The Constitutional Court of Ecuador deems investor-State arbitration clauses in trade agreement with Costa Rica unconstitutional

Introduction

The Constitutional Court of Ecuador ('CCE' or 'Court') has determined that the dispute resolution provision in Ecuador-Costa Rica Trade Association Agreement ('Ecuador-Costa Rica Agreement') is contrary to Article 422 of the Constitution of the Republic of Ecuador ('CRE'). In opinion 2-23-TI/23 ('Opinion'), the CCE examined the limits placed on Ecuador regarding the settling of investment disputes by arbitration shedding light on the interpretation of concepts such as 'yield of sovereign jurisdiction', 'contractual disputes with the State' and 'Latin American regional arbitration', and the extent to which Ecuador's ratification of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States ('ICSID Convention') was effective.

The CCE ruled that by entering into the Ecuador-Costa Rica Agreement, Ecuador had yielded its sovereign jurisdiction to settle contractual disputes with individuals or legal entities to an international arbitration entity. Furthermore, it ruled that none of the exceptions found in the CRE in favour of Latin American integration applied, as the Ecuador-Costa Rica Agreement did not restrict dispute settlement to arbitration before regional bodies.

Background

From 1986 to 2008, Ecuador had an ISDS-friendly stance. In June 1986 Ecuador ratified the ICSID Convention through depositing its instrument of ratification with the World Bank. Due to concerns regarding the legality of Ecuador's ratification, and following a preliminary ruling by the CCE on the ICSID Convention's constitutionality along with approval from the Ecuadorian National Congress, Ecuador ratified the ICSID Convention again in January 2001. Soon after, the first ICSID arbitration against Ecuador was brought by Repsol YPF Ecuador S.A.[1] Plenty of others would then follow.

In 2007, amid an increasingly litigious investment environment, Rafael Correa's government made a full u-turn on Ecuador's ISDS policy.

The ICSID Convention under the 2008 Ecuadorian Constitution

Article 422 of the CRE, which entered into force in October 2008, prohibits Ecuador from entering into '[t]reaties or international instruments where the Ecuadorian State yields its sovereign jurisdiction to international arbitration entities in disputes involving contracts or trade between the State and individuals or legal entities.'[2]

Based on this CRE article, and with the approval of the relevant commission of the Ecuadorian National Assembly, in July 2009 the Ecuadorian Government withdrew from the ICSID Convention,[3] with effect as from 7 January 2010. As expected, ICSID arbitration proceedings that were already underway continued, while those that commenced afterwards were eventually rejected on lack of jurisdiction grounds or ended with the claimants withdrawing their requests for arbitration.[4]

Over the following years, the CCE ruled on the constitutionality of a number of BITs, striking down at least 17 of them as unconstitutional.[5] Since its change of policy in early 2008, Ecuador has unilaterally terminated 26 BITs.

Ecuador's return to the ICSID Convention: Constitutional Court Opinion 5-21-TI/21

On 21 June 2021 Guillermo Lasso's newly elected government signed the ICSID Convention, requesting the CCE to issue a binding opinion on its constitutionality and whether the National Assembly's prior approval was needed to ratify it. Unlike in most States, Ecuadorian law does not require this prior vote of approval unless the international instrument touches on specific matters laid out in Article 419 of the CRE.

By way of opinion 5-21-TI/21 ('ICSID Opinion'), the CCE decided that ratification of the ICSID Convention did not require National Assembly approval as it did not meet the criteria of Article 419, specifically, Sections 4, 6 and 7.[6]

Regarding Section 4, the ICSID Opinion concluded that the ICSID Convention does not contain any clauses that refer to or modify the rights and guarantees provided for in the CRE.[7]

Furthermore, the CCE decided that Section 6 did not apply either as the ICSID Convention does not commit any member to enter into a trade agreement. While the ICSID Convention preamble considers: 'the need for international cooperation to achieve economic development,' it does not effectively commit Ecuador to any commercial or integration obligation.[8] The CCE considered that the existence of a centre for conciliation and arbitration between States and investors under the ICSID Convention does not impose any commercial or integration obligation on its members as it merely offers an option to resolve disputes after consent is given in a separate instrument.[9]

Finally, the CCE also ruled that Section 7 of Article 419 did not apply to the content of the ICSID Convention. The CCE considered that the ICSID Convention does not require any of its members to adhere to the system in the event of a dispute.[10]

The Court rightly noted that the ICSID Convention, in its preamble and in Article 25(1), does not require States to submit a dispute unless prior consent is given. This consent, the Court added, must be given through a separate agreement such as a BIT. Therefore, the Court decided that when Ecuador entered into the ICSID Convention it was not attributing 'powers of a domestic legal nature'[11] to ICSID.

Ecuador's third ratification of the ICSID Convention resulted in an extension of the validity of ICSID arbitration clauses in specific BITs that had previously been terminated by Ecuador as well as those that had not terminated.

The Constitutional Court's analysis of the legality of the Ecuador-Costa Rica Agreement

The Opinion ruled that Sections 11.20 and 15.20 to 15.35 of the Ecuador-Costa Rica Agreement were unconstitutional as they infringed Article 422 of the CRE. The remaining sections of the agreement were ruled to be constitutional.

Section 15.20 of the Ecuador-Costa Rica Agreement lays out the treaty's arbitration clause for investor-State disputes regarding investments in any of the contracting States. According to the relevant provision in Section 15.20, the dispute may be settled by arbitration pursuant to:

1. the ICSID Convention, either under the ICSID Arbitration Rules or the ICSID Additional Facility;
2. the United Nations Commission on International Trade Law Arbitration Rules; or
3. whichever other arbitration rules and before whichever arbitration institution, if any, the parties agree to.

Thus, the Court argued, there was a possibility that Ecuador could end up in arbitration proceedings against entities other than States, which must therefore be examined in light of Article 422 of the CRE.

The Court found that Ecuador did yield its jurisdiction, on the grounds that, as a result of the Trade Agreement, disputes that would normally fall under the jurisdiction of Ecuadorian courts would instead be assigned to a jurisdictional body that was not part of the Ecuadorian State. Indeed, investors could submit a request for arbitration without having to previously exhaust domestic judicial remedies. Additionally, Ecuador could be tried under a legal system other than its own, which is only possible if it has yielded its sovereign power to adjudicate and enforce judgments – in other words, its jurisdiction.

The Court then found that investment disputes are contractual disputes under Ecuadorian law. Avoiding the debate regarding the meaning of 'commercial' and 'investment' as specific technical terms within the arbitration community, the Court construed the term 'contractual' strictly from the Ecuadorian Civil Code.[12] Therefore, according to the Court, investment disputes are contractual in nature since they arise from contracts where investors and the State assume duties towards each other.

The last element the Court analysed before turning to the exceptions of Article 422, was whether the Ecuador-Costa Rica Agreement allowed individuals or legal entities to bring claims against the Ecuadorian State, which, under Article 422 of the CRE, would be unconstitutional. The Court found that the Trade Agreement is unconstitutional in this regard, since an investor under it can be an individual or a legal entity.

However, Article 422 II provides the following significant exceptions: 'Treaties and international instruments that provide for the settlement of disputes between States and citizens in Latin America by regional arbitration entities or by jurisdictional organizations designated by the signatory countries are exempt from this prohibition.'[13]

As expected, the Court found that the treaty fell short of the requirements in Article 422 II: (i) the arbitration clause did not provide for arbitration under regional arbitration organizations; and (ii) neither Ecuador nor Costa Rica had designated the relevant 'jurisdictional organizations' to settle the disputes.

Dissenting Opinion

A dissenting opinion was issued along with the Opinion ('Dissenting Opinion') disagreeing with the conclusions reached by the majority and affirming that the Ecuador-Costa Rica Agreement was constitutional in its entirety.

The dissenting judges argued that for the prohibition set out in Article 422 of the CRE to apply to the the Trade Agreement:[14] (i) it must be a treaty or international instrument, (ii) the Ecuadorian State must yield sovereign jurisdiction to international arbitration, (iii) the issues yielded to arbitration must be contractual or commercial matters, and (iv) the arbitration system in the treaty must resolve disputes between the State and individuals or legal persons (i.e. investors).[15]

The Dissenting Opinion found that despite the fact that investor-State arbitration is between an individual and a State, the treaty is agreed between two States. Therefore, the protections and rights granted under it that impose liability in the event of their breach fall under the scope of international law.[16]

The main element of discord in the Dissenting Opinion related to the prohibition against yielding Ecuador's sovereign jurisdiction to international arbitration entities. The dissenting judges argued that domestic law[17] forced the State to consent to international arbitration to resolve disputes arising out of investment contracts. Thus, Ecuador's obligation to arbitrate originated from domestic law and not the Ecuador-Costa Rica Agreement.[18]

The Dissenting Opinion also added that the existence of treaty-based jurisdiction did not imply that the State was yielding sovereignty as arbitration was recognized by the CRE itself as an alternative method of dispute resolution under the law,[19] and as a result, it did not infringe Article 422 of the CRE.

It also noted that the exception in the second paragraph of Article 422 was applicable to the case,[20] arguing that it was a treaty signed between two Latin American States seeking to promote integration, and that the system chosen to arbitrate disputes had been freely chosen by both parties.[21]

This demonstrates that the Ecuadorian legal provision with respect to investor-State disputes has some leeway for interpretation, and future judges may lean towards a more forgiving interpretation of Article 422 of the CRE.

Conclusion: perspective on ISDS in Ecuador

The Opinion on the constitutionality of the Ecuador-Costa Rica Agreement has shed light on the future of investor-State disputes under Ecuadorian law. When Ecuador ratified the ICSID Convention for a third time, many arbitration practitioners were hopeful that this marked a paradigm shift towards a more favourable environment for investment arbitration. However, the Opinion indicates that the status quo created by the CRE remains in place. It is safe to assume that when faced with a BIT or an agreement containing a provision that contemplates investor-State arbitration with Ecuador as a party, the CCE will likely declare that provision unconstitutional.

[1] Repsol YPF Ecuador S.A. v Empresa Estatal Petróleos del Ecuador (Petroecuador), ICSID Case n.º ARB/01/10.

[2] CRE, Art. 422, translation by the Center for Latin American Studies, Georgetown University (31 January 2011) <https://pdba.georgetown.edu/Constitutions/Ecuador/english08.html> accessed 6 November 2023: 'Treaties or international instruments where the Ecuadorian State yields its sovereign jurisdiction to international arbitration entities in disputes involving contracts or trade between the State and natural persons or legal entities cannot be entered into. The treaties and international instruments that provide for the settlement of disputes between States and citizens in Latin America by regional arbitration entities or by jurisdictional organizations designated by the signatory countries are exempt from this prohibition. Judges or nationals of the States that are part of the dispute cannot intervene in the above. [...].'

[3] See Decreto Ejecutivo n.º 1.823, Registro Oficial n.º 632, 13 July 2009.

[4] See e.g. Murphy Exploration and Production Company International v The Republic of Ecuador (II), PCA Case n.º 2012-16, Partial Award on Jurisdiction, 13 November 2013, para. 164.

[5] The Court struck down the BITs with: Argentina (Case N.º 9-10-TI); Bolivia (Case n.º 14-13-TI); Canada (Case n.º 3-10-TI); Chile (Case n.º 10-10-TI); China (Case n.º 4-10-TI); Finland (Case n.º 1-10-TI); France (Case n.º 7-10-TI); Germany (Case n.º 6-10-TI); Italy (Case n.º 15-13-TI); the Netherlands (Case n.º 5-10-TI); Peru (Case n.º 16-13-TI); Spain (Case n.º 10-11-TI); Switzerland (Case n.º 12-10-TI); Sweden (Case n.º 2-10-TI); Venezuela (Case n.º 11-10-TI), the United States of America ('US') (Case n.º 13-10-TI) and the United Kingdom ('UK') (Case n.º 8-10-TI).

[6] See Dictamen n.º 5-21-TI/21 (Dictamen de la corte Constitucional del Ecuador sobre la necesidad de aprobación legislativa del Convenio sobre arreglo de diferencias relativas a inversiones entre Estados y Nacionales de otros Estados), 30 June 2021, paras. 23-24 ('Dictamen n.º 5-21-TI/21'). Article 419 is comprised of eight numbered sections. The three relevant ones are reproduced here below: 'The ratification or denunciation of international treaties shall require prior approval by the National Assembly in the following cases: [...] 4. When they refer to the rights and guarantees provided for in the Constitution, [...] 6. When they commit the country to integration and trade agreements, (and) [...] 7. When they attribute powers of a domestic legal nature to an international or supranational organization.'

[7] Dictamen n.º 5-21-TI/21, para. 23.

[8] E. Carmigniani, et al, 'El regreso de Ecuador al CIADI' in El Retorno del Ecuador al CIADI y la Corte Constitucional (2022), Universidad Católica de Santiago de Guayaquil, p. 11.

[9] Ibid, p. 18; Dictamen n.º 5-21-TI/21, paras. 25-30.

[10] E. Carmigniani, et al, 'El regreso de Ecuador al CIADI' in El Retorno del Ecuador al CIADI y la Corte Constitucional (2022), Universidad Católica de Santiago de Guayaquil, p. 17; Dictamen No.5-21-TI/21, paras. 31-36.

[11] Ibid, para. 31.

[12] See Opinion (as defined supra), para. 180; see also Ecuadorian Civil Code, Art. 1454 ('Contrato o convención es un acto por el cual una parte se obliga para con otra a dar, hacer o no hacer alguna cosa. Cada parte puede ser una o muchas personas').

[13] See Fn. 2 supra, CRE, Art. 422, translation by the Center for Latin American Studies, Georgetown University (31 January 2011) <https://pdba.georgetown.edu/Constitutions/Ecuador/english08.html> accessed 6 November 2023.

[14] Ibid, Art. 422, Fn. 2 supra.'

[15] Dictamen n.º 2-23-TI/23 (Dictamen de la Corte Constitucional sobre la constitucionalidad del Acuerdo de Asociación Comercial entre la República del Ecuador y la república de Costa Rica), Voto Salvado, 28 July 2023, para. 17.

[16] Ibid, para. 18

[17] See Código Orgánico de la Producción, Comercio e Inversiones, Registro Oficial n.º 351, 29 December 2010, Art.16.2 <https://www.gob.ec/sites/default/files/regulations/2020-04/CODIGO%20ORGANICO%20DE%20LA%20PRODUCCION%2C%20COMERCIO%20E%20INVERSIONES%20COPCI.pdf > accessed 6 November 2023.

[18] Dictamen n.º 2-23-TI/23 (Dictamen de la Corte Constitucional sobre la constitucionalidad del Acuerdo de Asociación Comercial entre la República del Ecuador y la República de Costa Rica), Voto Salvado, 28 July 2023, paras. 18-19.2.

[19] Ibid, paras. 19.4–19.5.

[20] See Fn 18.

[21] Ibid, paras. 23-26.