Arbitrability and its application in Peru

Arbitrability refers to the ability of a particular dispute or matter to be resolved through arbitration rather than being submitted to the ordinary courts of law. In general terms, it constitutes a fundamental criterion that defines the scope within which disputes may be removed from the Judicial Branch and referred to a private dispute resolution mechanism. Arbitrability therefore functions as an initial objective filter to determine whether arbitration is a legally valid means of resolving a specific dispute.

From a functional perspective, arbitrability operates as an objective prerequisite of arbitration, since without it the arbitration agreement cannot validly take effect. Where a dispute is considered non-arbitrable under the legal system, the arbitration agreement is ineffective in binding the parties; consequently, if arbitral proceedings were to be conducted in relation to a prohibited matter, their outcomes would lack binding effect and any award rendered would inevitably be set aside by the Superior Courts due to a manifest lack of subject-matter jurisdiction.

The purpose of arbitrability is to ensure that only matters involving disposable rights are submitted to arbitration, namely those rights over which the parties enjoy full legal freedom to dispose, waive, settle or negotiate. Under the Peruvian legal system, disposable rights are primarily identified as private and proprietary rights, where the principle of party autonomy applies with particular force.

Arbitrability also seeks to preserve the coherence of the legal system by preventing disputes involving social public policy, collective interests or matters strictly reserved to the sovereign jurisdiction of the State from being transferred to private proceedings.

In this regard, a matter will be considered non-arbitrable where the legal system expressly prohibits it, where it is exclusively linked to State powers, or where by its very nature it requires the mandatory intervention of judicial or administrative authorities in order to safeguard non-disposable legal interests.

Pursuant to Article 2 of Legislative Decree No. 1071 (Arbitration Law), the admissibility of arbitration in Peru is established under a broad formula. According to this provision, disputes concerning matters that may be freely disposed of under the law, as well as those whose admissibility is expressly authorised by legislation, treaties or international agreements, may be submitted to arbitration.

Under this general framework, the limits of arbitrability in Peru are directly linked to the nature of the applicable substantive right. In private law practice, the general rule is that all disputes that are not expressly excluded, do not concern matters of public policy and do not affect third-party rights may be submitted to arbitration. This encompasses the vast majority of contractual and economic rights, in which private parties seek to protect strictly proprietary interests.

Arbitration in Peru is subject to special regulation where one of the parties is a public entity. This framework is governed by a principle of symmetry and parity enshrined in Article 4 of the Arbitration Law.

Under this provision, the reference to the Peruvian State is understood in a broad sense, encompassing the National Government, Regional and Local Governments and their respective agencies, as well as State-owned enterprises and private legal entities exercising public functions by delegation, concession or operation of law.

Based on this definition, Article 4 expressly authorises the use of arbitration in two scenarios: firstly, it permits national arbitration for disputes arising out of contracts and agreements entered into between State entities themselves; secondly, it authorises the State to resolve contractual disputes with private parties, whether domestic or foreign entities domiciled in Peru, through the same mechanism.

As highlighted by national commentators Mario Castillo Freyre and Rita Sabroso Minaya 1 , this provision demonstrates that under Peruvian legislation the State and its entities are considered to be on an equal footing with private parties by virtue of an arbitration agreement. In addition, the system expressly permits inter-administrative arbitration, namely the resolution of disputes arising among State agencies themselves.

However, for a matter involving the State to be arbitrable, legal doctrine requires a rigorous conceptual distinction, namely that the State must be acting within the sphere of ius gestionis (as a private law subject managing contracts and assets) and never within the sphere of ius imperii (exercising sovereign and non-delegable public powers).

In the specific field of public procurement, governed by Law No. 32069 (Public Procurement Law), arbitration ceases to be a purely voluntary mechanism and becomes a mandatory avenue imposed by the legislature.

The scope of arbitrable matters in this sector is exhaustively defined in Article 83 of Subchapter III. This provision establishes that any dispute arising between the parties concerning the validity, nullity, interpretation, performance, termination or effectiveness of a contract must be resolved through arbitration, unless the law itself expressly provides otherwise.

In all cases, under the responsibility of the relevant administrative authority, the arbitration agreement must take the form of a clause incorporated into the contract.

The boundaries determining non-arbitrability under the Peruvian legal system rest upon three fundamental pillars: social public policy, the protection of third-party rights outside the agreement, and the reservation of the State’s budgetary control functions.

a. Public policy and expressly excluded matters

Public policy operates as an absolute limit to arbitrability, preventing private autonomy from displacing the State’s jurisdiction in matters that underpin social organisation or fundamental legality. Consequently, the following matters are strictly excluded from arbitration and reserved to the exclusive jurisdiction of the Judiciary and the relevant administrative authorities:

• Civil status and legal capacity of individuals: Matters relating to the validity of marriage, divorce, filiation or declarations of incapacity.
• Criminal and Constitutional Law: The prosecution of criminal offences, the imposition of criminal sanctions, and the protection of fundamental non-proprietary rights.
• Tax powers and environmental sanctions: The powers of SUNAT to conduct audits and impose tax liabilities, as well as sanctions imposed by regulatory authorities for environmental damage.

b. Third-party rights

The restriction concerning “third-party rights” prohibits the submission to arbitration of disputes that seek to examine, modify or directly determine substantive rights belonging to persons who have neither consented to nor are parties to the arbitration agreement. For a matter to be considered non-arbitrable on this ground, the third party’s right must constitute the central subject matter of the proceedings, since arbitrators lack jurisdiction to render decisions that bind persons who are not parties to the arbitration agreement.

c. The major exception in public procurement: additional works

The most significant and critical restriction within administrative arbitration in Peru concerns the control of public expenditure and public funds. The legislative and institutional framework establishes limits in relation to the powers of the Office of the Comptroller General of the Republic:

• Approval of additional works: The decision of a public entity or of the Office of the Comptroller General of the Republic to approve or reject the execution of additional works or enhanced supervision services is absolutely non-arbitrable. Arbitrators lack subject-matter jurisdiction to assess the technical or budgetary appropriateness of such additional works or services.

Under the Peruvian legal system, the limits of arbitrability are determined by a framework centred on the disposability of the substantive right at issue. While, in purely private relationships, it is sufficient for the dispute to concern matters that may be freely disposed of (as provided in Article 2 of the Arbitration Law) in order validly to confer arbitral jurisdiction, the system adopts a mandatory approach in the context of public procurement.

Accordingly, Article 83 of the Public Procurement Law establishes arbitration as the mandatory and exclusive mechanism for resolving disputes arising out of the performance and effectiveness of public contracts; however, this openness is constrained by the powers of the State. Consequently, the legislature excludes from the jurisdiction of arbitrators those sensitive areas involving social public policy, the rights of third parties not party to the agreement and, most significantly, the approval of additional works.

Ultimately, the arbitrability regime in Peru successfully balances the advantages of speed and specialisation inherent in private dispute resolution with the indispensable protection of constitutional legality and the proper safeguarding of the Nation’s public resources.