’s list (ibid. Article 4). Otherwise, if the parties have reserved the right to select the arbitrators 86 Ministry of Interior and Justice 2007b, Correspondence (Oficio) OF107-DAJ-0500. 156 themselves, the CAC invites the parties to carry out this process as it is established in the arbitral agreement (ibid. Article 5). The next step is to inform the arbitrators of their selection; they must accept within 5 days following the notification (ibid. Article 6). The parties have the right to challenge arbitrators for legitimate causes. 87 The party has 5 days to act since the day she or he knows of the cause. The arbitrator is then notified and has 5 days to respond, accepting or denying the motive. The replacement of arbitrator, when needed, is done within 5 days by the appropriate party or by a district civil judge (Juez civil del circuito) (ibid. Article 7) Now the Arbitration Tribunal is ready. The CAC invites the parties and the arbitrators to the tribunal’s installation hearing. In this hearing, the tribunal selects its president and secretary, chooses its location, and decide on arbitrators’ and secretary’s salaries and other administrative expenses (ibid. Article 8). Serving Notice of the Demand, Third Party Intervention, and Conciliation Hearing After the respective payments are made, the tribunal then decides on its competency, the admission or dismissal of the arbitration request. The only legal resource admissible against the decision is an appeal of reversal (recurso de reposición) 88 or reconsideration, which is decided immediately in the same hearing by the tribunal (ibid. Article 9). Next, the admission of the arbitration request (or case) is served to the defendant, who will have between 10 to 30 days to reply and interpose his or her legal 87 For instance, an arbitrator’s close relative has some interest in the arbitration case; an arbitrator’s close relative heard the case previously in another legal forum; an arbitrator gives advice outside legal proceedings to one of the parties; a close relationship between an arbitrator and a party is developed; among others (Presidencia de Colombia 1970, Article 150 of the Code of Civil Procedure). 88 Through the appeal of reversal (recurso of reposición) you ask the tribunal to review a former decision. The court to resolve your claim is the same one that formerly admitted or denied your application. 157 claims, which can include a counterclaim (demanda de reconvención). 89 There is no third party intervention because of the limitation of the arbitral agreement to the two original signatories (ibid. Article 9, Paragraph 2). That is, since the arbitral agreement only has legal force over the signing parties, affected third parties must argue their case within another legal venue. After the resource of reversal and the counterclaim are decided, a conciliation hearing takes place. This hearing tries to bring the parties to an agreement on part or all of their claims. Once agreement has been reached on all of the issues, the arbitration process ends (ibid. Article 10). 90 When disagreement continues, during the same hearing the arbitration tribunal moves into the first hearing process (audiencia de trámite) and decides which of the evidence submitted is admissible and when it will be heard (ibid. Article 13). Duration of the Arbitration All arbitration proceedings will last the time decided by the parties in the arbitral agreement. However, if nothing was stated in the agreement, the arbitration will last no longer than 6 months from the date of the first mandatory or binding hearing (audiencia de trámite). Postponements cannot take the case beyond the timeframe established by the parties or past 6 months (ibid. Article 14). To expedite the process, notifications and the 89 For more details on a lawsuit’s admission, service of process and reply see the Code of Civil Procedure, Articles 428 to 430 (Presidencia de Colombia 1970). 90 For complete proceedings of the conciliation hearing see Code of Civil Procedure, Article 432 (Presidencia de Colombia 1970). 158 communication (serving) of acts and decisions to the parties (notificaciones y traslados) 91 does not need to take place in a hearing; these can be served through the secretary of the tribunal (ibid. Article 15). Furthermore, notifications of any legal action in the proceedings can validly and legally be done by electronic mail (ibid. Article 16). Article 15 of the CAC’s procedural rules states that the other parts of the arbitration process will be governed by standing legal norms. These legal norms are found in the Statute of Alternative Dispute Resolution Mechanisms --Estatuto de los Mecanismos Alternativos de Solución de Conflictos-- (Presidencia de Colombia 1998, Decree 1818). Evidentiary Hearings and Preventive Measures The requested evidence by the parties will be assessed in the scheduled hearings. The tribunal’s decision on admitting evidence cannot be contested. Decisions declining evidence can be appealed and reversed (Recurso de reposición) (Presidencia de Colombia 1998, Decree 1818, Article 151). The kind of evidence that can be introduced is: both private and public documents; scientific, technical or artistic studies; third party affidavits; and a party’s written declaration (ibid. Article 155 and Presidencia de Colombia 1991, Decree 2651, Articles 21 and 23). The parties to the arbitration process can request preventive measures 92 (Medidas cautelares) such as the registration of the 91 In the civil law tradition, as it is the case of Colombia, notifications and servicing is the legal way to communicate acts and decisions by written document. This provides the possibility for the parties to have all the relevant information -- characteristic of a fair trial. 92 Preventive or precautionary measures are procedures whose purpose is to guarantee the effects of the proceeding (of the arbitration in our case) concerning the security of property or of obligations to give, to do, or not to do a specific thing (Organization of American States 1979, Inter-American Convention on Execution of Preventive Measures). Colombia ratified the Convention on December 29, 1986. 159 arbitration process and preventive holding of movable property (Secuestro de bienes muebles) (Presidencia de Colombia 1998, Decree 1818, Article 152). Decision Hearing Once these preparatory steps have been concluded, there is a hearing wherein the parties have up to an hour each to argue their case. Then the tribunal decides on a date and time for a decision hearing. In the decision hearing, the secretary reads the most relevant considerations and the decisions. Each party receives a copy of the arbitral award, which lists the arbitration expenses and any other monetary obligation (ibid. Article 154). Arbitral Award and Appeal There is no need for consensus in the award. The decision is that of the majority of the tribunal. The disagreeing arbitrator writes the reasons for her or his disagreement (Salvamento de voto), but she or he still must sign the award (ibid. Article 158). The tribunal can clarify, correct and increase the arbitral award or the parties can request the tribunal to do so within 5 days of the decision (ibid. Article 160). The arbitral award is final and binding on the parties. It may only be annulled by a court on the grounds provided in the Statute of Alternative Dispute Resolution Mechanisms (Estatuto de los Mecanismos Alternativos de Solución de Conflictos) (Presidencia de Colombia 1998, Decree 1818). The reasons for nullification are: 1) Awards stemming from an illicit object or cause; 160 2) Evidentiary irregularities without legal merit, including cases that have been previously and opportunely argued; 93 3) Decisions evidently based on principles of fairness or equity (decisiones en conciencia) when the type of arbitration is legal; 4) Awards rendered after the term of the tribunal has passed; 5) Arithmetic mistakes or contradictions in the decisions that had been opportunely argued before the tribunal; 6) The tribunal was not integrated according to the established procedures - if this was argued in the first binding hearing (audiencia de trámite); 7) The award includes issues not submitted to arbitration; 8) There was no decision on issues submitted to arbitration. It should be pointed out that parties can claim the total or partial award annulment based on reasons 2 to 8, if they had already argued the motive during the proceeding and the situation was not corrected or validated (ibid. Article 163). Thus, Colombian law does not provide any appeal process against the arbitral award other than its total or partial annulment. The losing party can appeal only in a few circumstances: if the agreement to arbitrate is void or invalid, if the arbitrator has exceeded her or his power, or if the arbitration process has not been conducted according to a fair procedure. In general, neither a claim that the arbitrator has misinterpreted the facts, nor evidence that he or she has not followed the law invoked in the proceedings are grounds for appeal. In practice, this gives the arbitrator wide leeway in the choice of the principles inspiring the award. 93 The interested party should have argued her or his case within the terms during the arbitration proceedings. 161 Enforcement of the Award Once the arbitrator has rendered the award and it is final, 94 if the loser does not comply voluntarily, the winning party can have the award declared enforceable by the courts. The courts limit themselves to a purely formal role. They verify that an agreement to arbitrate exists, that the appointment of the arbitrator has been made according to such an agreement, and that the award satisfies the formal requirements established by Colombian law. As explained earlier, the definitive decision reached by the arbitration tribunal has the same characteristics of a judicial sentence, as it is a declaration of legal certainty (Colombian Constitutional Court 1991, Sentence No. 42/1991). Consequently the arbitral award is one of those documents described and mentioned as enforceable documents (titulo ejecutivo) in Article 488 of the Colombian Code of Civil Procedure: “EXECUTABLE TITLES. It is possible to demand the execution of expressed, clear, and recoverable obligations...that come from a sentence of a judge or tribunal of any jurisdiction, or from another judicial decision that has executable force according to the law.” 95 (Presidencia de Colombia 1970). It is internationally established that arbitration awards be recognized as binding and be enforced in accordance with the rules of procedure in the territory where the award 94 The award becomes final after it is no longer open to appeal and when any proceedings for the purpose of contesting the validity of the award are no longer pending. 95 Author’s translation. “TITULOS EJECUTIVOS. Pueden demandarse ejecutivamente las obligaciones expresas, claras y exigibles...que emanen de sentencia de condena proferida por un juez o tribunal de cualquier jurisdicción, o de otra providencia judicial que tenga fuerza ejecutiva conforme a la ley...” 162 was decided upon. 96 In Colombia, the court system is the institution responsible for enforcing the explicit, clear, and demandable 97 obligations written into the award (Presidencia de Colombia 1989, Decree 2279, Article 40 and Colombian Congress 1991, Law 23, Article 40). The laws governing award enforcement are found in the Code of Civil Procedure. 98 In synthesis, under Colombian legislation and the rules and procedures of the Center for Arbitration and Conciliation of Bogotá’s Chamber of Commerce, the Center shall: (1) decide if there appears to be a binding arbitration agreement under which the CAC is authorized to act; (2) decide whether there should be one or three arbitrators, if the parties have not specified the number; (3) appoint arbitrators in accordance with CAC rules; (4) determine the place of arbitration, if not already agreed upon by the parties; (5) set time limits for the arbitral tribunal if the parties have not stated them, and which in any case cannot be longer than 6 months; (6) review the draft of the arbitral tribunal's award; and (7) bill for fees and expenses of the arbitrators. At the same time, the arbitration tribunal: (1) selects a president and a secretary; (2) decides on the type of arbitration being requested; (3) serves notice to the parties; (4) orders evidence and conducts an evidentiary hearing; (5) decides the case; and (6) renders and registers the award. 96 Colombia is party to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), which it ratified on September 25th, 1979. 97 A recent complete explanation of these legal terms are found in Colombian Council of State (Consejo de Estado) Expedient No 30013 of March 15, 2006. See also Colombian Constitutional Court Sentence T-657- 06 of August 10, 2006. 98 For a detailed description of proceedings for the enforcement of awards (and, in general, sentences and other executable titles) see Articles 488 to 543 in the Colombian Code of Civil Procedure (Presidencia de Colombia 1970). This is the procedure followed for the enforcement of any international arbitration award. 163 The enforcement of the award is left to the national courts. Although arbitral awards produce the same effects as a court decision, it needs state support to enforce a finding against a party unwilling to fulfill obligations under the award. Conclusions The purposes of this chapter are several. The first objective is to bring to light the recent entrance onto the international stage of alternative dispute resolution mechanisms, ADRMs. The use of arbitration in commercial controversies is not exclusive to Colombia nor it is unique for developing economies to rely upon this venue. Although far from a new institution, private commercial arbitration has acquired new relevance in the economic context of export-led development models, globalized economic relations, and within debates on the role of domestic legal institutions in easing the context for doing business and in attracting investments. While this is an international trend, national particularities also influence the use of arbitration. The second objective is to establish the need for and importance of more precise knowledge about the constitutional and legal status of arbitration in Colombia. Here, I have tried to transcend those international rankings that create indices based on very thin data. In fact, such rankings overlook the need to explore the commitment of the Colombian state and private sector in the use of alternative dispute resolution mechanisms and market friendly legal institutions like arbitration. Colombia’s commitment to arbitration is seen in the promulgation of laws by both Congress and the executive and the recurrent constitutional support given to ADRMs by the Constitutional Court when deciding on cases of unconstitutionality surrounding laws on ADRMs. 164 Private sector commitment is seen in the well-functioning arbitration centers such as the one under the umbrella of the Bogotá Chamber of Commerce. Another purpose is to present complete information on arbitration in Colombia by examining the stipulations for arbitration procedures according to Colombian law. More specifically, I bring this story to life by using the Center of Arbitration and Conciliation of the Bogotá Chamber of Commerce as a case in point. Hence, my detailed presentation of the actual legal setting that investors face when pursuing an end to commercial controversies through arbitration. Little can be said about the advantages and disadvantages of a given institution without explicit knowledge of it. My expectation is that this analysis illuminates on the inner institutional local of ADRMs, while also pinpointing what works and what doesn’t for investors. How do the specific steps involved in the arbitration process influence investors to make decisions in favor of arbitration? The following chapters will examine this very question about the preferences of economic actors regarding alternative means for settling disputes. 165 Chapter 5 Empirical Research: Examining Colombian Private Commercial Arbitration As for all my despicable, unethical, immoral, treacherous, sleazy conduct. They called me everything but a terrorist, didn’t they? This business is not an ethical arena! Our legal system is adversarial by nature. Where it is often the very function of a lawyer’s job to prevent the truth from ever coming out. We get paid to suppress, and squash and conceal evidence [...] Every first year law student is taught don’t ever, ever equate legal ethic with morality. They’re almost always mutually exclusive! It’s an ugly world where underhandedness is often celebrated [...] I’m just an unscrupulous guy, trying to get by in an unscrupulous profession. Alan Shore (Fictional character in the TV Show The Practice) 99 One of the main shortcomings of the case-study method is the limits of generalizability to other contexts. In this study, this shortcoming is mitigated in two ways. First, as noted in Chapter 4, Colombian leadership and experience with arbitration has already provided a model that has been widely replicated in other Latin American countries. 100 Second, use of a single case study can be strengthened by examining numerous within-case units that can also be found in other contexts. The within-case study unit of analysis utilized here consists of 112 actual arbitration cases heard before the Center for Arbitration and Conciliation (CAC), of Bogotá Chamber of Commerce, between 1985 and 2007. Although I came across arbitration cases that date back to 1958 in the process of gathering data, these were excluded from this study for two main reasons: 1) most of the 99 Season 8, Episode 18. The Case Against Alan Shore. First aired March 28, 2004. 100 Paul Constance, writer of IDB América, the magazine of the Inter-American Bank, in writing about a particular case notes that “[The] case was just one of thousands that are resolved through alternative dispute resolution (ADR) methods each year in Colombia. With more than 120 arbitration centers across the country, and hundreds of trained conciliators and arbitrators, Colombia is a leader in this area, offering companies and consumers a speedy and efficient way to resolve disputes without going to court” (1998, n.p). 166 omitted cases had the Colombian State as one of the parties to the dispute; and, 2) they were not heard before the CAC. 101 Moreover, there were many more arbitration tribunals conducted by the CAC between 1983 and 2007 than those included in this study. After initial review, only those cases that complied with specific selection criteria (see below) were included in my research. My previous analysis of the mainstream approach to understanding the relationship between legal institutions and economic interests (see Chapter 2) revealed that the ranking of institutions according to international indices is not sufficient for fully comprehending this interconnection. The following suggests how recent scholarship has begun to question this quantitative approach: These different rule-of-law and legal institutions indicators measure different facets of a country’s legal system and are less tightly correlated than might be thought. Moreover, these measures are not closely correlated with some of the institutions deemed central to the rule of law [... These] problems are not trivial; prominent empirical findings might not be robust to alternative specifications using different rule-of-law measures (Haggard, MacIntyre, and Tiede 2008, 206). The vague and general definition of legal institutions utilized in the indices approach may serve its purposes. However, it offers little insights into how to design legal institutions that could better support economic development and growth, as well as the kinds of policies that would be conducive to institutional development within a specific context. In other words, the lax definition of legal institutions and the rather generic institutional labels used by international indices simplify law and economics to a degree that: 1) constitutional, statutory, criminal, commercial, administrative, substantive, procedural law, etc. are treated as one and the same; 2) all the complex sub-fields of law 101 The Bogotá Chamber of Commerce launched its arbitration and conciliation center in 1983. 167 have the same effect on economic interactions; 3) there are economies either with or without appropriate legal institutions as a whole; 4) there are no expectations for private investments when the legal framework (as a whole) is considered deficient; 5) the only institutional policy options are those from the “institutional reform manual” recommended by this same dominant approach, regardless of the host environment; 6) legal institutions are reduced to the regulatory powers of the state. This simplification may overlook successful institutional arrangements and discourage more precise studies of the relationship between economic interests and legal institutions. Studies that address a particular legal field may contribute to a better understanding of the complexity of the legal sphere and its dynamic within the economic sphere. Consequently, the main objective of this chapter is to contribute to a better understanding of the relationship between legal institutions and private economic interests by focusing on a specific subset of market contracts: commercial contracts; and particularly on their dispute governing structure: arbitration. In most cases, an arbitration clause is integral part of the contract. Long ago, Ronald Coase underlined the importance of contracts. Along with firms, he recognized that contracts were a major method of organizing business interactions (Coase 1937). 102 Thus, arbitration is a contract right in itself. Arbitration clauses may be seen as clear evidence of the contracting parties’ mutual interest in reducing the costs of resolving contract disputes. The costs of resolving 102 The choice between a firm and a contract to organize economic exchanges depends upon their comparative costs. That is, transaction costs determine which economic activities are carried out by business associations internally and which economic activities are left to the market, where contracting necessarily occurs. 168 contract disputes are part of transaction costs (Dahlman 1979). 103 Furthermore, cost reduction is one of the functions of contracts (Poster 1998). 104 This analysis will profile the users of alternative dispute resolution mechanisms, the business interactions they are part of, the type of controversies that arise, the legal solutions they pursue, the costs of arbitration, and ultimately, the recent demand trend for use of this mechanism to settle differences. Each of these elements sheds light on the interaction between law and economics and may help to explain the presence of international economic actors (investors) in the Colombian economy despite the low ranking of scores on its legal institutions found within the international indices reviewed in Chapter 2. Indeed, the presence of foreign parties actively participating in private commercial arbitration would seem to undermine cross-national findings that project a malfunctioning of market friendly legal institutions in Colombia. 105 According to the indices, in countries with low scoring legal institutions we should not expect major business interactions, let alone contracts involving foreign capital. This hypothesis will be tested using the arbitration data. The presence of 103 Dahlman organizes transaction costs into three sets: research and information costs, bargaining and decision costs, policing and enforcement costs (1979). The third set refers to the costs the contracting parties undertake to make sure obligations are performed, and that controversies are resolved, when obligations are not met. Contract writing and commercial arbitration are examples of each respective situation. 104 Poster states, “[C]ontract law has five distinctive economic functions: 1) to prevent opportunism, 2) to interpolate efficient terms, 3) to prevent avoidable mistakes in the contracting process, 4) to allocate risk to the superior risk bearer, and 5) to reduce to costs of resolving contract disputes” (1998, 108). 105 One has to ponder the reasons behind investors’ negative perceptions of legal institutions for most emerging economies. How much can these perceptions be explained by the framing of the questions? How many respondents have had personal negative experiences with some aspect of the legal system? Do respondents purposely foster a negative perception in order to sustain their ability to keep pressuring for domestic changes in their favor? Are responses driven by fad-like “truths” within the business community? How many respondents have actual knowledge and understanding of the relevance of law for their investments? As Messick argues: “ [P]erceptions can deceive. We remember the unusual, not the ordinary. The one in 100 cases that was sensational. Not the 99 other that were run of the mill” (2002, 8). 169 international businesses in commercial arbitration, if found, should be considered indicative of the robustness of Colombian legal commercial private institutions. Moreover, the inappropriateness of the definition and understanding of legal institutions in the international indices would be confirmed. In turn, a secondary hypothesis emerges: the functioning of private commercial arbitration, would show the successful coexistence of private mechanisms along side public ones. Should these two institutions coexist, it would indicate that a new relationship between law and economics has been formed at the structural level in Colombia. In this new relationship, private initiative plays a more central role in resolving contract disputes. To examine these hypotheses I focus on the legal institutional structure surrounding contractual relations, which means that the analysis belongs to the field often referred to as “institutional economics” as well as to the field of law and economics. 106 The field research for this chapter was intensive. After several months of gathering, selecting, and refining the data, I compiled 112 arbitration tribunals that complied with the following six criteria: 1) The case was held before the Center for Arbitration and Conciliation, CAC, of the Bogotá Chamber of Commerce. The case follows the Center’s arbitration 106 My analysis is not restricted by the formal assumptions of rationality and incentives that defines the new institutionalism and (new) law and economics. That is to say, it is not centrally concerned with rational actors and efficient outcomes. My main purpose is to understand the interplay between law and economics in the context of private commercial arbitration. In other words, I do not view the resort to commercial arbitration as an expression of maximizing behavior by the litigants. The prevalence or increased acceptance of ADRMs takes place in a globalized socio-economic context mediated by policy reforms. This is the institutional context I examine, together with decisions and commitments. In this sense, this study fits more closely with older schools of thought on institutionalism, or what is called “institutional political economy.” Since “law and economics” refers to a different scholarly debate, a new name is needed, such as the “political economy of law” or a “political-economic analysis of law.” 170 procedures, that is, the arbitration is institutional. 107 The CAC 108 is recognized as professional, modern and an exemplary arbitration center for the region. Its internal organization and its arbitration process have been replicated in many Latin American countries (IDB 2002). 2) Arbitration proceedings are en derecho (arbitration in law) as opposed to arbitration en equidad (equity or fairness) or technical arbitration (arbitramento técnico). 109 Arbitration in law means that the arbitrators are lawyers, attorneys represent the parties, and the tribunal follows current law. 110 3) Arbitration is private as opposed to public. This means that the parties to the dispute are private entities. In other words, arbitration cases with the state (or its officials in their role as public agents) are not part of this study. 4) The conflict to be resolved is commercial in nature, as opposed to civil, family, administrative, etc. In these cases, the parties to the controversy are merchants or the relationship that generated the conflict was a commercial (business) transaction, or both. Consequently, the body of law applicable to the relationship is commercial law, which is found in the Código de Comercio. 111 107 Institutional arbitration follows the rules of a given institution and uses its arbitrators and facilities. See Chapter 4 (pp. 150-153) for explanation of how institutional arbitration contrasts with independent and legal arbitration. 108 The Center for Arbitration and Conciliation, founded in 1983, was the first center in Colombia promoting the contemporary use of alternative dispute resolution mechanisms (http://www.cacccb.org.co/). 109 Cases of equity and technical arbitration were not present in the original data set. 110 Article 115 of Decree 1818 of 1998. Diario Oficial No. 43.380. September 7, 1998. 111 In the United Sates, this unified body of Colombian commercial law has its counterpart in the Uniform Commercial Code of the American Law Institute and the National Conference of Commissioners on Uniform State Laws. 171 5) The parties to the economic interaction relied on relatively well defined contracts to guide the transfer of private property rights (Werin 2003). 112 6) The parties’ obligations under the contract have a sequential character of performance. That is, the fulfillment of obligations does not occur simultaneously. In his book Economic Analysis of Law, Richard Poster distinguishes between economic interactions in which performance takes place without legal intervention, and economic exchanges that require legal intervention to oversee performance. The former happen simultaneously, with no contract. The latter are implemented sequentially and require a contract to deal with opportunistic behaviors and unforeseen contingencies that occur during the process of exchange (1998). Together, these six elements permit me to categorize a controversy as a private commercial legal arbitration tribunal held before the CAC of the Bogotá Chamber of Commerce. Once the 112 cases were selected, I summarized each one into a manageable document for coding, including all the elements needed for analysis. Original case files ranged from 300 to over 1,000 pages. The summarized documents ranged from 15 to 25 pages. Next, the summarized documents were prepared to be analyzed using Atlas.ti, a computer software application designed to aide the systematic, qualitative analysis of large volumes of text or multimedia data. Use of computer software like Atlas.ti requires the creation of a codebook composed of a list of codes 113 and their definitions. The codes encapsulate the 112 Property rights establish the legal owner of a resource and specify the way in which the resource may be used. Private property, specifically, is owned by individuals who decide on its use according to legal parameters. One of its uses is transfer or exchange. 172 information I expected to find in each of the arbitration cases that would permit cross- case analysis, comparison and contrast. That is, my codebook was determined by my research questions and the theoretical analyses advanced in Chapters 1-4. Once I created the codebook 114 I coded the data by re-reading the cases, marking segments of the text, and assigning the pre-defined numerical codes to them. The Codebook The codebook for this study consisted of the following seven categorizations: 1) parties to the arbitration, 2) commercial transaction, 3) legal pretensions and defense mechanisms, 4) length of the arbitration process, 5) means of proof/evidence, 6) arbitration cost in dollars, and 7) chronology of arbitration cases by year. There are several codes in each category. 1) Parties to the arbitration. This set of codes gives information about the plaintiff and the defendant. It includes the economic sector of the companies, based on stage in production chain and on type of product. It also distinguishes between domestic and foreign businesses as well as their size, based on their assets. 115 In short, these codes help to define the profile of the investors using arbitration. 113 For a comprehensive code list see Appendix D. 114 See the complete codebook in Appendix E. 115 Colombian Law 905 of 2004 defines size of companies based on assets and number of employees. The monthly current minimum salary (SMMV, acronym in Spanish) is the uniform reference used to determine the asset value. For instance, medium size companies have assets valued between 5,001 SMMV and 30,000 SMMV. In 2007, according to the Bogotá Chamber of Commerce, large companies were those with assets over CP$14,421 million of Colombian pesos, and medium size companies had assets over CP$2,040 million (Cámara de Comercio de Bogotá 2006, 2008). These amounts correspond approximately to US$6,383,798 and US$903,054, respectively, utilizing Banco de la República US dollar-Colombian peso exchange rate 2,259.72 from January 2007 (www.banrep.gov.co). 173 2) Commercial transaction. The codes in this group relate to the business endeavor between plaintiff and defendant that gave origin to the controversy. They identify the type of legal contract the contracting parties are part of and the length of the relationship; they differentiate between sporadic and recurrent transactions, pinpoint the occurrence of the conflict within the performance of contractual obligations, and determine the effect of the controversy on the continuity of the business relation. In brief, these codes provide the profile of the controversies submitted to arbitration. 3) Legal pretensions and defense mechanisms. This group of codes captures the parties’ legal objectives within the arbitration tribunal; that is, what the subjects to the controversy ask the arbitrators to decide in their favor. Pretensions and defense resources are based on each party’s particular account of contracted performance of obligations. In general, pretensions and defenses fall in one or more of three clusters: contract interpretation, contract implementation, and contract termination. Thus, this category is a snapshot of the legal strategy of the parties to the dispute. 4) Length of the arbitration process. These codes establish the duration in months for each arbitration process from the day the plaintiff requests the arbitration tribunal be set up until the decision hearing. Data on the length of the process is divided in the pre-arbitral and the arbitral phase. The former begins with the initial request and ends at the date of the first arbitral hearing. It does not have a legally mandated timeframe. The arbitral phase covers the time from the ending date of the first arbitration hearing to the date of the last hearing, the decision 174 hearing. Colombian law establishes a maximum period of 6 months for this phase, outside of interruptions, suspensions, and extensions mutually agreed upon by the parties (Presidencia de Colombia 1989, Art. 19, Decree 2279 of 1989 and Colombian Congress 1991, Art. 103, Law 23 of 1991). The codes also account for the time the arbitration process is extended when the parties exercise their procedural rights. In conclusion, this set of codes shows the actual duration of private commercial arbitration, and very importantly, the degree of parties protagonistic role in the process as illustrated by mutually agreeing on extending the time limits of the proceedings. To some extent parties run the proceedings. 5) Means of proof or evidence requested. As the title indicates, this cluster of codes identifies the type of evidence the parties and/or the arbitrators request and is practiced in the process. Particular attention is given to the use of expert witnesses (peritos). The absence of a discovery phase and the very precise time within which to petition evidence makes these proceedings move quickly. 6) Arbitration in dollars. A dollar-value is assigned to three elements in the arbitration process: 1) the dispute, 2) the cost of the arbitration tribunal, and 3) the arbitral award. Most of these values are originally expressed in Colombian pesos. I converted the sums into U.S. dollars using Colombia Central Bank (Banco de la República) exchange rate data. These codes also identify the distribution of the arbitration cost between the parties in the process, which assists in determining not only winners and losers, but also their legal behavior during the process. In short, these codes provide the monetary value and costs of the cases. 175 7) Chronology of arbitration cases by years. The arbitration cases are presented by year and also grouped in periods of five years, to allows for tracking the demand for arbitration historically. Examining the Use of Commercial Arbitration in Colombia One of the functions of the judicial system is to resolve disputes in a peaceful and fair fashion. In Colombia there are two main coexisting venues for people to seek resolution of their commercial controversies: a court of justice under the domain of the state or alternative resolution mechanisms under the umbrella of private or public institutions. Arbitration tribunals are part of the latter. 116 In the next section I explore the following questions: What do arbitration proceedings tell us about the consumers of private commercial arbitration in Colombia? Are there any commonalities among them? Can inferences be drawn about investors’ preferences for arbitration based on their profile? How welcoming is Colombian arbitration to international investors? How accepted is Colombian arbitration among foreign investors? The answers to these questions are examined in the order of the coding categorizes presented above. 116 For a review of the characteristics of alternative dispute resolution mechanisms, in general, and arbitration in particular, see Chapter 3. See Chapter 4 for the political and legal framework for alternative methods in Colombia, with special emphasis on arbitration. 176 A. The Profile of Arbitration Users Classification of Users by Economic Sector The economic sector provides the initial characteristic of the parties preferring alternative methods to resolve commercial disputes. Based on the main economic activity of each business firm, these are first grouped into three broad economic sector classifications: primary, secondary, and tertiary. Economic enterprises directly related to the exploitation of natural resources are part of the primary sector. Mining, forestry, agriculture are included here. The secondary sector refers to economic activities involved in the production of goods. Construction and the production of energy are sample activities. This sector is commonly called the manufacturing sector. Activities related to the tertiary or service sector include banking, retail, insurance, transportation, professional assistance, and information. Of the 224 principal 117 parties involved in the arbitration cases, 124 conduct economic activities dominantly in the tertiary or service sector. The array of productive enterprises encompasses transportation, warehousing, retail and whole sale, different professional services, finance, insurance, entertainment, etc. From the secondary or manufacturing sector there were 84 litigants. Construction and light and heavy industry dominate here. Finally, just 16 arbitration parties are part of the primary sector with all but one of these belonging to the petroleum industry, with the former registered as a coal mining company. 117 I say principal parties because in some cases more than one investor was either the plaintiff or the defendant. The complete list of arbitration cases is included in Appendix F. 177 Figure 18. Parties by Economic Sector 7% 38% 55% Primary Secondary Tertiary Below, these broad classifications are used to identify the economic transaction at the core of the legal dispute. Note that the percentages of firms involved in commercial arbitration by sector closely matches the actual sectoral composition of gross domestic product. Colombia’s 2006 GDP, according to the World Bank, consists of agricultural activities (12.1%), industrial production (33.6%), and services (54.3%). Table 27. Percent of GDP by Economic Sector, Colombia Economic Activity 1980 1990 2000 2006 Agriculture 19.9 16.7 14.0 12.1 Industry 32.5 37.9 30.3 33.6 Services 47.6 45.4 55.6 54.3 GDP (US$ Millions) 33,400 40,274 83,779 135,836 Source: World Bank. Data and Statistics: nd. (http://www.worldbank.org/) These numbers show a shift of economic activity from the primary sector to the tertiary sector, a trend also reflected in the demand for and use of arbitration in Colombia. This may be evidence of generalized acceptance of and support for arbitration in 178 particular and ADRMs in general by the private sector in Colombia, given the concentration of cases in the largest sector. This trend highlights the role for arbitration (see Chapter 4) as a revitalized and actualized means to settle business disputes in a very interdependent global economy (Buhring-Uhle 2006, Lynch 2003, Robe 1997, Teubner 1997). A second classification by economic sector was conducted by filtering the users of arbitration according to the North American Industry Classification System (NAICS). 118 This grouping is not only more detailed, it also follows the pattern of current globalized economic relations. Among the cases analyzed, parties to arbitration come from 14 of the 20 economic sectors within NAICS: Agriculture, forestry, fishing, and hunting; Mining; Utilities; Construction; Manufacturing; Wholesale trade; Retail trade; Transportation and warehousing; Finance and insurance; Real estate and rental and leasing; Professional, scientific, and technical services; Administrative and support and waste management nd remediation services; Arts, entertainment, and recreation; and Other services (except Public Administration). 118 Adopted in 1997, NAICS was devised by the U.S. Economic Classification Policy Committee in conjunction with Statistics Canada and the Instituto Nacional de Estadística, Geografia e Informática of Mexico, and is the standard classification system for businesses throughout the continent of North America. This system replaced the Standard Industrial Classification (SIC) System (US Census Bureau 2007). 179 Table 28. Arbitration Users according to the North American Industry Classification System Economic Sector Number of Parties (%) Agriculture, Forestry, Fishing and Hunting 1 Mining , Quarrying, and Oil and Gas Extraction 16 Utilities 7 Construction 29 Manufacturing 38 Wholesale Trade 15 Retail Trade 26 Transportation and Warehousing 21 Information 21 Finance and Insurance 17 Real Estate and Rental and Leasing 8 Professional, Scientific, and Technical Services 15 Administrative and Support and Waste Management 4 Health Care and Social Assistance 1 Arts, Entertainment, and Recreation 4 Other Services (except Public Administration) 1 Total 224 (100%) Are All Users of Arbitration Colombian Nationals? This classification identifies litigants as domestic or foreigners. The distinctive element is whether the company does or does not have legal and economic ties with international investors. The concern is not about the extent and specificity of the legal and economic relationship, nor it is about the concrete legal position of the international company’s investment in the Colombian market. 119 Neither is the volume of the economic enterprise important here. The decisive feature is any indication that part of the 119 The main options a firm has to enter a foreign market include exports, foreign direct investment, and contracting (Root 1998). 180 litigants’ profits from their economic activity does not enter the measurement of Colombia’s gross national product. In other words, part of their profits is included in the gross national product 120 of another economy. In the 112 arbitral tribunals studied, 68 121 of the conflicting parties were companies with clear legal and economic ties with foreign investors. They represent a very significant 30% of arbitration users. 122 The economic interests of the foreign parties in arbitration tribunals are rooted in different modes of entry into the Colombian economy: by direct trade, 123 foreign direct investment, 124 franchising, 125 and joint venture. 126 The foreign parties to arbitration are from the United States, Japan, Italy, France, Spain, México, Panamá, Korea, and Brazil, among other countries. As will be shown later, in some disputes both parties were foreigners. 120 Gross national product (GNP) is the total monetary value of goods and services produced in a year by the nationals, or residents, of a country. It includes income that nationals earn abroad, but does not include income earned within a country by foreigners. It differs from gross domestic product (GDP), which is the total monetary value of all goods and services produced domestically by a country. GDP includes income earned domestically by foreigners, but does not include income earned by domestic residents on foreign ground. In other words, the GNP is made up of the GDP, plus any income earned by residents from overseas investments, minus income earned within the domestic economy by overseas residents. 121 This number only refers to legal parties or litigants taken as one party. Consequently, the actual number of foreign companies directly or indirectly involved in arbitration proceedings is higher. For a complete list of international investors appealing to private commercial arbitration in Colombia see Appendix G. 122 This high participation of foreign firms in arbitration proceedings in Colombia should not be surprising. In a 2005 study of domestic and foreign firms in Colombia, Rowland established that 602 firms, out of 3,452 total firms, have some form of foreign ownership. Furthermore, firms with foreign ownership accounted for almost half of the total assets of all the firms, 48.6% (Rowland 2005). 123 Some examples are: Tracey & Co. S.A, Curacao Harbour Towing & Service Co., System Software Associates Inc., Transportation Maritima Mexicana (Cases in my files). 124 Examples include: Dupont de Colombia S.A,The Chase Manhattan Bank, Mitsui de Colombia S.A., Inversiones Petroleras S.A., Repsol Exploración S.A., B.M.G. Ariola de Colombia S.A, Hyundai Colombia Automotriz S.A., Exxonmobil de Colombia S.A. (Cases in my files). 125 For instance, Videcol (Blockbuster Inc.) (Case in my files). 126 For example, General Motors Colmotores S.A., Nortel Networks de Colombia, Francocolombiana de Construcción Ltda. (Cases in my files). 181 Figure 19. Foreign Participation in Arbitration Cases 70% 30% Domestic Foreign Table 29. Foreign Participation in Arbitration Cases Origin n (%) Domestic 156 (70) Foreign 68 (30) Total 224 (100) Size of Arbitration Users Based on Their Assets The Bogotá Chamber of Commerce divides companies into three groups according to their assets: large size companies are those with assets over Colombian pesos (COP) 14,421 million, medium size companies hold assets over COP 2,040 million, and small size companies have assets below COP 2,040 million. 127 The third characterization of commercial arbitration users in Colombia is based on this 127 This division follows Law 590 of 2000 and Law 905 of 2004, which define firms according to assets in the following manner: Small firms: total assets between 501 and less than 5,001 monthly minimum salaries. Medium firms: total assets between 5,001 and 30,000 monthly minimum salaries (Colombian Congress 2000, 2004). It is inferred that large firms have assets over 30,000 monthly minimum salaries. The sums cited are based on the monthly minimum salary in 2006, COP 408,700. 182 classification, but complemented with a fourth category: individual investors. Individual investors are not litigating on behalf of a company, they are individuals who are contracting and using arbitration to reach a settlement. Table 30. Size of Companies Using Arbitration Size n (%) Small 24 (11) Medium 41 (18) Large 144 (64) Individual Investors 15 (7) Total 224 (100) As seen in Table 30, large companies are the litigants in 144 of the 224 total examined, comprising a majority (64%) of the consumers of arbitration. Forty-one parties are medium size firms, and small companies and individual investors account for 24 (11%) and 15 (7%) of the counterparts, respectively. 183 Figure 20. Size of Companies Using Arbitration 11% 18% 64% 7% Small Medium Large Individual As seen in the above data, the classification of arbitration users into their respective economic sectors closely mimics the actual sectoral composition of Colombia’s GDP. For example, the high percentage of litigants with economic activities in the service sector matches the high percentage of the service sector in the productive structure of the economy. In this respect, users of arbitration are representative of the Colombian economy at large. Although the firms resorting to arbitration to settle their market economic disputes are mostly Colombian (70%), a high participation of foreign businesses is also evident. Thirty percent of litigants were non-Colombian investors or the firms represented have some form of foreign ownership. These percentages correspond to the number of firms. However, should a study based on the composition (domestic-foreign) of the value of the dispute be conducted, it is likely that the proportions/percentages will reassemble those of Rowland’s analysis on domestic and foreign firms in Colombia. He found that although foreign firms were 18% of total firms, 184 they accounted for almost half (49%) of the total assets of all firms (Rowland 2005). In other words, I expect that arbitration cases with the participation of foreigners would comprise at least 50% of the monetary value of all disputes brought to arbitration. Finally, the majority of the firms participating in arbitration are large firms (64%) with assets of more than 14,421 million COP. Thus, the distinctive characteristics of arbitration users in Colombia are: 1) they are representative of the productive structure; 2) the majority are Colombian but many of them are foreigners; and, 3) they are predominantly large firms. B. Profile of Commercial Transactions This section details the commercial relationship among entrepreneurs. First, it presents the legal typification of the economic exchange: the contract. Contracts are also grouped according to which economic sector the contractual obligations fall under. Second, it classifies the relationship according to its length (short, medium and long term), and according to whether the contractual obligations between the parties are performed in a single action or in recurrent actions. For instance, the purchase of a car is a single action transaction. On the other hand, obligations in commercial agency contracts are performed multiple times -- a recurrent transaction. 128 Third, it identifies the beginning of the conflict within the timeline of the business interaction (at the beginning, in the middle, or the end). Fourth, it tells what happens to the commercial relationship once the controversy is decided: whether it ends, continues, or had already ended. 128 For a discussion on contract rights and remedies in relation to the condition of simultaneity in obligations fulfillment see Poster (1998). 185 Type of Legal Contract In accordance with the case selection criteria for this study, all 112 arbitration tribunals were called to decide commercial disputes about contract rights and property rights originating from a legal contract signed between the disputants. As seen in Table 5, the types of legal contractual relations are diverse, as is their distribution. Table 31. Types of Legal Contract Type of Contract, English Type of Contract, Spanish n Affreightment Fletamento 1 Cession of Rights Cesión de Derechos 1 Commercial Agency Agencia Comercial 15 Concession Contract Conseción 4 Construction Obra 20 Distributorship Distribución 2 Idiosyncratic Innominado, Atípico 11 Insurance Seguro 2 International Financial Leasing Arrendamiento Financiero 1 Partnership Agreement Asociación 2 Power of Purchase Agreement 1 Promissory Sales Agreement Promesa de Compraventa 6 Purchase/Sale of goods Compraventa de Bienes 7 Purchase/Sale of services Compraventa de Servicios 14 Purchase/Sale Real State Compraventa de Finca Raiz 1 Real State Lease Agreement Arrendamiento inmobiliar 4 Supply Contract Suministro 9 Transportation/Shipping Transport 8 Transaction Contract Transacción 1 Turnkey Llave en mano 2 Total 112 186 Contract Obligations by Economic Sector The contractual obligations in dispute are organized following the North American Industry Classification System (NAICS). Earlier, I used NAICS to group the firms or the subjects to the contracts and disputes. Now I am using this classification scheme for the object of the dispute. This distinction is needed because companies conduct contractual relations in economic sectors outside the sector in which they operate. For instance, a bank, which belongs to the financial sector, contracts for the construction of a new building. This contractual obligation falls under the construction sector. Or a transportation firm, which belongs to the transportation sector, buys insurance. This contract falls in the finance and insurance sectors. Table 32. Content of Contractual Obligation Controversy by Economic Sector Sector for Contract Obligation n Agriculture, Forestry, Fishing, and Hunting 1 Mining 3 Utilities 3 Construction 22 Manufacturing 5 Wholesale Trade 26 Retail Trade 2 Transportation and Warehousing 13 Finance and Insurance 8 Real Estate and Rental and Leasing 10 Professional, Scientific, and Technical Services 10 Administrative and Support and Waste Management and Remediation Services 6 Arts, Entertainment, and Recreation 2 Other Services (except Public Administration) 1 Total 112 The highest number of contractual economic exchanges is in wholesale trade (n= 26, 23%), construction (n= 22, 20%), transportation and warehousing (n= 13, 12%) real 187 estate (n= 10, 9%), and professional services (n= 10, 9%). Together these account for 73% of the disputes. Length of Contractual Relations My central interest here is what the duration of business relations can tell us about the demand for arbitration to decide disputes. Some argue that the longer the contractual relation, the more likely it is for entrepreneurs to favor ADR over formal tribunals in order to preserve the business interactions, and possibly attract new ones, or at least not discourage new ones (Matti 2001, Broches 1995, Hunter et. al. 1993, Graving 1989, Scott 1987, Perlman and Nelson 1983). The duration of the business relation will be complemented with information about the future of the relationship once the arbitral award is produced (below) to gain a better overall understanding of the business relationship. For this study, short-term contractual interactions refer to those which existed for less than 1 year. Medium-term economic relations existed between 1 and 5 years. In long- term transactions, the parties have contracted with each other for more than 5 years. Table 33 lists the number of claims in each category and Figure 4 shows the percentage of cases by length of business relationship. Table 33. Length of Business Relationship Time Number of Claims Percent Less than 1 year 31 27% 1 to 5 years 52 47% More than 5 years 29 26% Total 112 100% 188 Figure 21. Length of Business Relationship 27% 47% 26% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Less than 1 year 1 to 5 years More than 5 years Percentage of Cases 27% 47% 26% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Less than 1 year 1 to 5 years More than 5 years Percentage of Cases As can be seen in Figure 21, there is a relatively even distribution of arbitration cases between short term and long term contracts. At the time they initiated arbitration proceedings, litigants had maintained economic interactions for less than 1 year in 31 claims and for over 5 years in 29 cases. In almost half of the disputes (47%), the litigants had economic exchanges between 1 and 5 years, or medium term contracts. Thus, evidence on short and long term contracts suggests that the length of the economic relation is not a strong determinant in a party’s decision to turn to arbitration to settle controversies. Put differently, parties in both short term and long term economic relationships equally include an arbitration clause in the contract regulating their obligations and rights. This may indicate that regardless of the expected duration of the contract - short, medium or long - economic agents are comfortable resolving disputes outside the traditional court system. Why might parties in all lengths of business relationship rely on arbitration? First, the benefits of arbitration (and/or the disadvantages of formal courts) apply to all 189 commercial transactions independent of their duration, and this is perceived by the parties. This is in tune with Hammergren’s claim on her study of judicial reform, On a worldwide basis, large companies prefer not to take their conflicts to court, but rather to resolve them through arbitration [...T]his increases predictability for them because it means a stable set of rules. Domestic firms may use these same mechanisms [...]Even for them, courts are intrinsically too formal, too unspecialized, and too slow under the best of circumstances (n.d, 7). Second, by using arbitration regardless of the length of the contract, investors may be sending a positive message about their commitment to alternative institutions for governing economic rights and obligations. Thus, without considering the outcome of the dispute, parties keep their names in the pool of potential contractors. I assume that contract disputes are becoming more commonplace within a globalized economy. For this reason, being involved in a contract dispute may not be a blemish on an investor’s history, but his or her preferences as to the means to settle a dispute well may be. Appealing to arbitration (or avoiding litigation before the traditional courts) may be seen as an incentive to “stay in business.” Performance of Contract Obligations The source and performance of contractual obligations have two categorizations in this study. First, they can be the result of a sporadic and/or one time business relation. The fulfillment of obligations takes places within a specific time, although in some cases the time is unknown. One example from the data set is a contract to buy legal (lawyer) services 129 for a specific matter: legal case # 386137. It was sporadic because there is no 129 Arbitration case number 44 in my files. 190 permanent labor relationship nor is the lawyer in charge of other cases for this client. Furthermore, there is certainty about the end of the business transaction. It will end once the case is decided, 130 but the exact day of that event is unknown. Similar reasoning applies to the purchase of other goods and services contracts and to some transportation and construction contracts submitted to arbitration. 131 They all have a one-time economic exchange, but with different timelines depending on the object of the contract. For instance a turnkey contract in the study stipulates as the object of the contract “[T]he design, supply, transportation, installation, and other necessary works” of a large telecommunication structure (case number 8 in my files 132 ). This is a one-time business deal regardless of the complexity of the job and the time it takes to finish it. In the second category, obligations are carried out recurrently and/or there are multiple contracts between the same two parties. Here, the duration of the relationship is less certain, although the contract may have references to the duration of the economic transaction. Let’s look at the example of a commercial agency contract where the agent obligates himself to commercialize the principal’s products or services. The contract 130 Obviously, the business transaction could end by the firing, resignation or even death of the lawyer. These circumstances do not challenge the “one shot” characteristic of the contract. 131 Further clarification is required (and caution should be exercised) for the distinction between sporadic and recurrent contracts that do not relate to the type of contract. For instance, as in the case of the legal services mentioned above, contracting oil drilling services is a sporadic business relationship (case 67 in my files). Although the parties stipulated periodical payments, payments are for the same service. However, the contracting of professional services for “education, consultancy, installation, optimization, and control of projects related to all licensed software” (case 38 in the study) is of a recurrent nature. The same with construction contracts. Contracts for constructing a road (case 70 in the study), a building, or a bridge is a sporadic business relation. Yet, a construction contract whose objective is the “obligation to build ‘something’ based on the supply of iron by the periodic supply of iron” by the contracting party (case 62 in the study) is a recurrent economic exchange. 132 For a similar contract and situation see case number 36 in my files: “The constructor obligates himself to the company to execute with his own elements, means, materials, supplies, equipment, and personnel, in an independent manner, with full technical and administrative autonomy, until all the works are finished, the activities related to the construction, supply, fabrication, assembly, and setting up of a filtering plant.” 191 states that for 6 months it is “renewable for equal periods of time.” This contract might be extended for an uncertain numbers of years, which was the situation in most commercial agency contracts in the sample data. 133 In another scenario, the business relationship could develop through multiple contracts between the two same parties. This is the case, for instance, of a manufacturing company contracting the same transportation firm on a regular basis. Clearly, each delivery is independent, but the recurrence of the economic transaction is easily noted and its permanence uncertain. The question for this study is which of these two types of economic exchanges, sporadic or recurrent, are more prevalent in private arbitration? Approximately 2.5 more recurrent-multiple contractual relations than sporadic-one time exchanges are found in the data for this study. There are 79 (71% of 112 total cases) cases of recurrent-multiple contracts and 33 (29%) cases of sporadic-one time contracts. Figure 22. Contractual Obligations Performance Categorization Recurrent - Multiple 71% Sporadic - One-time Deal 29% 133 See for instance case numbers 9, 19, 48, 80, and 107, among others. 192 The data indicate that business relations with performance obligations spread out over multiple installments, or multiple actions between the parties are more likely to use arbitration to settle disputes than business relationships with more defined/precise/limited fulfillment of obligations. I could argue that recurrent/multiple actions are characteristic of more complex business transactions whose eventual conflictive scenarios are more difficult to capture in a contract. Thus many situations are left implicit and performance is highly likely to be contested. Alternatively, given the one-time character of sporadic contractual relations, parties may not “bother” to include an arbitration clause in their contracts and ultimately then settle more disputes before traditional courts. The terms of the contracts governing these interactions are more explicit and their enforcement is likely to be easier. This seems to ratify Drahozal and Hylon’s (1995) empirical findings about the determinants of arbitration in franchise contracts. They find that: [T]he probability of arbitration is significantly higher when the parties are likely to rely on implicit terms for governance and compliance with those terms is difficult to ensure [...] On the other hand, where contracts are clear and enforcement easy to obtain through the courts, the parties are unlikely to find a greater deterrence benefit under arbitration (Drahozal and Hylon 1995, 58). The possibility of drafting complete, dispute-proof contracts does not exist. Contrary to the neoclassical view of economics, human being are imperfectly rational as it is impossible for us to anticipate every possible event. Once transaction costs enter the picture (the drafting of contracts and the settlement of dispute being part of these), our bounded rationality makes it impossible to completely regulate through contracts the complexity of the context in which economic exchange take place (Simon 1957, 1987; 193 Williamson 1985). That is, bounded rationality prevents the drafting of all-encompassing contracts. 134 Another element that impedes conflict-free business relations is the human tendency to take advantage of given situations by hiding or distorting information, acting on preferences, and confusing the situations; in short, opportunistic behavior (Williamson 1975). Consequently, the rational expectation about contracts is that they are incomplete. However, this is not an argument to deter economic exchanges. It is still plausible for parties to recognize the intricacy of the economic transaction, the complexity of the context wherein obligations are performed and rights exercised, the limitations of writing contracts, and their own human nature, and at the same time to anticipate the presence of conflicts and the need to include a governing mechanism to address them. That is, investors are capable and now have the right to decide on the inclusion of arbitration clauses in contracts regulating their business dealings. The cases in this study show that the parties did indeed exercise this ability, especially in recurrent business transactions. Occurrence of the Conflict within the Timeline of the Business Interaction I estimated the moment that the controversy took place using three categories: 1) at the beginning: the conflict arose within the initial 1/3 of the contractual relation; 2) in the middle: differences are evident during the second third of the business interaction; and 3) at the end: the dispute happened within the last third of the economic exchange. 134 As will be discussed later, entrepreneurs not only face the impossibility of writing complete contracts for their investments. There are also instances where contracts fail to match the expected actions with the actual performance. This discrepancy is captured by the saying, “law on the books vs. law in practice,” or the terms “de jure” (based on the law or contract) and “de facto” (based on reality or actual practice). There are discrepancies between what the contract says an obligation or right is and how the materialization of those obligations or rights actually happens. 194 In the 112 commercial arbitration controversies examined, only one started at the beginning of the economic transaction. This was a 2003 contract to purchase/sell timber valued in COP 1,150,000,000. 135 The seller did not deliver the goods and the buyer requested the arbitration tribunal. 136 As see in Table 34, the conflict erupted in the middle of the economic relationship in 17 situations, and at the end in 94 of the transactions. Table 34. Time of the Conflict within the Economic Interaction Time n Percent Beginning 1 1% Middle 17 15% End 94 84% Total 112 100% Business Relations after Arbitration It has been argued that one of the reasons investors appeal to arbitration is to maintain the business relation by avoiding the more adversarial nature of a trial before a state tribunal (Bonn 1972, Mattli 2001). This study did not find any evidence to support that claim. The data reveals that only three business relations “survived” the dispute and arbitration. The base contract in two of the surviving cases was a power purchase agreement. 137 The need and the obligation to supply electricity to households may explain the continuity of the economic relation in these two cases. The third surviving case had a 135 This sum corresponds roughly to US $650,000.00 (2009). 136 See arbitration case number 82 in my files. 137 See cases 72 and 104 in my files. 195 transaction contract (contrato de transacción ). 138 However, the parties to this contract signed it as a means to end controversies between them regarding the control and ownership of various shared investments. Thus, the continuity of the relationship meant, in this case, an “agreement to end” their relationship. 139 In the remaining 109 arbitration cases, 21 business relations ended with the arbitral award, and 88 relationships had already ended before the arbitration tribunal was requested. Table 35. Effect of Arbitration on the State of the Business Relationship State of the business relationship n Percent Relation continues 3 3% Relation ends 21 19% Relation had ended 88 78% Total 112 100% Figure 23. Effect of Arbitration on the Continuation of the Business Relation 3% 19% 78% Relation continues Relation ends Relation had ended 138 See case number 63 in my files. 139 In fact, the Colombian Civil Code states that a transaction contract is a contract in which the parties agree to end a conflict extra-judicially (Art. 2469). 196 The results of the estimated time of when the conflict happened during the contractual relation and of arbitration’s effect on the “future” of the business interaction indicate that continuity was not likely to have been a variable determining the choice of venue to settle controversies. The numbers indicate that a very high percentage of business relations, 84% (see Table 34), faced conflict only within the last third of the relationship; suggesting that through most of the duration of the relationship, contractual performance was harmonious or at least conflicts were not disclosed to third parties. However, that harmony was not sufficient for the parties to settle the dispute by themselves. It may be that activation of the contract’s arbitration clause and the consequent arbitration settlement demonstrates investors’ preferences for a rapid and final closure over salvaging and/or continuing the business interaction. Profit conscious business people regard commercial controversies as matters that need to be dealt with as quickly as possible (Bonn 1972). Longer dispute resolution could represent higher arbitral awards as the monetary amount includes depreciation and/or moratory instances, as was the case in most of the arbitration cases studied. Furthermore, the longer the conflict drags on over time, the longer investors are exposed to possible negative market conditions and/or the greater the chance of missing new investment opportunities. By the time of the arbitration proceeding, a resounding 78% of the economic interactions had already ended, and 19% finished with the arbitral award. This finding is in tune with Mattli’s arguments in favor of institutional arbitration (as opposed to ad hoc arbitration) to handle disputes that arise shortly before or after a commercial relationship 197 has ended. This is the case for most disputes submitted to the International Chamber of Commerce for arbitration (Mattli 2001). It is possible that the complex nature of contractual differences confronted by the parties made necessary third person intervention as a better alternative over carrying out ineffective and destructive direct bargaining. In this scenario, the appeal to arbitration proceedings is rational. Additionally, the ending of the specific business relation that is in dispute does not necessarily signify the absence of other economic exchanges between the same two parties. 140 By the same token, the non-continuity of some of the business relationships may be due to the nature of the contract and the “indifferent” characteristic of the party (i.e. think of buyers and sellers). For instance, it is expected that a purchase contract finish with the exchange of goods and money. However, the profile of users of arbitration (see section above) suggests that the demand for arbitration comes principally from medium and large size companies in most economic sectors, dealing with more complex business exchanges. They are a far cry from anonymous buyers and sellers. In synthesis, this data does not confirm the perception that firms intend to continue business relations with their conflicting counterparts as one of the reasons for favoring arbitration over state courts. However, there is no information about whether or not the parties to the disputes maintain other economic exchanges between them. What may be driving the demand for arbitration, then, is the need to close commercial disputes as quickly as possible and at the same time preserve one’s reputation as a good potential business partner within the market. This positive reputation stems not from being dispute- 140 Unfortunately, proving or disproving this hypothesis would demand further field data -- e.g. direct interviews with the parties to the disputes under analysis -- that is not currently available This could be explored in future research. 198 free, but because firms are able to settle their disputes through arbitration. This alternative agrees with Bruce Benson’s conclusion about the popularity of commercial arbitration in the United States (1995). In Benson’s study about the development of commercial arbitration in the United States, he concludes that the establishment and rapid growth of arbitration took place “as non-legal sanctions induced many members of the business community to live up to their commitments to arbitrate and to accept arbitration rulings” (1995, 497). Reputation and acceptance factors in investors’ business circles - its community - and a rapid definition of disputes are important variables in opting for private arbitration. Among private sector benefits of ADR over litigation in state courts the World Bank mentions “[The] release of funds or assets that are in dispute...Even for the party that is releasing the assets, the process could produce positive outcomes, like for instance, the improvement of business relations with the other party, and not putting at risk its commercial reputation” (World Bank n.d., 41). C. Legal Pretensions and Defense Mechanisms This segment focuses on the legal strategies used in the arbitration proceedings. Litigants’ versions of the contractual obligations and performance are recreated or inferred from each plaintiff’s pretensions and defendant’s defense resources. My focus is on what the firms in the dispute ask the arbitrators to decide in their favor. Generally, in Colombian private commercial arbitration defenses are limited to exceptions of merit 199 (excepciones de merito) to argue against pretensions or “the merits.” 141 In some instances a second means of defense is used to question either the procedure or the existence of the arbitration tribunal itself. This type of defense is called preliminary exceptions 142 (excepciones previas). 143 Finally, the responding party may even decide to go on the offensive and file a counterclaim. Incidentally, pretensions and exceptions are indications of the parties “good faith” and “collaborative effort” in the process. Their existence is one of the elements used by arbitrators to decide upon the burden of arbitration costs. (More information on the monetary costs of arbitration is presented in later sections). Legal Pretensions or Claims Pretensions and defense mechanisms fall into one or more of the following clusters: contract interpretation, contract implementation, and/or contract termination. In all of the 112 cases in this study, either the complainant or the respondent requested some kind of interpretation about single or multiple elements of the contract, its 141 In legal proceedings, there are two types of exceptions, merits and preliminary (de merito and previas). “Merit” exceptions are introduced to try to avoid a judge’s decision in favor of the plaintiff’s pretensions. Preliminary exceptions are introduced to signal the existence of irregularities in the process to avoid its eventual nullification. In arbitration cases, in general, each pretension is matched with an exception of merit. For instance, the plaintiff claims payment of a certain obligation and the defendant argues the exception of payment – that he has already paid. One exception may address multiple pretensions. 142 Preliminary exceptions are similar to the concept of dilatory defense: “A dilatory defence is one, the object of which is to dismiss, suspend, or obstruct the suit, without touching the merits, until the impediment or obstacle insisted on shall be removed. These defences are of four kinds: 1. To the jurisdiction of the court; 2. To the person of the plaintiff or defendant; 3. To the form of proceedings, as that the suit is irregularly brought, or it is defective in its appropriate allegation of the parties; and, 4. To the propriety of maintaining the suit itself, because of the pendancy of another suit for the same controversy” (Bouvier 1856, n.p.). 143 An example of a merit exception is the legal resource of reposition (recurso de reposición) against the decision to accept the request to initiate the arbitration tribunal (see case number 48 in my files). An example of a preliminary exception is the request of annulment of the arbitration proceedings for the alleged lack of the tribunal’s competence (see case number 30 in my files). 200 fulfillment, or its termination. Consequently, the occurrence of interpretation requests easily exceeds the number of arbitration cases. I came across 223 examples of interpretation, and my count was not exhaustive (See Table 36). Among other things, the parties asked about the object of the contract, the time to perform obligations, the duration of the contract, specific contractual clauses, the legal nature of the contract, the applicable law, legal termination, and abuse of rights. They even asked to clarify and interpret the very existence of the contract, the type of contract, and the parties to the contract. Even when there is no disagreement about the fundamentals, all parties have the same information and there is no evidence of opportunistic behavior, there is still room for conflict. As one arbitrator affirms, “It could be said the parties agree on the basic facts [of the contractual relation] and they only disagree on their interpretation” (case number 4, n.p.). 201 Table 36. Sample Topics of Contract Interpretation Case Numbers The object of the contract 18, 25,34, 35, 38, 41, 47, 49, 60, 84, 74, 97, 107, 110 The time to perform obligations or duration of the contract 8,9, 16, 17,19, 32, 36, 46, 49, 64,68, 73, 76, 101, 107 Contractual clauses 2, 8, 9,11,15, 21,22,31, 32, 33,34, 35, 44, 46,48,66, 83, 107 Applicable law 1, 8, 13, 15, 17,18,55,67, 83, 91, 104, 107 The legal nature of the contract 13,15,1, 22,34,35, 39, 46, 47, 48,52,53,55,59,60,61,66, 74, 75, 78, 91, 94, 104, 106, 107 Civil or commercial 1,53,55 Private or Public 8, 104, 106 The type of contract 5,6, 7,19, 25, 28, 31,34, 39, 41,48,50,53,54,57,66,67,68, 73,74 ,75, 80, 83, 107, 110 Existence of the contract 6, 22, 29,40,61, 84,101, 102, 103, 110, 111 Existence of obligations 22, 23, 28, 30,33,34, 35, 36, 38, 43,47,48,49,60,64,67,70, 75, 77, 78, 83,86, 87, 89, 95, 96, 99, 101, 102, 109, 111 Party to the contract 7, 8, 67, 75, 76, 78, 91, 95,96 110,111 Justify termination 8, 10, 14, 15,19, 22, 24, 27, 28, 29,32, 33, 34 Abuse of rights or of dominant position 8, 20, 22,23, 29, 31 Breach of contract 22, 24, 25, 26, 27, 29,31, 32, 36, 40, 41, 44, 47, 48, 50, 53, 56, 57,61,64,69, 73, 76, 77, 78, 79, 80, 83, 84, 85, 94, 95, 97, 100, 101, 106, 107, 108 Termination of contract 22,32, 38,43, 74, 78 Economic disequilibrium 22,31, 35, 58,69, 81 Precision of obligations 28,34, 41,46,60, 73,74, 75,81 83, 85, 86, 89, 92, 96, 97,99, 102, 105, 110 Existence of legal rights 28, 29,34,48,57,58,66, 70,73, 77, 80, 81, 86, 105, 109, 111 202 Similar qualifications should be made for contract implementation and determination of liability. Again, petitions for these were identified in all 112 arbitration tribunals indistinctly of the party. Their number is not limited by the number of controversies, as it is unusual for a business transaction to create a single contract right. Contracts contain multiple obligations/ rights. Again, without being all-inclusive, 265 instances of implementation and liability claims were established (See Table 37). Illustrative of the variety of petitions are the following: the quality of the job, appropriateness of the performance time, place of the obligation, breach of contract, type and estimation of damages, adjustment of monetary interests, and payment of monetary obligations, among others. 203 Table 37. Sample Topics of Contract Implementation and Liability Case Numbers Type of damages and estimation 20,22,24,25 26,29,33,35,38 40,41,44,45, 46, 48, 50, 51, 52,54,55,56,57,58,60,61,62,64, 66, 68, 69, 74, 75,77,79, 82,83,85,86,92,93,94, 97, 98, 100, 103, 106,111 Daño emergente 20,22, 26, 29, 45, 46, 48, 49 51, 52, 57, 58, 62, 64, 66, 68, 69, 74, 75, 77, 79, 82, 85, 86, 92, 93, 94, 97,98,100, 103,106,111 Lucro cesante 20, 22, 23, 25, 29, 40, 45, 46,51,52,58,62,64, 66, 68, 69, 74,75,77,79,82,83,85,86,92,94,97,98, 100, 111 Correction 20,26,28,29,40,44,48,50,53,57,60,67,71,72,74,95, 96, 98 Penalty Clause 36,37,48,49,51,52,58,61,62,69,77,83,84, 88, 91, 94, 95, 104 Payment of monetary obligations 21, 23, 25, 27, 28, 30, 32, 34, 41, 44, 46, 48, 49, 53, 57, 59,61,67, 76, 81, 85, 87, 89, 90, 91, 93, 94, 96, 99, 100, 101, 105,107,108,110,112 Adjustment of monetary interests 21, 27, 32, 40, 44, 45, 48, 50,51, 52, 54, 56, 57, 60, 61, 67, 72, 74, 82, 87, 91, 94, 95, 96, 102, 104, 106, 107,108, 110, 111,112 Reimbursement 23, 27, 41,72,73, 89, 94, 97, 102,108,110 Additional Costs 41, 56, 60, 69, 70, 81,108 Quality of the performance 26, 27, 29, 32, 35, 36, 37, 38, 39, 41, 42, 52, 61, 68, 69, 70, 71, 75, 84, 85, 94 Appropriateness of performance time 25, 26, 27, 35, 36. 38, 39, 41, 42, 45, 47, 49, 50, 51, 52, 56, 61,64, 70, 94 Place of the obligation 51, 52, 53 Breach of contract 24, 25, 26, 27, 29, 30, 31, 32 33, 36, 37, 38, 39, 40, 41, 42, 44, 45, 46, 47, 48, 49, 50, 51, 54, 55, 56, 57, 58, 59, 60,61,62,63,64,66,68,69,70,71,72,73,74, 76, 77, 78, 79, 82, 84, 85, 86, 87, 88, 90, 91, 92, 93, 94, 95,100,101, 102, 103, 104,106,107,108, 110,112 Legal rights/liability/ indemnizations 28,53,56,57,61,62,63,66, 68, 71, 76, 77, 78, 95, 97,107, 110 Retention of property 30, 40, 71, 77 Legal termination 33, 34, 74 Moral Hazard, Opportunism, Incomplete information 41,61, 83, 97 Incidents of arbitration tribunals responding to requests of contract termination were easier to quantify. The parties do or do not ask for the termination of the business interaction and the contract that controls it. References to termination of the contractual relationship are found in 37 of the 112 arbitration cases. 204 Table 38. Number of Declarative Claims by Type Types Frequency Contract interpretation 223* Contract implementation 265* Contract termination 37 *These numbers are merely illustrative of the declarative claims of the parties. They do not exhaust all the actual times they were requested. Exceptions and Other Defense Mechanism In most arbitration cases, the number of exceptions of merit match that of pretensions or claims. However, there are instances with no exceptions of merit and others where the exceptions outnumber pretensions. Reasons for the latter include the defendant trying to complicate and/or delay the proceedings as a legal strategy. As mentioned above, this sort of behavior may play against the defendant in the form of arbitration expenses. Obviously, the more the respondent party keeps the defense mechanisms true to the process, 144 the shorter the duration of the arbitration. In the arbitration cases analyzed, the number of exceptions of merit range from 0 to 14. 144 The same must be said about the complainant’s pretensions. 205 Table 39. Defendants' Exceptions of Merit Number of exceptions n 0 12 1 12 2 18 3 15 4 9 5 12 6 6 7 7 8 5 9 5 10 3 11 2 12 3 13 1 14 2 Total 112 Figure 24. Defendants’ Exceptions of Merit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 0 5 10 15 20 Number of cases Number of exceptions 206 The respondents kept their defenses on merits under 6 exceptions in 84 (75%) of the arbitration cases. Furthermore, exceptions were limited to 3 in more than 50% of the cases (n= 57). Only in less than 10% of the cases contestants argued more than 10 exceptions of merit. Another type of defense is that of preliminary exceptions (excepciones previas), similar to dilatory defense in American law. Examples of these exceptions include: falta de competencia, 145 which questions the competence or jurisdiction of the arbitation tribunal; inappropriate demand (ineptitud de la demanda); 146 illegal accumulation of claims (indebida acumulación de pretenciones); 147 inadequate proceeding (trámite inadecuado) 148 which questions the form of proceeding, a suit that is irregularly initiated, or that is defective in its appropriate allegation of the parties; and negative prescription (prescripción de la acción) 149 which questions the propriety of maintaining the suit itself. Previous exceptions were introduced in 19% of the arbitration cases; that is, in 20 of the 112 tribunals. For the most part, parties to arbitration limited their defense mechanisms to the merits of the case. Finally, in 31 (28%) of the proceedings, the contestant party “went on the attack” and filed a counter demand. 145 See cases 19, 30, 34, 35, 75, 83,89, and 101 in my files. 146 See cases 11, 19, 24, 38, 39, 48, 49, 58, 75,96, 109 and 111 in my files. 147 See case 19 in my files. 148 See case 21 in my files. 149 See case 19 in my files. 207 Table 40. Number of Defenses by Type and Percent of Total Cases Defense n (%) Merits 100 (89.3) Dilatory 20 (17.9) Counterclaim 31 (27.7) Figure 25. Merit Defenses, Dilatory Defenses and Counterclaims 89% 18% 28% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Merits Dilatory Counterclaim Judging by the type of defenses and their frequency, this evidence suggests highly collaborative behavior by the parties during the arbitration process. Dilatory defense (excepciones previas) were brought for only 17.9% of the cases. In general, the contestant party questions the legal competence of the arbitration tribunal and demands the nullification of any procedural action. This may signal that they do not want the dispute settled in arbitration although they signed a contract with an arbitration clause, in essence they signed an arbitration contract. A more plausible reason may be the defendant’s need to “buy some time” to prepare his initial legal strategy. In all of the 20 instances that 208 used this defense, the decision was found against the petitioner, and the process continued and finished with the arbitral award. In this sense, 100% of the arbitration contracts were enforced. Most defendants, 100 of the 112 tribunals (89.3%), circumscribed their defense tactics to the merits of the claims, and among these parties, more than 50% limited the number of exceptions to three or less. Consequently, the procedural behavior of the parties during arbitration may be considered a confirmation of how much they care about not damaging their reputation by delaying the arbitration process with numerous baseless defenses. Thus, not only investor preference for private arbitration over litigation within the courts, but also their procedural tactics signal their reputation as a quality business partner, more so than their involvement in commercial disputes per se. Obviously, conflict-free economic interactions are desirable and would be ideal, but this doesn’t seem to be the expectation for economic exchanges that are regulated by a private contract which, furthermore, includes a clause on how to settle disputes. Rather, investors may be more concerned about avoiding overly litigious venues to resolve conflicts and contentious behavior during the dispute settlement process. More evidence of how involved parties behave during the dispute settlement procedure is presented in the next section. D. Length of Arbitration Processes This section examines the duration of the arbitration process, as measured in months. Increments are organized according to pre-arbitration and arbitration phases. It also reveals the amount of time that the arbitration process may be extended due to requests by the parties involved. 209 Pre-Arbitration Phase The pre-arbitration phase takes place from the day the complaint party files the request for the arbitration tribunal until the day of the first arbitration hearing. In this study, the requests for arbitration were filed with the Center for Arbitration and Conciliation of the Bogotá Chamber of Commerce. The length of the pre-arbitral phase depends on the parties’ legal actions and their promptness in acting within the time a given action can take place. Thus, the behavior of the parties themselves plays a significant role in the speed/ duration of the pre-arbitration period. Legal action by the parties and the Chamber of Commerce during the pre-arbitral phase can include all or some of the following: 1) reception and acceptance of the request to set up the arbitration tribunal; 2) reception and acceptance of the claim; 3) defendant response; 4) selection of arbitrators by the parties or their selection by the institution; 5) request of evidence; 6) filing of preliminary exceptions; 7) filing of counterclaims; 8) reform of the demand; 9) pre-arbitration conciliation hearing; and, 10) determination of arbitration monetary cost, among others. Moreover, the parties need to be notified of every action and given time to respond or act. Basically this pre-arbitration period 150 exists to enable the involved parties to conduct the necessary steps to “shape” the dispute for its final form. It provides the “instruction of the process” (instrucción del proceso). Many of the procedures during this phase are conducted by the institution providing the service of dispute settlement, in these cases, the Center for Arbitration and Conciliation of the Bogotá Chamber of Commerce. 150 This phase corresponds to pre-trial proceedings in common law. 210 Table 41 lists the lengths of the pre-arbitral phase in the 112 cases under study, from shortest (two months) to longest (28 months). Table 41. Duration of the Pre-Arbitral Phase Months 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 18 20 28 N 3 4 13 15 20 17 12 4 7 6 0 3 1 1 3 1 1 1 112 Figure 26. Duration of the Pre-Arbitral Phase 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 0 5 10 15 20 25 30 Number of cases Months As can been seen in Figure 26, the cluster 4 to 8 months contains the majority of the arbitration processes, (n= 77, 69%). In seven cases (less than 7% of the total) less than three months were spent overseeing the controversy. Twenty of the cases (18%) fall into the 9 to 13 month cluster. The remaining 7% had pre-arbitration phases of more than 13 months. Put differently, 10% of the cases took 13 months or more to set up the arbitration process, while 90% of disputes were prepped in 11 months or less. Still, 49% of the controversies were ready for arbitration in less than 6 months. Although the main causes for longer instruction periods are individual legal actions by the litigants, some of the delays may be consented to by both parties. Parties are allowed to request extensions 211 or suspension of terms upon mutual agreement. Overall, the data suggest a high level of procedural efficiency in the pre-arbitral phase of the proceedings. Arbitration Phase The arbitration phase is the actual hearing of the dispute. This phase is measured from the day of the first arbitration hearing to the decision hearing. According to Colombian law, this phase has a period of 6 months, independent of the interruptions, suspensions, and extensions agreed upon by the parties 151 (Presidencia de Colombia 1989, Decree 2279 of 1989, Art. 19 and Colombian Congress 1991, Law 23 of 1991, Art. 103). As is for the duration of the pre-arbitration phase, the behavior of the parties themselves is also crucial for the length of this phase. However, in the arbitral phase the behavior has a collective (not individual) character since the request for extensions requires both parties’ agreement. Total extensions cannot exceed the term of 6 months. All the actions are conducted by and before the arbitrators. Table 42 lists the length of the cases for the arbitral phase. 151 My emphasis is to point out the crucial role of the disputants in the efficiency of the arbitration, as well as the quality of justice. This is one of the enforcing of contracts’ elements “evaluated” by World Bank’s Doing Business index (See Chapter 2 in this dissertation). 212 Table 42. Duration of the Arbitration Phase Forty arbitration cases (36%) were decided within less than 6 months, as established by law. Within the further extension of 6 months allowed by law when agreed upon by both parties, 100 cases (89%) were resolved in less than 12 moths. The precise reasons for the remaining 12 cases exceeding the legal time limits for a decision would have to be detailed case by case, and is beyond the purview of this study. However, it is expected that the extra time used to reach a solution was the result of the agreement on suspensions, interruptions, and extensions by both parties. Should a disagreement on extensions exist, it would affect the legality and continuity of the proceedings. As all the 112 arbitration cases finished with an arbitration award, I can conclude that no disagreements took place. Consequently, it seems that private motives or the initiative of the investors who are the parties to arbitration may lengthen the duration of the process in certain situations. Should both parties concur on extending the time needed to reach the arbitration award beyond the limits of the law, they may choose to do so. As it will be argued later, the size of the companies, the complexity of the economic interaction and the contract, and the monetary value of the economic exchange in dispute may each have some effect on the length of the process. Months n 1 1 2 5 3 3 4 7 5 11 6 13 7 14 8 16 9 12 10 4 11 3 12 11 13 2 14 3 15 2 16 0 17 1 18 1 19 2 20 1 Total 112 213 Figure 27. Duration of Arbitral Phase in Months 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 0 2 4 6 8 10 12 14 16 18 20 Number of cases Months Total Duration of Arbitration in Months The overall time of the arbitration proceedings is calculated from the day of the filing a petition with the tribunal to the final arbitral award hearing. Cases are organized by months from the shortest of 6 to the longest of 47 in Table 17. 214 Table 43. Overall Duration of Arbitration Cases Months n 6 1 7 2 8 2 9 10 10 2 11 9 12 9 13 8 14 6 15 13 16 8 17 5 18 10 19 8 20 1 21 3 23 1 24 2 26 3 27 1 28 3 29 1 33 1 37 1 39 1 47 1 Total 112 Thirty-five (31%) of the arbitration cases arrived at an award in less than 12 months. Eighty-five (76%) cases, were decided in less than 18 months. Eighty-nine percent of the cases (n= 100) reached a decision in less than 2 years, and 97% (n= 108), were resolved in less than 29 months. Incidentally, of the cases that exceeded 12 months 215 in the pre-arbitration phase 152 and of those exceeding 12 months for the arbitration phase 153 only two of them exceeded 12 months in both periods (cases 1 and 41). Obviously, the 12 cases exceeding 24 months overall 154 for their settlement come from the two previous categorizations: four belong to the pre-arbitration set and seven to the arbitration set. 155 This distribution suggests that mutually agreed upon procedural extensions in the arbitration phase have a more significant effect on the actual duration of the arbitration process than individual interruptions in the pre-arbitration stage. Furthermore, this distribution can also reflect the party-driven nature of the length of the arbitration process. I did not find any evidence that the profile of investors, of the investment/ contracts, or the controversies themselves were determinants in the length of the arbitration proceedings. The types of firms involved in the arbitration cases, the types of business interactions and contracts, and the types of disputes all varied without any apparent pattern for their differences. 152 Case numbers 42, 58, 99, 47, 36, 39, 41, 48, 1, 38, 29, and 11 in my files. 153 Case numbers 41, 87, 85, 103, 111, 49, 72, 96, 97, 1, 56, and 107 in my files. 154 Case numbers, 37, 38, 107, 36, 48, 49, 96, 41, 56, 1, 29, and 97 in my files. 155 The remaining case, number 37, was particular in its overall duration. Its pre-arbitration phase lasted only 4 months and its arbitration phase 8 months; yet its overall length was over 24 months because the parties agree to suspend the hearing that divides the two phases (the first arbitration hearing) for more than 1 year for some unknown reason. 216 Figure 28. Overall Duration of Arbitration Process, by Percent of Cases 31% 76% 89% 97% 0% 50% 100% less than 29 months less than 24 months less than 18 months less than 12 months Mutually Agreed Upon Suspensions and Other Extensions of the Proceedings As noted above, the parties to a dispute may request a suspension of the process within the arbitration phase. These requests exemplify the critical role investors play in resolving economic conflicts through arbitration; that is, their critical role in protecting their property and contract rights. Table 44 presents the length in months of mutually agreed upon suspensions and the number of cases in each timeframe. 217 Table 44. Process Suspensions Agreed Upon by Both Parties Months of suspension n % 0 29 25.9% 1 11 9.8% 2 21 18.8% 3 15 13.4% 4 8 7.1% 5 4 3.6% 6 13 11.6% 8 3 2.7% 9 2 1.8% 10 2 1.8% 11 1 0.9% 12 2 1.8% 15 1 0.9% Total 112 100% In 26% (n= 29) of the arbitration tribunals, the parties to the dispute did not request any suspensions. The process was suspended by the parties for less than 3 months in 76 cases (68%), and litigants agreed to suspend the arbitration for less than 6 months in 101 cases (90%). In the other 9.8% cases (n= 11), 156 the counterparts decided to stop the process longer than the 6-month period stipulated by law. There are some commonalities among these 11 arbitration tribunals. Based on their assets, the 22 parties involved in these cases are large size firms. Twelve of the litigants are domestic firms, and the other 10 are foreign. Their investments fall into one of the following economic sectors: telecommunications, construction, banking, or energy and petroleum. The contract regulating the investment is either a commercial agency, 156 Case numbers 83, 85, 111, 49, 56, 48, 103, 72, 96, 97, 107 in my files. 218 construction, purchase/ sale of shares, or idiosyncratic. 157 The monetary valuation of the dispute, the monetary costs of the arbitration, and the monetary size of the arbitral award are some of the highest in terms of cost. All these factors may indicate a deeper complexity of business interaction and controversy, and in turn the need for a longer resolution time. Figure 29. Process Suspensions Agreed Upon by Both Parties in Months 1 2 3 4 5 6 7 8 9 10 11 12 13 0 5 10 15 20 25 30 Cases Number of cases Months Along with suspensions agreed upon by the parties, the length of the arbitration might be extended by interruptions declared by the arbitrators due to exceptional issues such as the impeachment of an arbitrator, 158 resignation of an arbitrator, 159 or notification 157 A contract is idiosyncratic when, given the private initiative and free will of the parties, they agree on regulating the investment by a contract that does not exactly fit the typology in the laws. Under Colombian law, these contracts are called atypical (atípicos) or innominate (innominados). Idiosyncratic contracts result from investors exercising their freedom of contract in new contexts. For a discussion on the understanding and complexity of idiosyncratic contracts see Williamson 1981, Schanze 1991, and Frick 2001. 158 See case number 57 in my files. 159 See case number 35 in my files. The reason for the resignation is not disclosed. 219 to a co-party defendant. 160 This type of interruption only occurred in 5 (4%) of the 112 cases. Finally, by party consensus the time to reach a decision can be augmented beyond the mandated 6 months when they request an extension (prórroga). This occurred in 10 (9%) of the 112 arbitration cases. Let me reiterate that by law, the cumulative time of suspensions, interruptions and extensions is limited to 6 months (Presidencia de Colombia 1989, Decree 2279 of 1989, Art. 19 and Colombian Congress 1991, Law 23 of 1991, Art. 103). In general, the data on the length of the arbitration process denote high compliance of the parties with the rules of the process, suggesting collaborative behavior in their common interest of settling the business dispute. As explained and exemplified above, parties can “delay” the proceeding by individual actions during the pre-arbitral phase, and by consensus during the arbitration phase. According to the evidence, the latter source of delays seems to have a larger effect of increasing the overall duration of arbitration. Therefore, concurrence among the parties explains the speed and time necessary to attain the arbitral award, whether within or beyond the terms established in the rules for arbitration. When analyzing the 11 disputes that endured the longest, it was possible to identify common traits and from those to tentatively conclude that the investment disputes of domestic and foreign large size companies are likely to require longer arbitration periods. Yet, in 100 (89%) of the 112 cases in the study, the arbitration concluded in less than 24 months. 160 See case numbers 45, 51, and 83 in my files. 220 To offer some perspective on the duration of private commercial arbitration in Colombia, by comparison the settlement of disputes under NAFTA’s arbitration mechanisms has ranged between 29 and 86 months. More particularly, in disputes involving the government of the United States, the fastest decision took 30 months and the longest case, still in progress, had been underway for 91 months as of May 2009. When the Canadian government is involved, the shortest case took 29 months, and the longest, still in progress, 79 months as of May 2009. In disputes involving the government of Mexico, the fastest dispute was decided in 29 months and the longest in 57 months. 161 Thus 108 (96%) of the 112 arbitrations before the CAC of Bogota Chamber of Commerce came to a final decision in less time than the fastest case under NAFTA arbitration. E. Means of Proof of Evidence Requested In arbitration proceedings both the active and the passive party may petition for means of proof. Arbitrators not only decide on the admission of evidence but also may ask for additional means (pruebas de oficio). Although the number of “pieces” in each means of proof varies greatly among cases, the types of means of proof are essentially the same across all the arbitration cases studied. These are: testimony, party interrogation, documentary evidence, judicial 161 For a list of disputes see Appendix H. In contrast to the arbitration cases analyzed in this study, which are private party-private party disputes, the claims under NAFTA are private investors-state actor disputes. For a complete description of the arbitration process see North American Free Trade Agreement (1992), Chapter 11. In relation to the arbitration rules governing NAFTA arbitration, the US State Department affirms: “Investors may initiate an arbitration against the NAFTA Party under the Arbitration Rules of the United Nations Commission on International Trade Law ("UNCITRAL Rules") or the Arbitration (Additional Facility) Rules of the International Centre for Settlement of Investment Disputes ("ICSID Additional Facility Rules")” (US Department of State n.d., 1). 221 inspection, and expert or professional witness (peritos). There are two kinds of documentary evidence: 1) documents directly introduced by the parties; and, 2) documents provided by third parties through “arbitration summons” (oficios 162 ). The use of expert witnesses in the arbitration is divided by field of expertise. Table 45. Evidence Introduced in Arbitration Means of Proof Number of Cases Judicial Inspection 42 Party Interrogation 85 Testimony 89 Documentary Evidence 154 From parties 107 From subpoenas (summons) 47 Expert Witnesses 91 Accounting 48 Engineering 25 Finance 23 Economics 10 Translation 4 Architecture 2 Business Administration 1 Naval 1 Taxes 1 Technical 10 162 The arbitration tribunal sends written communications to people or institutions which requires them to produce books, papers, records and other data to be introduced as evidence. There is no requirement to appear personally before the tribunal. 222 Figure 30. Number of Cases Utilizing each Means of Proof 42 85 89 154 125 0 20 40 60 80 100 120 140 160 180 Judicial Inspection Party Interrogation Testimony Documentary Evidence Expert Witnesses As can be seen in Table 45, the means of proof used most frequently is documents provided directly by the litigants. It was utilized in 107 cases. 96%. This is not surprising since the conflicts arose from economic exchanges contained in written contracts. Except for judicial inspections, in most of the cases the evidence is presented, examined, and evaluated in the place where the arbitration tribunal is functioning. Judicial inspections are like field trips for arbitrators, or site observations. For instance, arbitrators may go to physically see the object in dispute; 163 or they may visit the offices of the parties to see their legal books and other documents. 164 This took place in 42 cases, 38%. In 47 (42%) cases, the arbitration tribunal requested the production of documents from third parties. Testimonies and party interrogations were conducted in 89 (79%) and 85 (75%) cases. The use of professional experts was extensive: 125 people were interviewed in 91 (82%) cases. Again, this is to be expected, since the disputants are private investors, 163 See case numbers, 3, 41, and 75 in my files. 164 See case numbers 19, 26, 39, 46, 70, 87, and 110 in my files. 223 protecting their contract and property rights, and involved in private commercial arbitration. Investors have the motive, the ability (through the flexibility of the process), and the material means to bring in quality experts regarding their allegations. The field of knowledge of the experts hints at the dominance of economic concerns within the arbitration process; most of them have an economic background. Eighty-three of the 125 experts used (66%) came from the fields of accounting, finance, economics, business administration or taxes, represented by the side bar graph in Figure 31. Figure 31. Use of Expert Witnesses by Field 20% 3% 2% 1% 8% 18% 8% 1% 1% 66% 38% Engineering Translation Architecture Naval Technical Accounting Finance Economics Business Administration Taxes The composition of the evidence requested in private commercial arbitration suggests the centrality of expert knowledge about the elements of the economic exchange in settling disputes. However, this expertise does not reside with the arbitrators, who in the process are responsible for interpreting that information and using it to decide the award. The qualified knowledge and expertise on parts of the economic transaction comes from expert witnesses, who understand the technical complexity of some elements 224 of the business interaction. The emphasis on ‘parts’ and ‘some’ is to indicate that the intricacy of investments is not limited to facts that can be correctly analyzed from a single field of knowledge. It is the balance of all specialized expertise, plus the arbitrators’ own specialized knowledge, that makes private commercial arbitration a lower transaction cost venue to settle private economic disputes. The combination of arbitrator expertise, 165 which lies not in the realm of trade/ investment per se but with the contract and laws regulating the investments, and the contributions of expert witnesses may be one of the features that makes private commercial arbitration more desirable than state courts for settling disputes. Using the same logic expounded by Richard Poser in discussing jurors and arbitrators, the area of life arbitrators know about is commercial contracts, performance of obligations, property rights, and contract rights (1998, 642). Thus, in private commercial arbitration in Colombia, arbitrators have access to technical expertise (via expert witnesses) and, given their own high level legal expertise, they do not have to cover the entire range of civil law to understand the complexity of the transaction and the contract governing it (Dixit 2004). The possibility to use experts as dispute resolvers is often mentioned as one of the advantages of arbitration over formal judicial tribunals. This is not the situation of the arbitration processes analyzed here. This study focuses on arbitration in law (en derecho), which means that the claims are heard before attorneys and the parties are represented by a lawyer. This does not mean, however, that expertise in the economic sector in which the 165 The Center for Arbitration and Conciliation, CAC, of Bogotá Chamber of Commerce, has highly qualified arbitration professionals with expertise in different legal fields. The qualifications to be an arbitrator are the same as those required to be a justice of the highest courts: Constitutional Court, Supreme Court, Superior Council of the Judicature, and Council of State (Cámara de Comercio de Bogotá n.d.) 225 conflict arose is missing. On the contrary, industry experience and knowledge enters the process by the parties’ initiative via witness experts or professional experts. In this manner, both the legal and economic interest of the litigants are taken into consideration. The idea of conflicts being decided not by lawyers but by people with experience in and knowledge of the economic sector or industry in which the difference arose is perceived, almost immediately, as a positive. However, this perspective might ignore the existence of contracts which create property rights, the cornerstone of legal concepts in a market economy. In this light it is difficult to imagine how the materialization of property and contract rights (and the strengthening of market relations) is better served without lawyers deciding contractual economic controversies. 166 A more accurate and contemporary brand of expertise in commercial arbitration is evident in the United States, as described by CPR Commission member Harold Hestnes: Commercial arbitration has evolved along many lines. It has expanded beyond conventional settings—construction, maritime, insurance, commodities, apparel industry, and the like—where particular expertise was expected of an arbitrator and relatively well cabined disputes were anticipated. It now covers commercial matters of all possible configurations, including vast, complex matters with high stakes. It has become virtually indispensable in the international field, where the home court advantage and forum selection are unattractive disincentives to litigation as a method for resolving commercial conflicts. These developments have led to a proliferation of providers, rules and regimes, more involvement by attorneys, and much more complexity. Arbitration has become a legalistic method of adjudication (Stipanowich and Kaskell 2001, 8). 167 166 There are certainly many instances of dispute resolution conducted without lawyers and even without the intervention of a third party. See Ellickson (1991) and Santos (2002). See also the vast literature on legal pluralism and alternative uses of law published by the Latin American Institute for Alternative Legal Services or the Law and Society Association. However, many of the experiences in these studies are not mediated by a contract, are not economic in nature, do not take place in the market, or are searching for alternative (non capitalist) economic and social relations. The lack of evidence about actual non-lawyers (laymen) as arbitrators settling market transactions suggests that such a claim may be an “urban legend.” 167 Quoting CPR Commission member Harold Hestnes. Center for Public Resources, CPR International Institute for Conflict Prevention and Resolution. 226 Furthermore, it must be recalled that the investors themselves agree (in most instances by creating the contract governing the economic transaction itself) to submit any dispute to legal arbitration, whether national or international. There are other, more specific advantages of using expert witnesses in arbitration over their use in formal tribunals. First, the parties to arbitration participate actively in the selection of experts. Second, since the parties pay for the expertise, the budgetary considerations are under the litigants’ control. Thus, litigants can have access to higher levels of knowledge and experience. Third, it is expected that the service is rendered more quickly. There are no delays in the process for awaiting the appointment, acceptance and reports of expert witnesses, for example. Considering the time needed to request, approve, conduct, and judge expert knowledge when adjudicating commercial disputes, it could be argued that arbitration also reduces transaction costs in this sense. F. The Monetary Value of Arbitration How much money is involved in private commercial arbitration? Based on the data, this question can be answered in three ways: 1) the valuation of the dispute, 2) the cost of the arbitration tribunal, and 3) the amount of the arbitral award. The first element complements the information about the economic exchange between the parties involved in the arbitration (see section B. “Profile of Commercial Transaction” above). Likewise, the valuation of the dispute, along with the second and third elements, also rounds out the facts about consumers of private commercial arbitration in Colombia (see section A. “Profile of Arbitration Users” above). The amount of the arbitral award, besides identifying the winners and losers, also sheds light on the distribution of the monetary 227 costs between the parties and in some cases reflects the behavior of the litigants during the course of the proceedings. The Valuation of the Dispute or the Amount in Dispute In the arbitration process the complainant party, after expressing its declarative claims or pretensions due to the alleged violation of its contract and property rights, generally requests compensation in monetary terms. For this study, the valuation of the dispute comes from these damages, which were used to create Table 46. Table 46. The Monetary Value of the Disputes Value of the Dispute, in thousands of US$ Number of Cases Undetermined 13 Below 11 4 11 to 20 4 21 to 50 13 51 to 100 10 101 to 250 18 251 to 500 10 501 to 1,000 13 1,000 to 2,000 9 2,000 to 5,000 10 5,000, to 10,000 4 15000 2 40000 1 250000 1 Total 112 For 13 cases there were no data on monetary claims: the documents available did not contain any information that could be used to draw conclusions about the value of the 228 dispute. 168 These 13 cases are excluded from the statistics on the value of the claims. Consequently instead of 112 arbitration cases, this section has sample data of 99 arbitration tribunals. The two highest valued disputes, one for US$40 million and another for US$250 million, have the same two litigants, but in reversed roles as complainant and contestant. The purchase/sale of a financial institution was the economic exchange that gave rise to the controversy for both processes. 169 Of the 99 tribunal proceeding, 27% were valued at over US$1 million, 40% valued US$500,000 or more, valuation of claims higher than US$100,0000 made up 69% of the cases and claims higher than US$20,000 comprised 92% of the disputes. As shown in Figure 15, only 8% of the controversies were valued below US$20,000 and just 4% had business disputes valued at less than US$10,000. To provide some perspective for these figures in relation to the Colombian economy, consider that the monthly legal minimum salary in 2007 (the last year of data for the study) was 433,700 Colombian pesos. This corresponds to US$192 170 monthly, for an annual income of US$2,304. In other words, even the lowest award amounts are very high by national standards. 168 For instance, there was no indication of arbitrators’ salaries or the Center’s administrative costs, which can be used to determine a controversy’s monetary value since both are a percentage of the sum in dispute. For 10 cases in the study, it was necessary to utilize this method to determine the material value of the controversy. 169 See case numbers 96 and 97 in my files. 170 Utilizing Banco de la República US dollar-Colombian peso exchange rate 2,259.72 from January 2007 (www.banrep.gov.co). 229 Figure 32. Percent of Cases for each Monetary Value of the Dispute 0% 5% 10% 15% 20% Less than $11,000 $11,000 to $20,000 $21,00 to $50,000 $51,000 to $100,000 $101,000 to $250,000 $251,000 to $500,000 $501,000 to $1 million $1 to $2 million $2 to $5 million $5 to $10 million $15 million $40 million $250 million The Cost of the Arbitration Tribunal The cost of the arbitration tribunal refers to the money investors must pay to settle the dispute utilizing this venue. Costs include compensation for the arbitrators and secretary, administrative expenses 171 paid to the CAC, payments to expert witnesses and other obligations associated with the collection of evidence, and lawyering costs. 171 These two costs are regulated by law, Decree 4089 of 2007 (Ministry of Justice 2007) and by the CAC’s own regulations, Reglamento del CAC (Cámara de Comercio de Bogotá 2007). The amounts are based on the economic allegations of the controversy. 230 Table 47. Cost of Arbitration For 23 of the private commercial controversies it was not possible to identify the total costs of the proceedings. These cases are dropped from the sample for this section, leaving 89 cases. Of those 89 cases, 76% (n= 68) of the litigants paid more than US$10,000 for arbitration. Doubling that, 64% (n= 57) spent over US$20,000 in arbitration expenses. In fact, almost half of the arbitration cases, 46 (n= 41) exceeded US$50,0000, and more than a quarter of the proceedings (28%, n= 25), cost over US$100,0000. The “price” of arbitration was higher than US$250,000 dollars for over 13% of the cases, while only 3% had a cost lower than US$2,000. Figure 33. Cost of Arbitration 0 2 4 6 8 10 12 14 16 18 Number of Cases $1000 to $2000 $2,000 to $10,000 $11,000 to $20,000 $21,000 to $50,000 $51,000 to $100,000 $101,000 to $250,000 $251,000 to $500,000 $501,000 to $1 million $1 million to $2 million More than $2 million Cost of Tribunal, In thousands of US$ Number of Cases Undetermined 23 1 to 2 3 2 to 10 18 11 to 20 11 21 to 50 16 51 to 100 16 101 to 250 13 251 to 500 8 501 to 1000 2 1000 to 2000 1 More than 2000 1 Total 112 231 The Size of the Award The arbitration award usually contains the ruling of the arbitrators on all the courses of action and exceptions argued by the parties. As in the initial claim, the award contains a declarative part and its corresponding monetary complement. In the former, arbitrators declare; in the latter, arbitrators sentence to pay. Using the monetary section of the data on awards, Table 48 organizes the arbitration cases by award amount. Table 48. Monetary Amount of Arbitral Awards There is no monetary component in 19% of the awards (21 cases) for one of two reasons: 1) all of the plaintiff’s causes for actions were unsuccessful and the tribunal ruled in favor of the defendant; or, 2) there were no monetary pretensions in the initial claim and the petitioner requested only declarative outcomes. These 21 contractual relations are excluded from the comparative data set on the monetary amounts of arbitration awards. Figure 34 illustrates the range and percentages of arbitral awards by award level. The defeated party was ordered to pay more than US$1 million in 16% of the settlements (15 cases). The 3 highest awards (3% of the cases), each of more than US$15 million, are related contracts about investments in telecommunications and financial assets. 172 There are awards higher than US$250,000 in 38 resolutions, 42% of cases. More than half of the awards (51%, n= 46) surpassed US$101,000; 65% (n= 59) have awards of more than US$51,000; 80% (n= 73) were over US$21,000; and 85% (n= 77) 172 See case numbers 49, 96, and 97 in my files. Amount of the Award, in thousands of US$ N Not Applicable 21 Below 10 14 11 to 20 4 21 to 50 14 51 to 100 13 101 to 250 8 250 to 500 17 500 to 1000 6 1000 to 2000 4 2000 to 5000 7 5000 to 10,000 1 15,000 to 25,000 2 More than 25,000 1 Total 112 232 were higher than US$11,000. In the remaining 15% of settlements, the loser paid less than US$10,000. Figure 34. Monetary Distribution of Arbitral Awards 0.0% 5.0% 10.0% 15.0% 20.0% More than $25 million $15 million to $25 million $5 million to $10 million $2 million to $5 million $1 million to $2 million $501,000 to $1 million $251,000 to $500,000 $101,000 to $250,000 $51,000 to $100,000 $21,000 to $50,000 $11,000 to $20,000 Less than $10,000 Distribution of Costs between Litigants How were the costs of arbitration distributed between plaintiffs and defendants? In deciding the distribution of the costs of the arbitration tribunal, the central concerns that the arbitrators take into account are which party the decision favored, and the balance between litigants’ claims (plaintiff’s course of action versus contestant’s defenses). The bill goes to the defeated party. “The losing party would be sentenced to pay the cost of the process” (Colombian Civil Procedural Code, Art. 392). However, the decision is not always a ‘looser-pays-all’ outcome. Determining the balance of claims decided in favor of each party is not just a numerical matter. It has analytical elements as can be noted in this arbitrator’s statement: “Although most of the plaintiff’s claims were unsuccessful, those that were successful are qualitatively more important” (Case number 57, n.p.). In this case, the defendant was 233 sentenced to pay 75% of the expenses. Other variables are considered in the final distribution of expenses, mainly the antagonists’ “fair play” during the process. As there is no set definition of “fair play,” I provide examples from the arbitration cases to help clarify this concept. The following examples are some actions considered contrary to the concept of “fair play:” 1) The number of causes of action versus the number of those deciding in favor. Arbitrators may assess the balance between the total number of the claimant’s allegations and those decided in the claimant’s favor. An imbalance on the side of the number of claims is punished with a share of the arbitration bill. For instance, in case number 9, all the decisions were against the defendant, yet of the 24 pretensions alleged by the plaintiff, only 5 were decided in his favor “For this reason, plaintiff is sentenced to pay 20% of tribunal’s costs” (n.p.). 2) The amount of the award is well below the monetary claims. Although all the pretensions were decided in favor of the petitioner in case number 91, the petitioner was sentenced to cover 25% of the costs because the amount of the award was well below that of the initial claim. Recall that part of the arbitration costs (arbitrators, secretary, and administration) is a percentage of the monetary claims. Excessive monetary claims raise the price of arbitration and unjustifiably punish the defeated party. 3) Negative procedural conduct. In these cases, even though some plaintiff’s pretensions may be successful, arbitrators do not divide the costs accordingly. Arbitrators can and do order the defendant to pay all the expenses due to his/ her procedural behavior. The procedural conduct of the defendant deserves some comment. While in the pre-arbitration phase the defendants participated actively with preliminary 234 exceptions [dilatory defense] and requests of suspensions, in the arbitration phase they abandoned procedural action...The conduct of the defendants’ attorney is also reproachable. She/ he was not prepared for his/ her duty of answering the tribunal’s questions during the party interrogation, She/ he eluded without foundation the suggested questions. For this tribunal that behavior is evidence against that society (Case number 38, n.p.). The tribunal must reproach the tactics of the defendant’s attorneys of avoiding personal notifications and waiting for public means of notification, with the objective of delaying and prolonging the process without reason... The careless preparation of the contestant’s attorney in the party interrogation...and his/ her absence in the conciliation hearing must also be reproached. ... These elements are to be reflected in the tribunal’s decision about the costs of the arbitration against the defendant. (Case number 41, n.p.). It may be inferred that the tribunal’s margin of discernment for the distribution of arbitration expenses are constrains and/or incentives that condition parties’ preferences on both the substantive claims and their procedural conduct towards a more “collaborative” effort or at least one free of behavior against fair play. In other words, distorted information (e.g. excessive numbers of claims or defenses, unrealistic monetary valuation of the dispute) and opportunistic procedural behaviors (e.g. acting diligently only in certain procedures, refusing to cooperate, being unprepared) obscure the proceedings and the content of property and contract rights, delay the process, and ultimately increase transaction costs. Monetary punishment is aimed at eliminating or reducing these behaviors. By altering the trade-offs of unfair practices, the partition of arbitration costs promotes a more genuine representation of the economic disputes and more collaborative conduct during the settlement. This in turn reduces transaction costs and favors improved enforcement of contract and property rights, the ultimate goal. 235 In Table 49, the arbitration cases were clustered according to the distribution of arbitration costs in the following sets: Complainant pays nothing (CPN), complainant pays less (CPL), complainant pays the same (CPS), complainant pays more (CPM), and complainant pays all (CPA). Table 49. Allocation of Arbitration Cost between Parties Proportion Paid by Complainant n CPN: Complainant pays nothing 25 CPL: Complainant pays less 26 CPS: Complainant pays the same 33 CPM: Complainant pays more 11 CPA: Complainant pays all 17 Total 112 Complainant pays nothing (CPN) means that in 25 cases (22% of the disputes) the plaintiff was successful in all his or her causes of action, and that arbitrators did not find any reason to make the winner responsible for part of the arbitration costs. Complainant pays all (CPA) means than in 17 cases (15% of the controversies), the arbitrators’ decision favored the defendant completely, and that there were no actions during the process to punish the winner with some percentage of the bill. Complainant pays less (CPL, 23%, n= 26)) and complainant pays more (CPM, 10%, n= 11) signify that the plaintiff’s claims were more or less successful, respectively, than those of the contestant (or than the defense mechanisms of the contestant). 236 For the 33 arbitration cases (29%) for which the tribunal ruled that the parties pay the costs of the process equally, 173 both pretensions and defense mechanisms were partially successful 174 and that the arbitrators applied the Civil Procedural Code article 392, No. 5, “...in the event that pretensions succeed partially, the judge may abstain from ruling on costs....” It is not the intent of this analysis to specify the decision on each claim and exception nor the percentage of arbitration cost assigned to each party. Figure 35. Distribution of Arbitration Costs to the Complainant Party 0 5 10 15 20 25 30 35 Number of cases CPN CPL CPS CPM CPA These results also suggest the neutral character of arbitration. Examination of the process costs between the litigants indicates strong neutrality of arbitration in settling disputes arising from private economic exchanges. Not only did causes of action and defense mechanism tie (prosper partially) in 29% of the commercial disputes (CPS), but also the defendant’s exceptions and other defenses were relatively more successful than 173 Actually, arbitrators do not decide on equal payment of arbitration expenses in these terms. Generally, arbitrators make statements like “the tribunal abstains from sentence on costs” or “Each party pays its own costs” or “Without costs.” When any of these phrases is used each party pays 50% of the process costs (which the parties already deposited at the beginning of the process) and that each litigant pays its own lawyer. That is, the tribunal does not order reimbursements nor payment of legal expenses. 174 For examples see, among others, case numbers 2, 11, 28, 46, and 63 in my files. 237 the plaintiff’s claims in 10% of the proceedings (CPM) and succeeded absolutely in 15% of the controversies (CPA). On a more abstract level, it is safe to say that both contract rights and property rights were upheld. Enforcement of these rights has nothing to do with arbitration tribunals, nor any court or other dispute settlement body, ruling in one’s favor. The arbitration award is the final decision of the tribunal. It resolves issues present in business and/or contractual relationships, and [re]determines the rights and obligations of each party. The arbitrators in case No. 49 argue about their role: In order to start the factual and legal analysis of the economic transaction and its contract, it is necessary to eliminate some elements which do not contribute to this task; on the contrary, they have served as distractors of the central issue. As it happens frequently in business disputes, the parties insist in obscuring the reality of their legal relationship by ultra-defending positions that do not resist any logical analysis (Case number 49, n.p. lines 405-411). Ideally, parties would adopt a positive course of action and avoid obscuring tactics. As illustrated above, however, this is not always the case. Even knowing the trade-offs, investors might still prefer distraction of the lawyers. In the end, the arbitral award settles the dispute and it cannot be appealed. Should the losing party choose to ignore the settlement, the other party has the recourse to initiate an “executive process 175 ” (proceso ejecutivo) to enforce compliance. However, this eventuality has nothing to do with the private commercial arbitration process, or its settlements. An executive process might also become necessary for international commercial arbitration awards. Colombia committed to enforce 175 This legal process can also be called execution process or summary debt collection proceedings. 238 international commercial arbitration awards when it ratified the New York Convention 176 in September 1979. 177 Katherine Lynch refers to the dependency of international commercial arbitration on domestic courts: [T]he regime of international commercial arbitration remains heavily embedded within national legal systems and national courts and their legislation plays an important role within the international arbitral process. International arbitration depends upon the substantial and reliable state support: national courts are the critical line of defense against attempts to frustrate an arbitration (2003, 167). Attempts to sabotage decision settlements are not exclusive to arbitral awards. Any court sentence may face recalcitrant defeated litigants. The solution for all of them is one and the same: an executive process. In Colombia, arbitral awards, both domestic and international, have the same legal standing as any final court decision: they have executive merit (merito ejecutivo), meaning that courts will enforce the unfulfilled obligations it contains. 178 176 UNCITRAL’s 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards. 177 Colombia will apply the Convention only to the recognition and enforcement of awards made in the territory of another contracting State. More recently, in November 1990, the Colombian Congress approved the New York Convention (Colombian Congress 1990). 178 By comparison, court-annexed arbitration awards under US law have a more uncertain standing and they are not necessarily the final decision. For instance, the Alternative Dispute Resolution Act of 1998 Section 657 states: “Arbitration award and judgment (a) FILING AND EFFECT OF ARBITRATION AWARD. An arbitration award made by an arbitrator under this chapter, along with proof of service of such award on the other party by the prevailing party or by the plaintiff, shall be filled promptly after arbitration hearing is concluded with the clerk of the district court that referred the case to arbitration. Such award shall be entered as the judgement of the court after the time has expired for requesting a trial de novo. The judgement so entered shall be subject to the same provisions of law and shall have the same force and effect as a judgement of the court in a civil action, except that the judgment shall not be subject to review in any other court by appeal or otherwise” (United States Congress 1998). (Emphasis added). 239 G. Demand for Arbitration in Recent Years To identify the historical trend of the demand for private commercial arbitration, the number of arbitration settlements is presented by year. Additionally, the data is clustered into periods of 5 years, except for the first and last groupings. The first group corresponds to cases “before 1990” and starts with a proceeding from 1987 (chronologically, the first case that met the selection criteria for this study). The last cluster covers only the years 2006 and 2007, the last year for which data were available. Also, a more comprehensive CAC data set is used to further substantiate the trend. Finally, for comparative purposes, data on commercial cases filed with the American Arbitration Association are included. Table 50. Demand for Arbitration, 1987-2007 Year n Year n 1985 1 1999 4 1989 1 2000 5 1991 2 2001 10 1992 0 2002 12 1993 5 2003 11 1994 2 2004 11 1995 3 2005 13 1996 4 2006 9 1997 5 2007 9 1998 5 Total 112 240 Figure 36. Arbitration Demand by Lustrum 0 10 20 30 40 50 60 Before 1990 1990 -1995 1996 - 2000 2001 - 2005 2006 - 2007 Number of cases Although in Colombia the possibility of settling private commercial disputes through arbitration existed long before the creation of the Center for Arbitration and Conciliation of the Bogotá Chamber of Commerce in 1984, 179 only 4 cases heard before the CAC between 1984 and 1992 passed the selection criteria for this study. This suggests that dominant gains in acceptance of arbitration as a means to settle private commercial disputes occurred in 1993 and after. This finding coincides with new legislation tending towards institutional modernization of the state in general, and the 179 In 1969, the Colombian Supreme Court stated: “Should arbitration be of private character, it cannot be considered unconstitutional, as this mechanism to settle dispute of mere private law, over abdicable rights, is neither expressly nor tacitly prohibited by the Constitution” (Sentence of May 29, 1969). 241 administration of justice in particular, including arbitration. 180 At the core of the modern legal framework is the Political Constitution of 1991. 181 From 2003 forward there is an ascending demand for commercial arbitration before the CAC of the Bogotá Chamber of Commerce. If data for 2006-2007 were averaged conservatively over a 5 year period, a slight decline in demand would still be noted (45 cases, as compared to 57 in the 2001-2005 period). However, the steady growth or stability in demand for arbitration is affirmed by complementary data provided by the Center for Arbitration and Conciliation. According to more inclusive CAC data, the total number of arbitration cases in all legal fields (administrative, civil, commercial, and labor law), and in commercial law in particular, has the following yearly distribution between 1999 and 2006. 182 180 The move towards actual use of arbitration is not circumscribed to Colombia. In 1998, Paul Constance wrote, “Although laws codifying the validity of some kind of ADR have existed in nearly all the region's countries for most of this century, in practice very few companies or individuals have chosen this option. During the last six years, however, a wave of interest in ADR has led two-thirds of the region's countries to either overhaul old laws concerning ADR or draft new ones, and dozens of new arbitration and conciliation centers have opened their doors.” (1998, n.p.). 181 For the Colombian legislation related to arbitration and other alternative dispute resolution mechanisms, see Chapter 4 in this dissertation. 182 Data provided by Rafael Bernal Gutierrez, director of the Center for Arbitration and Conciliation, during a personal interview. Data and complete interview in my files. At the time of the interview, the CAC did not have consolidated information for earlier years. 242 Table 51. Demand for Arbitration in CAC, 1999-2006 Year Arbitration in All Legal Fields Commercial Arbitration Percentage of Total 1999 172 101 59% 2000 263 68 33% 2001 217 66 30% 2002 201 72 36% 2003 191 96 50% 2004 196 108 55% 2005 225 116 52% 2006 205 119 58% Figure 37. Demand for Arbitration in CAC, 1999-2006 0 50 100 150 200 250 300 1999 2000 2001 2002 2003 2004 2005 2006 Year Number of cases Arbitration in All Legal Fields Commercial Arbitration Commercial Arbitration as a Percent of Total Table 51 and Figure 37 show not only an increasing trend in the number of commercial arbitration cases, but also an increasing percentage in comparison to arbitration in other legal fields. Similar trends can be identified for international commercial arbitration. Although reliable statistics on the volume of international 243 commercial arbitration are often difficult to obtain (given the private nature of the process) the volume of arbitration conducted by the International Chamber of Commerce Court of Arbitration is indicative of the growth of arbitration. The numbers of new requests for arbitration filed at the ICC Court of Arbitration has increased ten-fold since the 1960’s. In 2008 the ICC Court of Arbitration received 663 requests for arbitration involving 1,758 parties from more than 120 states compare with 250 requests in 1980 (ICC 2008, n.p.). 183 In the context of the United States, for the most part, the American Arbitration Association caseload data presents slow and steady growth or stability in demand for commercial arbitration (See Table 52). In fact, “[Commercial arbitration] case filings gradually increased from about 1,000 cases in 1960 to more than 17,000 in 2002” (Stipanowich 2004, 873). Table 52. American Arbitration Association Commercial Cases Filed 1997–2002 Year N 1997 13,813 1998 15,232 1999 16,822 2000 17,791 2001 17,297 2002 17,105 Source: American Arbitration Association, Department of Case Administration (Stipanowich 2004). 183 Incidentally, the amount in dispute exceeded US$1 million dollars in 72.5% of the new cases, compared with 49% of the cases in 1999 (ICC 2008). 244 Figure 38. Number of Commercial Cases Filed with American Arbitration Association, 1997-2002 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 1997 1998 1999 2000 2001 2002 Year Number of cases filed The increasing numbers of commercial arbitration proceedings, both domestic and international, is one factor that points to the centrality of arbitration as one of the preferred means to settle economic disputes in the context of global capitalism. Some of the features of the globalized economy are: dominance of market economies, increased lead and leverage of multinational corporations, the market-supportive role of the state in the economy, technological advances in information transfer and computer networking, proliferation of bilateral and multilateral investment and free trade agreements, and increasing exposure to foreign counterparts, even for small domestic businesses and individual entrepreneurs. This process brings with it new and more intricate investments or economic transactions, and their ensuing contracts, disputes, and demand for dispute settlements are equally complex. 184 184 For a discussion of the increasing complexity of business transactions in the context of the globalization of the economy see Christian Buhring-Uhle et al. 2006. 245 In her study about the challenges that globalization presents for international commercial arbitration, Katherine Lynch states: Since the 1970’s there has been an increase in both the size and complexity of international business transactions which tend to be multiparty, of long term duration, and deal with complex technologies and sophisticated financing arrangements (e.g. agency and distributorship, licensing and transfer of technology agreements involving high tech and patents, joint ventures and construction of engineering projects (2003, 1). The examples of economic transactions cited by Lynch, are matched in the investments and contracts of the 112 private commercial arbitration cases analyzed in this study (see section B. Profile of the Commercial Transaction, above). The congruence of both business exchanges and the venue for the settlement of commercial disputes at Colombia’s domestic level and at the international level is crystal clear. It is symptomatic of the contemporary relationship between economics and law at the structural level in Colombia -- and in the rest of the world. 185 In a critical discussion about contemporary interests in the “Rule of Law” and economic development, Trubek affirms that they take place in the context of neoliberal market policies, increased international trade and world economic integration, and the realization and spread of the idea that certain regulatory changes are required to secure institutional conditions for markets (2006). It is in this context where real demand for “new” venues to settle private economic controversies outside the formal courts increases and gains acceptance. It seems more than appropriate not only to mention but also to assign central stage to 185 For a discussion, at a more abstract level, about the historical interplay between law and economics see Teubner (1997), Campbell and Piciotto (1998), and Jessop (2003). 246 arbitration (and other ADRMs) when studying legal institutions and private economic interests. There is an extensive variety of legal institutions and it might be argued that all of them have an effect on the economy and economic development. This argument would make any distinctions among legal institutions unnecessary. It makes more sense, such an argument might continue, to attain data that prompts cross-national comparative studies. However, despite the dominance of this approach to studying the relationship between legal institutions and economic interests, it has not contributed much to a better understanding of the interplay between law and economics. One of the reasons for this may be that studies born from this perspective have not realized that the approach is missing a crucial element: an understanding of law, in general, and legal institutions in particular. This has created confusion about even the most basic legal terms. It is not surprising that the most recent studies attempt to get some legal concepts straight (Tiede 2006; Haggard, MacIntyre, and Tiede 2008), and that others even question the contribution of studies based on the dominant cross-national comparative approach (Rodrik 2006; Dixit 2006; Haggard, MacIntyre, and Tiede 2008). There seems to be a growing consensus that the time is overdue to introduce some stratification of legal institutions that matter most to private economic interests, and to study the actual functioning of key legal institutions and their role in economic development. This study was conceived in this vein. It set the discussion about legal institutions and private economic interests in the context of a specific institution: private commercial arbitration; in the context of a precise function for that institution: the settlement of private business disputes; in the context of a country: Colombia; utilizing primary data: 247 112 private commercial arbitration cases. Finally, the whole analysis was guided by a particular role assigned to institutions: that of reducers of transactions costs. However, the specific setting of this research did not limit the conclusions and implications of the study to only those cases. Throughout the dissertation I drew different conclusions and implications, not only circumscribed to the elements at hand, but also expanded to higher levels of interaction linking legal institutions and economic transactions. Each section has contained its corresponding conclusions. A summary of the overriding conclusions and implications of this dissertation is presented next. I want to close this chapter by referring to the opening quote. Throughout this dissertation arguments and evidence have been presented to illustrate the advantages of private arbitration over public courts in settling private commercial controversies. Those advantages serve the interests of investors since their more direct involvement in the proceedings, among other features, increases efficiency and reduces transactions costs in relation to the enforcement of property and contractual rights. Yet commercial arbitration governing market disputes is hardly a congenial setting. Contemporary commercial arbitration covers all sorts of complex investments with high stakes. Evolution towards greater attorney involvement and much more complexity is expected (Stipanowich and Kaskell 2001). The arbitrators in one of the cases sound the alert about the tendency of investors to recall reality in their own terms, “As it happens frequently in business disputes, the parties insist in obscuring the reality of their legal relationship by ultra- defending positions that do not resist any logical analysis” (Case number 49, n.p. lines 410-411). Thus both the complexity of the investments and lawyers ‘doing their job’ in private commercial arbitration proceedings may increasingly resemble the public legal 248 system which Alan Shore describes in the opening quote of this chapter. However there is one substantial difference: the arbitration process is driven by private investors. Thus, research about the presence of certain legal institutions in an economy may be complemented by researching the use and behavior of business people within those institutions. In other words, the efficiency, predictability, and stability of institutions may be affected by investors themselves. They are an integral part of the institutional framework of the country within which they do business. 249 Chapter 6 Conclusions To establish the relationship between legal institutions and economic interests, the dominant approach has been to use international rankings. This approach utilizes macro variables, which allow easier comparison among economies, but lack rigorous understanding and interpretation of legal institutions. Many institutional reforms and private legal practices that clearly support market relations and private economic interests are unaccounted for in these indices. Consequently, there is a large gap between international rankings and micro data addressing the state-of-the-art of domestic legal institutions. In Colombia, alternative dispute resolution mechanisms, ADRMs, are among those legal institutions ignored by cross-country rankings that purport to assess market- friendly institutional frameworks. I argued that the increasing use of ADRMs and private commercial arbitration in particular are part of a trend towards alternative forms of governance intended to lower transaction costs and reduce economic inefficiencies. In Colombia, institutional reform in the realm of the conciliation and arbitration of commercial issues is symptomatic of the adaptive process of a business community closely engaged with the world economy. Demand for private commercial arbitration by economic agents is the consequence of global economic pressures. ADRM’s reduce economic transaction costs and offer more efficient and predictable venues for resolving litigation. Consequently, they create a more stable environment for investors. The increasing use of ADRMs also suggests that the relationship between law and economics is rapidly changing at the structural level in Colombia. This constituted a 250 secondary hypothesis: market-friendly governance structures guided by private interests are displacing those dominated by the state. In other words, settling business controversies through private arbitration is becoming the preferred means for cases once channelled through the state judicial system. Although specific legislation related to private commercial arbitration might be part of broader state policies like consolidation of the democratic regime, increased access to justice, or attempts to address the national judicial system crisis, the use of ADRMs need, not only to be included, but also to be given a protagonist role in research about legal institutions and economic interests. It is accepted that law and justice systems need to offer clear definitions of property and contract rights, permit free entry and exit of private economic agents, enhance competition, enforce obligations, and reduce the margin of negative effects from opportunism and bounded rationality in order to support economic growth in Latin America. Clearly, the creation or expansion of alternative dispute resolution mechanisms such as arbitration and conciliation fall within this realm. ADRMs offer parties the flexibility needed to amend contracts/obligations and settle disputes according to evolving circumstances. Businesspeople who use ADRMs are no longer at the mercy of lengthy and uncertain processes. The virtues or shortcomings of existing legal institutions with respect to the economy are better observed at a practical micro level rather than at a macro level. The latter tends to obscure the content of legal institutions. Only the study of the actual functioning of particular legal institutions can illustrate the partnership between 251 institutions and economic interests, and consequently shed light on pertinent institutional reforms. The Limits of International Indices The main indices/ international rankings used to evaluate Colombia’s legal institutional support for economic development are: Worldwide Governance Indicators, Economic Freedom of the World, Index of Economic Freedom, Corruption Perceptions Index (CPI),Opacity Index, Global Competitiveness Index, and Doing Business. These indices were analyzed and their limits pinpointed. The specificity of the objectives of these indices sharply contrasts with an over- generalized and imprecise approach to examining legal institutions. The confusing composition of legal and institutional variables obscures conclusions concerning the support of Colombia’s legal order for the economy. In particular, commercial laws and those structures that govern commercial conflict are lost within macro variables that combine the larger questions of Colombia’s political stability, the division of state powers, and the political regime in general. With the partial exception of Doing Business, commercial transactions for real and personal property and the legal institutions that support these exchanges are not accounted for in the indices. The vast majority of property rights are not truly incorporated into the evaluation of legal institutions. A more precise and specific approach to legal institutions would translate into more accurate evaluations of the laws and their costs for national economies, and better information for policies oriented towards improving the institutional framework. 252 Rather than an uncritical inclusion of a “rule of law” cluster for all data sets on legal issues, index creators need to regroup sources according to the substance of the legal interaction those sources are evaluating, and probably to disaggregate the cluster. Legal theory would be handy here, as a basic and crucial distinction should be made between private and public law. Next groupings by civil law, commercial law, criminal law, administrative law, and so on would be in order. There is also a clear difference between procedural and substantive law and between regular and alternative dispute resolution mechanisms. I have to reiterate that it is odd that the private component of the legal system (commercial law, civil law, and the methods governing private investment controversies) does not receive higher consideration in determining a country’s institutional health, especially when one considers the crucial interactions between commercial law, dispute resolution mechanisms, and private economic interests. Possibly, index creators consider that legal institutions, and institutions in general, play such a limited role in improving economic competitiveness that a more judicious incorporation of property and contractual rights would have an insignificant effect. Or maybe they view the role of institutions as uncertain. Indeed the causality between institutions and economic development is far from established. However, the high value that the indices assign to institutions in the discussion of economic growth and development contravenes this possibility. Why does a high value for institutions in a ranking not merit a more rigorous understanding of legal institutions and composition of variables? These inconsistencies likely have negative implications for policy decisions. The use of rankings at the international level (by researchers and funding agencies) may 253 prompt national governments to formulate public policies for institutional changes in order to improve them and better compete for funding. Consequently, moving up in the rankings arguably becomes the new goal for national leaders and international consultants. I question whether this strategy would actually lead to higher levels of international investment since the indices are ill equipped with regard to legal institutions. Government officials could end up spending limited resources on reforms that are guided by fragile data and based on questionable premises. The bottom line is that economies with low scores on legal institutions are capable of attracting a good deal of investment. Some institutions have to be working to attract businesses! I venture an explanation that highlights the deficiencies of the international rankings: the indices aggregate variables to represent the entire legal system without a rigorous explanation of those factors and their effects on economic decisions. The rankings are built upon perceptions of state-centered legal institutions. In the case of Colombia, for example, scores of the whole legal system are hypothetical ratings that can overlook the kinds of market-friendly legal practices that are directed towards investors. The ability to settle commercial disputes through private commercial arbitration is one example of these legal practices. Arguably, investors might be looking at institutions and practices beyond those of the international rankings and with which they are familiar with and feel comfortable. “Secrecy” about institutions that support private economic exchanges only benefits those actors with previous access to that information; presumably large corporations historically conducting business in a given economy. This undermines higher levels of competition (market entry) and ultimately the health of the domestic 254 economy. Put differently, keeping the study of legal institutions and economic development at the level of cross-country macro variables might be creating (or maintaining) uncompetitive conditions. The perception is that most economies lack market institutions. Thus, only companies long-acquainted with certain markets invest there, keeping to themselves their knowledge about the institutions that are functioning for private accumulation. In short, rankings can reproduce the status quo by discouraging entry into new markets. The alternative is to overcome “perceptions” of institutions, to clarify the understanding of legal institutions, to conduct empirical studies of specific institutions, and them publicize them as much as the rankings. Doing Business requires particular mention. Clearly Doing Business embraces the challenge of going beyond perceptions and favors empirical information for understanding and improving the regulatory environment for business. Unfortunately, the call for greater attention to arbitration and other means to settle differences without the direct intervention of state courts is left untouched. Thus, the result may be better information about (and to ease) the regulatory domestic framework for economic transactions, but not necessarily about (and to improve) property and contract rights and the settlement of business disputes. After all, the focus of Doing Business’ empirical data is on the regulatory powers of the state, not on the judicial system. The empirical data may improve the content of or refocus business regulations, but is not likely to alter the role of dispute resolution mechanisms in the context of judicial reforms and their relationship with economic growth. In brief, the information offered by Doing Business about the number of procedures, duration, and cost of resolving a commercial dispute before a state court suggests the need to improve the performance of civil courts. 255 What if investors are not settling their commercial controversies in public courts? Hammergren’s empirical study of five Latin American countries finds that not only large firms prefer to take their disputes to arbitration over courts, “[d]omestic firms may use the same mechanisms, [thus] the growing number of national mediation centers, or less formal arrangements. Even for them, courts are intrinsically too formal, too unspecialized, and too slow under the best circumstances” (Hammergren n.d., 7). Ibrahim Shihata, general counsel and senior vice president of the World Bank from 1983 to 1998, confirms that over 80 percent of commercial disputes in Colombia are resolved through conciliation (Shihata 1996, 60). Thus, in the aspect enforcement of contracts, the empirical data of Doing Business may not be that relevant or at least complete. This dissertation addressed the shortcomings of the international indices by analyzing the use of an alternative dispute resolution mechanism utilized by business people, private commercial arbitration. First, the general trend towards the use of ADRMs in Colombia was established, followed by a within-case analysis of 112 instances of arbitration that took place between 1985 and 2007. The functioning of private commercial arbitration would show the successful coexistence of private mechanisms along side public ones. Should these two institutions coexist, it would indicate that a new relationship between law and economics has been formed at the structural level in Colombia, and support one of my hypotheses. The Place of ADRMs in Colombia The latest legal reforms in Colombia, and their approach to commercial controversies in particular, follow the current international trend of institutional and legal “modernization.” This trend is not something limited to a country or group of countries. 256 The worldwide importance of alternative dispute resolution mechanism goes hand-in- hand with increasing international trade and, more generally, a more globalized world economy. However, local conditions play a role in how reforms take place and the depth with which they are implemented. ADRMs have constitutional and legal bases, which is evidence of how the strengthening of these instruments has become embedded in Colombian policy. In Colombia, private commercial arbitration is a concrete expression of the constitutional right to access to justice. Arbitration has constitutional status as a means to administer justice and is regulated by lawmakers. Moreover, the state grants citizens the right to exclude themselves from the jurisdiction of its courts. At the same time, the actual use of arbitration is only possible by way of private agreement between the parties. Finally, the state regards arbitral awards as final, binding decisions, and Colombian law does not provide any appeal process against the arbitral award other than its total or partial annulment. Private sector commitment to ADRMs is seen in the well-functioning arbitration centers such as the one under the umbrella of the Bogotá Chamber of Commerce, which has been the model for many Latin American countries. Empirical Findings The analysis of the empirical cases profiles the users of alternative dispute resolution mechanisms, the business interactions they are part of, the type of controversies that arise, the legal solutions they pursue, the costs of arbitration, and ultimately, the recent demand trend for use of this mechanism to settle differences. Each 257 of these elements sheds light on the interaction between law and economics. The presence of international businesses in commercial arbitration, if found, should be considered indicative of the robustness of Colombian legal commercial private institutions, and support my second hypothesis. The Profile of Arbitration Users According to the data under study, the classification of arbitration users into their respective economic sectors closely mimics the actual sectoral composition of Colombia’s GDP. For example, the high percentage of litigants with economic activities in the service sector matches the high percentage of the service sector in the production structure of the economy. In this respect, users of arbitration are representative of the Colombian economy at large. Although the firms resorting to arbitration to settle their market economic disputes are mostly Colombians (70%), a high participation of foreign businesses is also evident. Thirty percent of litigants were non-Colombian investors or the firms represented have some form of foreign ownership. These percentages correspond to number of firms. However, should a study based on the composition (domestic-foreign) of the value of the dispute be conducted, it is likely that the proportions/percentages will reassemble those of Rowland’s analysis on domestic and foreign firms in Colombia. He found out that although foreign firms were 18% of total firms, they accounted for almost half (49%) of the total assets of all firms (Rowland 2005). In other words, I expect that arbitration cases with participation of foreigners would compromise at least 50% of the monetary value of all disputes brought to arbitration. 258 Thus, the demand for and use of arbitration represents of the productive make up of Colombia’s economy. This may be evidence of generalized acceptance of and support for arbitration in particular and ADRMs in general by the private sector in Colombia. This support complements state support for arbitration as a revitalized and actualized means to settle business disputes in a very interdependent global economy. Finally, the majority of the firms participating in arbitration are large firms (64%) with assets of more than 14,421 million COP. Thus, the distinctive characteristics of the arbitration users in Colombia are: 1) they are representative of the production structure; 2) the majority are Colombian but many of them are foreigners; and, 3) they are predominantly large firms. The Profile of Contractual Relations in Arbitration The types of contracts brought to arbitration are diverse, as is their distribution. The highest numbers of contractual economic exchanges are in wholesale trade, construction, transportation and warehousing, real estate, and professional services. Together these account for 73% of the disputes under study. It has been argued that one of the reasons investors appeal to arbitration is to maintain the business relation by avoiding the more adversarial nature of a trial before a state tribunal. This study did not find any evidence to support that claim. The data reveals that only three business relations, out of 112, “survived” the dispute and arbitration. In similar discussions, it has been said that the longer the contractual relation, the more likely it is for entrepreneurs to favor ADR over formal tribunals in order to preserve the business interactions, and possibly attract new ones, or at least not discourage new ones. The evidence on short- and long-term contracts suggests that the length of the economic 259 relation is not a strong determinant in a party’s decision to turn to arbitration to settle controversies. Put differently, parties in both short-term and long-term economic relationships equally include an arbitration clause in the contract regulating their obligations and rights. This may indicate that regardless of the expected duration of the contract -- short, medium or long-- economic agents are comfortable resolving disputes outside the traditional court system. Why might parties in all lengths of business relationship rely on arbitration? First, the benefits of arbitration (and/or the disadvantages of formal courts) apply to all commercial transactions independent of their duration, and this is perceived by the parties. Second, by using arbitration regardless of the length of the contract, investors may be sending a positive message about their commitment to alternative institutions for governing economic rights and obligations. Thus, without considering the outcome of the dispute, parties keep their names in the pool of potential contractors. I assume that contract disputes are becoming more commonplace within a globalized economy. For this reason, being involved in a contract dispute may not be a blemish on an investor’s history, but his or her preferences as to the means to settle a dispute well may be. Appealing to arbitration (or avoiding litigation before the traditional courts) may be seen as an incentive to “stay in business.” Another empirical finding about the determinants of arbitration indicates that business relations with performance obligations spread out over multiple installments, or multiple actions between the parties are more likely to use arbitration to settle disputes than business relationships with more defined/precise/limited fulfillment of obligations. I could argue that recurrent/multiple actions are characteristic of more complex business 260 transactions whose eventual conflictual scenarios are more difficult to capture in a contract. Thus, many situations are left implicit and performance is highly likely to be contested. Alternatively, given the one-time character of sporadic contractual relations, parties may not “bother” to include an arbitration clause in their contracts and ultimately then settle more disputes before traditional courts. The terms of the contracts governing these interactions are more explicit and their enforcement is likely to be easier. Consequently, the rational expectation about contracts is that they are incomplete. However, this is not an argument to deter economic exchanges. It is still plausible for parties to recognize the intricacy of the economic transaction, the complexity of the context wherein obligations are performed and rights exercised, the limitations of writing contracts, and their own human nature, and at the same time to anticipate the presence of conflicts and the need to include a governing mechanism to address them. That is, investors are capable and now have the right to decide on the inclusion of arbitration clauses in contracts regulating their business dealings. The cases in this study show that the parties did indeed exercise this ability, especially in recurrent business transactions. It may be that activation of the contract’s arbitration clause and the consequent arbitration settlement demonstrates investors’ preferences for a rapid and final closure over salvaging and/or continuing the business interaction. Profit-conscious business people regard commercial controversies as matters that need to be dealt with as quickly as possible (Bonn 1972). Longer dispute resolution could represent higher arbitral awards as the monetary amount includes depreciation and/or moratory instances, as was the case in most of the arbitration cases studied. Furthermore, the longer the conflict drags on over 261 time, the longer investors are exposed to possible negative market conditions and/or the greater the chance of missing new investment opportunities. In synthesis, these data do not confirm the perception that firms intend to continue business relations with their conflicting counterparts as one of the reason for favoring arbitration over state courts. However, there is no information about whether or not the parties to the disputes maintain other economic exchanges between them. What may be driving the demand for arbitration, then, is the need to close commercial disputes as quickly as possible and at the same time preserve one’s reputation as a good potential business partner within the market. This positive reputation stems not from being dispute- free, but because the firms are able to settle their disputes through arbitration. This alternative agrees with Bruce Benson’s conclusion about the popularity of commercial arbitration in the United States (1995). Collaborative Behavior of Investors during Arbitration Judging by the type of defenses and their frequency, this evidence suggests highly collaborative behavior by the parties during the arbitration process. Dilatory defense (excepciones previas) were brought for only 17.9% of the cases. In general, the contestant party questions the legal competence of the arbitration tribunal and demands the nullification of any procedural action. This may signal that they do not want the dispute settle in arbitration although they signed a contract with an arbitration clause, in essence they signed an arbitration contract. A more plausible reason may be the defendant’s need to “buy some time” to prepare her/his initial legal strategy. In all of the 20 instances which used this defense, the decision was found against the petitioner, and the process 262 continued and finished with the arbitral award. In this sense, 100% of the arbitration contracts were enforced. Most defendants, 100 of the 112 tribunals (89.3%), circumscribed their defense tactics to the merits of the claims, and among these parties, more than 50% limited the number of exceptions to three or less. Consequently, the procedural behavior of the parties during arbitration may be considered a confirmation of how much they care about not damaging their reputation by delaying the arbitration process with numerous baseless defenses. Thus, not only investor preference for private arbitration over litigation within the courts, but also their eagerness to signal an investor’s reputation as a quality business partner matter, more so than that party’s involvement in commercial disputes per se. Obviously, conflict-free economic interactions are desirable and would be ideal, but this doesn’t seem to be the expectation for economic exchanges that are regulated by a private contract which, furthermore, includes a clause on how to settle disputes. Rather, investors may be more concerned about avoiding overly litigious venues to resolve conflicts and contentious behavior during the dispute settlement process. In general, the data on the length of the arbitration process denote high compliance of the parties with the rules of the process, suggesting collaborative behavior in their common interest of settling the business dispute. As explained in Chapter 5, parties can “delay” the proceeding by individual actions during the pre-arbitral phase, and by consensus during the arbitration phase. According to the evidence, the latter source of delays seems to have a larger effect of increasing the overall duration of arbitration. Therefore, concurrence among the parties explains the speed and time necessary to attain 263 the arbitral award, whether within or beyond the terms established in the rules for arbitration. To offer some perspective to the duration of private commercial arbitration in Colombia, by comparison the settlement of disputes under NAFTA arbitration has ranged between 29 and 86 months. Thus 108 (96%) of the 112 arbitration before the CAC of Bogotá Chamber of Commerce came to a final decision in less time than the fastest case under NAFTA arbitration. Ideally, parties would adopt a positive course of action and avoid obscuring tactics. Even knowing the trade-offs, investors might still prefer distraction tactics. In the end, the arbitral award settles the dispute and it cannot be appealed. Any arbitral award or court sentence may face recalcitrant defeated litigants. The solution for all of them is one and the same: an executive process. In Colombia, arbitral awards, both domestic and international, have the same legal standing as any final court decision: they have executive merit (merito ejecutivo), meaning that courts will enforce the unfulfilled obligations it contains. The Place of Experts’ Knowledge The possibility to use experts as dispute resolvers is often mentioned as one of the advantages of arbitration over formal judicial tribunals. This is not the situation of the arbitration processes analyzed here. This study focuses on arbitration in law (en derecho), which means that the claims are heard before attorneys and the parties are represented by a lawyer. This does not mean, however, that expertise in the economic sector in which the conflict arose is missing. On the contrary, industry experience and knowledge enters the 264 process by the parties’ initiative via witness experts or professional experts. In this manner, both the legal and economic interest of the litigants are taken into consideration. The use of professional experts was extensive in the arbitration cases analyzed. The composition of the evidence requested in private commercial arbitration suggests the centrality of expert knowledge about the economic elements of the exchange in settling disputes. The qualified knowledge and expertise on parts of the economic transaction comes from expert witnesses, who understand the technical complexity of some elements of the business interaction. The emphasis on ‘parts’ and ‘some’ is to indicate that the intricacy of investments is not limited to facts that can be correctly analyzed from a single field of knowledge. It is the balance of all specialized expertise, plus the arbitrators’ own specialized knowledge, that makes private commercial arbitration a lower transaction cost venue to settle private economic disputes. The combination of arbitrator expertise, which lies not in the realm of trade/ investment per se but with the contract and laws regulating the investments, and the contributions of expert witnesses may be one of the features that makes private commercial arbitration more desirable than state courts for settling disputes. Using the same logic expounded by Richard Poser in discussing jurors and arbitrators, the area of life arbitrators know about is commercial contracts, performance of obligations, property rights, and contract rights (1998, 642). Thus, in private commercial arbitration in Colombia, arbitrators have access to technical expertise (via expert witnesses) and, given their own high level legal expertise, they do not have to cover the entire range of civil law to understand the complexity of the transaction and the contract governing it (Dixit 2004). 265 The idea of conflicts being decided not by lawyers but by people with experience in and knowledge of the economic sector or industry in which the difference arose is perceived, almost immediately, as a positive. However, this perspective might ignore the existence of contracts which create property rights, the cornerstone legal concepts in a market economy. In this light it is difficult to imagine how the materialization of property and contract rights (and the strengthening of market relations) is better served without lawyers deciding contractual economic controversies. Furthermore, it must be recalled that the investors themselves agree (in most instances by creating the contract governing the economic transaction itself) to submit any dispute to legal arbitration, whether national or international. There are other, more specific advantages of using expert witnesses in arbitration over their use in formal tribunals. First, the parties to arbitration participate actively in the selection of experts. Second, since the parties pay for the expertise, the budgetary considerations are under the litigants’ control. Thus, litigants can have access to higher levels of knowledge and experience. Third, it is expected that the service is rendered more quickly. There are no delays in the process for awaiting the appointment, acceptance and reports of expert witnesses, for example. Considering the time needed to request, approve, conduct, and judge expert knowledge when adjudicating commercial disputes, it could be argued that arbitration also reduces transaction costs in this sense. The Costs of Arbitration Contrary to the claims that the lower cost of arbitration is a determinant in choosing this venue over state courts to settle disputes, in the Colombian context 266 arbitration is the more expensive alternative. For an economy where the monthly legal minimum salary in 2007 was 433,700 Colombian pesos, or US$192 monthly (for an annual income of US$2,304), even the following lowest amounts are very high by national standards. Only 4% of the controversies were valued at less than US$10,000; only 3% of the tribunals cost less than US$ 2,000; 50% cost over US$ 50,000 and 28% over US$ 100, 000; finally, the lowest arbitral award was over US$ 2,000. In more than 51% of the cases the award was more than US$ 100, 000. In short, lower dispute resolution costs is not one of the elements driving the demand for commercial arbitration in Colombia. In another aspect, examination of the process costs assessment between litigants indicates strong neutrality of arbitration in settling disputes arising from private economic exchanges. Not only did causes of action and defense mechanism tie (prosper partially) in 29% of the commercial disputes (cases where both parties paid process costs equally), but also the defendant’s exceptions and other defenses were relatively more successful than the plaintiff’s claims in 10% of the proceedings (complainant was sentenced to pay more) and succeeded absolutely in 15% of the controversies (complainant was ordered to pay all the process expenses). On a more abstract level, it is safe to say that both contract rights and property rights were upheld. Enforcement of these rights has nothing to do with arbitration tribunals, nor any court or other dispute settlement body, ruling in one’s favor. The arbitration award is the final decision of the tribunal. It resolves issues present in business and/or contractual relationships, and [re]determines the rights and obligations of each party. Thus, contract and property rights were 100% respected. 267 Demand for Commercial Arbitration Although in Colombia the possibility of settling private commercial disputes through arbitration existed long before the creation of the Center for Arbitration and Conciliation of the Bogotá Chamber of Commerce in 1984, only 4 cases heard before the CAC between 1984 and 1992 passed the selection criteria for this study. This suggests that dominant gains in acceptance of arbitration as a means to settle private commercial disputes occurred in 1993 and after. This finding coincides with new legislation tending towards institutional modernization of the state in general, and the administration of justice in particular, including arbitration. At the core of the modern legal framework is the Political Constitution of 1991. From 2003 forward there is an ascending demand for commercial arbitration before the CAC of the Bogotá Chamber of Commerce. Similar trends can be identified for international commercial arbitration. Although reliable statistics on the volume of international commercial arbitration are often difficult to obtain (given the private nature of the process) the volume of arbitration conducted by the International Chamber of Commerce Court of Arbitration is indicative of the growth of arbitration. The numbers of new requests for arbitration filed at the ICC Court of Arbitration has increased ten-fold since the 1960’s. In 2008 the ICC Court of Arbitration received 663 requests for arbitration involving 1,758 parties from more than 120 states compare with 250 requests in 1980. In the context of the United States, for the most part, the American Arbitration Association caseload data presents slow and steady growth or stability in demand for commercial arbitration between 1997 and 2002. In fact, commercial arbitration case filings gradually increased from about 1,000 cases in 1960 to more than 17,000 in 2002. 268 Increasing numbers of commercial arbitration proceedings, both domestic and international, is one factor that points to the centrality of arbitration as one of the preferred means to settle economic disputes in the context of global capitalism. It is symptomatic of the contemporary relationship between economics and law at the structural level in Colombia -- and in the rest of the world. It is in the context of increased international trade and economic integration where real demand for “new” venues to settle private economic controversies outside the formal courts increases and gains acceptance. It seems more than appropriate not only to mention but also to assign central stage to arbitration (and other ADRMs) when studying legal institutions and private economic interests. 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World Bank’s Worldwide Governance Indicators (WGI) Data Sources for Regulatory Quality and Rule of Law Source Rule of Law Regulatory Q Beltersmann Transformation Index (BTI). Expert assessment own staff Rule of law, private property Competition Business Environment Risk Intelligence <www.beri.com> Expert assessment. Permanent panel Enforceability of contracts, direct financial fraud, money laundering and organized crime. Cingranelli Richards Human Rights Database and Political Terror Scale. Expert assessment: Amnesty International and U.S. Department of Sate. <humanrightsdata.com> Independence of judiciary Economist Intelligent Unit Expert assessment - correspondents. <www.eiu> Violent crime, organized crime, fairness of judicial process, enforceability of contracts, Speediness of judicial process, confiscation/expropriation, intellectual property rights protection, private property protection Unfair competitive practices, price controls, discriminatory tariffs, excessive protections, discriminatory taxes Freedom House: Experts -Staff and consultants Nations in transit: rule of law; Countries at the crossroads: rule of law. (Narratives) Gallup World Poll. Survey households <www.gallupworldpoll.com> Confidence in police force. Confidence in judicial system. Have you been a victim of crime? Global Insight Business Risk and Conditions (WMO - World Markets Online ratings). Experts- Staff <www.globalinsight.com> Judicial independence - legal impartiality; crime - security precautions. Tax effectiveness, assessment of necessary business laws Global Insight Global Risk Service (DRI - Data Resources Inc.). Experts-Staff <www.globalinsigh.com> Losses and costs of crime; kidnapping of foreigners; enforceability of government contracts; enforceability of private contracts Exports 2% reduction, imports 2% reduction, increase in other regulatory burdens, ownership of business by non-residents, ownership of equities by non- residents Heritage Foundation Index of Economic Freedom. Expert-Staff <www.heritage.org> Property rights Foreign investment; banking/finance International Fund for Agricultural Development, IFAD. Rural Sector Performance Assessments. Experts - Country Economist <www.ifad.org> Access to land; access to water for agriculture Enabling conditions for financial services development; investment climate for rural businesses; access to agricultural input and produce markets 291 Source Rule of Law Regulatory Q Latinobarometro. Survey households <www.latinobarometro.org> Trust in judiciary; trust in police; have you been a victim of crime? Merchant International Group gray Area Dynamics. Expert assessment <www.merchantinternational. com> Legal safeguards; organized crime Unfair trade; unfair competition Political Risk Services International Country Risk Guide. Expert assessment <www.prsgroup.com> Law and Order: Strength and impartiality of the legal system and assessment of popular observance of the law Investment profile: risk to operations, taxation, repatriation, labor costs. Government attitude towards business Institute for Management Development World Competitiveness Year Book (WCY). Survey business people in country <imd.ch> Tax evasion is a common practice in your country, Justice is not fairly administered in society, Personal security and private property are not adequately protected, Parallel economy impairs economic development in your country, Insider trading is common in the stock market, Patent and copyright protection is not adequately enforced in your country The exchange rate policy of your country hinders the competitiveness of firms, Protectionism in the country negatively affects the conduct of business, Competition legislation in your country does not prevent unfair competition, Price controls affect pricing of products in most industries, Legal regulation of financial institutions is inadequate for financial stability, Foreign financial institutions do not have access to the domestic market, Access to capital markets (foreign and domestic) is easily available, Ease of doing business is not a competitive advantage for your country, Financial institutions' transparency is not widely developed in your country, Customs' authorities do not facilitate the efficient transit of goods, The legal framework is detrimental to your country's competitiveness, Foreign investors are free to acquire control in domestic companies, Public sector contracts are sufficiently open to foreign bidders, Real personal taxes are non distortionary, Real corporate taxes are non distortionary, 292 Source Rule of Law Regulatory Q Banking regulation does not hinder competitiveness, Political system as obstacle to development Labor regulations hinder business activities New Legislation restricts competitiveness, Subsidies impair economic development, Ease to start a business World Economic Forum Global Competitiveness Survey.Survey firms. <weforum.org> Common crime imposes costs on business Organized crime imposes costs on business Money laundering through banks is pervasive Money laundering through non- banks is pervasive Quality of Police Insider trading is pervasive The judiciary is independent from political influences of government, citizens, or firms Legal framework to challenge the legality of government actions is inefficient Intellectual Property protection is weak Protection of financial assets is weak Illegal donation to parties are frequent Percentage of firms which are unofficial or unregistered / Tax evasion Administrative regulations are burdensome Tax system is distortionary Import barriers / cost of tariffs as obstacle to growth Competition in local market is limited It is easy to start company Anti monopoly policy is lax and ineffective Environmental regulations hurt competitiveness Government subsidies keep uncompetitive industries alive artificially Complexity of Tax System U.S. Department of State Trafficking of People Report. Expert assessment Trafficking of people World Bank Country Policy and Institutional Assessment Expert assessment Business regulatory environment; factor and products markets; trade policy Property rights 293 Appendix B Table 54. Milken Institute’s Opacity Index Table Data Sources for Legal and Judicial Environment Question/ Category Source Are secured creditors ranked first in the distribution of the proceeds that result from the disposition of the assets of a bankrupt firm? Country's insolvency law codes Do bankruptcy procedures allow the continued operation of the business? Country's insolvency law codes Can creditors participate in bankruptcy proceedings? Country's insolvency law codes Does the insolvency court recognize foreign insolvency proceedings? Country's insolvency law codes Does the insolvency court recognize foreign insolvency proceedings? Country's insolvency law codes Do shareholders have preemptive rights that can only be waved by a shareholders' vote? International Securities Services Association, & Salomon Smith Barney Guide to World Equity Markets Is the consent of creditors required before a firm files for reorganization? Country's insolvency law codes Number of procedures for court filing World Bank Doing Business Low risk of expropriation, profit repatriation and payment delay International Country Risk Guide Political Risk Index Aon Corporation (Insurance Broker) Effectiveness of bankruptcy law - well defined and enforced? Global Competitiveness Report Judicial Independence Global Competitiveness Report Efficiency of legal framework Global Competitiveness Report Religious Tensions International Country Risk Guide Law and Order International Country Risk Guide Property Rights Heritage Foundation Financial Assets Property rights Global Competitiveness Report Get Credit: Creditor Rights Index World Bank Doing Business Close Business: Court-Powers Index World Bank Doing Business Source: Milken Institute, n.d. Note that the Opacity Index does not use the World Bank’ s Doing Business data on enforcing contracts for grading legal and judicial environment. Instead this data is used 294 for grading the effectiveness of economic policy. The Opacity Index uses: “Average days of legal procedure from filing to enforcement,” “Contract enforcement index: how inefficient (formalism) is contract enforcement?” And “Enforce contracts: cost (GNI per capita), all three from Doing Business’ enforcing contracts variable. Yet it incorporates Heritage Foundation’s Index of Economic Freedom on property rights; which, incidentally, also contains the GCR’s data on judicial independence. Thus judicial independence is included twice in the Opacity Index. 295 Appendix C The 12 Variables and 3 Sub-indices of the Global Competitiveness Index Subindex A: Basic Requirements 1) Institutions 2) Infrastructure 3) Macroeconomic stability 4) Health and primary education Subindex B: Efficiency Enhancers 5) Higher education and training 6) Goods market efficiency 7) Labor market efficiency 8) Financial market sophistication 9) Technological readiness 10) Market size Subindex C: Innovation and Sophistication Factors 11) Business sophistication 12) Innovation 296 Appendix D List of Codes ______________________________________________________________________ HU: Sanabria’s Masters Thesis File: [C:\Atlas\Sanabria’s Dissertation.hpr5] Edited by: Super Date/Time: 06/23/09 10:28:12 AM ______________________________________________________________________ 001- Primary sector 001- Secondary sector 001- Tertiary sector 01- Administrative Services 01- Agriculture, Forestry, Fishing and Hunting 01- Arts, Entertainment and Recreation 01- Construction 01- Finance and Insurance 01- Health Care and Social Assistance 01- Information 01- Manufacturing 01- Mining, Quarrying, and Oil and Gas Extraction 01- Other Services 01- Professional, Scientific and Technical Services 01- Real Estate and Rental and Leasing 01- Retail Trade 01- Transportation and Warehousing 01- Utilities 01- Whole Sale Trade 02- Domestic 02- Domestic/Foreign 02- Foreign 02- Two Colombians 02- Two Foreigners 02.1- Large 02.1- Medium 02.1- Small 02.2- Individual investors 03-Affreightment (Fletamento) 03-Partnership Agreement (Asociación) 03-International Financial Leasing (Arrendamiento Financiaero) 03-Cession of Rights (Cesión de Derechos) 03-Commercial Agency (Agencia Comercial) 03-Concession Contract (Conseción) 03-Distributorship (Distribución) 03-Idiosyncratic (Innominado, Atípico) 297 03-Insurance (Seguro) 03-Real Estate Lease Agreement (Arrendamiento Inmobiliaria) 03-Turnkey (Llave en Mano) 03-Construction (Obra) 03-Power Purchase Agreement 03-Promissory Sales Agreement (Promesa de Compraventa) 03-Purchase/Sale of goods (Compraventa) 03-Purchase/Sale of services (Compraventa) 03-Purchase/Sale Real State (Compraventa de Finca Raiz) 03-Supply Contract (Suministro) 03-Transportation/Shipping (Transporte) 03-Transaction Contract (Transacción) 03.1- Administrative Services 03.1- Agriculture, Forestry, Finishing and Hunting 03.1- Arts, Entertainment and Recreation 03.1- Construction 03.1- Finance and Insurance 03.1- Health Care and Social Assistance 03.1- Information 03.1- Manufacturing 03.1- Mining, Quarrying, and Oil and Gas Extraction 03.1- Other Services 03.1- Professional, Scientific and Technical Services 03.1- Real Estate and Rental and Leasing 03.1- Retail Trade 03.1- Transportation and Warehousing 03.1- Utilities 03.1- Whole Sale Trade 04- Long term +5y 04- Medium term 1 to 5y 04 - Short term -1y 04.1- Recurrent-Multiple 04.1- Sporadic/1 time 05- Towards the beginning 05- Towards the end 05- Towards the middle 05.1- Relation had ended 05.2- Relation ends 05.3- Relation continues 06- Contract Execution 06- Contract Implementation and Liability 06- Contract Interpretation 06- Contract Settlement (Liquidación) 06- Contract Termination 06- Economic Disequilibrium 06- Indemnify (Loss and Damages) 298 06- Payment of Obligations 07- Moral Hazard 07- Opportunism 07- Abuse of Economic Power or Dominant Position 07 - Third Party Issues 07 - Unforeseen Contingencies 08- Exceptions 0 08- Exceptions 01 08- Exceptions 02 08- Exceptions 03 08- Exceptions 03 08- Exceptions 04 08- Exceptions 05 08- Exceptions 06 08- Exceptions 07 08- Exceptions 08 08- Exceptions 09 08- Exceptions 10 08- Exceptions 11 08- Exceptions 12 08- Exceptions 13 08- Exceptions 14 08- Preliminary Exceptions 08- Counterclaim 09- Arbitration Clause 09- Compromise (Compromiso) 09- Both 09- Reform to Arbitration Clause 09- 1Arbitrator 09- 3Arbitrators 10.1- Day of the Filing of the Demand- 10.2- Day of the First Arbitration Hearing- 10.3- Day of the Decision Hearing- 11- Overall 06m 11- Overall 07m 11- Overall 08m 11- Overall 09m 11- Overall 10m 11- Overall 11m 11- Overall 12m 11- Overall 13m 11- Overall 14m 11- Overall 15m 11- Overall 16m 11- Overall 17m 11- Overall 18m 299 11- Overall 19m 11- Overall 20m 11- Overall 21m 11- Overall 23m 11- Overall 24m 11- Overall 26m 11- Overall 27m 11- Overall 28m 11- Overall 29m 11- Overall 33m 11- Overall 37m 11- Overall 39m 11- Overall 47m 12- D2FH 02m 12- D2FH 03m 12- D2FH 04m 12- D2FH 05m 12- D2FH 06m 12- D2FH 07m 12- D2FH 08m 12- D2FH 09m 12- D2FH 10m 12- D2FH 11m 12- D2FH 13m 12- D2FH 14m 12- D2FH 15m 12- D2FH 16m 12- D2FH 18m 12- D2FH 20m 12- D2FH 28m 13- FH2DH 01m 13- FH2DH 02m 13- FH2DH 03m 13- FH2DH 04m 13- FH2DH 05m 13- FH2DH 06m 13- FH2DH 07m 13- FH2DH 08m 13- FH2DH 09m 13- FH2DH 10m 13- FH2DH 11m 13- FH2DH 12m 13- FH2DH 13m 13- FH2DH 14m 13- FH2DH 15m 13- FH2DH 17m 300 13- FH2DH 18m 13- FH2DH 19m 13- FH2DH 20m 14- Suspensions 0 14- Suspensions 01m 14- Suspensions 02m 14- Suspensions 03m 14- Suspensions 04m 14- Suspensions 05m 14- Suspensions 06m 14- Suspensions 08m 14- Suspensions 09m 14- Suspensions 10m 14- Suspensions 11m 14- Suspensions 12m 14- Suspensions 15m 14- Interruptions 14- Extensions 15- Documentary 15- Documentary Subpoenas 15- Judicial Inspection 15- Party Interrogation 15- Witnesses interrogation 15- Professional or Expert Witnesses (Peritos) 15.1- Expert Business Administration 15.1- Expert Architecture 15.1- Expert Accounting 15.1- Expert Economics 15.1- Expert Finance 15.1- Expert Engineering 15.1- Expert Naval 15.1- Expert Technical 15.1- Expert Translation 16- Dispute to be determined 16- Dispute1 -10K 16- Dispute2 11K to 20K 16- Dispute3 21K to 50K 16- Dispute4 51K to 100K 16- Dispute5 101K to 250K 16- Dispute6 251K to 500K 16- Dispute7 500K to 1M 16- Dispute8 1M to 2M 16- Dispute8 2M to 5M 16- Dispute9 +5M 16- Dispute91 +15M 16- Dispute91 +40M 301 16- Dispute91 250M 17- Arbitration Undetermined 17- Arbitration1. 17- Arbitration2 17- Arbitration3 17- Arbitration4 17- Arbitration5 17- Arbitration6 17- Arbitration7 17- Arbitration8 +500K 17- Arbitration9 1M 17- Arbitration9 2M 18- Plaintiff pays nothing 18- Plaintiff pays all 18- Plaintiff pays less than defendant 18- Plaintiff pays more than defendant 18- Plaintiff pays same as defendant 19- Award N/A 19- Award1 -10 19- Award2 11 to 20 19- Award3 21 to 50 19- Award4 51 to 100 19- Award5 101 to 250 19- Award5 251 to 500 19- Award6 501 to 1M 19- Award7 1M to 2M 19- Award8 2M to 5M 19- Award8 5M to 10M 19- Award9 +15M 19- Award9 +25M 20- Cases between 1991 to 1995 20- Cases between 1996 to 2000 20- Cases between 2001 to 2005 20- Cases between 2006 to 2007 20- Cases Before 1990s END. 302 Appendix E Code Book Parties to the arbitration. This set of codes gives information about the plaintiff and the defendant. It includes the economic sector of the companies, based on stage in production chain and according to the North American Industry Classification System (NAICS). It also distinguishes between domestic and foreign businesses as well as their size, based on their assets. In short, these codes help to define the profile of the investors using arbitration. Economic Sector Code each firm individually. 001-Primary-Firm extracts or harvest products. Examples: Agriculture, mining, forestry, farming, grazing, hunting and gathering, fishing, and quarrying. 001-Secondary-Firm manufactures finished goods. Also known as the industrial sector. 001-Tertiary-Firm provides services to the general population and business. Also know as service sector. Code each party to the arbitration individually according to the North American Industry Classification System (NAICS). This grouping is not only more detailed, but also it is more in tune with current globalized and internationalized economic relations. 01-Administrative Services-Firms primarily engaged in providing a range of day-to-day office administrative services, such as financial planning, billing and record keeping, personnel, and physical distribution and logistics. 01-Agriculture, Forestry, Finishing and Hunting- Establishments primarily engaged in growing crops, raising animals, harvesting timber, and harvesting fish and other animals from a farm, ranch, or their natural habitats. 01-Arts, Entertainment and Recreation- Firms that operate facilities or provide services to meet varied cultural, entertainment, and recreational interests of their patrons 01-Construction- Establishments primarily engaged in the construction of buildings or engineering projects (e.g., highways and utility systems), in the preparation of sites for new construction, and in subdividing land for sale as building sites. Construction work includes new work, additions, alterations, or maintenance and repairs. 01-Finance and Insurance- Companies primarily engaged in financial transactions (transactions involving the creation, liquidation, or change in ownership of financial assets) and/or in facilitating financial transactions. 01-Health Care and Social Assistance. Self-explanatory. 303 01-Information- The main components of this sector are the publishing industries, motion picture and sound recording industries, broadcasting industries, telecommunications industries, Web search portals, data processing industries, and information services industries. 01-Manufacturing-The manufacturing sector comprises establishments engaged in the mechanical, physical, or chemical transformation of materials, substances, or components into new products. 01-Mining, Quarrying, and Oil and Gas Extraction- Establishments primarily engaged in growing crops, raising animals, harvesting timber, and harvesting fish and other animals from a farm, ranch, or their natural habitats. 01-Other Services- Comprises establishments engaged in providing services not specifically provided for elsewhere. It includes activities such as repairing equipment and machinery, providing dry cleaning and laundry, personal care, death, pet care, photo- finishing, temporary parking, security, and dating services. 01-Professional, Scientific and Technical Services- These activities require a high degree of expertise and training. Activities performed include: legal advice and representation; accounting, bookkeeping, and payroll services; architectural, engineering, and specialized design services; computer services; consulting services; research services; advertising services; photographic services; translation and interpretation services; veterinary services; and other professional, scientific, and technical services. 01-Real Estate and Rental and Leasing- Companies primarily engaged in renting, leasing, or otherwise allowing the use of tangible or intangible assets, and establishments providing related services. 01-Retail Trade-The retailing process is the final step in the distribution of merchandise. Retailers are organized to sell merchandise in small quantities to the general public. Includes store and non-store retailers. 01-Transportation and Warehousing-The Transportation and Warehousing sector includes industries providing transportation of passengers and cargo, warehousing and storage for goods, scenic and sightseeing transportation, and support activities related to modes of transportation. 01-Utilities- Firms are engaged in the provision of the following utility services: electric power, natural gas, steam supply, water supply, and sewage removal. 01-Whole Sale Trade- Companies wholesaling merchandise and rendering services incidental to the sale of merchandise. The wholesaling process is an intermediate step in the distribution of merchandise. 304 Domestic/Foreign 02-Domestic- Colombian national company without any foreign capital. 02-Domestic/Foreign- The economic transaction is between a Colombian and a non- Colombian firm. 02-Foreign- The firm is not Colombian or has legal and/or financial ties with a non- Colombian firm. Part of its profits goes to a foreign establishment. 02-Two Colombians- The economic transaction is between two Colombian firms. 02-Two Foreigners- The economic transaction is between two foreign firms or two firms with legal and/or financial ties with a non-Colombian company. Part of their profits goes to a foreign establishment. Size of Firms. Law 905 of 2004 defines size of companies based on assets and number of employees. The monthly current minimum salary (SMMV, acronym in Spanish) is the uniform reference used to determine the asset value. Thus, values are adjusted annually. For instance, medium size companies have assets valued between 5,001 SMMV and 30,000 SMMV. In 2007, according to Bogotá Chamber of Commerce, large companies were those with assets over CP$ 14,421 million, and medium size companies had assets over CP$ 2,040 million. 02.1-Large- Companies with assets over 14,421 millions of Colombian pesos. 02.1-Medium-Firms with assets between 2, 040 and 14, 421 millions of Colombian pesos. 02.1-Small-Companies with assets of less than 2,040 millions of Colombian pesos. 02.2-Individual investors- These are not companies but people transacting with firms. Commercial transaction. The codes refer to the commercial relationships among the entrepreneurs. First, they present the legal typification of the economic exchange: the contract. Contracts are also grouped according to which economic sector the contractual obligations fall under. Second, it classifies the relationship according to its length (short, medium and long term). Type of Contract. This refers to the legal denomination of the economic interaction between the parties: the contract. 03-Affreightment (Fletamento) 03-Partnership Agreement (Asociación) 03-International Financial Leasing (Arrendamiento Financiaero) 03-Cession of Rights (Cesión de Derechos) 03-Commercial Agency (Agencia Comercial) 03-Concession Contract (Conseción) 03-Distributorship (Distribución) 03-Idiosyncratic (Innominado, Atípico) 03-Insurance (Seguro) 03-Real Estate Lease Agreement (Arrendamiento Inmobiliaria) 03-Turnkey (Llave en Mano) 03-Construction (Obra) 305 03-Power Purchase Agreement 03-Promissory Sales Agreement (Promesa de Compraventa) 03-Purchase/Sale of goods (Compraventa) 03-Purchase/Sale of services (Compraventa) 03-Purchase/Sale Real Estate (Compraventa de Finca Raiz) 03-Supply Contract (Suministro) 03-Transportation/Shipping (Transporte) 03-Transaction Contract (Transacción) Contract Obligations by Economic Sector. Codes group contracts according to which economic sector the contractual obligations fall under. The contractual obligations in dispute are organized following the North American Industry Classification System (NAICS). Earlier, the NAICS was used to group the firms or the subjects to the contracts and to the disputes. Now this classification scheme is used for the object of the dispute. This distinction is needed because companies conduct contractual relations in economic sectors outside the sector they comprise. For instance a bank, which belongs to the financial sector, contracts for the construction of a new building. This contractual obligation falls under the construction sector. Or a transportation firm, which belongs to the transportation sector, buys insurance. This contract falls in the finance and insurance sector. 03.1- Administrative Services 03.1- Agriculture, Forestry, Fishing and Hunting 03.1- Arts, Entertainment and Recreation 03.1- Construction 03.1- Finance and Insurance 03.1- Health Care and Social Assistance 03.1- Information 03.1- Manufacturing 03.1- Mining, Quarrying, and Oil and Gas Extraction 03.1- Other Services 03.1- Professional, Scientific and Technical Services 03.1- Real Estate and Rental and Leasing 03.1- Retail Trade 03.1- Transportation and Warehousing 03.1- Utilities 03.1- Whole Sale Trade Length of Contractual Relations 04- Long term +5y- The economic relationship lasts more than 5 years. 04- Medium term 1to5y- The economic exchange is between 1 and 5 years 04 - Short term -1y- The economic exchange last less than 1 year. Performance of Contract Obligations: Recurrent or Sporadic 04.1- Recurrent-Multiple- The contractual duties are performed multiple times, in recurrent fashion. 306 04.1- Sporadic/1time- The contractual obligations between the parties are performed one time, and the contract is fulfilled. There are no more economic duties between the parties beyond that “one action.” Occurrence of the Conflict within the Timeline of the Business Interaction. Estimation of the moment that the controversy takes place during the economic relationship. 05- Towards the beginning- The conflict arose within the initial 1/3 of the contractual relation. 05- Towards the end- The dispute happened within the last third of the economic exchange. 05- Towards the middle- The differences are evident during the second third of the business interaction. Business Relations after Arbitration. This refers to the effect of the conflict (and arbitration) on the business interaction. 05.1- Relation had ended- Economic exchanged had ended at the time of arbitration. 05.2- Relation ends- Business interaction ends with the arbitral award. 05.3- Relation continues- Commercial relation is maintained after the arbitration decision. Legal pretensions and defense mechanisms. This group of codes captures the parties’ legal objectives within the arbitration tribunal; that is, what the subjects to the controversy ask the arbitrators to decide in their favor. Pretensions and defense resources are based on each party’s particular account of contracted performance of obligations. Thus, this category is a snapshot of the legal strategy of the parties to the dispute. Legal Pretensions. In general, pretensions and defenses fall in one or more of three clusters: contract interpretation, contract implementation, and contract termination. Code all that apply. 06- Contract Execution- Plaintiff asks for the enforcement of the contract or part of it. 06- Contract Implementation and Liability- Party asks to establish faulty implementation of the obligations and to declare the other party liable. 06- Contract Interpretation- Party is concerned with the interpretation of part (or the whole) of the contract, the obligations, the implementation. 06- Contract Settlement (Liquidación)- Once the termination of the contract is established or declared, the party wants the arbitrators to assign rights and responsibilities. 06- Contract Termination- Party asks for the end of the contractual obligation. 06- Economic Disequilibrium- Party argues external conditions that make its end of the agreement “unjust.” 06- Indemnify (Loss and Damages)- Party asks for the establishment of losses and damages and their payment. 307 06- Payment of Obligations- Party demands the monetary payment for services already rendered. 07- Moral Hazard- The character or circumstances of the other party changes the costs of fulfilling the contractual obligations (e.g. withheld information). 07- Opportunism- Party argues that the other took advantages of situations making the deal “unfair” or the fulfillment of obligations difficult, impossible, or too onerous. 07- Abuse of Economic Power or Dominant Position- Party argues power (dis) advantage affecting the terms of the contract and its implementation. 07- Third Party Issues- Party says that compliance with contract is affected by a third party. 07- Unforeseen Contingencies- External factors affected the fulfillment of obligations. Defense Mechanisms. Generally in Colombian private commercial arbitration, defenses are limited to exceptions of merit (excepciones de merito) to argue against pretensions or “the merits.” In some instances a second means of defense is used to question either the procedure or the existence of the arbitration tribunal itself. This type of defense is called use of preliminary exceptions (excepciones previas). Finally, the responding party may even decide to go on the offensive and file a counterclaim. Code according to the number of exceptions the defendant argues. Code preliminary exceptions and counterclaims when presented. 08- Exceptions 0- No merit exceptions were argued. 08- Exceptions 01- One merit exception was argued. 08- Exceptions 02- Two merit exceptions were argued. 08- Exceptions 03- Three merit exceptions were argued. 08- Exceptions 04- Four merit exceptions were argued. 08- Exceptions 05- Five merit exceptions were argued. 08- Exceptions 06- Six merit exceptions were argued. 08- Exceptions 07- Seven merit exceptions were argued. 08- Exceptions 08- Eight merit exceptions were argued. 08- Exceptions 09- Nine merit exceptions were argued. 08- Exceptions 10- Ten merit exceptions were argued. 08- Exceptions 11- Eleven merit exceptions were argued. 08- Exceptions 12- Twelve merit exceptions were argued. 08- Exceptions 13- Thirteen merit exceptions were argued. 08- Exceptions 14- Fourteen merit exceptions were argued. 08- Preliminary Exceptions- In general, the contestant party questions the legal competence of the arbitration tribunal and demands the nullification of any procedural action. They attack form, not substance. 08- Counterclaim- Defendant files a counter-suit against the original plaintiff. Source of the Arbitration Tribunal. Ultimately, the only sources of an arbitration tribunal are the parties themselves. Formally, the decision to recur to arbitration can occur before or after the dispute arises. 308 09- Arbitration Clause- The contract itself has an arbitration clause. 09- Compromise (Compromiso)- Parties express their agreement to arbitration in a separate document. 09- Both- There is arbitration clause and compromise. 09- Reform to Arbitration Clause- Parties modify the terms of the arbitration clause. 09- 1Arbitrator- The arbitration tribunal has one arbitrator. 09- 3Arbitrators- The arbitration tribunal has 3 arbitrators. Length of the arbitration process. These codes establish the duration in months for each arbitration process from the day the plaintiff requests the arbitration tribunal be set up until the decision hearing. 10.1- Day of the Filling of the Demand- Code the date. 10.2- Day of the First Arbitration Hearing- Code the date. 10.3- Day of the Decision Hearing- Code the date. Overall Duration of Arbitration. From the day of the demand unitl the decision is reached. Calculate the months between these 2 dates and code accordingly. 11- Overall 06m- 11- Overall 07m- 11- Overall 08m- 11- Overall 09m- 11- Overall 10m- 11- Overall 11m- 11- Overall 12m- 11- Overall 13m- 11- Overall 14m- 11- Overall 15m- 11- Overall 16m- 11- Overall 17m- 11- Overall 18m- 11- Overall 19m- 11- Overall 20m- 11- Overall 21m- 11- Overall 23m- 11- Overall 24m- 11- Overall 26m- 11- Overall 27m- 11- Overall 28m- 11- Overall 29m- 11- Overall 33m- 11- Overall 37m- 11- Overall 39m- 11- Overall 47m- 309 Pre-arbitral Phase. This begins with the initial arbitration request and ends at the date of the first arbitral hearing. D2FH: Demand date to first hearing date. Calcuate months between these 2 dates and code accordingly. 12- D2FH 02m- 12- D2FH 03m- 12- D2FH 04m- 12- D2FH 05m- 12- D2FH 06m- 12- D2FH 07m- 12- D2FH 08m- 12- D2FH 09m- 12- D2FH 10m- 12- D2FH 11m- 12- D2FH 13m- 12- D2FH 14m- 12- D2FH 15m- 12- D2FH 16m- 12- D2FH 18m- 12- D2FH 20m- 12- D2FH 28m- Arbitral Phase. This covers the time from the ending date of the first arbitration hearing to the date of the last hearing, the decision hearing. FH2DH: First hearing to decision hearing. Calculate moths between these 2 dates and code accordingly. 13- FH2DH 01m- 13- FH2DH 02m- 13- FH2DH 03m- 13- FH2DH 04m- 13- FH2DH 05m- 13- FH2DH 06m- 13- FH2DH 07m- 13- FH2DH 08m- 13- FH2DH 09m- 13- FH2DH 10m- 13- FH2DH 11m- 13- FH2DH 12m- 13- FH2DH 13m- 13- FH2DH 14m- 13- FH2DH 15m- 13- FH2DH 17m- 13- FH2DH 18m- 13- FH2DH 19m- 13- FH2DH 20m- 310 Suspensions Requested.These codes account for the time the arbitration process is extended when the parties exercise their procedural right of asking for suspensions. Code the number of months arbitration was on stand-by. Also code other interruptions and extensions when appropriate. 14- Suspensions 0- 14- Suspensions 01m- 14- Suspensions 02m- 14- Suspensions 03m- 14- Suspensions 04m- 14- Suspensions 05m- 14- Suspensions 06m- 14- Suspensions 08m- 14- Suspensions 09m- 14- Suspensions 10m- 14- Suspensions 11m- 14- Suspensions 12m- 14- Suspensions 15m- 14- Interruptions- 14- Extensions - Means of Proof or Evidence Requested. This cluster of codes identifies the type of evidence the parties and/or the arbitrators request and is practiced in the process. Particular attention is given to the use of expert witnesses (peritos). 15- Documentary- Documents directly introduced by the parties. 15- Documentary Subpoenas- Documents provided by third parties through “arbitration summons” (oficios). 15- Judicial Inspection- 15- Party Interrogation- 15- Witness Interrogation- 15- Professional or Expert Witnesses (Peritos)- Double code with specific expertise. 15.1- Expert Business Administration- 15.1- Expert Architecture- 15.1- Expert Accounting- 15.1- Expert Economics- 15.1- Expert Finance- 15.1- Expert Engineering- 15.1- Expert Naval- 15.1- Expert Technical- 15.1- Expert Translation- The Monetary Value of Arbitration. How much money is involved in private commercial arbitration? 311 The Valuation of the Dispute. Generally, the complainant party estimates the monetary value of the claim. This is included under legal pretensions. Convert the sums into U.S. dollars using Colombia Central Bank (Banco de la República) exchange rate data, and code accordingly. 16- Dispute to be determined- There is not indication of the monetary claim. 16- Dispute1 -10K- Claim is between 1,000 and 10,000 dollars. 16- Dispute2 11K to 20K- 16- Dispute3 21K to 50K- 16- Dispute4 51K to 100K- 16- Dispute5 101K to 250K- 16- Dispute6 251K to 500K- 16- Dispute7 500K to 1M- Claim is between 500,000 and 1 million dollars. 16- Dispute8 1M to 2M- 16- Dispute8 2M to 5M- 16- Dispute9 +5M- Claim is between 5 and 15 millions of dollars. 16- Dispute91 +15M- Claim is between 15 and 40 millions of dollars. 16- Dispute91 +40M- Claim is between 30 and 250 millions of dollars. 16- Dispute91 250M- Claim is 250 millions of dollars. The Cost of the Arbitration Tribunal. Generally, this value is established at the beginning of the proceedings and is based on the value of the claim. Convert the sums into U.S. dollars using Colombia Central Bank (Banco de la República) exchange rate data, and code accordingly. 17- Arbitration Undetermine- There is not indication of the arbitration cost. 17- Arbitration1 -2K- Cost is less than 2,000 dollars. 17- Arbitration2 2K to 10K- Cost is between 2,000 and 10,000 dollars. 17- Arbitration3 11K to 20K- 17- Arbitration4 21K to 50K- 17- Arbitration5 51K to 100K- 17- Arbitration6 101K to 250K- 17- Arbitration7 251K to 500K- 17- Arbitration8 +500K- Cost is between 500, 000 and 1 million dollars. 17- Arbitration9 1M- Cost is between 1 and 2 millios of dollars. 17- Arbitration9 2M- Cost is of 2 millions of dollars. Cost Distribution. (Winners and Losers). These codes identify the distribution of the arbitration cost between the litigants. 18- Plaintiff pays nothing- 18- Plaintiff pays all- 18- Plaintiff pays less than defendant- 18- Plaintiff pays more than defendant- 18- Plaintiff pays same as defendant- 312 The Amount of the Arbitral Award. This is the tribunal’s decision on the monetary claims. Convert the sums into U.S. dollars using Colombia Central Bank (Banco de la República) exchange rate data, and code accordingly. 19- Award N/A- Decision against the plaintiff. Therefore, there is no award. 19- Award1 -10- Award is less than 10,000 dollars. 19- Award2 11 to 20- Award between 10,000 and 20,000 dollars. 19- Award3 21 to 50- 19- Award4 51 to 100- 19- Award5 101 to 250- 19- Award5 251 to 500- 19- Award6 501 to 1M- Award between 501,000 and 1 million dollars. 19- Award7 1M to 2M- 19- Award8 2M to 5M- 19- Award8 5M to 10M- 19- Award9 +15M- Award between 15 and 25 millions of dollars. 19- Award9 +25M- Award over 25 millions of dollars. Demand for Arbitration in Recent Years. The arbitration cases are grouped in periods of 5 years. 20- Cases between 1991 to 1995- 20- Cases between 1996 to 2000- 20- Cases between 2001 to 2005- 20- Cases between 2006 and 2007- 20- Cases Before 1990s- 313 Appendix F Arbitration Cases 1. Caja de Previsión Social del Banco Central Hipotecario v.Asdrúbal Valencia Sierra 2. Curaçao Harbour Towing & Service Co. N.V. v. Transportadora Colombiana de Graneles S.A. 3. Libia de J. Velásquez de Amórtegui v. Flota Mercante Grancolombiana S.A. 4. Proyectos y Suministros P. y S. Limitada v. Inmobiliaria el Cedrito Limitada 5. Carlos Rincón Duque e Hijos Ltda. v. La Empresa Colombiana de Productos Veterinarios S.A., "Vecol" S.A. 6. Instituto de Mercadeo Agropecuario, Idema v. Colmares Ltda. y TMM S.A. de C.V. (COFL 1) Transportación Marítima Mexicana, Sociedad Anónima de Capital Variable. 7. Instituto de Mercadeo Agropecuario, Idema v. Colmares Ltda. y TMM S.A. de C.V. (COFL-2/91 y COFL-3/91). 8. Mitsui de Colombia S.A. v. Metalec, Manufacturas Metal Eléctricas Ltda. 9. Representaciones Cajiao y Cortés Ltda. Gregorio Cajiao Roa v. Servicio Aéreo a Territorios Nacionales Satena. 10. Distribuidora Montejo Ltda. v. Bavaria S.A. 11. Inversiones Petroleras S.A., Inverpetrol v. Repsol Exploración S.A. 12. Distral S.A. (EMA) General Electric Canada Inc. v. La Nacional Compañía de Seguros Generales de Colombia S.A. 13. Radio Televisión Interamericana S.A. v. Guy Frederick Ecker. 14. Betancur Aranzazu Chávez Arquitectos Compañía Ltda. v. Bonilla y Arboleda Ltda. 15. Ricardo Bustos Reyes v. B.M.G. Ariola de Colombia S.A. 16. Gerza Ltda. v. Bavaria S.A. 17. Instituto de Mercadeo Agropecuario, Idema v. Americana de Gestiones Comerciales, Amerco Limitada (International Grain Trade Inc.). 314 18. Rojas Torres y Cía. Ltda. v. Bavaria S.A. 19. Daniel J. Fernández & Cía. Ltda. v. Fiberglass Colombia S.A. 20. Acarreos Beyjor Ltda. v. Bavaria S.A. 21. Fumigaciones Young Ltda. v. Cuéllar Serrano Gómez S.A. 22. Preparaciones de Belleza S.A., "Prebel S.A." v. L'Oreal (Co. Francesa). 23. Comercial Bira Ltda. v. Bavaria S.A. 24. Interpack de Colombia Ltda. v. Grace de Colombia Ltda. 25. Supercar Ltda. v. Sociedad de Fabricación de Automotores S.A. (Sofasa). 26. Geofundaciones S.A. v. Consorcio Constructores Asociados de Colombia (Conascol S.A.). Impregilo S.P.A. Sucursal Colombia 27. Carlos Alfonso Ayala Jiménez v. Forever Living Products Colombia S.A. 28. Aerolíneas Internacionales y Turismo Representaciones Limitada,Alitur Ltda. v. Air Aruba Sucursal en Colombia. 29. Icollantas S.A. v. Auto Mundial Ltda. y otras 30. Texas Petroleum Company v. Eduardo A. Escobar Tamayo y María del Rosario Porras Do Santos. 31. Risaralda Motor S.A. v. General Motors Colmotores S.A. 32. Geoadinpro Ltda. v. Ingenieros Civiles Asociados S.A. 33. Parque Central Bavaria S.A. v. Clínica La Sabana S.A. 34. Maquinaria Pesada del Tolima Ltda., MPT v. Tracey & Cía. S.A. 35. H. Rojas y Asociados Ltda., y Gonzalo Sarmiento P. y Asociados Ltda. v. Peñalisa de Entre Ríos S.A. 36. Impsa Andina S.A. v. Argosy Energy International 37. Bavaria S.A. v. Cooperativa de Transportadores del Oriente Antioqueño Ltda. Cootransorán Ltda. 315 38. Laboratorios California S.A. v. System Software Associates Inc. y S.S.A. Colombia S.A. 39. Total Inversión Inmobiliaria Ltda. v. The Chase Manhattan Bank 40. Alfredo Gaitán Borrero y María Carmenza Vásquez de Gaitán v. Texas Petroleum Company 41. Constructora Mazal Ltda. v. Inversiones GBS Ltda. 42. Álvaro Orozco Asociados Ltda. v. Bavaria S.A. 43. Industria Colombiana de Productos Farmacéuticos de Consumo, Konsuma de Colombia S.A. v. Tecnoquímicas S.A. 44. Luis Alfonso López Ruiz v. Juan Moreno Rodríguez 45. Bavaria S.A. v. Compañía Especializada en Transporte Terrestre Ltda., Transportes Cetta Ltda. 46. Angelcom S.A. v. Nortel Networks de Colombia 47. Juan Carlos Guzmán Pulido v. Promotora El Faro de Cartagena S.A. 48. Cellular Trading de Colombia Ltda., Cell Point, v. Comunicación Celular S.A., Comcel 49. Teleconsorcio S.A. v. Radiotrónica S.A. y Sistemas Asesorías y Redes S.A. (SAR S.A.) Radiotrónica S.A.v. Teleconsorcio S.A., NEC Corporation, Nissho Iwai Corporation, Mitsui & Co Ltd. y Sumitomo Corporation 50. Colombiana de Incubación S.A., Incubacol, v. Dupont de Colombia S.A. 51. Bavaria S.A. v. Transportes Transvizar Ltda. Llamamiento en garantía a Cóndor S.A. 52. Bavaria S.A. v. Transportes Transvizar Ltda. 53. Oscar Mario Mora Trujillo y Cía. S. en C. Insucampo e Insucampo v. Agrevo S.A. (Aventis Cropscience Colombia S.A. - Bayer) 54. Ladrillera Santafé S.A. v. STK de Colombia S.A. (Softtek) 55. Avisos Lucaso Ltda. v. Carlos J. Mattos, Hyundai Colombia Automotriz S.A. e Inversiones y Proyectos GTS Ltda. 316 56. Augusto Ruiz Corredor y Cía. Ltda., v. Constructora Andrade Gutiérrez S.A. 57. Valores y Descuentos Limitada v. Bellsouth Colombia S.A. 58. Dragados Hidráulicos Ltda. v. Concesionaria Tibitoc S.A. ESP. 59. Corporación de Ahorro y Vivienda AV Villas v. Luis Fernando Uribe Aristizábal . 60. Tecnaire Ltda. v. Conconcreto S.A. 61. Clínica Vascular Navarra Ltda. v. Medical Systems Finance S.A. 62. Ingeniería Perfiles y Figurados Ltda. Inperfig Ltda. v. Distribuidora Acerías Paz del Río Ltda. 63. Wilson Sarmiento Ayala v. Víctor Salazar Tejada. 64. Bavaria S.A. v. Compañía Especializada en Transportes Terrestres Ltda. 65. Construcciones Bonaire Limitada v. Impregilo SPA sucursal de Colombia. 66. Francisco de Paula Higuera Forero, Pablo Antonio Lozano Buriticá y Epifanio Aldana González v. Casa Luker S.A. 67. DART International Inc. sucursal Colombia v. Mohave Colombia Corporation. 68. Avalnet Comunicaciones Ltda. v. Avantel S.A. 69. Rafael Tono Lemaitre & Cía. Ltda. v. Banco de la República. 70. IEC Ingenieros S.A. v. Hocol S.A. 71. Consorcio Business Ltda.v. Bellsouth Colombia S.A. 72. Tebsa S.A. ESP v. Corporación Eléctrica de la Costa Atlántica S.A. ESP (Corelca). 73. Lina María Zuluaga Mantilla v. Héctor Falla Urbina. 74. Prodesic S.A. v. Promociones San Alejo Limitada. 75. Conavi Banco Comercial y de Ahorros S.A. v. Conconcreto S.A. 76. Multiphone S.A. v. Bellsouth Colombia S.A. 77. Exxonmobil de Colombia S.A. v. Muñoz Real y Cía. Ltda. 317 78. Comercial de Oriente Ltda. v. Alimentos Kraft de Colombia S.A. 79. Comercial Okasa Ltda. v. Banco Colpatria Red Multibanca Colpatria S.A. 80. Invertexty, E.U. v. L.G. Electronics Colombia Limitada. 81. Ingeniería, Servicios, Montajes y Construcción de Oleoductos de Colombia S.A. (Ismocol S.A.) v. Petrobras Colombia Limited. 82. Procesadora de Maderas Cimitarra Ltda. v. Acerías Paz del Río S.A. 83. Corpoaseo Total S.A. ESP v. AMA SpA Azienda Municipale Ambiente Societa per Azioni. 84. Banco Agrario de Colombia S.A. v. Life Gard Security Ltda. 85. Sociedad Colombiana de Construcciones, Sococo S.A. v. Carbones del Cerrejón LLC (antes International Colombia Resources Corporation) 86. Herpaty Limitada v. Sociedad de Concesionarios S.A. (Concesa S.A.) 87. Lloreda S.A. y "Patrimonio Autónomo Fiduciaria Colpatria Lloreda III" v. Segurexpo de Colombia S.A., aseguradora de crédito y del comercio exterior. 88. Philips Colombiana de Comercialización S.A. v. Cosmitet Limitada Corporación de Servicios Médicos Internacionales Them y Cía. Ltda. 89. Digimaster Ltda. v. Ana Lucía Pachón de González y Cía. Ltda. 90. Video Colombia S.A. (Blockbuster Inc.) v. Comcel S.A. 91. Astecnia S.A. v. Francocolombiana de Construcción Ltda. 92. Exconvial Ltda. v. Dragados Internacional de Pipelines - DAIP S.A. (Mantenimiento y Montajes Industriales Masa S.A. sucursal Colombia) 93. Unibase Ltda. v. Panamco Colombia S.A. (Panamerican Beverages) 94. Terpel de la Sabana S.A. v. Tethys Petroleum Company Ltd. y Meta Petroleum Ltd. 95. Drug Pharmaceutical S.A. - Drug S.A. v. Alianza Fiduciaria S.A. 96. Bancolombia S.A. v. Jaime Gilinski Bacal 318 97. Jaime Gilinski Bacal, Isaac Gilinski Sragowicz, Swain Finance Co, Jacklyn Finance Co, Garbay Isle Investments, Foye Investments, Feldome Worldwide Corp., Early Haven Investments, Colonel County, Caprice Maritime LTD, Bloice Enterprice, Aileen International, Quantum Partners LDC, Quantum Emerging Growth Partners C.V. Y Quantum Endowment Fund N.V. (antes Quantum Fund N.V.) v. Bancolombia S.A., Nicanor Restrepo Santamaría, Fabio Rico Calle, José Alberto Vélez Cadavid, Jorge Londoño Saldarriaga, Ricardo Sierra Moreno, Jorge Vega Uribe y Jaime Alberto Velásquez Botero. 98. Lispy S.A. (Homecenter) v. El Retiro Centro Comercial S.A. 99. Comercializadora y Constructora Integral Limitada v. Makro de Colombia S.A. (Comercial Inmobiliaria Internacional S.A.) 100. Sociedad AS Colombia Ltda. v. Informática & Gestión S.A. 101. Inversiones Interglobal Ltda. v. Samsung Electronics Colombia S.A. y Soon Ho Park. 102. Arcec Internacional Ltda. (Arcec S.A.) v. Banco Comercial AV Villas S.A. 103. Jaime de la Cruz Franco Pérez y otros v. Héctor Villa Osorio y otros. 104. Electrificadora de Santander S.A. ESP v. Energía y Finanzas S.A. ESP. 105. Almacenes Pensilvania Ltda. v. Mary Tarquino de Portela 106. Alcanos de Colombia S.A. ESP v. Ecopetrol S.A. 107. Punto Celular Ltda. v. Comunicación Celular S.A. (Comcel S.A.) 108. Construcciones C.F. Ltda. v. Banco de la República. 109. Comerciamóvil S.A.v. Colombia Móvil S.A. ESP. 110. Telemóvil Colombia S.A. v. Colombia Móvil S.A. ESP. 111. Almagran S.A. v. Clover Systems Inc.(Agent of Allied Van Lines). 112. Human Life C.T.A. v. Arcec S.A. 319 Appendix G International Investors Directly or Indirectly Involved in Private Commercial Arbitration 1. Curaçao Harbour Towing & Service Co. N.V. 2. Transportación Marítima Mexicana, Sociedad Anónima de Capital Variable (TMM S.A. de C.V.) 3. Mitsui S.A. 4. Inversiones Petroleras S.A. Inverpetrol 5. Repsol Exploración S.A. (Hispánica de Petróleos S.A., Hispanoil) 6. Carupana Oil Latin America Company 7. Petrocanadá Oil & Gas Inc. 8. General Electric Canada Inc. 9. Guy Frederick Ecker 10. B.M.G. Ariola 11. International Grain Trade Inc. 12. Fiberglass Colombia S.A. 13. L'Oreal 14. Interpack de Colombia Ltda. 15. Grace de Colombia Ltda. 16. Sofasa Renault 17. Impregilo S.P.A. 18. Forever Living Products S.A. 19. Air Aruba 20. Icollantas S.A. 21. Texas Petroleum Company 22. General Motors 23. Tracey & Cía. S.A. 24. Argosy Energy International 25. System Software Associates Inc. 26. The Chase Manhattan Bank 27. Nortel Networks 28. Northern Telecom Cala Corporation 29. Cellular Trading de Colombia Ltda. (Cell Point) 30. Comunicación Celular S.A. (Comcel) 31. NEC Corporation 32. Nissho Iwai Corporation 33. Mitsui & Co Ltd. 34. Sumitomo Corporation 35. Sistemas Asesorías y Redes S.A. (SAR S.A.) 36. Angelcom S.A. 37. Radiotrónica S.A. 38. Teleconsorcio S.A. 39. Colombiana de Incubación S.A. (Incubacol) 40. Dupont 320 41. Agrevo S.A. - Aventis Cropscience Colombia S.A. (Bayer) 42. Softek 43. Hyundai 44. Bellsouth 45. Medical Systems Finance S.A. 46. DART International Inc. 47. Mohave Colombia Corporation 48. Avalnet Comunicaciones Ltda. 49. Avantel S.A. 50. Hocol S.A. 51. Multiphone S.A. 52. Exxonmobil 53. Kraft Foods 54. Philip Morris Corporation 55. L.G. Electronics 56. Petrobras Limited 57. AMA SpA Azienda Municipale Ambiente Societa per Azioni 58. Carbones del Cerrejón LLC (International Colombia Resources Corporation) 59. Philips 60. Cosmitet Ltda. (Corporación de Servicios Médicos Internacionales) 61. Blockbuster Inc. 62. Francocolombiana de Construcción Ltda. 63. Dragados Internacional de Pipelines (DAIP S.A.) 64. Panamerican Beverages (Coca Cola) 65. Terpel S.A. 66. Tethys Petroleum Company Ltd. 67. Meta Petroleum Ltd. 68. Jaime Gilinski Bacal 69. Mantenimiento y Montajes Industriales Masa S.A. 70. Cossack Limited 71. Oakland Limited 72. Clova Services Limited 73. Beaumont Consultants Limited 74. Fillians Enterprises Limited 75. David W. Sloan 76. Comercial Inmobiliaria Internacional S.A. (Makro) 77. Swain Finance Co. 78. Jacklyn Finance Co. 79. Garbay Isle Investments 80. Foye Investments 81. Feldome Worldwide Corp. 82. Early Haven Investments 83. Colonel County 84. Caprice Maritime Ltd. 85. Bloice Enterprises Corp. 86. Aileen International 321 87. Quantum Partners L.D.C. 88. Quantum Emerging Growth Partners C.V. 89. Quantum Endowment Fund N.V. (Quantum Fund N.V.) 90. Samsung Electronics Colombia S.A. 91. Millicom International Celular (MIC: Tigo) 92. Clover Systems Inc. 93. Allied Van Lines. 322 Appendix H NAFTA Investor-State Arbitration Duration in Months * Table 55. Disputes Involving the Government of Canada Cases Notice of Arbitration Final Award Date Months to Date of Last Notice Chemtura Corporation (formerly Crompton Corp.) 17 Oct. 2002 20 Oct 2008 Case unfinished 79 ** V. G. Gallo 30 March 2007 April 9 2009 Case unfinished 26 ** Merrill & Ring Forestry L.P. 27 Dec. 2006 29 Dec. 2008 Case unfinished 29 ** Pope & Talbot, Inc. 25 March 1999 6 Nov. 2002 43 S.D. Myers, Inc. 30 Oct. 1998 30 Dec. 2002 50 United Parcel Service 19 April 2000 11 June 2007 86 **Cases in progress as of May 2009. Table 56. Disputes Involving the US Government Cases Notice of Arbitration Final Award Date Months to Date of Last Notice ADF Group Inc. 19 July 2000 9 Jan. 2003 30 CCFT 16 March 2005 28 Jan. 2008 35 Canfor Corporation 5 Nov. 2001 7 March 2005 Case unfinished 91** Glamis Gold Ltda. 10 De. 2003 19 Sept. 2007 Case unfinished 70 ** Grand River Enterprises Six Nations Ltda. et al. 12 March 2004 3 March 2009 Case unfinished 63 ** R. Loewen and Loewen Corp. 30 Oct. 1998 26 June 2003 56 Methanex Corporation 2 July 1999 9 August 2005 73 Mondev International Limited 1 Sept. 1999 11 Oct. 2002 37 Tembec Corp. 3 Dec. 2004 14 march 2008 Case unfinished 42 ** **Cases in progress as of May 2009. * Only some sample cases are presented. For an actualized list see http://www.state.gov/s/l/c3439.htm (Last visited May 2009) or http://www.naftaclaims.com/disputes.htm (Last visited May 2009). 323 Table 57. Disputes Involving the Government of Mexico Cases Notice of Arbitration Final Award Date Months to Date of Last Notice Archer Daniels Midland Co. & Tate & Lyle Ingredients Americas Inc. 10 August 2004 26 Sept. 2007 38 Robert Azinian and Others 10 March 1997 1 Nov. 1999 31 Corn Products International 21 Oct. 2003 15 Jan. 2008 52 Marvin Feldman 10 April 1999 13 June 2003 50 Fireman’s Fund 20 Oct. 2001 17 July 2006 57 GAMI Investments, Inc. 9 April 2002 15 Nov 2004 31 Metalclad Corporation 2 Jan. 1997 2 Sept. 2000 44 Texas Water Claims (aka. "Bayview") 19 Jan. 2005 21 June 2007 29 International Thunderbird Gaming Corp. 1 August 2002 26 Jan. 2006 42 Waste Management, Inc 29 Sept. 1998 30 April 2004 67

Abstract (if available)

Abstract This dissertation analyzes legal and institutional responses to economic liberalization in Colombia. The main hypothesis is that the increasing use of alternative dispute resolution mechanisms (ADRMs) by economic agents is the consequence of global economic pressures, as well as an attempt to address the crisis of the national judicial system. ADRM's reduce transaction costs, and offer more efficient, predictable, and independent venues for resolving litigation. Consequently, they create a more stable environment for investors. This, in turn, suggests that the relationship between law and economics is rapidly changing at the structural level in Colombia

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Creator Sanabria, Javier Mauricio (author)

Core Title Political economy of private commercial arbitration in Colombia

School College of Letters, Arts and Sciences

Degree Doctor of Philosophy

Degree Program Political Economy

Publication Date 09/08/2009

Defense Date 08/20/2009

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag alternative dispute resolution,Colombian legal institutions,commercial law,international institutional rankings,law and economics,OAI-PMH Harvest,private commercial arbitration,transaction costs economics

Place Name Colombia (countries)

Language English

Contributor Electronically uploaded by the author (provenance)

Advisor Wise, Carol (committee chair), Dekle, Robert (committee member), McKenzie, Roderick C. (committee member)

Creator Email sanabria.jm@gmail.com,sanabria@usc.edu

Permanent Link (DOI) https://doi.org/10.25549/usctheses-m2592

Unique identifier UC1322320

Identifier etd-Sanabria-3234 (filename),usctheses-m40 (legacy collection record id),usctheses-c127-266018 (legacy record id),usctheses-m2592 (legacy record id)

Legacy Identifier etd-Sanabria-3234.pdf

Dmrecord 266018

Document Type Dissertation

Rights Sanabria, Javier Mauricio

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Repository Name Libraries, University of Southern California

Repository Location Los Angeles, California

Repository Email cisadmin@lib.usc.edu