Public Entities Consider Validity of Dispute Resolution

Companies that conduct business with foreign countries and their public institutions are sometimes not comfortable having their contractual disputes resolved by the courts of the contracting country. This is because of a fear that the respective courts will not be impartial. Therefore, this type of international contract is often made the subject of international arbitration.

In Ecuador, the opportunity for government and public institutions to submit to international arbitration is expressly contemplated in legislation. Article 191 of the Constitution recognizes arbitration as an alternate procedure for the resolution of conflict. However, there is constitutional and legal confusion as to whether a contract entered into by the government and performed within Ecuador can then be subject to arbitration. Doubts arise predominantly because of Article 14 of the Constitution, which states that when public entity contracts with foreigners "are performed in Ecuadorian territory, subjection to a foreign jurisdiction cannot be allowed, except in case of international agreements".

If it is accepted that arbitration does not exercise any jurisdiction (ie, jurisdiction is an authority delegated by the government), the constitutional provision would not cause a problem because submitting to international arbitration would not constitute subjection to a foreign jurisdiction. The relevant clause would therefore be valid, irrespective of where the contract is performed. However, this assumption has not been confirmed.

In light of the above, it seems that in order to guarantee the validity of international arbitration clauses included in contracts that foreigners enter into with the Ecuadorian government or its public institutions, contracts must be executed outside of Ecuador. This is unless there is an international agreement that allows the contract. This does not, however, include the Convention on the Settlement of Investment Disputes between States and Nationals of Other States.

The abovementioned convention is a multilateral instrument that was created by the International Centre for the Settlement of Differences Regarding Investments (ICSID) to facilitate international conciliation and arbitration. Ecuador became a party to this agreement on January 15 1986 and it was ratified the same day. However, ratification was made by the executive without the prior approval of Congress (a necessary requirement according to the Constitution). This situation is in the process of being rectified, but it continues to cast doubt on the validity of the agreement within Ecuador.

A recent example illustrates the situation. The government has approved the execution of the contract for the provision of potable water and sewers to the city of Guayaquil, at the head office of the Inter-American Bank of Development in Washington. This avoids any uncertainty with regard to the scope of Article 14 of the Constitution and the ICSID agreement.

For further information on this topic please contact Pedro M Perez at Coronel & Pérez by telephone (+593 4 519 900) or by fax (+593 4 320657) or by e-mail ([email protected]).