PUERTO RICO: An introduction to Dispute Resolution

Puerto Rico’s Continued Recovery From Natural Disaster

Puerto Rico continues its efforts to re-emerge from the bankruptcy proceedings commenced during 2017 by the government of Puerto Rico and certain of its ministries and state owned enterprises; and to rebuild after experiencing historic and unprecedented natural disasters since 2017. The impact of Hurricanes Irma and María, as well as a magnitude 6.4 earthquake (and its subsequent aftershocks), and the coronavirus outbreak in 2020, have resulted in considerable damage to the infrastructure and economy of Puerto Rico. 

As a result, Puerto Rico has received an unprecedented amount of federal aid to rebuild its infrastructure and utilities. To date, Puerto Rico has approximately USD90 billion allocated in federal aid for reconstruction and permanent projects, of which approximately USD36 billion has been disbursed. These natural disasters have also contributed to a migration of professionals, including healthcare personnel, to the United States. Puerto Rico also continues to battle the economic trends that have affected the United States and beyond, with inflation and rising interest rates impacting its economy. To stimulate its economy and combat outgoing migration, Puerto Rico has implemented tax and other incentives aimed at attracting non-residents and foreign corporations to relocate to Puerto Rico, as well as to prevent further migration of medical professionals.

Dispute Resolution Trends

These natural disasters, the substantial quantity of federal aid being disbursed, wider economic trends, and tax incentives have all also had an impact on the dispute resolution landscape. The rise in inflation and ensuing rise in operational costs and costs of living, as well as the rise in interest rates and ensuing rise in credit card and mortgage rates, have yielded a substantial increase in bankruptcy filings. As of the end of July 2024, bankruptcy filings had increased over 30% versus the same period last year. On the other hand, the unprecedented amount of federal aid has created litigation related to breach of contracts, payment and performance bonds, and similar controversies, while the natural disasters and the pandemic have increased insurance-related claims and energy disputes. Personal injury and medical malpractice cases also seem to be trending upward given the rising age of the population and the exodus of young professionals, including those in the medical field. The growing number of individuals and corporations relocating to Puerto Rico because of the tax incentives available, as well as foreign banks opening branches in Puerto Rico, have also yielded a new market for dispute resolution focused on shareholder and real estate disputes, breach of contract claims, and bank regulatory enforcement actions. In recent years, and consistent with similar trends in the United States and elsewhere, Puerto Rico has seen a rise in cyber-attacks, privacy data breaches and related litigation. This is an emerging area, and the government of Puerto Rico has been enacting regulations to prevent and reduce the impact of these attacks. Private entities have also continued to develop policies and mechanisms to mitigate perceived cybersecurity threats and develop efficient post-incident responses.

Puerto Rico has also achieved an important milestone in its recovery, as the government of Puerto Rico and most of its ministries and state-owned enterprises, with the exception, as of this publication, of the Puerto Rico Electric Power Authority (PREPA), have substantially exited their bankruptcy proceedings and have confirmed plans of adjustment. Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) and Puerto Rico’s public restructuring continues to impact the dispute resolution landscape. Bankruptcy avoidance actions relating to these cases remain pending and in litigation, as well as disputes relating to PREPA and, more generally, as to PROMESA and its implementation.

COVID-19 and Procedural Reform

The COVID-19 pandemic has also had lasting effects on the dispute resolution procedural landscape. Hearings by videoconference appear to be here to stay, at least in the Puerto Rico state courts and in the federal bankruptcy courts. During the height of the pandemic, courts in all United States jurisdictions started to hold civil hearings by videoconference. Puerto Rico was not the exception. Presently, however, while the Puerto Rico federal district court has moved back to in-person hearings for some matters, most state courts and federal bankruptcy courts still hold some hearings by videoconference. That has proven efficient and productive, particularly, when it involves status conferences, discovery disputes or argumentative hearings because it has substantially decreased the waiting times for the parties and their attorneys for their case to be called or travel to courts that, in some instances, may be hours away, depending on the municipality. The challenge arises, however, when courts hold hearings on evidentiary matters by videoconference and, indeed, many state courts still do. This is so, presumably, because civil trials in the Puerto Rico state courts are heard by the judge instead of juries and, presumably, because it is more efficient for some judges to hold virtual instead of in-person trials. Witness and document presentations, however, may be more challenging by videoconference. The parties should continue to plan accordingly and follow court instructions for virtual hearings to ensure the proceedings are carried out properly and in an organised manner.  

Court Congestion and ADR as a Solution

Parties continue to face other challenges with dispute resolution in Puerto Rico; the most common of which is court docket congestion. Criminal case volumes continue to rise, both at the federal and state levels, and this has contributed to more delay in civil matters given that, for constitutional reasons, criminal matters take precedence. Currently, it is not uncommon for civil matters to take between three and five years to be resolved. And that range can increase depending on the type of civil litigation involved and appeals taken. Many commercial property insurance claims filed after Hurricane María, for instance, are still active in state courts, and those cases were filed around five years ago.

Arbitration is a viable alternative. The Federal Arbitration Act applies and supersedes any section of the Puerto Rico Arbitration Statute that is inconsistent. Corporate entities or businesspersons doing business in Puerto Rico may want to enter contracts that carry well-thought-out arbitration clauses that protect against unnecessary delay and strive for cost efficiency. Private arbitration forums such as the American Arbitration Association and JAMS are available. Mediation under those forums or under the auspices of the Puerto Rico judiciary is also common and can prove productive. Both the federal court in Puerto Rico, and its state counterpart, offer mediation alternatives. The federal court regularly offers mediation for commercial and personal injury matters that magistrate judges undertake, often with success. While mediation in state court is less common because judges do not have magistrate counterparts to whom they can assign matters for mediation and instead need to appoint private persons usually after the parties have agreed to a particular mediator, it is nevertheless accessible and can also prove productive. Mediation is also an option in federal bankruptcy courts, typically carried out by another bankruptcy judge, and such mediation has proven effective in recent cases.