THE AUTHORS:
Haly Tran Guevara, law student at the Universidad San Francisco in Quito
Daniela Endara Bastidas is a trainee at ECIJA Integrum
David Molina Coello, international arbitration intern at the London office of Three Crowns LLP.
Whilst 2021 saw several milestones in the arbitration field in Ecuador, such as rejoining the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (“ICSID Convention” or “ICSID”) after the State’s withdrawal in 2008, or enacting the Regulation to the Arbitration and Mediation Law, which clarified its practical application in a pro-arbitration manner (Decree No. 165), 2022 has also proved to be an eventful year for arbitration in Ecuador. This note will address such events by explaining recent developments in case law, treaties, and regulations and summarizing the current stage of the investor-state dispute settlement (“ISDS”) cases initiated against the Republic of Ecuador.
Case law
After upholding the constitutionality of Ecuador’s ratification to the ICSID Convention in 2021, the Constitutional Court of Ecuador dismissed a request for interpretation filed in 2018 challenging the current interpretation of Article 422 of the Constitution, which prohibits the conclusion of investment treaties providing for investor-State international arbitration seated outside of the region. In decision No. 2-18-IC/22, the Constitutional Court declared the request’s inadmissibility as it did not encompass a general interpretation of the provision (the main admissibility requirement for a request for the interpretation of a Constitutional rule) and was intended to consult the Court on the application of the norm to a specific scenario – the conclusion of a Bilateral Investment Treaty (“BIT”). The Court, however, left the discussion open. It could be dealt with during the internal process to ratify an eventual BIT providing for ISDS. Although there is no information on whether the parties included an ISDS provision in its text, Ecuador and Spain completed a draft BIT on 5 December 2022, pending internal ratification in both states. This may be the opportunity for the Constitutional Court to review the previous interpretation of Article 422 of the Constitution.
Treaties
In addition to the negotiations to conclude new BITs and to promote international arbitration, Ecuador concluded a Host Country Agreement with the Permanent Court of Arbitration (“PCA”) on 25 October 2022, granting privileges and immunities to PCA officials and arbitrators, and participants in PCA-administered cases. This also paves the way to set a framework for the institution’s use of facilities located in Ecuador.
Laws, Regulations, and Arbitral Rules
First, in February 2022, the Executive sent a draft law to the National Assembly titled Organic Law for the Attraction of Investments, Strengthening of the Stock Market and Digital Transformation.[1] This draft includes a provision stating that delegated management contracts and public-private partnerships concluded with the State must include a multi-tier dispute resolution clause– negotiation between the parties, mediation, and arbitration. The draft law also provides for the conclusion of arbitration agreements in investment contracts exceeding US $15,000,000, ensuring the benefit of recourse to arbitration for investors investing in Ecuador.
Second, the Ministry of Economy and Finance issued a Regulation for recognizing and paying arbitral awards rendered against Ecuador and its entities,[2] creating a program to include a financial provision in the State’s yearly budget for the payment of awards and decisions which are foreseen to be due during the year in which the budget is operational. This provision will apply to all the awards due against the State with an amount equal or superior to US $ 1,000,000. The National Treasurer of Ecuador will assign the funds using the information of the awards that the General Attorney’s office will provide for such effect.
Third, the Arbitration Centers of the Ecuadorian-American Chamber of Commerce (“AMCHAM”) and the Chamber of Commerce of Guayaquil (“CCG”) updated their arbitration rules, the validity of which started in 2022, to meet international standards while instrumenting Decree No. 165. The update includes rules on emergency arbitration, electronic notification of a claim, and a calendar for payment of arbitral costs.
ISDS Cases
2022 has had newly instituted investor-State arbitration proceedings against Ecuador, updates on ongoing proceedings, and concluded arbitrations.
Regarding arbitrations initiated in 2022:
- CODELCO, a Chilean state-owned company, started two arbitral proceedings against Ecuador, alleging the breach of a partnership agreement concluded between the investor and the Ecuadorian State-owned mining company, ENAMI, in 2019. The agreement was supposed to inaugurate the exploitation phase of a mining operation initiated with the exploration phase in 2008. The first arbitral proceeding was commenced in January 2022 pursuant to the ICSID arbitration rules (being the first ICSID proceeding against Ecuador since its re-accession to the Convention), and the second proceeding commenced in April 2022 pursuant to the International Chamber of Commerce (“ICC”) arbitration rules with the seat in Paris. To date, the ICSID arbitration is suspended and the parties are negotiating.
- The Chinese mining company Junefield filed an ad hoc arbitration in October 2022, claiming Ecuador is liable for the lack of guarantees to operate the Rio Blanco Project as indigenous and anti-mining groups allegedly conducted numerous disturbances that prevented the company from carrying out activities in the area.
Regarding ongoing and concluded arbitrations:
- Poma SAS and Sofratesa Inc initiated an ICC arbitration alleging a breach of the contract signed with the Municipality of Guayaquil and the Municipal Public Transit Company of Guayaquil in September 2021. However, at least the state-owned company has not appointed its member of the arbitral tribunal yet.
- In May 2022, an arbitral tribunal of a PCA-administrated case issued an award condemning Ecuador to pay US $10,700,000 in favor of Gente Oil. Ecuador challenged the validity of the award before the Court of Appeals of Santiago, the decision of which is pending.
- In June 2022, the Court of Appeals of The Hague rejected Ecuador’s appeal and upheld the 2018 partial award in favor of Chevron and Texaco, which found fraud and corruption in the judgment on environmental damages issued against Texaco in Ecuadorian courts. Later, in September 2022, the Attorney General’s Office filed a cassation appeal within the process of annulment of the second partial award before the Supreme Court of the Netherlands.
- In August 2022, international press signaled that Luxemburgish financial institutions were ordered to freeze Ecuadorian assets under their guard for the payment of the ICSID award rendered in favor of Perenco in 2019, although the Ministry of Economy and Finance issued a communication asserting that the State did not receive an official notification from the judicial authorities of Luxembourg on the issue. In any case, in December 2022, the government agreed on a payment schedule with Perenco that extends throughout 2023.
- On 16 December 2022, an ICC arbitral tribunal constituted under the UNCITRAL Arbitration Rules issued a final award in the arbitration initiated by MAESSA and SEMI in 2015. The tribunal found the State’s unilateral termination of the construction contract concluded with the claimants to be in breach of its obligations and awarded US $17,367,897.31 in favor of MAESSA and SEMI. The Attorney’s General Office issued a press release saying the Republic of Ecuador is reviewing its options, which include challenging the award in the courts of Paris.
Looking ahead, 2023 may bring a new ISDS claim against Ecuador. Petrolia, a Canadian company, has declared that it will seek recourse to international arbitration for Ecuador’s decision not to extend the period of its contracts to operate blocks 16 and 67, due by the end of 2022. The investor has anticipated that its claim will be on the scale of US $260,000,000.
Conclusion
The Constitutional interpretation prohibiting the Ecuadorian government from concluding investment treaties providing for investor-state arbitration proceedings seated outside of the region is still in force in 2022. However, the issue is likely to be revised during the ratification process of newly concluded BITs providing for an investor-State dispute resolution mechanism. In any case, Ecuador continues to develop its approach to ISDS proceedings; there have been efforts to equate Ecuador’s arbitral practice to international standards; the government has decided to allocate funds from the State’s budget to pay its obligations arising from arbitral awards; Ecuadorian law recognizes the right of investors and private parties concluding contracts with the State to seek recourse to arbitration; and the country has become one of the Host Countries of the PCA. Overall, 2022 was a favourable year for international arbitration in Ecuador.
ABOUT THE AUTHORS:
Haly Tran Guevara is a law student at the Universidad San Francisco in Quito and a junior member of ECUVYAP. She participated in the XI National Arbitration Competition (Best memorial for the Plaintiff and the Respondent) and the XV International Commercial Arbitration Competition, jointly organized by the Universidad del Rosario and the Universidad de Buenos Aires.
Daniela Endara Bastidas is a trainee at ECIJA Integrum (Guatemala) and a junior member of ECUVYAP. During her legal studies, she participated in the XIV (Best memorial for the Respondent) and XV International Commercial Arbitration Competitions, jointly organized by the Universidad del Rosario in Colombia and the Universidad de Buenos Aires.
David Molina Coello is an international arbitration intern at the London office of Three Crowns LLP. He earned MIDS LLM (First Hons. Equivalent) and LLB at Universidad Hemisferios (Summa Cum Laude), having been admitted to practice in Ecuador since 2020. David is a member of the Executive Committee of ECUVYAP and a member of the Ecuadorian Arbitration Institute.
[1] The translation is ours. The project’s original name is: “Ley Orgánica para la Atracción de Inversiones, Fortalecimiento del Mercado de Valores y Transformación Digital”.
[2] See pages 20-22.
