This article was featured in Jus Mundi‘s 2024 Arbitration Year in Review, in collaboration with VYAPs, a yearly collection of articles from jurisdictions all around the globe updating you on arbitration-related developments from the previous year.
THE AUTHORS:
Daniela Endara Bastidas, Associate at AVL Abogados
Valentina Paladines, Associate at Bustamante Fabara
Juan David Vicuña Matovelle, Partner at Cordero & Asociados Abogados
The year 2024 has been an eventful year for Ecuador in the arbitration field. A lot of things took place this year. From a failed constitutional referendum related to the modification of article 422 of the Constitution regarding the recognition of international investment arbitration to important decisions of the Constitutional Court regarding domestic arbitration matters and international case development in which Ecuador acts as part of the dispute. Through the following lines, the mentioned events will be explained in detail.
Domestic Matters
Decisions emitted by local courts and authorities have contributed to shape the international arbitration landscape for Ecuador. In that regard, three key significant developments have unfolded during the year 2024, namely: (i) the April 2024 referendum related to article 422 of the Ecuadorian Constitution, about international investment arbitration; and two decisions emitted by the Ecuadorian Constitutional Court, (ii) one relating to the homologation of foreign arbitration awards and (iii) a decision about the exhaustiveness of grounds for annulment of awards.
Constitutional Referendum on Article 422 of the Constitution of the Republic of Ecuador
Locally, Investor-State Dispute Settlement (“ISDS”) has been a contested topic since the promulgation of the Ecuadorian Constitution of 2008, which a restriction related to ISDS on article 422, which established a prohibition on entering treaties or international instruments where the Ecuadorian state “yields its sovereign jurisdiction to international arbitration entities” in disputes that involved contracts or trade between the State and natural persons or legal entities. Citing this provision, Ecuador denounced the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (1965) (“ICSID Convention”) and several Bilateral Investment Treaties (“BITs”) in 2009. In 2021, the Constitutional Court approved rejoining ICSID, ruling that it was not contrary to article 422. Later, this same provision was interpreted to be in opposition to the Costa Rica – Ecuador BIT (2001) arbitration clause referring to the ICSID Convention.
The wording of this article has led to several interpretations regarding the scope of its application. A referendum was proposed as an opportunity to clarify the uncertainty of this wording and held this past April. With that said, the voting outcomes of the referendum did not favor changing the existing wording, and so, the text contained in the Ecuadorian constitution remains unchanged. With this, ongoing arbitrations, BITs that remain in effect, and existing legislation remain unchanged too.
Decision of the Constitutional Court of Ecuador on the Recognition of International Awards
In May 2024, the Ecuadorian Constitutional Court issued a landmark decision that cleared the existing debate regarding foreign awards and whether homologation is needed for their enforcement in Ecuador. In CW Travel v. Seitur, Judgment of the Constitutional Court of Ecuador (Judgment No. 3232-19-EP/24), 9 May 2024, the Court found that the decision of a lower court to require the claimant to homologate the arbitral award prior to enforcement was an unnecessary obstacle, clarifying that the rules requiring homologation of arbitral awards had been repealed in earlier years.
Decision of the Constitutional Court on the Exhaustiveness of Grounds for Annulment of Awards
In the same month, the Constitutional Court issued another key decision on the exhaustiveness of grounds for annulling arbitral awards. The case arose from two extraordinary protection actions filed against a Provincial Court judgment that upheld an arbitral award in a dispute between OTECEL, ARCONEL, and the Attorney General’s Office.
ARCONEL and the Attorney General’s Office alleged violations of constitutional rights, claiming the Provincial Court failed to address the arbitral tribunal’s lack of motivation and jurisdiction. However, the Constitutional Court reaffirmed that Article 31 of the Arbitration and Mediation Law provides an exhaustive list of annulment grounds, preventing challenges based on other considerations.
The Court emphasized that claims of a presumed lack of motivation or jurisdiction of the arbitral tribunal do not constitute valid grounds for annulment under the Arbitration and Mediation Law. As a result, the Constitutional Court rejected the extraordinary actions for protection filed by ARCONEL and the Attorney General’s Office.
Case Developments
In 2024 case development upheld regarding international arbitration procedures against Ecuador. Let´s review what happened in the following cases.
Ecuador TLC v. Ecuador (Awards)
The case EcuadorTLC and others v. Ecuador and others (I) stems from Ecuador’s early termination of a 2010 production sharing agreement (PSA) with a consortium. In 2018, an arbitration tribunal awarded USD $515 million to the plaintiffs but excluded state-owned Petromanabí’s 12% share (USD $42 million). In 2020, Ecuador TLC sought this amount on Petromanabí’s behalf in a new arbitration under UNCITRAL (United Nations Commission on International Trade Law) Arbitration Rules (1976) (“UNCITRAL Arbitration Rules”)
The second award issued in 2024 reaffirmed Ecuador’s binding obligation under the pacta sunt servanda principle, confirming that the 2018 decision had established the compensation mechanism for all consortium members. However, it allowed Ecuador to raise objections, except those challenging the 2018 compensation itself.
Ecuador has initiated annulment actions in Chile, keeping the case open and sparking debates on jurisdiction, enforcement, and state-private agreements.
Igapó v. Ecuador (Award)
The dispute between Igapó v. Petroecuador raised from the contract for crude oil production entered by these parties. Igapó alleged a breach of contract from Petroecuador, concerning the lack of payment for certain amounts agreed for its services. Consequently, Igapó’s relief sought consisted in the payment of said amounts plus compensation for lost profits. On the other hand, Respondent asserted that Igapó was not entitled to the payment of the requested amounts nor the compensation.
Notwithstanding the jurisdictional objections raised by Respondent, the tribunal declared it had jurisdiction, considering that the contractual agreement regarding the claimable amount through international arbitration and the preliminary steps to its activation were fulfilled. Regarding the merits, Igapo’s relief sought was granted by the tribunal, as it admitted that certain activities regarding crude oil production were indeed carried out, and Petroecuador failed to provide the corresponding compensation. Petroecuador was ordered to pay the arbitration costs.
Annulment of Awards in the Gente Oil and Inter Rao Cases
Two award annulment proceedings in international arbitration involving Ecuador were settled, both by the Court of Appeals of Santiago de Chile. Both attempts to annul the awards were rejected by said court, inter alia, based on the impossibility to review substantive issues in an annulment proceeding.
Gente Oil v. Ecuador
In Gente Oil v. Ecuador, the State Attorney General’s Office (PGE) filed an annulment action against the award. The action was based on two grounds:
- The award resolved on a dispute not provided for in the arbitration agreement or contained decisions that exceeded the terms of the agreement; and
- The award is contrary to the public policy of Chile.
Regarding the first ground, it was alleged that the tribunal exceeded its powers by deciding on precontractual indemnity and moral damages. Likewise, the PGE alleged an excess in the decision on the grounds that the PGE was condemned, and this state entity was not a party to the dispute. Concerning the second ground, it was asserted that the award is openly contrary to public law since the tribunal infringed the principle of legality by limiting and conditioning the actions of Ecuadorian state entities.
The tribunal rejected the annulment action. Regarding the first ground, according to the literalness of the arbitration clause, it extended to “all conflicts related to the application […] execution, non-performance, as well as the effects of an early termination”, therefore, the decision did not go beyond what was permitted. Additionally, it did not exceed the scope of the parties involved because the PGE acted on behalf of one of the parties to the dispute. The second ground was dismissed because the award condemned Ecuador for its attributable conducts, by virtue of its contractual duties with Gente Oil. Finally, the Court of Appeals noted that it is not possible to review the merits of the case in an annulment proceeding.
Inter Rao v. CELEC EP
In Inter Rao v. CELEC EP, CELEC filed an annulment action against the award. CELEC stated that its right to due process was violated in the arbitration proceedings, asserting that this right not only requires that the party has the possibility to present its defenses and evidence, but such right must become effective, as the tribunal rules based on such defenses and evidence.
This was particularly alleged because the tribunal would have omitted three central aspects that CELEC raised during the proceedings:
- That the parties stipulated a term that could only be modified under an established condition that was never fulfilled;
- That CELEC was reproached for not signing an exchange order, despite having done so; and
- It overlooked that the parties agreed on a non-extendable deadline for initial evidence, which Inter Rao did not comply with.
The annulment action was dismissed. The Court of Appeals found that CELEC indeed presented its thesis, submitted evidence, was duly notified, became aware of the information and relevant evidence presented by Inter Rao and, moreover, the award addressed the said matters in dispute, considering each of the parties’ arguments. The tribunal ruled that CELEC’s challenge referred to substantive issues, which cannot be reviewed through an annulment proceeding.
Settlement Between Occidental and Andes Petroleum for the Payment of the Award
After years of legal dispute, Occidental Petroleum (Oxy) and Andes Petroleum (Andes) reached a final settlement in 2024 and jointly requested the dismissal of their case before the United States Supreme Court.
The dispute originated from a 2012 ICSID arbitration ruling in the Occidental v. Ecuador (II) case, which awarded Oxy USD $1.7696 billion plus interest. In 2015, an ICSID Ad-hoc Committee partially annulled the award, reducing the compensation by 40% to USD $1.0617 billion plus interest.
Under their Farmout Agreement, Oxy and Andes had agreed that Andes would receive a share of any compensation related to Block 15. Based on this, Andes initiated an international arbitration against Oxy in 2017, claiming 40% of Oxy’s award from Ecuador. In 2021, an arbitral tribunal ruled that Andes was entitled to USD $392 million. However, both parties continued to challenge the ruling through legal proceedings.
In 2024, Oxy and Andes reached a definitive agreement, resolving the dispute. On April 12, 2024, they formally requested the United States Supreme Court to dismiss the case.
Conclusion
In conclusion, even though the failed referendum regarding the wording of article 422 of the Constitution, Ecuador´s legal framework concerning international investment arbitration remains unchanged. Both decisions issued by the Constitutional Court marked a precedent of legal security for the homologation of international legal awards and reaffirmed that annulment actions for arbitration awards proceed just when the specific grounds could be applied to the case. Also, in 2024 two arbitration awards that condemned Ecuador were issued, two annulment actions filed by Ecuador were rejected and an agreement was concluded in a very long dispute such as Andes v. Occidental. Overall, 2024 was a year in which Ecuadorian and international arbitration practitioners had a lot to discuss about.
ABOUT THE AUTHORS
Daniela Endara Bastidas is an undergraduate lawyer from Universidad San Francisco de Quito. She has taken several specialized courses in international commercial and investment arbitration and participated in several national and international arbitration competitions. She is currently an associate in the litigation and arbitration area at AVL Abogados, arbitration secretary at CAM CCQ and member of the Executive Committee of ECUVYAP.
Valentina Paladines is an undergraduate lawyer from Universidad San Francisco de Quito. She specializes in international commercial arbitration and has worked at recognized arbitration boutiques. She is currently an associate in the litigation and dispute resolution department at Bustamante Fabara. Additionally, Valentina is a member of the Executive Committee of ECUVYAP.
Juan David Vicuña Matovelle is a Partner at Cordero & Asociados Abogados, specializing in Public and Corporate Law, Litigation, and Arbitration. He holds a law degree from Universidad del Azuay with postgraduate studies in Administrative and Energy Law. Additionally, he serves as Syndic of the Cuenca Chamber of Construction and arbitration secretary at CAM Azuay. He is a founder and member of the Executive Committee of ECUVYAP.
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