According to information from the Attorney General´s Office (“Procuraduria General del Estado”), Ecuador has paid over two billion dollars in awards issued by arbitration tribunals, and only received forty seven million in return. Furthermore, landmark cases such as “Oxy”, “Odebrecht” and “Chevron”, have displayed various forms of abusive conduct from the Ecuadorian state, with actions ranging from unilateral cancellations of contracts to coercive appropriation of private property. This scenario is detrimental to our national interests and poses a direct threat to foreign investment opportunities, which are essential to the development of public works and national infrastructure.
In the case of Chevron, the Permanent Court of Arbitration of The Hague has
recently ruled in favor of the oil company and has declared Ecuador responsible
for violating a Bilateral Investment Treaty (“BIT”); denying justice; and
refusing to offer a fair and equitable treatment to the company. Consequently,
our country is forced to pay over nine billion dollars and our society has
reacted with bewilderment, not because of the complexity of the issue, but
because of the economic significance of such ruling. This draws comparisons,
almost instinctively, to the “Odebrecht” scandal, and other corruption cases
that derive from governmental platforms and dubious contractual schemes.
As of today, we know that the country is facing twenty six lawsuits similar to the Chevron case, with compensations that amount to thirteen billion dollars approximately. Under these circumstances, it is worth analyzing the factors that propitiate such a high number of cases, and using references such as the 2014 “Human Rights Report” and the 2015-2016 “Global Competitiveness Report”, I have concluded the following:
- The judicial system carries a high risk of corruption for companies operating in Ecuador.
- Political pressure and interference are common practices that present a risk for any business.
- Judges are susceptible to bribes in return for favorable decisions and accelerating the settlement of cases.
- Property rights are guaranteed under Ecuadorian law but are not always protected in practice.
Without a doubt, these examples are a direct deprecation to arbitration culture and foster negative ideas in our future legal professionals. For us, modern dispute settlement mechanisms are relatively new (the “Arbitration and Mediation Law” was enacted in 1997) and the justice system is beginning to cope with it. Consequently, there are many grey areas as to the influence that our justice system may exert over an arbitrator or arbitral procedure.[1]
In addition, under the former legal regime, arbitration was only available to foreign investors after (i) the exhaustion of administrative proceedings, (ii) amicable discussions between the parties (for at least 60 days), and (iii) a mandatory mediation. These conditions resulted in obvious obstacles for raising capital towards the development of dozens of public projects.
However, on August 21th, 2018, Ecuador took a major step in the promotion of foreign investment and started sailing onto international waters in search of capital to boost the economy of the country. This comes with the enactment of the “Law for the Promotion of Economic Development” (hereinafter the “Law”)[2] which establishes, among others, rules focused on attracting investments, by providing that disputes arising out of investment agreements are to be resolved through arbitration and that arbitral awards arising therefrom are immediately enforceable in Ecuador, without the need for any further recognition by the courts.
- International arbitration as an obligation for investment contracts: To favor stability in the country and strengthen the significance of international arbitration, the Law establishes three fundamental rules regarding investment contracts:
First, the Law establishes that disputes arising from investment contracts must be subject to arbitration: “… [t]he Ecuadorian state must pact domestic or international arbitration to resolve disputes arising from investment contracts, in accordance with the law”. [3]
A literal interpretation of this article would suggest that the institution of arbitration is, henceforth, mandatory for all investment contracts, it establishes that the State “must agree on arbitration” instead of saying that the State “may agree on arbitration”. Consequently, investment contracts signed after the enactment of the new law cannot be discussed before ordinary justice.
Secondly, the law stipulates that for investment agreements whose value is over ten million dollars, the arbitration must be subject to law.
“… [f]or investment agreements whose value is over ten million dollars, the state must pact domestic or international arbitration subject to law”.[4]
Following this logic, the rule would allow arbitration in equity for those investment contracts that do not exceed ten million dollars, and demand arbitration subject law for contracts that exceed that amount.
Thirdly, for all the cases in which the arbitration must be subject to law, the norm clearly states that the claimant will have the faculty to choose the rules of the arbitration applicable to the dispute. For instance, the claimant may choose one of the various arbitration rules valid until August 2018, such as UNCITRAL, ICC or CIAC.
Meaning that, any future amendment to the relevant institutional rules, regarding any given subject, will not apply, absent any further consent by the State. It should also be noted that at the end of the previous article, the Law expressly excludes any emergency arbitration rules which might otherwise have been available to the investor.
- Awards rendered in international arbitration cases will be enforced in Ecuador
This crucial step towards progress reinstates article No. 42 of the previous Arbitration and Mediation Law (“AML”), eliminated in May 2015, with the promulgation of the “Organic Codification of Processes” (“COGEP”). The reform introduces the following text: “…
[t]
he awards conceded in an international arbitration proceeding shall have the same effects and shall be executed in the same manner as the awards rendered in a proceeding of national arbitration “.[5]
These measures lead us to comply with our obligations under the New York Convention. In contrast, the former AML established that the applicant would have had to demonstrate, among other things, that the opposing party had been able to exercise its right of defense in the proceedings and that the award was already a judged matter. As a result, this constitutes an obstacle for any party due to the possibility of annulment proceedings.
Finally, let us remember the fact that Ecuador has 27 arbitration proceedings, and many of them have caused suspensions of high-profile public works that jeopardized our communities in an irreparable way. All these numbers add up to a questionable profile for Ecuador in our modern world, thus, a true enforcement of competitive arbitration rules might just be one of our best tools for development at the present moment.
Edgar Bustamante
Associate
The information published here does not imply any particular advice or legal advice, being its function merely informative.
[1] Gerhard and Stephan Wilske, “Arbitration in 49 Jurisdictions Worldwide”, (London: Getting the Deal Through, 2014, p. 149)
[2] “Ley Orgánica para el Fomento Productivo, Atracción de Inversiones, Generación de Empleo, y Estabilidad y Equilibrio Fiscal”, Official Registry No. 309 (Supplement), August 21th, 2018
[3] Ibíd., art. 37.
[4] Ibíd.
[5] Ibíd.
