Ecuador's legislative branch approves termination of 12 Bilateral Investment Treaties

On 3 May 2017, Ecuador's Legislature approved the termination of 12 bilateral investment treaties ("BITs") entered into with China, Chile, Venezuela, the Netherlands, Switzerland, Canada, Argentina, the U.S., Spain, Peru, Bolivia and Italy.

This is not only consistent with Ecuador's political appetite to denounce international treaties but this is another step in a process that started years ago.

Factual background

Ecuador entered into a series of BITs in the 1990s and early 2000s.

The termination process dates back to 2008 when a new Constitution was enacted.  Article 422 of the Constitution provides that:

"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 of the States that, as such or their nationals, are part of the dispute cannot intervene in the above."

Pursuant to Article 419 of the 2008 Constitution, the denunciation of treaties involving the state's consent to jurisdiction of international bodies requires the approval of the National Assembly.  Prior to the National Assembly's approval, the Constitutional Court has to issue an preliminary ruling on the constitutionality of the treaty that is to be denounced.

On 28 September 2009, President Correa requested that the National Assembly denounce various BITs on the ground that they were contrary to Article 422 of the Constitution.  Subsequently, the Constitutional Court initiated unconstitutionality actions and started issuing judgments in June 2010 declaring the unconstitutionality of articles within the BITs with the United Kingdom, Germany, China, Finland, Sweden, the Netherlands, France, Venezuela, Chile, Switzerland, Canada and the U.S.

In late 2010, the National Assembly approved the denunciation of the BITs with Finland, the United Kingdom and Germany. Likewise, in March 2011 the body approved the denunciation of the BITs with Sweden and France.

A few years later, in April 2013, President Correa filed a petition with the Constitutional Court to declare unconstitutional the BITs with Argentina, Bolivia, Italy, Peru, and Spain.  In the same year, the Constitutional Court issued the judgments declaring those treaties unconstitutional.

On April 20, 2017, the Commission for Sovereignty and International Affairs issued a report on the denunciation of the Ecuador-Italy BIT for the consideration of the National Assembly's plenary session.  So far, this is the only publicly available report produced in advance of the approval for the termination of the other 11 BITs.

On May 3, 2017, the National Assembly approved the denunciation of the 12 treaties.  According to the President of the Commission for Sovereignty and International Affairs, the objective of the denunciation is to renegotiate the treaties on equal conditions.  However, according to an assemblyman and as requested by the Ecuadorian Business Committee to the National Assembly, an alternative option could have been to renegotiate the treaties without terminating them, as some of the treaties expressly allow for renegotiation between the state parties.

Immediate consequences

The National Assembly's approval of the termination of these treaties does not automatically imply that the denunciation has taken effect vis-à-vis the other contracting parties. Some of the treaties, for example, require an official communication from the Government of Ecuador to the other party for the denunciation to be effective.

Furthermore, most of the denounced treaties contain "sunset" or "survival clauses" under which investments made prior to the denunciation of the treaty will continue to benefit from the treaty's protections for a period of time –usually 10 to 15 years.

A milestone of a long lasting trend?

The National Assembly's latest approval follows an anti-ISDS campaign started with President Correa's regime.  In December 2010, Ecuador's legislative body enacted the Production, Trade and Investment Code which contains an investment chapter which aims to provide substantive protections to foreign investors, as an alternative to traditional BITs.

In May 2013, President Correa created a joint government-civil society commission to audit Ecuador's investment protection treaties and Ecuador's obligations under international law known as CAITISA.  CAITISA will issue its report on 8 May 2017.

Also, Ecuador has been the precursor of the creation of a regional investment dispute settlement body at the Union of South American Nations (UNASUR), which would administer investor-state disputes in the region.

Finally, Ecuador is not the only country who has announced and terminated its BITs, India, Indonesia and South Africa have also announced their decision to terminate its BITs. 

For more information please contact Christian Leathley, Partner, Daniela Paez, Associate, or your usual Herbert Smith Freehills contact.