On April 21st, 2024, Ecuadorians participated in a constitutional referendum that included, among others, a question on the recognition of international arbitration as a method to resolve investment, contractual or commercial disputes. The result was negative: 65.16% of voters rejected the possibility of the State recognizing international arbitration as a method for resolving disputes of any nature.
Since the referendum was aimed at reforming an article of the Constitution, the victory of the vote against that reform only resulted in Article 422 remaining unchanged. This article does not totally prohibit international arbitration[1]. Moreover, prior to the referendum, other norms already recognized the validity of this dispute resolution mechanism[2]. Consequently, the ‘no’ vote on this referendum question did not result in a total prohibition of international arbitration for the State; it simply did not extend its validity to other cases.
However, taking advantage of the referendum result, some legislators are now proposing to build a legal framework that reflects “the will expressed in the consultation”.
The main purpose of the bill is to apply to investment contracts or Public-Private Partnerships the same limitations as those established in Article 422 for treaties or international instruments. In addition, if this project is approved, international awards would once again be required to be recognized prior to being executed in Ecuador. This last issue has already been settled with the issuance of the second derogatory provision of the Organic Law for the Promotion of Production, Attraction of Investments, Generation of Employment, and Fiscal Stability and Balance and by the recent pronouncement of the Constitutional Court in Decision No. 3232-19-EP/24, which establishes that international awards should not be recognized prior to their execution in Ecuador.
The “Bill for the Compliance of the Popular Will Expressed in the Popular Consultation and Referendum of April 21, 2024 regarding the Prohibition of International Arbitration” also seeks to ensure that the State does not finance with loans the payment of awards issued by international arbitration tribunals. Another rule that this Law would incorporate to the legislation prohibits the budgeting of resources for the payment of awards issued against Ecuador as long as the award has not been recognized by Ecuadorian courts.
Those who see the Bill as something positive argue that the result of the ‘no’ vote in question d) of the referendum represents an interest of the people to eliminate the possibility that the State continues to acquiesce to arbitration proceedings in which it is often found guilty. The promoters of the Project consider that national interests would be preserved in the face of international controversies.
On the other hand, the Bill represents a major concern for investors and government contractors. Eliminating alternative dispute resolution methods in a country where the institutional framework of the judicial system is weak[3] would surely increase country risk. In addition to the concerns that this bill brings with respect to future investments, the provisions that prohibit indebtedness for the payment of international awards and the budgeting for the payment of non-approved awards put at risk the execution of existing awards or those that are about to be issued.
The Bill was only qualified on June 19. In order to be admitted, it must be approved in two debates of the Specialized Permanent Commission of Justice and Structure of the State, be approved by the Plenary of the Assembly and, finally, not be subjected to objections or vetoed by the Executive.
[1] First, the prohibition of Article 422 refers to “international treaties or instruments” and not, for example, to contracts. But additionally, the Constitutional Court decided in opinion 2-23-TI/23 that, in cases in which a treaty or instrument falls within the exception of the second paragraph of article 422 (that the resolution of disputes is in charge of regional instances or jurisdictional bodies that have been designated by the signatory countries), the prohibition of article 422 would not be applicable (paragraphs. 158 -192).
[2] Constitution of the Republic of Ecuador. Article 190. “Arbitration, mediation and other alternative dispute resolution procedures are recognized. […] In public procurement, arbitration in law shall proceed, prior favorable pronouncement of the State Attorney General’s Office, in accordance with the conditions established by law” (emphasis added).
Organic Law of the Office of the Attorney General of the State. Article 11. “The agencies and entities of the public sector may submit to legal arbitration procedures and to national or international mediation […]. In order to submit to international arbitration they shall also require the authorization of the Office of the Attorney General of the State.” (emphasis added).
Organic Code of Production, Commerce and Investments. Articles numbered after Article 16.2. Art. (…) Investment contracts: “The Ecuadorian State shall agree to national or international arbitration to resolve disputes generated through investment contracts, in accordance with the Law”. Art. (…) Arbitration: “For investment contracts exceeding ten million United States dollars, the State shall agree to national or international arbitration at law, in accordance with the law” (emphasis added).
Organic Code of Planning and Public Finance. Fifth General Provision. “Prior authorization by the Attorney General of the State, other jurisdiction and legislation may be accepted for the solution of divergences or controversies related to contracts entered into by the State and entities and agencies of the public sector with foreign governments, public or private entities”.
[3] According to the 2018 Global Competitiveness Report, published by the World Economic Forum, Ecuador ranks 135 out of 140 in judicial independence.
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This publication contains information of general interest and does not constitute legal opinion on specific issues. Any analysis will require legal advice from the Firm.
