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The future of international arbitration in Ecuador: the boomerang effect

Background
International arbitration has always been controversial in Ecuador. In fact, for a long time, submitting a dispute to international arbitration was considered to violate Ecuadorian public law. However, this aversion has been gradually replaced by a more nuanced approach. In the mid-1970s, a new regime was established that permitted certain disputes to be submitted to arbitration in foreign jurisdictions. However, it was not until 1997 with the passing of the Arbitration and Mediation Law that Ecuador became more receptive to international arbitration as a dispute resolution mechanism. Most significantly, this law permits arbitration agreements in public contracts.

ICSID, BITs, and Ecuador’s arbitration boom
Ecuador’s ratification of the International Centre for Settlement of Investment Disputes (ICSID) Convention in 2001, combined with the signing of over 40 bilateral investment treaties (BITs) between 1995 and 2001, has demonstrated the country’s willingness to submit disputes to international arbitration. Ecuador’s assertive entry into such a large number of BITs during the middle of the decade, and thus their implicit agreement to submit investor disputes to arbitration, was eagerly accepted by foreign investors around the world. Consequently, Ecuador has become the second most frequently sued country in investment arbitration, facing more than 20 international arbitrations, due in large part to the Ecuadorian Congress’s unilateral modification of oil contracts in 2006.

International arbitration under the 2008 Constitution
Since Ecuador’s new, self-proclaimed socialist government took office in January 2007, Ecuador’s increased hostility towards international arbitration has been noticeable. Under this new leadership, Ecuador adopted a new Constitution in 2008. Article 422 of this Constitution expressly prohibits the Ecuadorian state from entering into international agreements under which Ecuador would have to cede jurisdiction to international arbitral tribunals in contractual or commercial controversies between the state and individuals or corporations. An assembly member from President Correa’s political party, Alianza País, defended the necessity of Article 422’s inclusion by contesting that:

“Historically Ecuador has signed treaties that are considered harmful to the country’s best interests by transferring national jurisdiction and competence of transnational commercial or contractual relations to supranational arbitration institutions, in which, it seems, different countries are treated in the same manner as commercial companies.”

Despite Article 422’s aspirational nature, the effects of the provision are limited. First, it is important to note that Article 422 forbids only the signature of new international treaties. It does not restrict other agreements from including an arbitration clause. In fact, in a recent decision by Ecuador’s Constitutional Court, the court authorized the Ministry of Finance to sign a loan contract with the Inter-American Development Bank (IADB) that included an arbitration clause binding the parties to resolves any disputes in ex aequo et bono arbitration.