The Constitutional Court recently annulled an arbitral award based on grounds that are not listed in the Arbitration Law as causes for such action. To reach that outcome, the court made an expansive application of certain constitutional guarantees dealing with due process. The ruling has created troubling uncertainty regarding the enforcement of arbitral awards.

Dispute

In April 2006 the municipal enterprise Quito For Potable Water and Sanitation entered into a contract with private joint venture Bigdig SA and Associates for the construction of a water distribution system. The contract included an arbitration clause. As a result of a series of problems that arose once construction was underway, the contractor went to the municipal enterprise and requested an extension of the contract term or the opportunity to negotiate an amicable agreement to end the contract. However, in April 2008 the municipal enterprise declared unilaterally the caducity of the contract, alleging that the company had breached its obligations.

In November 2008, despite the arbitration clause, the municipal enterprise sued the contractor for damages before the Quito District Administrative Tribunal. At the trial, the contractor argued that the administrative tribunal lacked jurisdiction regarding the arbitration clause. However, it also filed a counterclaim against the municipal enterprise.

Arbitral award

In June 2009 the contractor submitted a request for arbitration before the arbitration centre of the Quito Chamber of Commerce. In its lawsuit, the company sought the payment of some overdue invoices as well as damages. During the arbitration, the municipal enterprise argued that the tribunal lacked jurisdiction because by filing a counterclaim at the trial before the administrative tribunal, the contractor had waived the arbitration clause. The arbitral tribunal found that it had jurisdiction to hear the case and issued its award in February 2011. On the merits, the arbitrators found for the company and ordered the municipal enterprise to pay the contractor for several items that were overdue.

Annulment of award denied

The municipal enterprise filed a nullity action before the Quito Provincial Court. It argued that the arbitrators had breached the Constitution because they had failed to provide proper motivation as to why its jurisdictional argument had not been accepted. The Attorney General's Office joined the municipal enterprise's petition and requested the nullity of the award. In its view, the arbitrators lacked jurisdiction because the arbitration clause had ceased to exist from the moment that the municipal enterprise declared the caducity of the contract.

On August 23 2011 the court rejected the nullity actions. It was ruled that the grounds to demand the nullity of arbitral awards are those expressly listed in Article 31 of the Arbitration Law and that the issue raised by the petitioners was not found in that list. The court also noted that in dealing with the issue of nullity, the interpretation of the law must be of a restrictive nature. The losing parties appealed to the court's Chamber for Civil Commercial Matters. The chamber dismissed the appeal in April 2012.

National court decision

Both the municipal enterprise and the attorney general each filed a cassation recourse against the Quito Provincial Court ruling. In January 2013 the national court refused to hear the cassation recourses. It argued that the cassation law did not grant competence to the court for reviewing the rulings of lower courts dealing with arbitral awards. In April 2013 the defeated parties filed an extraordinary protection action with the Constitutional Court.

Constitutional Court decision

The Constitutional Court accepted the extraordinary protection action filed by the municipal enterprise and the Attorney General's Office.(1) The court found that the petitioners' constitutional rights of defence and effective judicial protection were breached by the lower courts and the arbitral tribunal. As a remedy, the court declared the judicial rulings of the Quito Provincial Court and the Chamber for Civil Commercial Matters, as well as the arbitration award, to be "without effect".

The court said that under the new Constitution of 2008, constitutional rights are enforceable directly and autonomously regardless of what the legislative statutes may say. Thus, constitutional guarantees such as the right to receive rulings duly motivated and to be heard by tribunals that have jurisdiction apply to arbitration, no matter what the law may establish. The court stated that the breach of such constitutional guarantees is sufficient ground to annul an arbitral award, even if Article 31 of the Arbitration Law makes no reference to these guarantees.

The court went on to examine the arbitration process itself. It agreed with the municipal entity that the private contractor had waived the arbitration clause. The court underlined the fact that the contractor had filed the arbitration request several months after the municipal enterprise had initiated an action before the administrative tribunal, and the fact that it submitted a counterclaim during the trial. The court also found that the arbitrators had not given due motivation for not accepting this argument, thus breaching the Constitution.

Comment

The Constitutional Court ruling is a serious setback for arbitration. With few exceptions, the general courts have showed great restraint in the interpretation of the grounds for the annulment of arbitration awards. Such an attitude has contributed greatly to the use of arbitration in Ecuador. By carving up new causes for the annulment of awards that are not specifically established by law, the court has added unwelcome uncertainty.

In this case, the court took the disturbing step of reviewing the award, and in the process it even raised issues that the parties had ignored during arbitration. The Constitutional Court did not even mention the fact that the municipal enterprise had breached the arbitration clause by filing a lawsuit before the administrative tribunal in the first place. In the end, the municipal enterprise's decision to breach the arbitration clause, far from being criticised, was in fact rewarded by the court.

For further information on this topic please contact Hernán Pérez Loose at Coronel & Pérez by telephone (+593 4 2519 900) or email (hperez@coronelyperez.com). The Coronel & Pérez website can be accessed at www.coronelyperez.com.

Endnotes

(1) See Sentence 302-15-SEP-CC, Case 0880-13-EP.

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