Ecuador is Now Officially a Contracting State of the ICSID Convention

On June 30, 2021, Ecuador’s Constitutional Court (Constitutional Court) held that President Guillermo Lasso had the power to ratify the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) without the approval of Ecuador’s National Assembly (the Decision).[1] The Constitutional Court also held that the ratification of the ICSID Convention does not imply that Ecuador has assigned inherent domestic powers to international jurisdiction nor that the ratification of the treaty automatically binds Ecuador to investor-state arbitration.

Following the Decision, on July 16, 2021, President Lasso ratified the ICSID Convention and on August 4, 2021, deposited Ecuador's Instrument of Ratification with the World Bank. Pursuant to Article 68(2) of the ICSID Convention, it will enter into force today, September 3, 2021.

In response to Ecuador’s latest ratification of the ICSID Convention and the Decision, Ecuador’s legislative branch, the National Assembly, voted on a resolution which (i) opposed the ratification of the ICSID Convention and the Decision, and (ii) supported the launching of a constitutional action seeking a declaration from the Constitutional Court that the ICSID Convention is unconstitutional.[2] As a result, at least three actions have been filed by members of the National Assembly during August 2021.[3] A decision from the Constitutional Court is pending.

Ecuador’s denunciation of the ICSID Convention

Ecuador became a Contracting State of the ICSID Convention in 1986 and remained so until the administration of former President Rafael Correa denounced it in 2009. The 2009 denunciation followed a constitutional amendment that—in the Correa Administration's view—prevented Ecuador from being party to investment arbitration proceedings.[4]

The Lasso Administration’s comeback

On June 21, 2021, Ecuador’s Ambassador to the United States of America, Ivonne Juez Abuchacra de Baki, signed the ICSID Convention on behalf of Ecuador in Washington D.C. In accordance with Ecuadorian law, the ICSID Convention’s entry into force was dependent on the signature of the President of Ecuador. However, the National Assembly did not consider the President’s ratification sufficient for the ICSID Convention’s entry into force, given that (i) Article 419(6) of the Ecuadorian Constitution states that the National Assembly’s approval is necessary if a treaty that is to be ratified binds the country into integration and trade agreements; and (ii) Article 419(7) requires approval if the treaty confers attributions that are inherent to the domestic legal system to an international or supranational body.

On the same day that Mrs. Baki signed the ICSID Convention, President Lasso’s Office sent the Constitutional Court a copy of the ICSID Convention and requested that the court issue an opinion on whether the National Assembly’s approval was necessary for its ratification.

The Decision

Following the President’s request, the Constitutional Court (in a 6-3 ruling) issued its Decision. The Decision recognizes that under the ICSID Convention, Contracting States can, if they wish to do so, submit their disputes to an investment arbitration tribunal[5] and that ratification does not trigger any automatic obligation to do so.[6]

Under a two-fold assessment, the Constitutional Court first answered whether the ICSID Convention conferred any attributions to an international or supranational body, and second, whether such attributions were inherent to Ecuador’s domestic legal system. Regarding the first question, the court held that the ICSID Convention does not confer jurisdiction to ICSID or to its arbitrators or conciliators. The court understood that arbitration is a consensual means of dispute resolution and that the Preamble of the ICSID Convention recognizes that states are not bound to arbitrate their investor-state disputes if they did not consent to arbitration in a separate instrument.[7] The court also stated that the only submittal to foreign jurisdiction that is conferred under the ICSID Convention is the jurisdiction of the International Court of Justice in disputes related to the interpretation or application of the ICSID Convention (pursuant to Article 64). When addressing the second question, the court held that such jurisdiction is not inherent to Ecuador’s domestic system. The court also confirmed that the ICSID Convention does not bind Ecuador to any trade or economic integration agreements and therefore does not fall within the scope of Article 419(6).

The majority of the Constitutional Court was clear that the assessment in the Decision was limited by Article 419 of the Constitution, which refers exclusively to whether the National Assembly’s approval is needed. It also held that the court’s jurisdiction in the case did not allow for an analysis of the constitutionality of the ICSID Convention outside the scope of Article 419. As a consequence, the court rejected certain amicus curiae briefs which argued that, under Article 422 of the Constitution,[8] the ICSID Convention was unconstitutional. However, two dissenting Justices found that the ICSID Convention did violate Article 422 of the Constitution, which, they opined, was applicable and within the scope of their jurisdiction, through a systematic and contextual interpretation of the Constitution.

Ongoing opposition to Ecuador’s accession

Following the Decision, in late July 2021, the National Assembly approved the filing of constitutional actions against the President’s ratification of the ICSID Convention on the basis of Article 422 of the Constitution.[9] The resolution was adopted by 75 votes out of 100, most of them from political blocs aligned with former President Rafael Correa.[10] The congressman who introduced the proposal to the National Assembly called the ICSID Convention a mechanism of “international looting.”[11]

The constitutional challenges were filed in August 2021, by some members of the National Assembly^[12] and the members of the political coalition Unión por la Esperanza (Union for Hope).[13] In their petitions, the petitioners requested that the Constitutional Court suspend the entry into force of the ICSID Convention while the proceeding is pending.[14]

The ICSID Convention does not contain provisions that allow Signatory or Contracting States to suspend its entry into force or application. Instead, it only specifically empowers Contracting States to exit the ICSID Convention by filing a denunciation, which takes effect six months after receipt. The Vienna Convention on the Law of Treaties, to which Ecuador is a party, allows parties to international treaties to unilaterally suspend their obligations but only pursuant to specific circumstances, such as material breach by one of the parties to the treaty, supervening impossibility of performance or a fundamental change of circumstances. None of these seem to apply in this case.

As mentioned, the Constitutional Court has not yet made any rulings on the petitions seeking the declaration of unconstitutionality. In resolving these decisions, the Constitutional Court may analyze the applicability of Article 422 of the Ecuador’s Constitution to the ICSID Convention.

Conclusion

As of today, the ICSID Convention has entered into force for Ecuador, and if suspension or denunciation is sought, the appropriate steps (described above) should be taken. The internal backlash against Ecuador’s ratification of the ICSID Convention is aligned with the public statements from Ecuador’s neighbor country Peru, whose newly-appointed President Pedro Castillo considers ICSID to be an “adjudicatory system at the service of international companies.”

Despite President Lasso’s lack of support at the National Assembly, Lasso is still working on regulatory changes to forge a clear path to encourage foreign investment in Ecuador. Lasso has also recently approved a 20-article decree introducing Regulations to the State’s 1997 Arbitration and Mediation Act. As we discuss here, the Regulations are also part of Lasso’s strategy to promote trade and foreign investment.

For more information, please contact Amal Bouchenaki, Partner, Daniela Paez, Associate, Emily Westphalen, Associate, Carolina Rocha, Visiting Attorney, or your usual Herbert Smith Freehills contact.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[1] See, Ecuador’s Constitutional Court, Decision No. 5-21/TI-21, June 30, 2021.

[2] See, “La Asamblea debatió resolución de condena contra Ejecutivo y Corte Constitucional por acuerdo CIADI,” El Comercio, July 16, 2021, https://www.elcomercio.com/actualidad/politica/asamblea-debate-resolucion-condena-ejecutivo-corte-constitucional-acuerdo-ciadi.html.

[3] See, Esther Cuesta, “Regresar al CIADI representa una pérdida de la soberanía”, Radio la Calle (August 26, 2021), https://radiolacalle.com/esther-cuesta-regresar-al-ciadi-representa-una-perdida-de-la-soberania/.

[4] See, International Centre for Settlement of Investment Disputes, “Denunciation of the ICSID Convention by Ecuador”, https://icsid.worldbank.org/news-and-events/news-releases/denunciation-icsid-convention-ecuador.

[5] Decision, 11.

[6] Id., 28, 32.

[7] Id., 33, 34.

[8] Article 422 states that “no international treaties or instruments may be signed in which the Ecuadorian State surrenders sovereign jurisdiction to international arbitration bodies with regard to contractual or commercial disputes between the State and private natural or legal persons.”

[9] See, “La Asamblea debatió resolución de condena contra Ejecutivo y Corte Constitucional por acuerdo CIADI,” El Comercio, July 16, 2021, https://www.elcomercio.com/actualidad/politica/asamblea-debate-resolucion-condena-ejecutivo-corte-constitucional-acuerdo-ciadi.html.

[10] See, “La Asamblea rechaza acuerdo con el CIADI y presentará una demanda de inconstitucionalidad,” El Comercio, July 27, 2021, https://www.elcomercio.com/actualidad/politica/asamblea-rechaza-acuerdo-ciadi-gobierno-lasso.html.

[11] According to the news, the member of the National Assembly, Mr. Ricardo Ulcuango, stated that the ratification of the ICSID Convention is a “nefarious instrument that guarantees transnational looting.” (free translation). See, “La Asamblea debatió resolución de condena contra Ejecutivo y Corte Constitucional por acuerdo CIADI,” El Comercio, July 16, 2021, https://www.elcomercio.com/actualidad/politica/asamblea-debate-resolucion-condena-ejecutivo-corte-constitucional-acuerdo-ciadi.html.

[12] Ibid.

[13] See, “UNES ingresó acción de inconstitucionalidad a la suscripción y ratificación del convenio CIADI,” Pichincha Comunicaciones, August 25, 2021, https://www.pichinchacomunicaciones.com.ec/unes-ingreso-accion-de-inconstitucionalidad-a-la-suscripcion-y-ratificacion-del-convenio-ciadi/

[14] Ibid.