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Arbitration and mediation law: guidelines for applicability
Arbitration in Ecuador is regulated by the Arbitration and Mediation Law of 1997 (AML).1 The AML provides for a dualist regime comprising detailed rules governing local arbitration and a few – albeit determinant – rules on international arbitration. Additionally, pursuant to the AML, other bodies of law, such as the General Organic Code of Procedures (COGEP), the Organic Code for the Judiciary and the Civil Code,2 may be supplementary to it.3
As regards international arbitration, article 42 of the AML categorically provides the following:
International arbitration shall be regulated by treaties, conventions, protocols and other acts of international law signed and ratified by Ecuador. Every natural or juridical person, public or private with no restrictions whatsoever is at liberty, directly or by reference to an arbitration regulation, to stipulate everything concerning the arbitration proceeding, including its establishment, discussions, language, applicable legislation, jurisdiction and seat of the arbitration panel which may be in Ecuador or in a foreign country.
The above provision sets forth the principle of pre-eminence of free will in matters of international arbitration on the basis of which everything relating to the arbitration proceeding can be freely agreed by the parties, resulting in important consequences including the following.
- Parties may elect the rules to govern an ad hoc or institutional arbitration proceeding. This attribution would mean that, in principle, the procedural norms for international arbitration chosen by the parties would not clash with local law unless they infringe norms pertaining to public policy – not clearly defined in Ecuador. Despite this lack of definition, we consider that norms such as those relating to the due process (specified below) would be included in this category.
- AML provisions for local proceedings are not necessarily applicable to international arbitration, except strictly to the assumptions described in this article.
- Ecuador does not have a law on international arbitration that might limit the prerogatives of article 42 of the AML with respect to an arbitration proceeding.
- Substantive non-procedural provisions in the AML could be important and applicable to international arbitration in certain circumstances.
It is therefore necessary to outline such assumptions where Ecuadorian law could be applicable to international arbitration. In principle, local law is important when it operates as lex arbitri, namely, when it is the law chosen by the parties to govern the arbitration or, in its absence, as the law of the place where the arbitration has its seat. Lex arbitri is fundamental for certain questions that could arise before, during and after arbitration, especially provisions that might be deemed imperative or pertaining to public policy. Although not intending to provide a fully comprehensive list of such questions, it is clear that the rules comprised in Ecuadorian law might include at least the following aspects:
- creation and effects of the arbitration agreement;
- subjective and objective arbitration;
- excuse of the arbitrators;
- Kompetenz-Kompetenz principle;
- due process rules;
- preventive measures;
- judicial assistance;
- formalities for issuing the arbitral award;
- actions and recourses against the award; and
- jurisdiction of the courts.
International commercial arbitration: definition and scope
The AML does not have an explicit definition for international arbitration. It only mentions the requirements for a proceeding to be considered as such. Article 41 sets forth two kinds of requirements: subjective and objective. In the former case, the parties must establish in their agreement that the arbitration will be international. In our opinion, this agreement does not have to be explicit – the mere adoption of foreign laws, regulations or other set of rules regarding international arbitration ought to be interpreted as the parties' positive decision that the arbitration is international. In the latter case, it is necessary that the dispute be included within at least one of the following assumptions:
- if at the time of execution of the arbitration agreement the parties are domiciled in different states;
- if the place where a substantial portion of the obligations is to be performed or to which the issue under litigation is most closely related is situated outside the state in which at least one of the parties is domiciled; or
- if the issue being litigated relates to an international trade operation susceptible to compromise and not affecting or impairing national or collective interests.4
Characterising an arbitration proceedings as international is vitally important because by virtue thereof the parties may accede to the pre-eminence of the free will principle set forth in the AML and mentioned in the preceding section, as well as to international instruments regarding this issue executed and ratified by Ecuador.
According to Ecuador's legal system, international law is subordinated to the Ecuadorian Constitution (the Constitution) and prevails over and above any other domestic laws,5 except with respect to human rights where international instruments may prevail over the Constitution if they stipulate more favourable rights to persons.6
With regard to international arbitration, Ecuador adopted the main international instruments on this subject quite early, including:
- the 1928 Havana Convention on Private International Law;7
- the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention);8
- the 1966 International Convention on Settlement of Investment Disputes between States and Nationals of other States (the Washington Convention)9 (denounced in 2009);10
- the 1975 Inter-American Convention on International Commercial Arbitration (the Panama Convention);11 and
- the 1979 Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards.12
International arbitration and foreign investment protection
Ecuador's former president, as one of his last actions in office, concluded the bilateral investment treaty (BIT) denunciation process initiated in 2008.13 Denunciation is based on the idea that dispute resolution clauses included in the BITs violate article 422 of the Constitution which provides:
Treaties or international instruments where the Ecuadorian State yields its sovereign jurisdiction to international arbitration, in contractual or commercial disputes, between the State and natural persons or legal entities cannot be entered into.
The Constitutional Court has issued a series of decisions declaring that the dispute settlement provision of BITs14 is unconstitutional.
Since the 1960s, Ecuador has negotiated 30 BITs, 27 of which have entered into force. Only one of them – executed with Egypt – terminated in 1995, and in 2008, Ecuador denunciated nine of these BITs: those executed with Uruguay, the Dominican Republic, Guatemala, El Salvador, Cuba, Nicaragua, Honduras, Paraguay and Romania (the last six will still be in force until 2018, due to their survival clauses).
Consequently, 17 BITs remained in force and a second denunciation round took place in 2017. The National Assembly's special committee in charge of analysing the denunciations issued several reports, recommending the termination of the remaining BITs entered into with Argentina, Bolivia, Canada, Chile, China, Finland, France, Germany, Italy, the Netherlands, Peru, Spain, Sweden, Switzerland, the United Kingdom, the United States and Venezuela. Finally, on 3 May 2017, the National Assembly's Plenary approved the termination of all these BITs.
Back in 2013, President Correa created the Commission for Comprehensive Audit of the Reciprocal Investment Treaties and the Investment International Arbitration System (CAITISA). CAITISA finally made public its report and conclusions on 8 May 2017.15 Among the general recommendations, CAITISA proposes to eliminate or limit certain BIT provisions, namely:
- to exclude dispute resolution clauses;
- to include rights to be claimed by host states;
- to give standing to the indigenous communities; and
- to establish performance standards for investors such as technology transfer obligations, capital flow regulations and others.
However, CAITISA's main recommendation focuses on sponsoring an Alternative Model BIT (AMB), suggesting a reinforced focus on human and labour rights, together with protections for the indigenous communities and nature. Also, the AMB proposes giving host states standing to bring claims under the BIT, enforcing sustainable development standards and supports the creation of an international investment court.
Moreover, the AMB suggests including a specific and strict definition of 'investment', requiring two-year minimum duration and limited to direct property owned by the investor. Also, the AMB recommends limiting the 'investor' definition by requiring potential investors to have active operations in the host state for at least two years, revealing ownership information and providing the possibility of losing investor standing if fraud or corruption in the management of the investment is proven.
The AMB recommends to expressly and strictly define the fair and equitable treatment standard, to exclude umbrella and most-favoured nation clauses, to limit survival clauses by establishing fixed-term provisions requiring the states' express intent for renewal, and to exclude protection for indirect expropriation. Interestingly, the AMB suggests replacing full protection and security clauses with provisions enforcing the international minimum standard of treatment of foreign investors.
Finally, on 16 May 2017, President Correa issued the executive decrees that order the termination of the BITs and the notification to the treaties' state parties. The formal notifications have already been made concluding with the denunciation process.
The new Model Bilateral Investment Agreement
As a consequence of CAITISA's report, on 9 March 2018, the Ecuadorian Minister of Foreign Affairs, presented, to all the ambassadors of the states with which Ecuador had executed bilateral investment treaties that were denounced, the new Model Bilateral Investment Agreement (BIA) that Ecuador seeks to negotiate with said states.
The BIA provides changes to a BIT's regular provisions. Some of the changes are the following.
- Regarding the definition of 'investment', to be considered as such, the BIA requires for the transfer of assets to comply with Ecuador's regulations on environment, human rights and corruption.
- As per the 'investor' definition, the BIA embraces the effective nationality and effective control tests for persons and legal entities, respectively.
- As per the fair and equitable treatment standard, the BIA limits its protection to cases of denial of justice and discriminatory treatment.
- Regarding expropriation, the BIA excludes protection for indirect expropriation and defines a method for compensation of direct expropriation measures.
- As per dispute resolution, the BIA provides for international arbitration requiring a Latin American seat and administration (a Latin American institution).
- The BIA provides a statute of limitations of three years counting from the date of the trigger letter for the investor to submit a demand for arbitration. Additionally, it requires objective and subjective identity between the trigger letter and the demand for arbitration.
- The BIA provides standing for host states to bring claims or counterclaims under the treaty.
- Additionally, the BIA requires, as a condition precedent, for the investor to exhaust the administrative local proceedings.
- Also, the BIA limits the sanctions to be imposed by arbitral tribunals to monetary compensation, excluding, for example, specific performance sanctions.
- Finally, the BIA provides for annulment proceedings and also appeals proceedings before an ad-hoc arbitral tribunal.
Pending cases against Ecuador
According to the last statement, Ecuador has 37 active international proceedings as reported by the Attorney General's Office.16
Enforcement of international arbitral awards in Ecuador
The COGEP sets forth the rules to be followed in order to recognise and enforce an international arbitration award. Article 103 states that international awards will be enforced according to international conventions ratified by Ecuador. This seems to be a direct reference to the New York Convention to which Ecuador is a party; unfortunately, article 104 of the COGEP seems to contradict the New York Convention (which has never been applied by an Ecuadorian court) provisions by putting the burden of proof on the shoulders of the petitioner rather than the party opposing enforcement. In fact, article 104 mentioned before states that, in order for a local court to recognise an international arbitral award, it must:
- prove that all the formalities required by the state (lex arbitri) where the award was rendered were observed;
- prove that the award is firm;
- provide a translation of the award and other documents if drafted in a language other than Spanish; and
- prove that due process and right to be heard was observed to both parties.
The experience with judges applying the new rules regarding recognition and enforcement of arbitral awards has been troublesome due to its novelty. Additionally, the specificity of the above-mentioned requirements and its non-arbitration friendly drafting have caused delay and misconstructions by the competent judges. Nevertheless, we have now successfully recognised and enforced two international arbitral awards.
For awards rendered against the state, the COGEP sets the bar even higher and requires demonstration of the fact that the awards are in accordance with domestic law. It seems that this provision was introduced in light of the possible unfavourable international investment awards against Ecuador.
Other aspects worth mentioning
The development of arbitral proceedings has recently been disturbed by a series of constitutional actions impeding the regular development of arbitral cases. Judges are currently invoking constitutional rights to force arbitrators to refrain from entertaining certain arbitral proceedings or force them to make important jurisdictional decisions in the nascent stages of the proceedings.
Additionally, we have learned about an attempt from the disciplinary board of the judiciary to initiate administrative proceedings against an arbitral tribunal. The judiciary has no right to rule or entertain disciplinary actions against arbitrators.
1 Official Register 145, 4 September 1997. Codification was published in Official Register 417, 14 December 2006.
2 The Organic Code of Procedures was recently published on 22 May 2015.
3 Article 37, AML: 'The provisions of the Civil Code, Code of Civil Procedure or Commercial Code and other related laws are supplementary and shall be applied on all matters not set forth in this Law, provided that arbitration at law is involved.' It is not possible to understand the objectives of the lawmaker's limitation because, in practice, supplementary norms also are – and should be – used in arbitration ex aequo et bono or in equity, especially if the judiciary intervenes during any stage.
4 Article 41, AML. The terms 'if susceptible to compromise and not affecting or impairing national or collective interests' in the last assumption are the result of a hasty legal amendment in 2005 within the context of international arbitration claims that the Ecuadorian State was beginning to confront at that time. There is no case law providing clarity for its application. See such amendment in Law No. 2005-48, Official Register 532, 25 February 2005.
5 Article 425, Constitution:
The hierarchical order for the application of norms shall be as follows: The Constitution, international treaties and conventions, organic laws, ordinary laws, regional rules and district ordinances, decrees and regulations, ordinances, agreements and resolutions, and other acts and decisions of the public powers.
6 Article 417 of the Constitution:
International treaties ratified by Ecuador shall be subject to the provisions of the Constitution. In the case of treaties and other international instruments on human rights, the principles pro human being, no restriction of rights, direct applicability and open clause established in the Constitution shall apply.
This principle has been developed further in article 5 of the Organic Code for the Judiciary, which states that:
The judges, administrative authorities and officials of the Judiciary shall directly apply constitutional norms and those set forth in international instruments on human rights if the latter are more favourable to those established in the Constitution, even if not expressly invoked by the parties.
Organic Code of the Judiciary, Official Register Supplement 544, 9 March 2009.
7 Official Register Supplement 1201, 20 August 1960.
8 Official Register 43, 29 December 1961. Ecuador ratified the New York Convention resorting to the commercial and reciprocity reservations set out in article I(3).
9 Official Register 386, 3 March 1986. Note that this Convention only pertains to disputes relating to investments between contracting states and nationals of other states, as specified in its provisions.
10 On 3 June 2009, the President of the Republic delivered a request to the Legislative and Auditing Committee of the National Assembly asking it to denounce the Washington Convention, claiming that it infringes the interests of Ecuador and violates article 422 of the Constitution. The request was considered by the National Assembly on 12 June 2009. Subsequently, the President of the Republic issued Executive Decree No. 1823 on 2 July 2009, where he resolved: '(1) To denounce and, therefore, to declare the termination of the Convention on Settlement of Investment Disputes ICSID . . . .' Notice of the denunciation was served to ICSID on 6 July 2009.
11 Official Register 875, 14 February 1992.
12 Official Register 153, 25 November 2005.
14 See the article by Global Arbitration Review at the following URL: www.globalarbitrationreview.com/news/article/28642/ecuador-champing-bits.