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Bridging the Gap: Arbitration's Impact on the Panama Canal

In August of this year, the Panama Canal will turn one hundred years old. An engineering marvel from its inception, the canal serves as a shortcut for 13,000 ships every day, making it one of the busiest and most important commercial waterways in the world. Efforts are underway to build an additional set of locks that would create a new lane of traffic, effectively doubling the canal's capacity.

Those efforts, however, have stalled due to cost overruns. The project, already nine months behind schedule, was dealt a further blow a few days ago when work was halted by the Spanish-led consortium that is working on the expansion of the canal. The work, which was originally budgeted at $3.2 billion dollars, is being performed by a consortium called Grupo Unido por el Canal (GUPC), which is led by the Spanish builder Sacyr and includes Italy's Salini Impregilo, Jan De Nul from Belgium, and Panama's own Constructura Urbana (CUSA).

The group is currently negotiating with the Panama Canal Authority (the PCA), a semi-government entity, in an effort to restart work on the Canal. One of the major sticking points is GUPC's moratorium on repaying a $784 million advance. In order to free up funds, GUPC wants to delay the repayment until the end of an arbitration hearing, which is supposed to resolve a question on which party is responsible for $1.6 billion in cost overruns. The Panamanian government is opposed to paying for the cost overruns and has threatened to cancel the agreement it has with GUPC, even going so far as to providing other investors with tours and information on the project so they can jump in and take over the expansion efforts.

Under the terms of the contract, the dispute will be referred to the Dispute Review Board, which is an international arbitration institution. If the parties disagree with the DRB's decision, they are allowed to submit an appeal to an Arbitration Tribunal at the International Commerce chamber. According to the complaint, the issue is the cement that was to be used to cast the lock structures. GUPC argues that the PCA repeatedly rejected type and mix of cement that should be used. The PCA, in turn, argues that the contract establishes which type of cement that should be used and that GUPC never presented it for review. Although an apparently minor dispute, this could create a delay of another five years on the project. This is a major arbitration case that bears watching, as its impact could have major consequences for global trade.

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