International Arbitration Update: May 2025

Costa Rica Reforms Its Arbitration Law: The Harmonization Law and Its Impact on Domestic and International Arbitration

On October 1, 2024, Costa Rica enacted Law No. 10535, known as the Harmonization Law, a reform designed to streamline and modernize its arbitration framework.  This new legislation, which will take effect on April 2, 2025, addresses key inconsistencies caused by the previous dualist system regulating domestic and international arbitration separately.  The Harmonization Law consolidates both systems under one unified structure, providing clearer, more consistent rules for arbitration practitioners and businesses involved in arbitration within Costa Rica.

For over two decades, Costa Rica’s arbitration system was governed by two distinct legal regimes: Law No. 7727 on Alternative Dispute Resolution and Promotion of Social Peace (“RAC Law”) enacted in 1998 and focused mainly on domestic arbitration, and Law No. 8937 on International Commercial Arbitration (“ICA Law”) based on the UNCITRAL Model Law, which was enacted in 2011, applied to international arbitrations, and aimed to address the limitations that the RAC Law imposed on international cases.  This dualist approach created a fragmented legal environment where arbitration proceedings were subject to different rules, depending on whether the arbitration was classified as domestic or international.

Although the RAC Law was designed with the objective of promoting domestic alternative dispute resolution, it was limited in its application and did not fully align with international arbitration standards.  The ICA Law, on the other hand, was tailored for international arbitration, offering a more sophisticated legal framework consistent with the UNCITRAL Model Law but leading to further discrepancies in interpretation and practice when it came to domestic arbitration.

The application of these two separate laws sometimes led to divergent interpretations, particularly in areas such as the appointment of arbitrators, the powers of arbitral tribunals, and the enforcement of arbitral awards.  As a result, parties engaged in arbitrations seated in Costa Rica often faced legal uncertainty, depending on which law applied to their case.  This inconsistency undermined Costa Rica’s attractiveness as a destination for arbitration, as parties could not always predict how their disputes would be handled depending on the classification of the arbitration.

The Harmonization Law seeks to eliminate the discrepancies caused by the dualist system by unifying Costa Rica’s arbitration framework under a single legal structure.  By integrating both domestic and international arbitration under one umbrella, the new law simplifies and modernizes the arbitration process, ensuring that both types of arbitration are subject to the same set of core principles.

The key aim of this reform is to provide a consistent legal environment where the same rules apply regardless of the nature of the arbitration.  For instance, under the old system, domestic arbitrations were often subject to different timelines, procedural rules, and standards compared to international arbitrations, even if the disputes were substantively similar.  This inconsistency created confusion and delays, especially when arbitrations involved both domestic and international parties.  The Harmonization Law rectifies this issue by aligning domestic arbitration with international standards, effectively eliminating the legal barriers that previously existed between the two.

The following are some of the key features of the Harmonization Law:

1. Unified Legal Framework: The Harmonization Law unifies Costa Rica’s arbitration system by eliminating the distinction between domestic and international arbitration. Although it still recognizes differences—such as default rules regarding the number of arbitrators—the law aligns both types of arbitration under the same legal principles, fostering efficiency and reducing legal uncertainty.  This unification is a direct response to the legal challenges posed by the dualist model, where parties involved in arbitration proceedings often had to navigate the complexities of two different sets of rules.  By consolidating the framework, the Harmonization Law aims to eliminate the confusion and inefficiencies that resulted from the dualist approach.
2. Arbitral Tribunal Composition: The reform establishes a default rule of a three-member arbitral tribunal for international arbitration and a single arbitrator for domestic arbitration, unless the parties agree otherwise. This shift ensures that both systems are treated similarly and reduces the potential for differing interpretations of the tribunal’s role, regardless of whether the arbitration is domestic or international.
3. Appointment and Qualification of Arbitrators: Under the new law, Costa Rican arbitral institutions can appoint arbitrators when the parties fail to reach an agreement. The law also adjusts the qualifications required for domestic arbitration, maintaining the need for arbitrators to be members of the Costa Rican Bar in certain cases.  These provisions reduce the possibility of inconsistent rulings due to varying qualifications of arbitrators under the old system.
4. Interim Measures and Emergency Arbitrators: A notable advancement is the inclusion of provisions that allow arbitral tribunals to grant interim measures in both domestic and international arbitration proceedings. This was previously restricted to international arbitration, thereby enhancing the utility of arbitration for all types of disputes.  This change eliminates a significant gap in the previous legal framework, where domestic arbitration lacked similar provisions for interim relief.
5. Clarification on Non-Signatories: The Harmonization Law introduces a provision allowing the application of arbitration clauses to non-signatories. This is particularly important in cases where third parties benefit from contracts that contain arbitration clauses, expanding the scope of arbitration’s applicability.
6. Faster Procedures and Judicial Oversight: The new law introduces time-bound procedures, which streamline the arbitration process. For example, challenges to an arbitrator’s decision in domestic arbitration must now be filed within five days, a reduction from the previous 15 days.  Additionally, judicial oversight is limited, ensuring that arbitrators’ decisions are respected and reducing the frequency of unnecessary court interventions.

Costa Rica’s legal reform positions the country as an increasingly attractive destination for arbitration in Latin America.  The unification of its arbitration laws brings Costa Rica in line with global standards and removes the legal inconsistencies that could have deterred international businesses.  By adhering to the UNCITRAL Model Law, the Harmonization Law enhances the country’s reputation as a stable, reliable forum for arbitration.

Costa Rica’s Harmonization Law marks a critical milestone in the country’s arbitration development.  The shift from a dualist to a unified system promises greater clarity, efficiency, and alignment with international arbitration practices.  As the law takes effect in April 2025, Costa Rica is poised to become a leading arbitration hub in Latin America, offering a modern and consistent legal framework for resolving disputes.  The Harmonization Law not only simplifies arbitration processes but also enhances Costa Rica's standing on the global stage, eliminating past discrepancies between domestic and international arbitration frameworks.