Arbitrability and its application in Chile

Arbitrability is the legal capacity of a dispute to be resolved through arbitration. In commercial matters, the general rule is that disputes involving economic rights are arbitrable. This rule is limited where the dispute concerns non-disposable rights, affects third parties not bound by the arbitration agreement, engages public policy, or relates to matters reserved by law to specific courts or public authorities.

Under Chilean law, there is no positive statutory definition of arbitrable matters. Instead, the law expressly identifies matters excluded from arbitration and, a contrario sensu, all other disputes are arbitrable. Arbitrability is therefore the general rule, and non-arbitrability the exception. This exception operates as an objective limit: it does not depend on the parties’ wishes or on the breadth of the arbitration clause, but rather on the nature of the dispute and the interests at stake.

In practice, arbitrability should be assessed when drafting the arbitration clause, when commencing a dispute and before enforcing an award. In contracts containing regulatory, employment, family, succession, criminal, tax, administrative, local police, public entity or significant third-party elements, the arbitration clause should be carefully reviewed to confirm that the contemplated dispute can validly be resolved through arbitration.

Patricio Aylwin Azócar, in El Juicio Arbitral, a leading reference work in Chilean arbitration practice, argues that arbitration is essentially founded on agreement: it may only concern matters over which the parties have the power of disposition. If the parties cannot dispose of the substantive right, they likewise cannot entrust its determination to arbitrators. 1

A broadly drafted arbitration clause will generally be valid for purely economic disputes, but not necessarily effective in relation to matters involving public policy, non-disposable rights, effects upon third parties, or exclusive judicial jurisdiction. These limits create an effectiveness risk that may affect: (i) the obligation to submit disputes to arbitration; (ii) the arbitral tribunal’s jurisdiction; (iii) the validity of the proceedings; (iv) the effectiveness of the award; and (v) its recognition or enforcement.

i. Non-disposable rights

If the parties cannot freely dispose of a right because it is non-waivable, strictly personal in nature, or protected on public policy grounds, such as matters relating to parentage, they likewise cannot submit it to arbitration.

ii. Public policy

A dispute may involve economic interests and yet still engage a public interest sufficient to exclude it from arbitration. Public policy may operate a priori, preventing submission to arbitration, or a posteriori, preventing recognition or enforcement of the award. The decisive factor is not simply the existence of mandatory rules, but rather whether the law intended to reserve the matter for state courts or to remove it from the realm of private autonomy. Accordingly, certain case law has held that damages claims based on the same criminal conduct being investigated in criminal proceedings are non-arbitrable ex ante for reasons of public policy.

iii. Third-party rights

Arbitration is based on consent and, in principle, binds only those who entered into the arbitration agreement. The mere involvement of third parties does not necessarily render a dispute non-arbitrable. The issue arises when arbitration seeks to determine directly the rights of persons who are not parties to the agreement. This risk is particularly relevant in corporate disputes, insolvency proceedings, multi-party contracts, successions, corporate groups and other complex structures.

iv. Statutory reservation of jurisdiction

Certain matters are expressly entrusted by law to a specific court or authority, and that jurisdiction cannot be displaced by the parties through an arbitration clause. This risk is particularly relevant in regulated industries, administrative matters, sanctioning proceedings, constitutional actions, non-contentious proceedings, the jurisdiction of specialised courts and mandatory procedures.

Chilean procedural scholarship has traditionally dealt with these rules under the category of “matters prohibited from arbitration”, principally contained in Articles 229 and 230 of the Organic Code of Courts (Código Orgánico de Tribunales or “COT”), without prejudice to other special provisions. For practical purposes, they may be organised as follows:

i. Family and personal matters

Article 229 of the COT excludes from arbitration matters relating to maintenance obligations and the right to request separation of property between spouses. In addition, pursuant to Article 230 of the COT, disputes between legal representatives and those represented, as well as matters concerning civil status, are excluded. These generally involve non-disposable rights, protected family interests, or legal situations extending beyond the parties’ purely economic interests.

ii. Criminal matters and local police court matters

Article 230 of the COT expressly excludes criminal cases, which involve the exercise of the State’s punitive power, and matters assigned by law to the Local Police Courts (Juzgados de Policía Local), which hear, inter alia, infringements and breaches of special legislation, traffic-related matters and consumer disputes. In principle, this exclusion also extends to civil actions deriving from infringements subject to those proceedings.

iii. Matters requiring the intervention of the Judicial Prosecutor

Non-arbitrable matters include proceedings in which the Judicial Prosecutor (Fiscal Judicial) must be heard. The Judicial Prosecutor is an auxiliary body of the Chilean justice system that issues opinions in matters involving public, institutional or specially protected interests. These include fiscal proceedings (any case in which the Treasury of Chile has a financial interest), disputes affecting assets of public-law corporations or foundations, civil liability of judges and public officials arising from official acts, and jurisdictional conflicts. Their non-arbitrability is explained by the presence of fiscal interests, public assets, state powers or issues relating to the organisation of the judicial system.

iv. Matters reserved to specific authorities or procedures

In addition to the cases contemplated by the COT, certain matters are non-arbitrable because the law reserves them to a specific authority or procedure. These include non-contentious proceedings, applications for review, actions for inapplicability or unconstitutionality, and jurisdictional conflicts. The parties cannot, by agreement, displace jurisdiction expressly reserved by law.

v. Employment matters

Although the COT contains no general rule regarding individual employment disputes, such disputes present a high risk of non-arbitrability, given the jurisdiction of the labour courts and the non-waivable nature of employment rights. Collective labour arbitration, however, is governed by specific rules.

Not every exclusion from arbitral jurisdiction amounts to absolute non-arbitrability. There are situations in which the law grants non-waivable rights to one of the parties, which might suggest that disputes concerning those rights cannot be referred to arbitration. Nevertheless, it has been accepted that disputes involving such rights may be arbitrated, as is the case with proceedings relating to leases of urban property.

A similar situation arises in relation to certain issues governed by Articles 1,330 and 1,331 of the Civil Code, concerning the partition of property, which is subject to mandatory arbitration. These provisions remove certain issues from the ordinary jurisdiction of the partition arbitrator, such as determining who is entitled to participate in the partition, the rights of each participant, or which assets form part of the divisible estate. This does not transform such matters into prohibited subjects of arbitration. The provisions do not establish a general prohibition on arbitration, but rather limit the ordinary jurisdiction of the partition arbitrator.

The practical criterion is clear: a distinction must be drawn between the lack of jurisdiction of a particular arbitrator and the non-arbitrability of the subject matter. A dispute falling outside the ordinary jurisdiction of a specific arbitrator may nonetheless be submitted to arbitration through an express submission agreement.

Law No. 19,971 on International Commercial Arbitration (“ICA Act”), which is an identical adaptation of the UNCITRAL Model Law, recognises in Article 1(5) that domestic legal rules may exist under which certain disputes are not arbitrable or may only be submitted to arbitration subject to different provisions.

This rule avoids conflicts with domestic rules on prohibited arbitration. In arbitrations seated in Chile, arbitrability must be analysed in accordance with Chilean law, including the rules contained in the COT. If the matter is one that is prohibited from arbitration, the arbitration agreement will not produce effects in relation to that dispute and may be subject to absolute nullity for unlawful subject matter pursuant to Articles 1,466 and 1,682 of the Chilean Civil Code.

Non-arbitrability also operates as a ground for reviewing arbitral awards. Article 34(2)(b)(i) of the ICA Act permits an award to be set aside where the subject matter is not arbitrable under Chilean law, and Article 36(1)(b)(i) permits recognition or enforcement in Chile of an award, including a foreign award, to be refused on the same ground. The Chilean court must assess arbitrability under Chilean law because Chile is the enforcing State.

Nevertheless, this review must be applied restrictively. As noted above, non-arbitrability does not arise merely because mandatory rules or public policy considerations are involved, but only where the law has removed the matter from the parties’ power of disposition or reserved it exclusively to state courts or public authorities.