The fact that Paraguay has an enviable legal framework for arbitration is certainly not in question. Indeed, in Paraguay (1) arbitration is expressly recognized in the National Constitution[1](2) it has a modern arbitration law, since Law 1879/02 on Arbitration and Mediation (“Arbitration Law”) reproduces quasi-literally the UNCITRAL Model Arbitration Law[2](3) is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the ICSID Convention[3].

On the other hand, the jurisprudence of the judicial bodies in charge of deciding on the merits of an appeal for annulment against arbitral awards has been very favorable to arbitration to date. Indeed, the Courts of Appeal in Civil and Commercial Matters (the “Court of Appeal”) have uniformly held that the appeal for annulment only proceeds in the event of the grounds for annulment set forth in the Arbitration Law. However, this changed with the Agreement and Judgment No. 111 dated December 29, 2016 issued by the Court of Appeals, 1st Chamber of the Capital. The same upheld the declaration of nullity of an arbitration award based on grounds other than those established by the Arbitration Law.

The losing party filed an action of unconstitutionality against the aforementioned ruling, requesting its nullity. In a decision that can be considered a leading case for Paraguayan jurisprudence, the Constitutional Chamber of the Supreme Court of Justice declared the nullity of the decision issued by the Court of Appeals, arguing that it was arbitrary, since the Court had exceeded its jurisdictional powers by declaring the nullity of the arbitration award based on grounds other than those mentioned in the Arbitration Law.

The arbitration proceeding dealt with the alleged breach by the defendant of a purchase and sale agreement, since the defendant had failed to make the required payments under the agreement. Consequently, the plaintiff requested (i) the termination of the contract; (ii) the payment of damages; (iii) the restitution of the property. The Arbitral Tribunal granted the plaintiff's claims.

The Respondent filed a nullity action against the arbitration award. It argued that the Arbitral Tribunal had violated constitutional principles, as well as the provisions of the Paraguayan Civil Code. With respect to the latter, it claimed to have demonstrated the payment of the obligation.

The Court of Appeals resolved to declare the nullity of the arbitration award. Two judges voted in the sense of declaring the nullity while Judge Arnaldo Martínez Prieto voted in the sense of rejecting the nullity of the arbitration award.

As to the grounds for the declaration of nullity, although the Court of Appeals acknowledged that the appellant's arguments dealt with the merits of the dispute, it pointed out that it was appropriate to analyze the nullity action ex officio, since the appeal alluded to matters of public policy.

In this regard, the Court pointed out that the appeal for annulment grants the court the power to control that the procedural guarantees and rights of the parties are respected. In the specific case, it indicated that the arbitration award suffered from procedural defects.

Specifically, it stated that the arbitration award suffered from the defect of inconsistency, since it had not fully declared the rights of the parties by omitting to rule on one of the defendants. In fact, the Court of Appeal indicated that the Arbitral Tribunal did not rule with respect to one of the co-defendants, since the operative part of the arbitration award states “to condemn the defendant”, so that the Court of Appeal understood that such condemnation referred only to the main defendant -Cárnicas Villa Cuenca S.A.- and not to the subsidiary defendant -PABENSA-. The Court of Appeals considered that this constituted a violation of the principle of congruence (citrapetita ruling). Finally, the Court of Appeals questioned the interpretation that the Arbitral Tribunal made with respect to one of the clauses of the contract, specifically the fact that it considered that the contract in question did not include a penalty clause.

The dissenting vote of Judge Arnaldo Martínez Prieto was emphatically against the declaration of nullity. He pointed out that the only way to challenge arbitral awards is the appeal for nullity as provided in the Arbitration Law. He indicated that this remedy should not be confused with the appeal for annulment legislated in the Code of Civil Procedure, since the appeal for annulment against arbitral awards has an autonomous regulation. He emphasized that it is only applicable if any of the grounds for nullity set forth in the Arbitration Law are present.

Analyzing the arguments of the party that filed the appeal for nullity, the aforementioned judge expressed that the errors pointed out by the same have to do with the merits of the controversy, and that none of the grounds for nullity established in the Arbitration Law have been configured. Consequently, he voted to reject the appeal for nullity.

The plaintiff filed an action of unconstitutionality against the Agreement and Judgment issued by the Court of Appeals. The Constitutional Chamber of the Supreme Court of Justice granted said action and, consequently, declared the nullity of the aforementioned ruling.

Judge Miryam Peña was the preopinent. She stated that the decision of the Court of Appeals was arbitrary, since it violated the constitutional and legal duty of the jurisdictional bodies to base their decisions on the Constitution and the Law. It indicated that in matters of arbitration the principles of autonomy and the non-appealability of the arbitration award govern, with the purpose of avoiding unnecessary and unjustified intrusions in the ordinary justice system that conspire against its effectiveness as an alternative method of conflict resolution. He pointed out that in line with these principles, the Arbitration Law provides a limited framework for challenging arbitral awards, which is limited only to the declaration of nullity, but only in the event of the grounds strictly enumerated in the law.

Likewise, he remarked that the Court of Appeals is not allowed to rule on the merits of the dispute. He concluded by stating that the fact that the Court of Appeals had declared the nullity, departing from the grounds for nullity set forth in the Arbitration Law, constituted an excess in the exercise of its jurisdictional power, and therefore voted to annul the decision of the Court of Appeals for being arbitrary.

Judge Bareiro de Módica, although she also voted in favor of declaring the decision of the Court of Appeals null and void, made her own reasoning. She pointed out that the disagreement of the respondent with the decision of the Arbitral Tribunal is not a valid argument to declare the nullity of the award, citing a decision of the First Chamber Court of Appeals, which emphatically states that the declaration of nullity of an arbitral award only proceeds if any of the grounds for nullity contemplated in the Arbitration Law have been configured. Consequently, it also concluded that the Court of Appeals exceeded its jurisdictional powers and, consequently, ruled in favor of the nullity of the decision issued by said Court.

This decision of the Constitutional Chamber of the Supreme Court of Justice sets a clear precedent in favor of arbitration. It emphatically states that the appeal for annulment (i) is not appropriate to attack the decision of the arbitrators as to the merits of the dispute; (ii) only proceeds in the event of any of the causes established by the Arbitration Law for the declaration of nullity of the arbitration award. The ruling undoubtedly consolidates the use of arbitration in the domestic sphere and, why not, invites to think that in the future Paraguay may be considered as a seat of international arbitration. As the saying goes, “a journey of a thousand miles begins with the first step”. Paraguay has taken the first step.

If you would like to know more about our International Arbitration practice, please contact Eusebio López (elopez@vouga.com.py) or Mirtha Dos Santos (mdsantos@vouga.com.py).

[1] Art. 248: “...In no case may members of the other branches of government or other officials assume judicial powers that are not expressly established in this Constitution, nor revive expired proceedings, nor paralyze existing ones, nor intervene in any way in trials. Acts of this nature shall be null and void. All this without prejudice to arbitral decisions in the field of private law, with the modalities determined by law to ensure the right of defense and equitable solutions.” (emphasis added)
[2] United Nations Commission on International Trade Law.
[3] International Center for Settlement of Investment Disputes.