Legal Market Overview
Costa Rica remains one of the most politically stable and economically successful countries in Central America, and despite the slowdown triggered by the Covid-19 pandemic, recent developments suggest economic relief is on the way. First, there was the approval of a $1.778bn loan from the International Monetary Fund in March 2021 and the immediate release of $296.5m to implement fiscal reforms to provide a stabilising infusion into the economy. Then, in early May, the Inter-American Development Bank announced its grant of two $250m loans to continue the recovery. One of the loans is specifically designed for ‘assistance for households and businesses affected by the Covid-19 crisis’. And, finally, on 25 May 2021, Costa Rica became the 38th member country of the Organization for Economic Cooperation and Development. The ideal outcome of these recent events would not only be an economy restored to pre-pandemic levels, but also the reduction of Costa Rica’s deficit of 8.3% of GDP – the country’s highest since 1981. In addition, the potential impact of the February 2022 presidential elections is on the horizon.
The effect of Covid-19, the economic slowdown and the rise of homeworking have not only forced a change of the workload of Costa Rican law firms, but also a reevaluation of operating procedures in all practice areas of the market.
In the banking and finance area, firms have cited the need for improved digital services to adapt to the changing needs of the financial clients they serve. This, in turn, has led to a surge in the usage of digital signatures and promissory notes.
In the tax area, firms have experienced an increased level of requests for asset planning for family businesses and an uptick in regulatory compliance matters. The latter has been attributed to the July 2019 changes in the tax code, after which the imposition of VAT was expanded from the sales of goods to also include the provision of services. Firms reported a downturn in tourism-related tax matters, but a rise in other sectors such as aviation, real estate and free trade zones.
In relation to projects and infrastructure, firms report a slowdown of government projects, coupled with a higher level of bidding. A successful transfer to virtual platforms has eased the process and firms are optimistic that infrastructure projects of different scales will aid in the reactivation of the Costa Rican economy. Pharmaceuticals, aviation and energy remain growing sectors.
In the real estate arena, firms reported a pandemic rebound effect in the first quarter of 2021, and a boom in the second-home market, with many visitors seeking a new residence to wait out Covid. Some practices adapted by offering virtual viewings of homes for clients, but have indicated frustration with changing pandemic guidelines, coupled with a rise in government discretionary powers. Firms have also reported an increase in the renegotiation of rentals and the restructuring of real estate costs. The long view from real estate teams is more deals in the industrial logistics area, more distribution centres, more free trade zone regime-related transactions, and a positive continued impact with regards to nearshoring. Firms also see a post-pandemic revitalisation of the leisure market.
As a result of Covid-19, the labour and employment market has been characterised by an increase in contract suspensions, reductions in working hours, and the implementation of company teleworking schemes. Firms see more cases down the line regarding vaccine mandates in the workplace.
The insurance industry has experienced a pandemic slowdown coupled with a rising wave of digital claims, requiring increased levels of adaptation on the part of law firms. The Legal 500 has also adapted to these changes and the Latin America guide has now added a new section for the practice area. Firms see a future reckoning over how insurance contract provisions apply to businesses that lost revenue during the pandemic shutdown.
In the environmental practice area, firms have adapted to reviewing and managing environmental health and safety audits virtually. Water regulatory matters are on the rise, and firms envision water energy issues being a dominant conversation over the next five to ten years. A strain has been reported in the electricity market with regards to the state monopoly, with several private generators having their contracts shut down.
With dispute resolution, firms have reported a rise in bankruptcy cases, as well as labour cases because of pandemic-related dismissals. They also predict a future surge of insolvency cases in the wake of the new Costa Rican Bankruptcy Law, which eliminates proceedings for administration and reorganisation with judicial intervention, preventative creditor agreements, civil insolvency and bankruptcy, replacing them with a single bankruptcy process.
Corporate and M&A practices have seen a trend towards pandemic-related corporate restructuring matters, as well as an influx of corporate tax-related issues. The pharmaceuticals sector in particular is on the upswing. In addition, firms report a more aggressive-than-usual pursuit of clients and a rise in competitive rates. They foresee an expansion of software services, as well as nearshore operations, but some fear the current alterations to the tax code may affect M&A transactions in the future.
With few exceptions, 2021 has seen BLP solidify its position as a leader in the Costa Rican market, while other major regional players include Aguilar Castillo Love, Arias and Consortium Legal. Central American firms Central Law Costa Rica, Latamlex / Gómez y Galindo Abogados, S.A, Lexincorp, Sfera Legal and labour and employment specialist BDS Asesores are also active, as are full-service domestic firms such as Facio & Cañas and Zürcher, Odio & Raven, local boutiques such as leading banking and finance firm Vector Legal, and international players including Dentons Muñoz, ECIJA, EY Law Central America and Deloitte Legal.
At the end of May 2021, an industry bombshell was dropped with the announcement of the creation of Alta, a power merger between Batalla in Costa Rica, Valdés, Suárez & Velasco in El Salvador, QIL+4 Abogados in Guatemala and Melara & Asociados in Honduras. Up in the air is the question of how this will impact the market over the course of the next 12 months.