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National and International Arbitration in Ecuador
Development of arbitration in Ecuador
Alternative dispute resolution (ADR) methods are not new in Ecuador. Traditionally they have existed as a valid means to resolve controversies, even in judicial proceedings. Nowadays all civil litigation must by law submit to a conciliation board seeking an amicable solution to the conflict. In practice, nonetheless, a solution is reached in very few cases in judicial proceedings. This fact has made it necessary to include ADR mechanisms in our legislation.1
The Arbitration and Mediation Law (AML) follows the UNCITRAL Model Law and was enacted on 4 September 1997.2 The AML repealed the former Commercial Arbitration Law that had been in force since 28 October 1963 and other provisions in the body of laws that contradicted it or made its application difficult, such as article 1505 of the Civil Code, which was construed by the Supreme Court of Justice in the sense that submission to international arbitration constituted illicit object.3
More than 10 years after the enforcement of the AML, it is possible to infer that dispute resolution mechanisms — arbitration in particular — provide certainty, independence and impartiality to the users. Subsequent statistics evidence that very few conflicts are submitted to the resolution of arbitration tribunals and that most of them continue being heard by the ordinary justice.
Several amendments to the original text of the AML were introduced on 25 February 2005, in an effort to abridge the concerns and demands generated during the first few years after those provisions were applied.
The most important changes embodied in the 2005 amendment referred to the following issues:
- the mechanism for challenging the validity of an arbitral award is an action, and not a recourse;
- 30 days were allowed for the president of the Superior District Court of Justice to resolve annulment actions filed against arbitral awards; and
- an ordinary judge is obligated to resolve — in advance – a plea of existence of an arbitration agreement submitted during the course of an ordinary lawsuit.
One of the major drawbacks in developing and propagating arbitration is lack of experience in drafting and preparing efficient arbitration clauses. This gives rise to frequent problems of jurisdiction due to 'pathological' clauses. Likewise, there is a certain degree of ignorance among users and lawyers concerning the differences between the arbitration system and the ordinary justice.
Statistics show that although there is an increasing trend in the number of cases being heard at the major arbitration centres existing in the country, it still is infinitely lower than the number of cases arriving at the ordinary courts – that may well amount to 1,500 per courthouse every year as an average.4
The arbitration regime in the draft new Constitution
The draft new Constitution submitted to a referendum on 28 September 2008, prepared by the National Constituent Assembly (NCA) contemplates the existence of arbitration and includes provisions relating to its treatment and regulation. Likewise, the draft constitution comprises specific rules addressing international arbitration and international treaties.
Recognition of arbitration and other ADR methods
First of all, it is important to mention that the draft new Constitution prepared by the NCA recognises arbitration as an ADR method, although in a different manner than the recognition set forth in the Constitution approved in 1998,5 as will be explained below:
The new Constitution includes the following with respect to arbitration:
Section VIII — Alternative methods for dispute resolution
Article 190 — Arbitration, mediation and other alternative methods for dispute resolution are recognised. These proceedings shall be applied in accordance with the law on matters where, by reason of their nature, it is possible to compromise. Arbitration at law shall apply on public contracting upon a prior favorable opinion from the Attorney General of the State pursuant to conditions set forth in the law.
The following conclusions can be drawn from the above:
- the condition that arbitration only applies to matters where it is possible to compromise, a principle already included in the AML that does not affect arbitration per se, has now been raised to a constitutional principle; and
- in matters involving contracts with the state, the prior authorisation of the attorney general of the state will be a condition for arbitration to proceed. This condition applies to national and to international arbitration and makes no distinction with respect to state institutions, whether or not with juridical capacity of their own.6 It ought to be understood that such authorisation must be given before the arbitration clause is executed, and not before the arbitration proceeding commences because, if so, the attorney general of the state would be entitled to veto the very commencement of the arbitration, thus resulting in arbitration being an innocuous proceeding.
Prohibition to enter into future treaties
The new Constitution also expressly prohibits the Ecuadorean state from entering into international treaties or instruments waiving jurisdiction with a view towards international arbitration involving contractual and commercial issues, as follows:
Article 422 — It shall not be possible to enter into international treaties or instruments in which the Ecuadorian State waives sovereign jurisdiction to international arbitration venues in contractual or commercial disputes between the State and private individuals or corporations.
Excepted from the foregoing are international treaties and instruments providing for dispute resolution between States and citizens of Latin America by regional arbitral venues or by jurisdictional organizations designated by the signatory countries. Judges from the states that as such or as nationals of those states are parties of the dispute cannot participate.
In the case of disputes relating to the foreign debt, the Ecuadorian State shall promote arbitral solutions in terms of the origin of the debt, subject to principles of transparency, equity and international justice.
The approval of the constitutional text with the above provision weakens international arbitration and, specifically, investor-state arbitration. However, the limitation mentioned in article 422 above does not affect the international treaties currently in force.7
Article 422 seeks to shield the Ecuadorean state from international arbitration and is a sort of reissue of the Calvo clause, which is confirmed by the minutes of the NCA that read as follows:
Article 8 [now 422] takes up an aspiration having had much national support as a consequence of the abuses that have impaired Ecuador's juridical sovereignty. That provision expressly states that it will not be possible to enter into international conventions or treaties compelling the Ecuadorian State to waive jurisdiction to international arbitration venues involving contractual or commercial matters. Historically, Ecuador has executed treaties that have been considered detrimental for the country's interests because they transfer jurisdiction and venue in cases of disputes originating from contractual or commercial relations with transnational companies to supranational arbitration venues where, it seems, the states are placed at the same level as a commercial company.8
Article 422 leads us to the following conclusions:
- the execution of treaties allowing arbitration in investment cases has not been prohibited, that is, not for contractual or commercial reasons, and under the standards of international public law on investment;
- the prohibition refers to contractual or commercial matters where the state is the counterparty of private persons;
- it is, besides, allowed to enter into treaties to resolve disputes:between states and individuals (that is, not companies); in Latin America; by regional venues or by regional jurisdictional bodies;9 and disputes relating to the foreign debt;
- the international treaties to which Ecuador has been a party before the new Constitution becomes effective, and that comprise arbitration matters, will continue in full effect, ie, the prohibition is limited to the execution of new treaties; and
- the constitutional provision does not prohibit the state — upon a prior opinion from the attorney general — from executing arbitration clauses in international arbitration.
Another important and positive aspect of how international arbitration is treated in the new Constitution is that it eliminates the concept or prohibition of submitting to an extraneous jurisdiction — ie, to international arbitration — in contracts executed between the state and juridical persons that had been included in article 14 of the 1998 Constitution.10 This provision has not been included in the new Constitution, thus definitively eliminating the concept of extraneous jurisdiction in relation to arbitration, although there are judicial decisions clearly stating that the term 'extraneous jurisdiction' does not include international arbitration.11
Local statistics: arbitrations in the principal centres in Ecuador (2007 and 2008)
|Quito Chamber of Commerce||66||61|
|Ecuadorean-American Chamber of Commerce||5||4|
|Quito Construction Chamber||10||7|
|Azuay Production Chambers||7||1|
|Manta Chamber of Commerce||15||10|
International arbitration as guarantee for foreign investment
For purposes of promoting, attracting and protecting foreign investment, Ecuador signed the International Convention on Settlement of Investment Disputes between States and Nationals of other States (the ICSID Convention) on 3 March 1986, which became fully in effect on 19 April 2001.12 Likewise, Ecuador has executed sevaral bilateral investment treaties (BITs) that include ICSID or UNCITRAL arbitration clauses. Likewise, Ecuador is a party to the World Trade Organization (WTO)13 and more than once it has applied state-state arbitration set forth in WTO treaties.14
Furthermore, article 32 of the Investment Promotion and Guarantee Law15 reads as follows:
The State and the foreign investors may submit any disputes arising from the application of this Law to arbitration tribunals constituted by virtue of international treaties of which Ecuador is a party, or to procedures specifically agreed upon or stipulated in bilateral or multilateral agreements signed and ratified by our country.16
The above provision is in keeping with the spirit of opening up to foreign investment that was very much alive in Ecuador during the 1990s and in the first years of the 21st century.
The administration of President Rafael Correa has openly demonstrated its doubts about ICSID impartiality, alleging that the Center only favours the interests of developed countries and of those countries' companies coming to invest in Ecuador. This scepticism took on definite form on 4 December 2007, when President Correa sent a communication to ICSID withdrawing Ecuador's consent to submit to arbitration on issues pertaining to the utilisation of natural resources such as oil, gas, minerals and others.17
Currently, Ecuador has nine pending international arbitration cases pertaining to investment as set out below.
Pending cases against Ecuador at ICSID or under UNCITRAL Rules18
|Plaintiff||Registration date||Rules||Subject matter|
|Repsol, Murphy Oil, OPIC, CRS||12 June 2008||ICSID||Increased royalty tax|
|Burlington||4 June 2008||ICSID||Increased royalty tax|
|Perenco||2 June 2008||ICSID||Increased royalty tax|
|Murphy||15 April 2008||ICSID||Increased royalty tax|
|Occidental||13 July 2006||ICSID||Cancellation, petroleum contract|
|Noble||29 July 2003||ICSID||Electricity generation project|
|EMELEC||16 May 2003||ICSID||Electricity company|
|MCI||6 April 2003||ICSID||Electricity generation project|
|Chevron||6 December 2006||UNCITRAL||Judicial problems|
Enforcement of international arbitral awards in Ecuador
On 19 August 1961, Ecuador ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (the New York Convention).19 At the time of the ratification, Ecuador submitted the reservation on reciprocity subject to arbitral awards deriving from litigations that arise from juridical commercial relationships pursuant to the national laws as allowed by article 1.3 of the New York Convention.20 There are still no cases in Ecuador relating to enforcement of awards issued under the New York Convention.21
The Inter-American Convention on International Commercial Arbitration (the Panama Convention), entered into on 30 January 1975, and ratified in 1978,22 is a second tool for enforcing foreign arbitral awards. The Panama Convention was executed by the Organization of American States (OAS) member countries and therefore its application is limited to arbitral awards pronounced in one of the OAS member countries that entered into the Panama Convention.23 The PC applies to arbitral decisions resulting from disputes of a commercial character.24 It is important to mention that Ecuador ratified the Panama Convention 'with a declaration that the entities under Ecuadorean public law cannot submit to a foreign jurisdiction.'25 According to this reservation, it is inferred that the Panama Convention can only apply if the arbitrated dispute has had an Ecuadorean individual or corporation under private law as the counterparty.
Article 4 of the Panama Convention provides that recognition and enforcement of arbitral awards that meet the requirements and limitations of the Convention must be recognised in the same manner as national or foreign judgments are recognised and enforced.26
In May 1982,27 the Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards, 1979 (Montevideo Convention)28 came into effect in Ecuador. In addition to the coverage provided by this Convention to judgments and awards pertaining to other matters, it also applies to enforcement of foreign arbitral awards relating to commercial issues. An important limitation in the Montevideo Convention, just as in the Panama Convention, is that it only applies to judgments and awards issued in OAS member countries. The Montevideo Convention's intention is to cover 'judicial judgments and awards issued in civil, commercial or labour proceedings in one of the member states'.29
As far as local norms are concerned, the AML does not have a specific system for recognition and enforcement of foreign awards but, rather, it gives them the same treatment as the process for enforcing local judicial judgments in a last instance. Article 42 of the AML states that 'awards issued in an international arbitration proceeding shall have the same effects and shall be enforced in the same manner as awards issued in a national arbitration proceeding.' According to article 32 of the AML, that proceeding will be applicable to local judgments passed in a last instance, that is, through a judicial order. The AML sets forth the judge's duty to recognise and enforce foreign awards through a judicial order, without the possibility of applying any other procedure.
The judicial order procedure is commenced by the judge who allows a very short period for the debtor to pay what is due or otherwise to designate property for attachment and subsequent auction. This proceeding does not admit any opposition from the debtor, while the NYC does.30 For this reason, the AML presents an alternative that could be more expeditious to enforce awards before the lex fori.
1. See articles 5 and 18 of the Code of Civil Procedure.
2. The AML was codified in Official Register (OR) No. 417, 14 December 2006. Previously, the original text of the Law had been amended by the Amendatory AML Law published in OR No. 532, 25 February 2005.
3. Article 1505 of the Civil Code stated that: 'Thus, the promise to submit in Ecuador to a jurisdiction not recognized by Ecuadorean law is null and void due to defect in the object.'
4. This has been the average number of cases arriving every year. See: www.funcionjudicial-pichincha.gov.ec/corte/index.php.
5. Political Constitution (1998), article 191.
6. See: Organic Law of the Office of the Attorney General of the State, article 11. See, besides, AML, article 4. According to the AML, public institutions need no authorisation from the attorney general of the state if arbitration has been agreed in the contract.
7. Vienna Convention on the Law of Treaties (VCLT), articles 26 and 27. Ecuador ratified the VCLT on 18 July 2003.
8. Taken from the report from the majority in Working Group 9, NCA, 14 April 2008.
9. So far, there have not been created any regional venues or tribunals that could make this section applicable.
10. Political Constitution (1998). article 14: 'Article 14 — Contracts executed by State institutions with foreign individuals or corporations shall implicitly include a waiver to all diplomatic claims. If such contracts are executed in Ecuadorean territory, submission to an extraneous jurisdiction shall not be agreed, except in the case of international conventions.'
11. See EMELEC v Ministry of Energy and Mines, Supreme Court of Justice, Constitutional Chamber, Award dated 7 February 1994.
12. Executive Decree No. 1417-B, published in OR No. 309, 19 April 2001.
13. The Protocol of Adhesion to the WTO was published in OR No. 852, 29 December 1995.
14. Ecuador has participated 15 times in the WTO dispute resolution system, three times as claimant, three times as defendant, and nine times as a third party. See: www.wto.org/spanish/thewto_s/countries_s/ecuadoir_s.htm#disputes.
15. Investment Promotion and Guarantee Law. OR No. 219, 19 December 1997.
17. See: http://icsid.worldbank.org/ICSID/Index.jsp. Besides, LatinLawyer magazine, 'Ecuador partially withdraws from ICSID', December 2007. The pertinent portion of the communication reads as follows: 'The Republic of Ecuador will not consent to submit to the jurisdiction of the International Centre on Settlement of Investment Disputes (ICSID) the differences arising on matters pertaining to treatment of investments deriving from economic activities relating to the utilisation of natural resources such as oil, gas, minerals or others. All instruments containing the willingness previously expressed by Ecuador of submitting those disputes to the jurisdiction of the Center and not yet perfected by means of the express and explicit consent of the other party before the date of presentation of this notice are withdrawn by Ecuador, effective immediately as of this date.'
18. Taken from LatinLawyer magazine, volume 7, No. 6, page 46.
19. Legislative Resolution 000, published in OR No. 293, 19 August 1961.
20. 'Ratifies the execution of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, taking into account that Ecuador, on the basis of reciprocity, will apply such Convention to recognition and enforcement of arbitral awards pronounced in the territory of another contracting state only when such awards involve litigations arising from juridical relations deemed to be commercial by Ecuadorean law.' Legislative Resolution 000, published in OR No. 293 of 19 August 1961.
21. The case of Occidental Exploration and Production Company v Ecuador was processed according to UNCITRAL Rules and its enforcement was submitted to the NYC in London (lex arbitri). However, it was not examined under Ecuadorean law because the parties reached a compromise.
22. Supreme Decree No. 3019 published in OR 729, 12 December 1978.
23. Panama Convention, articles 7 and 9.
24. Panama Convention, article 1: 'An agreement between the parties whereby they undertake to submit to arbitral decision the differences arising or having arisen between them with relation to a commercial business is valid. The respective agreement shall be included in a written document signed by the parties or in an exchange of letters, telegrams or telex communications.'
25. This declaration is included in the ratification instrument (6 August 1991).
26. Panama Convention, article 4: 'Arbitral judgments or awards that cannot be challenged according to the law or applicable procedural rules shall have the force of res judicata. Their enforcement or recognition may be demanded in the same manner as judgments pronounced by national or foreign ordinary courts according to the procedural rules of the country where they are enforced and to what is established by international treaties in this respect.'
27. Executive Decree No. 853 published in OR No. 240, 11 May 1982.
28. This Convention was executed in Montevideo, Uruguay, on 8 May 1979.
29. Montevideo Convention, article 1: 'This Convention shall apply to judicial judgments and arbitral awards issued in civil, commercial or labor proceedings in one of the member states unless at the time of ratification one of them has made an express reservation to limit it to judgments pertaining to convictions on equity matters. Likewise, any of them may declare, at the time of ratification, that it also applies to resolutions culminating the proceeding, those issued by authorities that exercise some jurisdictional function, and to criminal sentences as regards indemnities of damages deriving from the offense. The rules of this Convention shall apply as regards arbitral awards on everything not set forth in the [Panama Convention].'
30. Article 5 of the NYC establishes criteria whereby a local judge may not recognise and enforce a foreign arbitral award.