PANAMA: An Introduction to Dispute Resolution

This overview appeared in Latin America 2024 and is awaiting update by the firm.

Current Economic Conditions: Dealing With the COVID-19 Aftermath

Panama continues to recover from the effects of the COVID-19 pandemic, which adversely impacted its economy. To mitigate the effects of the emergency measures adopted by the government to face the pandemic, a series of temporary protective measures were implemented by the government to protect affected individuals and companies, such as temporary protection against eviction and foreclosure proceedings, implementing special regulations to protect employment, including terms for employment contract stays and termination, while banks agreed to refinance, redistribute, or extend financing terms.

However, once the protective measures were lifted and the special agreements with banks expired, the deterioration of debtor financial positions led to an increase in litigation, most notably, in the real estate area, with eviction and collection with foreclosure proceedings on the rise, as well as in the construction sector, with a notable increase in owner-contractor disputes. The retail, food and hospitality sectors were also affected, although these sectors are gradually recovering.

On the positive side, the government is pushing its public infrastructure development through public contracts and public-private partnerships, which should help bolster the national economy, although it is no doubt also laying the groundwork for eventual disputes.

Adoption of protective legislation 

Through Law No 212 of 2021, the Republic of Panama adopted a special, temporary, conciliatory reorganisation regime for individual and companies with operations dating no less than 24 months, facing insolvency, because of the national emergency measures adopted by the government due to the COVID-19 pandemic.

The legislation entered into effect through its publication in the Official Gazette on 21 April 2021, and was available to interested parties from that moment, for a period of up to 24 months after its publication, for purposes of filing notice to adopt the proceeding, without prejudice to any conciliatory agreements reached, which may be implemented and continue after such period pursuant to the agreed terms.

The advantage of this special, temporary, conciliatory regime is that it allowed debtors to negotiate, with the help of a conciliator, a reorganisation and continuation agreement with their creditors, with minimum judicial intervention.

Trends 

Increase in the number of Arbitration Cases

With effect from 9 January 2014, Panama adopted a modern commercial arbitration law (Law No 131 of 2013) that draws from the United Nations Commission on International Trade Law’s model law on international commercial arbitration.

Since the adoption of the Arbitration Law, Panama has seen an increase in the number of arbitration cases and has positioned itself as an arbitration forum for the resolution of international commercial disputes in Central America, while experiencing growth in domestic arbitration.

Disputes submitted to the Panamanian arbitration centres generally involve the construction and insurance sectors, transportation, distribution and commercial agreement disputes, and public contract disputes.

The country is also seeking to expand its dispute resolution services offering to the maritime sector; for instance, the Conciliation and Arbitration Centre of Panama and the Panama Maritime Conciliation and Arbitration Centre have presented a consolidated offer for the resolution of maritime disputes.

Financial protection of Debtors  

Companies facing insolvency (failure to pay debts when due or when debts exceed the value of assets) or imminent insolvency have access to the judicial reorganisation process adopted by the recent Insolvency Law (Law No 12 of 2016), in force as of 2 January 2017, which introduced the right of a debtor to seek reorganisation in case, in order to preserve its company and assets, and avoid liquidation.

By submitting to the reorganisation process of the Insolvency Law, the debtor can obtain financial protection against enforcement and liquidation and cannot be subject to evictions or requests for restitution of assets.

During the reorganisation process, an administrator will be appointed by the court, with the duty of reviewing and supervising the accounting and management of the assets; the administrator shall assist in negotiations between the debtor and creditors and will give a monthly report on the status of matters to the judge.

The reorganisation plan must be approved by creditors representing an excess of 66% of the total debt, and its performance is overseen by a manager, an individual in charge of the performance of the plan and a supervisor.

Recent Developments and New Legislation 

Imminent adoption of a new Code of Civil Procedure

The National Assembly has recently admitted to third debate a proposal submitted by the Supreme Court, for the adoption of a new Code of Civil Procedure. This initiative represents a major overhaul of the rules of civil procedure and seeks to simply and expedite traditional judicial proceedings.

This draft legislation seeks to eliminate the excessive written formalities, limiting the use of written forms to material submissions, such as the complaint, its reply, counterclaim, motions, and appellate filings, while favouring the use of oral hearings. This initiative has also amplified the use of hearings, dividing proceedings into two key moments: (i) the preliminary hearing and (ii) the final hearing.

The draft legislation introduces the concept of discovery with the purpose of allowing the parties to directly sort their evidence prior to the preliminary hearing. In connection with motions or objections that may result in early termination of proceedings, these will have to be directly and timely raised by the parties prior to the preliminary hearing (or when such a situation materialises at a subsequent moment), with the exclusion of the judge’s initiative, except in cases where an absentee defendant has been appointed.

Other innovations include the simplification of the service of process. Notably, service of process will no longer need to be exclusively handled by a court clerk since it can also be done with the assistance of a notary public, or by providing the court with evidence of delivery of the complaint and exhibits at the defendant’s physical address or email address.

Although the general objective of the proposed Code Civil Procedure is to simplify and expedite proceedings, certain applications have now been subjected to higher formalities; such is the case of the traditional, confidential, ex-parte precautionary measures (eg, seizure attachment of assets), which generally only required the consignment of a damages bond for their issuance. For such measures to be granted, the applicant will now have to argue and provide to the court prima facie evidence.

Finally, trial decisions are to be issued within one year following service of process and may only be delayed in exceptional circumstances.

Once approved by the National Assembly, the New Code of Civil Procedure will enter into effect four years after its publication in the Official Gazette.

Special Investment Arbitration Office 

Effective as of 13 July 2023, the Ministry of Economy and Finance of the Republic of Panama created a special Investment Arbitration Office, in response to an increase in the number of arbitral investment treaty claims filed by investors against the Republic of Panama.

The Investment Arbitration Office’s duties include managing investment treatment disputes, hiring counsel to represent the State, participation in arbitral proceedings and monitoring the progress of cases, analysing the use of alternative dispute resolution mechanisms in alignment with the interests of the State, standardising dispute resolution clauses to be used in treaties and contracts, as well as helping local professionals representing the State in local and international investment arbitration disputes.