PUERTO RICO: An Introduction to Dispute Resolution

Climate of Dispute Resolution in Puerto Rico

Puerto Rico’s Legal Landscape 

Puerto Rico’s legal system is perhaps unique among United States jurisdictions. As a former colony of the Kingdom of Spain until the end of the nineteenth century, Puerto Rico’s legal system draws heavily on the civil law tradition of continental Europe. The civil code is the basic source of law in many areas of private practice, but interacts with several other large codified legal texts, such as: the tax code, the Commercial Transactions Act (Puerto Rico’s version of selected parts of the Uniform Commercial Code), and special legislation. The latter regulates areas like product distribution and sales representation arrangements, among others. Puerto Rican courts frequently rely on three sources of law: written law, judicial opinions, and the work of tratadistas or treatise writers. The treatise writers are scholars who author detailed commentaries on the civil law, just like scholars who analyse the common law.

Having been a territory of the United States for over a century, common law has also heavily influenced local legislation, judicial opinions, and legal commentary. Puerto Rico’s system is thus a mixture of Spanish civil law, common law, and United States-style constitutional and procedural law. Adding to the complexity, the United States federal legal and courts systems and the Commonwealth’s judiciary (both three-tier court systems) coexist. This means that the Commonwealth and federal judiciaries constantly need to apply and interpret legal norms adopted by the other system. This latter characteristic is also true in the states of the Union. But while the federal courts operate strictly in English, the Commonwealth’s judiciary and other branches of government operates mostly in Spanish. Puerto Rico Rules of Civil Procedure allow for filings to be in Spanish or English, but the use of the former language is the overwhelming norm. Frequently, this adds an extra layer of complexity and costs to litigating cases in Puerto Rico. For instance, parties to federal court litigation often need to translate documents and legal materials, and disputes about whether translations accurately convey the applicable legal rules are not uncommon. In other words, language issues and obstacles have significant pecuniary consequences for litigants. These complications present challenges for businesses that rely on the legal and courts systems for the speedy resolution of disputes that impact their operations.

In late-November 2020, a new Civil Code went into effect in Puerto Rico, repealing the Civil Code of 1930. Important changes in the new code include punitive damages as a remedy for some tort claims, the codification of regulations applicable to general contract clauses, contracts of adhesion, purchase and sale contracts, supply contracts, leases, project developments, brokerage, agency relationships, partnership agreements, and products liability; as well as, the adoption of rules concerning liability due to conduct during contract negotiations, and obligations upon contract successors. Puerto Rico’s legal system is in a new chapter in its history, as courts begin to apply the provisions of the Commonwealth’s main legal text to actual disputes; and, in the process, construing and shaping new legal doctrines.

Current Challenges  

For the past several years, dispute resolution practice in Puerto Rico has been heavily impacted by challenging conditions. Puerto Rico remains at a juncture where economic and natural crisis have combined with significant legislative enactments that have modified decades-old private law norms. The Commonwealth has been suffering from a fiscal crisis for well over a decade. In recent years, the economy and the fiscal crisis have been further impacted by the devastation caused by Hurricanes Irma and María in 2017, the bankruptcy-like process led by the Fiscal Oversight and Management Board (“FOMB”) created by the U.S. Congress to restructure the debt of the Commonwealth central government and several other public corporations; and, as in the rest of the world, the COVID-19 pandemic. The FOMB-led proceedings, ongoing in the federal district court for the District of Puerto Rico, represent the largest municipal bankruptcy in United States history (USD71.5 billion in bonds and USD50 billion in pension bonds). These proceedings and the authority of the FOMB over the budget and expenses of the Commonwealth and its instrumentalities, as well as over policy that may affect public finances, severely curtail the ability of the local government to provide certain services and operate in the most efficient manner. As the U.S. District Court for the District of Puerto Rico has noted, the creation of the FOMB resulted in “an awkward power-sharing arrangement.” Hence, while the FOMB has “not been given power to affirmatively legislate,” it does have significant tools to shape Puerto Rico's financial operations and has been largely successful in using that power to shape policy, including invalidating recently-passed legislation that it believes will have a negative fiscal impact. In fact, the FOMB and the Commonwealth are currently at odds over recent legislation that seeks to provide enhanced benefits to employees in the private sector. The FOMB has instructed the Commonwealth to “suspend the law’s implementation and enforcement” but the government has refused to do so. Consequently, businesses and employees alike remain at a state of uncertainty as to the fate of these benefits, with its resulting impact in business operations. In a territory where the government has a very pervasive presence in most aspects of economic activities, these limitations present a serious obstacle for businesses.

Finally, these and other factors have contributed for an unprecedented fractured political scenario. Recently, traditional political parties have struggled to barely win the governorship while emerging parties have made significant gains and obtaining legislative seats, and different political factions controlling the governorship and the legislature. The combination of such conditions make it difficult to pass new legislation and confirm appointments for the judiciary, among others.

Under this scenario, even businesses and companies with a long-term commitment to the Puerto Rican archipelago continue to face challenges to keep viable and successful operations. Thus, it tests the means to protect property rights, secure the speedy resolution of disputes involving complex and large-scale business transactions, labour disputes and the like, which are crucial to any business’ stability and ability to grow.

Takeaways  

The combination of the challenges faced by litigators and practitioners due to natural, economic, and fiscal crisis, as well as new legal developments, have prompted both the judiciary and legal services providers to rethink how they operate to effectively achieve their function. Faced with a tight budget, in recent years the Commonwealth’s judiciary has been actively expanding the use of tools, such as electronic filing and notifications systems, to speed up case management, as well as the use of videoconferences for certain court proceedings.

Practitioners recognize that scarce judicial resources combined with significant changes in key legislation that has yet to be interpreted by the courts will result in new arguments and disputes over new legal principles that will take years to be sufficiently defined or clarified. Therefore, to meet these challenges and in their effort to advise clients on a strategy that not only maximizes likelihood of success, but also achieves the most cost-effective and speedy end to disputes, practitioners are faced with the task of carefully evaluating issues such as choice of forum considerations, the availability or desirability of alternative dispute mechanisms, early settlement, or the availability of pre-judgment remedies such as preliminary injunctive relief. In fact, in recent years, the legislature has begun to selectively incorporate mandatory mediation provisions in legislation dealing with claims such as mortgage foreclosure and employment harassment. Finally, practitioners also must cope with a need to explain to clients that important questions linger about how courts and arbitrators will interpret new legislation.