In order to attract private investment, Ecuador recently adopted a new law that regulates the establishment and operation of public-private partnerships. One of its features is that parties to these partnerships may submit their disputes to international arbitration. While this is a positive step to encourage foreign investment and is a favourable development for arbitration, certain conditions established by the law on the arbitration agreement may dissuade some companies from entering into this type of partnership.
As international oil prices began to drop dramatically during 2015, the government began to look for ways to incentivise the inflow of foreign investment. In particular, it focused on attracting private investors in areas such as public services and construction or maintenance of large infrastructure (eg, ports, airports and highways). Although Ecuador has traditionally accepted the participation of foreign investors in these areas – in particular, the 1993 Modernisation Law and the 1998 Constitution – the 2008 Constitution, which was adopted by referendum, marked a departure from this policy. According to the new Constitution, the state is solely responsible for investing in these areas and only under exceptional circumstances will private companies be allowed to invest.
In this context, in December 2015 the government promulgated the Organic Law for the Encouragement of Public-Private Associations (OLEPPA).(1) The new law establishes the framework within which private corporations can invest in areas of public services and infrastructure. The law requires the investor to sign an association agreement with the relevant public agency where the mutual obligations and rights are set. The agreement may include, among other things, tax exemptions and normative stabilisation clauses.
One of the incentives that OLEPPA offers to investors is the possibility to resort to international arbitration to settle disagreements with the public agency that is party to the association.(2) In light of past decisions against international arbitration – such as the withdrawal of Ecuador from the International Convention for the Settlement of Investment Disputes – OLEPPA's arbitration provisions are of significant importance. The provisions recognise that international arbitration continues to be the most credible system for settling disputes between public entities and private foreign investors.
However, the new law establishes the following conditions:
- Parties must first try to resolve their disagreement through dialogue or mediation;
- If direct negotiations fail, the investor must exhaust any administrative remedies;
- If the disagreement remains unsettled despite the exhaustion of administrative remedies, the investor can resort to international arbitration, as long as its request is filed within a fixed period provided in the partnership agreement;
- International arbitration must take place in Latin America; and
- Tax issues cannot be subject to arbitration, nor should "any other act that arises directly from the legislative and regulatory powers of the Ecuadorean State".
Although the law does not address the enforcement of international arbitral awards, the issue is regulated by the new Organic Code of Processes.
Despite OLEPPA's positive features, its requirements and limitations regarding arbitration may undermine the legislative intent of attracting foreign investors. For example, the requirement to exhaust administrative remedies as a condition to initiate the arbitration process seems to be an unnecessary burden for investors. The exhaustion of administrative remedies may cause delays and create needless uncertainties for the investor.
Moreover, the requirement that international arbitration take place in Latin America is rather odd. The government has agreed to settle disputes with foreign parties before such institutions as the London Court of International Arbitration, so it is unclear why OLEPPA does not treat foreign investors which sign a partnership association with the state in the same manner. Finally, the exclusion of tax matters from arbitration seems to contradict one of the key features of the law: granting tax exemptions to the operations of investors. Regarding the enforcement of international arbitral awards, the new Code on Civil Procedure has created a set of rules that complicate the process, particularly when the defeated party in an arbitration is the state or a state agency (for further details please see "New (and difficult) rules for enforcing international awards").
For further information on this topic please contact Hernán Pérez Loose at Coronel & Pérez by telephone (+593 4 2519 900) or email (firstname.lastname@example.org). The Coronel & Pérez website can be accessed at www.coronelyperez.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.