What Determines The Outcomes Of Public Procurement Arbitration?

ABSTRACT

The strengths and weaknesses of arbitration compared to litigation, as a system for solving procurement disputes between governments and their private counterparts has been a subject of debate among scholars. A particularly sensitive topic relates to the impartiality standards of each system and the determinants of its outcomes. Using a unique database of national arbitration resolutions we analyze the determinants of awards in procurement disputes related to public works. Estimating a cross-section model, we find evidence in favor of party capability theory and the influence of institutional factors in arbitration outcomes, like amendments to procurement law or the characteristics of the organization in charge of administering these processes. As well, we find indirect evidence that suggests that adverse outcomes for government entities are related with the lack of individual incentives of officials to settle with private contractors, and the presence of presumably undue influence among private contractors and arbitrators.

KEYWORDS:

• Arbitration
• party capability theory
• public procurement
• public works

Acknowledgement

I would like to thank Ezequiel Velasque for their support in data processing. As well I would like to thank Pontifical Catholic University of Peru, for their financial support to this research. Errors are totally attributable of the author.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. For a revision of recent research on public procurement see, Trammell et al. (2020).

2. For a comparative analysis of the discussion in United States, Europe and Canada, see, Miller (2006).

3. We will the use the term ‘claimant’ as the party that submits to an arbitration tribunal a controversy arisen against their contractual counterpart, which will be identified as the ‘respondent’.

4. Article 62 establishes that the parties of a contract can agree on the mechanisms for solving disputes, which can be either judicial or arbitration.

5. Article 2 of Law 26572 states, as well, that commercial disputes must be solved according to trade uses and customs.

6. The OSCE is the Government Procurement Supervisory Organization, based on its initials in Spanish.

7. See, Castillo Freire and Sabroso (2009), pp. 13-14.

8. According to this author, the government regulation of arbitration is unavoidable given the public interest inherent in public procurement and government activities.

9. It is important to mention that rights and duties corresponding to public contracts disputes are regulated by the law that was in force upon the signing of the contract. In contrast, applicable procedural rules and regulations are those approved at the time of the start of the dispute.

10. A factor not considered here is tribunal characteristics. There exists an abundant branch of the literature focusing mainly on international investment arbitration, studying the influence of arbitrators’ characteristics on tribunals’ awards (see, Waibel & Wu, 2017; Van Harten, 2012; Franck, 2009; Ruiz Diaz, 2021). According to such studies, arbitrators’ ideological preferences can bring about deviations from the impartiality objectives of the arbitration system. However, in the Peruvian case, accessing information regarding arbitrators’ profile and ideology is still a difficult and complex task that must be addressed by future research.

11. The database is http://www.osce.gob.pe/descarga/arbitraje/laudos/arbitraje1.asp (accessed in April 2020).

12. There exist a relatively small number of claims of government entities against private contractors, which are excluded.

13. According to public sources (https://gestion.pe/peru/politica/club-construccion-son-31-empresas-fiscalia-pide-informacion-266759-noticia/, accessed in January 2022), there exist 31 companies under investigation.

14. Disputes resolved under the OSCE scope include ad hoc arbitration regulated under Law Decree 1071, as mentioned above.

15. Stigler (1971) coined this term to reflect the risk that regulators or authorities’ decisions can be influenced or shaped by particular interest groups or political sectors. Although originally applied to authorities or regulators, this term can also be used in the context of arbitration, to the extent that tribunals’ decisions may be unduly influenced by the parties that participate in a case.

Additional information

Funding

This research was partially funded by the Pontifical Catholic University of Peru.