Ecuador’s National Assembly approved a new bill on 7 August 2018 (hereinafter ‘Organic Law for the Promotion of Production and Investment’ or the ‘new Law’),1 which, among other changes, amended the Code on Production, Trade and Investment.2 This initiative originated from the office of the President of the Republic, Lenin Moreno, who has demonstrated an increasingly positive attitude towards the use of international arbitration in general, and investment arbitration in particular, as a method of dispute settlement with foreign investors. The new language expressly approves the use of arbitration to settle all disputes arising from investment contracts exceeding USD 10 million, directly reversing previous legislation enacted during the administration of former President Rafael Correa following the denunciation of the ICSID Convention in 2009 (denunciation that entered into force in January 2010). In fact, between 2008 and 2017 the Correa administration denounced twenty-five BITs—clearly communicating its distaste for investment arbitration to the international community.

It is important to note the context of the current legislative reform: Ecuador is in the process of negotiating new BITs with sovereign partners and recently circulated a new model BIT to 16 potential partners.

Recognition of foreign awards

The Organic Law for the Promotion of Production and Investment reveals two new provisions which follow Article 16 of Section II, as well as some minor deletions among Dispute Resolution Articles 27 and 102-106 of the General Procedural Code.3 These changes are in accordance with the New York Convention for Recognition and Enforcement of Foreign Awards:4

  • They remove the requirement for the recognition of the award before it could ultimately be enforced in Ecuador; and
  • They reinstate an important part of Article 42 of the 1997 Arbitration and Mediation Law,5 which grants awards issued in international arbitration the same effect and means of enforcement as awards issued in domestic arbitration. This reform is in accordance with the principle of the most favorable legislation foreseen under the New York Convention, by which, under Article VII(1), Ecuador will not be in breach of the Convention when enforcing arbitral awards pursuant to more favourable enforcement provisions under its domestic laws .

Recourse to arbitration: direct access or ultima ratio ?

Under the Code on Production, Trade and Investment,6 arbitration was available to foreign investors only following (i) exhaustion of administrative proceedings, (ii) amicable discussions between the parties and (iii) exhaustion of mandatory mediation. The new Law removes these pre-conditions, thereby streamlining an investor’s access to arbitration. This is in contrast to the draft Model-BIT (proposed in July 2018) which is slightly more restrictive. The proposed model text requires the (i) exhaustion of local administrative proceedings, as well as (ii) amicable negotiations prior to the filing of the request for arbitration.7 In the event the parties are not able to settle their dispute within six months of ‘bona fide’ negotiations, parties can select the following forums to submit their dispute:

  • national courts,
  • jurisdictional organs competent in investment matters agreed by the Contracting states,
  • arbitration centers of the host state, or
  • a Latin American seat for arbitrations under ICC or UNCITRAL Rules.

An example of the new trend in treaty practice towards the multi-tier clauses is found in the Netherlands new model BIT,8 incorporating a provision for negotiation, mediation or conciliation even where an arbitration has already commenced. Ecuador’s attempt to address the disputes amicably, before the arbitration is filed, seems to follow the trend in modern ISDS treaty practice.

State-approved arbitral institutions and the ICSID omission

The provisions of the new Law provide a list of arbitral institutions and arbitral rules that the Republic of Ecuador considers reliable to administer investment arbitration proceedings. The options available under the new Law include the International Court of Arbitration of the International Chamber of Commerce (ICC), the UNCITRAL Arbitration Rules administered by the Permanent Court of Arbitration (PCA), and the Arbitration Rules of the Inter-American Commercial Arbitration Commission (IACAC). The election of the ICC and the UNCITRAL Rules is rarely disputed, given their popularity and prestige, and there is an interest in promoting Latin American arbitral institutions.

While the amended Law is progressive and places Ecuador back on the proverbial ISDS map, ICSID arbitration is shunned by its omission from the options provided in the text. This is not surprising given Ecuador’s decision to withdraw from the ICSID Convention, and is rather a continuation of Correa’s disenchantment with ICSID following several cases registered by ICSID at the beginning of his administration and what he perceived as an ‘institutional pro-investor bias’ in the system.9 Only time will tell whether Ecuador will see a need to go back to being a Contracting Party to the ICSID Convention in the future; for now, the necessity is not apparent.

The blanket exclusion of emergency arbitration rules

The new Law expressly eliminates the option for the application of emergency arbitration: ‘in no case shall emergency arbitration rules apply’. This carve-out directly aligns with sovereign respondents’ interests. Sovereign respondents are indeed less equipped to defend their interests as swiftly as commercial actors in arbitral disputes.10 The question of fairness, equality of arms and access to justice is important when considering the application of emergency measures to investment arbitration. Sovereign respondents are more often hampered by budget restrictions, imperative bureaucracy, limitations to timely access to relevant information and unavoidable delays in obtaining and retaining external counsel with subject-matter expertise. The particular struggles sovereigns face in ISDS proceedings transform emergency arbitration from a useful dispute resolution mechanism to a hostile coup de main. For this reason, Ecuador’s option to exclude emergency arbitration seems wise.

Next step: Resolving the constitutional question

On 28 June 2018, the National Assembly (i.e. the Congress) submitted to the Constitutional Court the question of the constitutionality of the ISDS provisions in BITs under the Ecuadorean Constitution.11 Article 422 of the Constitution has been interpreted as forbidding the state from agreeing to any treaty or international instrument that would ‘yield its sovereign jurisdiction to international arbitration, in contractual or commercial disputes, between the state and natural persons or legal entities’.12 In fact, this text was the basis for the 2017 denunciation of all remaining BITs to which Ecuador was a party. However, many practitioners and academics have asserted that the prohibition in Article 422 only applies to commercial and contractual disputes and not to Investor-State disputes.13 Consequently, the omission of a specific mention of ISDS in that provision should be construed as a carve out and interpreted as legislative intent to leave ISDS out of the reach of the provision.

While the final outcome of the Constitutional Court decision remains uncertain, it is expected that the question will be considered in early to mid-2019, upon the appointment of new members of the Constitutional Court. The outcome of the constitutionality review is pivotal as it will define Ecuador’s standing in international arbitration and will fully delineate the framework of its new investment regime under President Moreno’s administration.


1
‘Ley Orgánica para el Fomento Productivo, Atracción de Inversiones, Generación de Empleo y Estabilidad y Equilibrio Fiscal’ entered into force in 21 August 2018: https://www.comercioexterior.gob.ec/wp-content/uploads/downloads/2018/08/LEY-ORGA%CC%81NICA-PARA-EL-FOMENTO-PRODUCTIVO-ATRACCIO%CC%81N-DE-INVERSIONES.pdf

2
Código Orgánico de la Producción, Comercio e Inversiones (COPCI), entered into force on 29 December 2010: https://www.correosdelecuador.gob.ec/wp-content/uploads/downloads/2018/11/COPCI.pdf

3
Código Orgánico General de Procesos (COGEP), entered fully into force (after a one year vacatio legis) on 23 May 2016, http://servicios.agricultura.gob.ec/transparencia/2018/Agosto2018/a2)%20Base%20legal%20que%20la%20rige%20a%20la%20instituci%C3%B3n/COGEP.pdf.

4
Ecuador ratified the New York Convention on 1961 with the two reservations: the ‘reciprocity’ and ‘commercial’ reservations.

5
Ley de Arbitraje y Mediación, entered into force on 4 September 1997, http://www.funcionjudicial.gob.ec/www/pdf/mediacion/Ley%20de%20Arbitraje%20y%20Mediacion.pdf

6
See supra note 2, Art.27.

7
Ecuador Bilateral Investment Treaty Model, Art.21.

8
Netherlands Model Investment Agreement (Oct. 2018), Art. 17, https://globalarbitrationreview.com/digital_assets/820bcdd9-08b5-4bb5-a81e-d69e6c6735ce/Draft-Model-BIT-NL-2018.pdf.

9
President Correa, in May 2013, created a Commission (‘CAITISA’) with the aim of the remaining BITs in force. The denunciation of the remaining BITs, in May 2017, was announced to the public as a direct result of the final CAITISA report.

10
Joel Dahlquist Cullborg, ‘Emergency Arbitrators in Investment Treaty Disputes’ (2015) Kluwer Arbitration Blog, http://arbitrationblog.kluwerarbitration.com/2015/03/10/emergency-arbitrators-in-investment-treaty-disputes/.

11
Maricio Zambrano, ‘Corte Constitucional Deberá Interpretar Si La Prohibición De Arbitrajes Incluye Tratados Bilaterales’ (9 July 2018), https://www.asambleanacional.gob.ec/es/blogs/mauricio-zambrano/56514-corte-constitucional-debera-interpretar. Press Release, ‘La Corte Constitucional Deberá Interpretar Si La Prohibición De Arbitrajes Incluye A Tratados Bilaterales De Inversión’ (28 June 2018), https://www.asambleanacional.gob.ec/es/noticia/56382-la-corte-constitucional-debera-interpretar-si-la.

12
Constitution of the Republic of Ecuador, Art. 422 (Original Spanish text: ‘No se podrá celebrar tratados o instrumentos internacionales en los que el Estado ecuatoriano ceda jurisdicción soberana a instancias de arbitraje internacional, en controversias contractuales o de índole comercial, entre el Estado y personas naturales o jurídicas privadas’).

13
Tom Jones, ‘Ecuadorean Court to Rule on the Constitutionality of ISDS Clauses’ (2018) Global Arbitration Review https://globalarbitrationreview.com/article/1171286/ecuadorean-court-to-rule-on-constitutionality-of-isds-clauses.