Kluwer Arbitration Blog

Costa Rica has long been heralded as a beacon of political, social and economic stability in the Americas. Its respect for the rule of law, coupled with a strong commitment to the peaceful resolution of disputes, has allowed it to develop a strong practice of alternative dispute resolution.

The arbitration law adopted in 1998 (the Law on Alternative Dispute Resolution and Promotion of Social Peace known as “Ley RAC”) even included in its Article 1 the right to “peace education”. In this context, Costa Rica has continued to promote the use of mediation and arbitration through additional legislation.

More recently, in October 2024, Costa Rica enacted Law No. 10535 (“New Arbitration Law”), which will enter into force on 1 April 2025. This new law promises to propel Costa Rica’s arbitration practice into a new modern stage. We address below the most relevant developments.

 

The Evolution Behind Costa Rica’s New Arbitration Law

Although arbitration has been present in Costa Rica’s legislation for over a century and is even incorporated in Article 43 of the current 1949 Constitution, what we could call “modern arbitration” effectively began in 1998 with the entry into force of the Ley RAC. This law operationalized a right that had remained dormant in the constitutional text, laid the foundation for arbitration by recognizing the binding nature of the arbitration clause and requiring judges to respect it, and conferred jurisdiction to arbitrators to resolve disputes through a binding award. Private arbitral institutions were subsequently created to administer arbitration proceedings. Over the past 25 years, hundreds of awards have been rendered, significant progress has been made towards professionalizing the role of the arbitrator, and a mostly successful collaboration has been achieved between the arbitration community and the judiciary.

This successful system developed by the Ley RAC was designed for domestic arbitration. However, it presented limitations for the management of international arbitrations. In 2011, in order to address the limitations of the Ley RAC, Costa Rica enacted the International Commercial Arbitration Law (“LACI”), based on the UNCITRAL Model Law with the 2006 amendments. This second milestone was relevant since it introduced a more modern arbitration law that, although mainly intended for international arbitration, permeated domestic arbitration practice.

In addition, with the approval of this second arbitration law, Costa Rica adopted a dualist model, with two laws regulating arbitration, the Ley RAC for domestic arbitration and the LACI for international arbitration. Although these two laws should be interpreted in a harmonious and complementary manner, the fact is that in practice they are applied separately, generating regulatory and interpretative inconsistencies depending on the application of one or the other.

To address this situation, in 2019, Costa Rica’s leading arbitration centers created a commission with the task of adapting Costa Rica’s arbitration laws to current international standards. This was achieved with the approval of Bill number 23,259 that became Law No. 10535. Via the introduction of a series of adjustments to the LACI and the repeal of the arbitration regulations in the Ley RAC (which is still in force to regulate conciliation and mediation), Costa Rica’s arbitration regulation is unified under a single Arbitration Law.

 

Highlights of Costa Rica’s New Arbitration Law

The spirit of the New Arbitration Law is to closely align itself to the UNCITRAL Model Law, while also preserving the lessons learned in the past 25 years with the application of the Ley RAC.

The New Arbitration Law offers a few differences from the UNCITRAL Model Law, mainly:

1. The title of the Law eliminates the reference to “international”, which allows it to encompass both international and domestic arbitrations.
2. Article 1 clarifies that the Law’s scope of application includes both international and domestic arbitrations.
3. Article 7A introduces a provision that regulates the application of the arbitration clause to non-signatories, following the wording of Article 14 of the Peruvian Arbitration Law.
4. Article 10, which refers to the number of arbitrators, establishes the default option for domestic arbitration as one arbitrator and for international arbitration as three arbitrators.
5. In Article 11, which refers to the appointment of arbitrators, the New Arbitration Law expressly states that any entity authorized to administer arbitrations in Costa Rica may act as appointing authority, instead of only referring to the Costa Rican Supreme Court mentioned in Article 6.
6. Article 13 that refers to the challenge procedure of arbitrators includes different time limits for the filing of the challenge, depending on whether it is an international or a domestic arbitration.
7. Article 16, which refers to the arbitral tribunal’s competence to rule on its jurisdiction, also incorporates different time limits for international and domestic arbitrations.
8. Article 17 includes a new paragraph (3) that essentially regulates the possibility of having an emergency arbitrator decide on interim measures instituted before the beginning of the arbitration process. This is only possible with the parties’ agreement.
9. Article 33, which refers to the correction and interpretation of the award, also integrates different time limits for international and domestic arbitrations.
10. Article 34 also offers different time limits for the application to set aside an award in international and domestic arbitrations.
11. Article 35 provides for a more detailed procedure for judicial enforcement and recognition of foreign awards.

An important modification in the New Arbitration Law is the elimination of Article 1(5) of the LACI, which previously established that the LACI was not applicable to investor-State disputes. This restriction was not intended to interfere with Costa Rica’s international commitments on this matter, but rather it was based on an incorrect interpretation of the consequences of investor-State arbitration and the hierarchy of norms. Consequently, with the elimination of this restriction, once it enters into force, the New Arbitration Law can be applied to regulate investment cases seated in Costa Rica.

Moreover, the New Arbitration Law provides significant benefits for domestic arbitration, including:

1. It eliminates the possibility of applying Costa Rican procedural rules to arbitration, an interference that for many years judicialized arbitration and distorted its principles.
2. It restricts the cases in which the parties may request a judicial review of the arbitrators’ decision on jurisdiction. This is now limited to those cases in which the arbitral tribunal declares itself to have jurisdiction and allows the arbitration to continue even if the decision of the Supreme Court is pending. This translates into more expeditious arbitrations, as it limits the practice of suspending the proceedings pending the decision of the Supreme Court.
3. The grounds for challenging the arbitration award are consolidated and narrower, thus guaranteeing a more limited judicial control that follows international standards.
4. As mentioned supra, a new provision is included which regulates the application of the arbitration agreement to non-signatory parties. This was not regulated previously in Costa Rican legislation.
5. The New Arbitration Law provides for a reduction in costs for parties involved in domestic arbitration, since, as mentioned supra, when the parties have not agreed on a number of arbitrators, a one-person tribunal will be appointed.

 

Implications and Benefits

Law No. 10535 is the product of years-long effort by the Costa Rican arbitration community to unify and modernize Costa Rica’s arbitration legislation. In particular, domestic arbitrations will be able to take advantage of the UNCITRAL Model Law, which provides for a more flexible procedure and gives the tribunal more discretion to decide on a number of issues. These range from issues as simple as the language of the arbitration (which the Ley RAC required to be Spanish) to the possibility of granting interim measures (the Ley RAC did not have the best wording regarding the tribunal’s powers to grant them).

Moreover, in certain cases where issues arose as to which law was applicable, the Ley RAC or the LACI had clear and concrete implications depending on the case. The unification of international and domestic cases under one law has eliminated this problem. This also has two additional benefits: (1) international best practices in arbitration will permeate and influence domestic arbitration, and (2) arbitration users will consider Costa Rica as a more attractive seat, since it will now have an arbitration law shaped by international standards for all arbitration cases. This will provide much needed legal certainty.

 

Conclusion

The New Arbitration Law intends to make it easier for the users of arbitration to identify the applicable regulations and principles. This will make for more streamlined processes that operate on the bases of international standards, irrespective of their domestic or international nature.

In addition, the New Arbitration Law is an opportunity to optimize arbitration in Costa Rica, benefiting from an accumulated experience of more than 25 years in the application of modern arbitration legislation in the country.

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