Synopsis:
Albemarle, a Chilean company involved in lithium production, initiated arbitration against Emaresa (Chile) and Cipatex (Brazil) for allegedly supplying defective materials. The tribunal applied the Chilean international arbitration law (“LACI”) because of the involvement of a foreign party, Cipatex. Cipatex successfully secured dismissal after arguing that it was not a party to the arbitration agreement between Albemarle and Emaresa. After the tribunal issued its award, Albemarle challenged it on jurisdictional grounds that the proceeding lost its “international character” because of the dismissal of Cipatex, and therefore was not subject to LACI. Chile’s Supreme Court upheld LACI’s application, emphasizing the tribunals’ discretion, raising questions about international arbitration’s “foreign” element requirement.
Background:
Albemarle Limitada (“Albemarle”), a Chilean entity entered into a contract with Emaresa Ingenieros y Representaciones S.A. (“Emaresa”), another Chilean entity, for the supply of textile materials to be used for the construction of ponds intended for lithium extraction. Emaresa entered into a separate contract with Cipatex Impregnadora de Papéis e Tecidos Ltda. (“Cipatex”), a Brazilian entity, under which Cipatex would be in charge of the fabrication of such textile materials. Cipatex was not party to the contract between Albemarle and Emaresa,, which stipulated that disputes arising under its terms would be resolved through arbitration. A dispute arose between Albemarle and Emaresa over material defects, and Albemarle sued both Emaresa and Cipatex in arbitration.
Due to the nationality of Citapex, the tribunal applied the Chilean Law No. 19,971 on International Commercial Arbitration (“LACI”) framework, based on the UNCITRAL Model Law. Cipatex challenged the tribunal’s jurisdiction, asserting that it was not a party to the arbitration agreement between Albemarle and Emaresa. After the tribunal dismissed the challenge, Cipatex appealed to the Santiago Court of Appeals under Article 16(3) of the LACI. The Court of Appeals ruled in Cipatex’s favor, finding that the tribunal lacked jurisdiction over Cipatex as it was not a party to the arbitration agreement. With Cipatex excluded, leaving only the two Chilean parties in the proceeding, the tribunal issued an award applying the LACI to the dispute. Albemarle filed a complaint recourse against the award with the Santiago Court of Appeals, which was denied, prompting Albemale to file a second complaint recourse before the Chile Supreme Court. Albemale argued that the application of the LACI was improper since Cipatex, the sole foreign party, had been removed from the proceedings following the jurisdictional challenge upheld by the Santiago Court of Appeals.
The Ruling of the Supreme Court
Dismissing Albemarle’s complaint recourse, the Chile Supreme Court held that the continued applicability of the LACI to the dispute was a matter of interpretation, which falls within the “own and fundamental task” of the tribunal. The Court clarified that such interpretation could not be reviewed through a complaint recourse unless a serious fault or abuse was evident in the Santiago Court of Appeals’ decision, which was not the case.
The Implication of the Chile Supreme Court’s Ruling
International commercial arbitration is widely recognized as a dispute resolution mechanism designed for resolving conflicts between two or more private parties arising from international commercial transactions. Indeed, one of its purposes is to avoid litigation in the national courts of either party’s home country. As the name suggests, the applicability of this mechanism is premised in the foreignness of the parties or the transaction. This landmark decision questions this principle.
LACI states that an arbitral proceeding will be considered international if:“(a) the parties to an arbitration agreement have, at the time of the conclusion of this agreement, their places of business in different States; (b) the place of arbitration, or any place where substantial part of the obligations is to be performed, are situated outside the State in which the parties have their place of business; or (c) the parties have explicitly agreed that the subject matter of the arbitration agreement relates to more than one country.” Requirement (c) was at issue in the present case, as both Albemarle and Emaresa agreed to the international nature of the proceeding because of the foreignness of Cipatex.
Whether the “foreign” element must continue until the end of the arbitral proceeding is not clear, which creates the dilemma presented in the Albemarle Case. That is, does the involvement of a foreign party at the outset of an arbitration proceeding suffice to preserve its international character if that party is subsequently dismissed? Or must the foreign party remain involved for the duration of the proceeding until the final award is issued? According to the Chile’s Supreme Court, that question was for the arbitral tribunal to decide.
This ruling has been said to align with Chile’s arbitration-friendly stance but may pose challenges. It could incentivize Chilean parties to involve foreign parties in international arbitration proceedings solely to initiate the process, with the understanding that even if the foreign entity is later excluded, the proceeding would retain its international character. On the other hand, upholding the type of jurisdictional challenge made by Albemarle could undermine the public policy in favor of finality of arbitration awards, especially when such party previously consented to LACI jurisdiction. As the Supreme Court in Chile clarified, this determination is left to arbitral tribunals, which should remain vigilant during the early stages of a proceeding, understanding that subsequent changes to the proceeding impacting its international character may question the applicability of LACI to preserve the “foreign” character that international commercial arbitration should have.
Endnotes
1 CIPATEX IMPREGNADORA DE PAPEIS E TECIDOS LTDA./BARAONA: 06-24-2022 (-), File No. 922-2022. In the Court of Appeals Search Engine (https://juris.pjud.cl/busqueda/u?dktt). Date of consultation: 12-05-2024, ¶ 2.
2 Id.
3 Id.
4 Id. at ¶¶ 2-3.
5 ALBEMARLE ROCKWOOD LITHIUM (/ARAYA): 05-28-2024 ((CIVIL) COMPLAINT), File No. 10854-2024. In Jurisprudential Search Engine of the Supreme Court (https://juris.pjud.cl/busqueda/u?dg0x7). Date of consultation: 12-05-2024, ¶ 7°.
6 CIPATEX IMPREGNADORA DE PAPEIS E TECIDOS LTDA./BARAONA, File No. 922-2022, at ¶ 4.
7 LACI, Article 16(3). Available at Ley Chile – Ley 19971 – Biblioteca del Congreso Nacional.
8 CIPATEX IMPREGNADORA DE PAPEIS E TECIDOS LTDA./BARAONA, File No. 922-2022, at ¶¶ 26-27.
9 ALBEMARLE ROCKWOOD LITHIUM (/ARAYA), File No. 10854-2024, ¶ 7°.
10 Id. at ¶ 1°.
11 Id. at ¶ 7°.
12 Id. at FIFTH.
13 Id.
14 LACI, Article 16(3). Available at Ley Chile – Ley 19971 – Biblioteca del Congreso Nacional.
15 CIPATEX IMPREGNADORA DE PAPEIS E TECIDOS LTDA./BARAONA, File No. 922-2022, at ¶¶ 26-27.
