On 21 August 2018, Ecuador took a major step in the promotion of foreign investment with the entry in force of the Ley de Fomento Productivo (Law for the Promotion of Economic Development, or hereinafter the Law). This Law provides that disputes arising out of investment agreements are to be resolved through arbitration, and arbitral awards arising therefrom are immediately enforceable in Ecuador, without the need for any further recognition by the courts.

Resolution of disputes related to investment agreements through arbitration

Under the former legal regime, arbitration was only available to foreign investors after (i) the exhaustion of administrative proceedings, (ii) amicable discussions between the parties (for at least 60 days), and (iii) a mandatory mediation. These cumulative conditions created significant hurdles for any investor seeking recourse to arbitration. However, Ecuador has now introduced a more streamlined investor-friendly regime which has done away with these burdensome pre-conditions.

Pursuant to article 37 of the Law, the Ecuadorian State “must” agree to domestic or international arbitration to resolve disputes regarding investment agreements. In a further provision, the Law stipulates that for investment agreements whose value is over USD 10 million, the investor may initiate proceedings before a number of arbitral institutions, namely (i) the Permanent Court of Arbitration (PCA), (ii) the International Chamber of Commerce (ICC) or (iii) the Interamerican Commercial Arbitration Commission (CIAC-IACAC). The arbitration will be governed by the UNCITRAL Rules or the relevant institutional rules. Ecuador's withdrawal from the ICSID Convention in 2009 explains why there is no reference to ICSID arbitration.

The express reference to these well-established arbitral institutions will no doubt reassure potential investors, although it should be noted that the Law provides that the applicable arbitration rules will be those in force as at the date of promulgation, i.e. 21 August 2018. This means that any future amendments to the relevant institutional rules (for example, regarding transparency of proceedings or use of new technology) will not apply, absent any further consent by the State. It should also be noted that the Law expressly excludes any emergency arbitration rules which might otherwise have been available to the investor.

The Law is a welcome part of Ecuador’s general strategy to reopen itself to foreign investment, barely a year after taking the decision to terminate all of its bilateral investment treaties. In an apparent volte-face, the State’s National Assembly has also requested the opinion of the Constitutional Court as to whether, in principle, bilateral investment treaties are compatible with the Constitution. This opinion has been sought in the context of Ecuador’s current efforts to negotiate and conclude new bilateral investment treaties, based on a new model treaty. It is understood that Ecuador has proposed this model treaty to a number of countries and that arbitration will be available only (i) after exhaustion of local remedies and (ii) if the arbitration is seated in a Latin American country, administered by the PCA or the ICC. Interestingly, the provisions of the Law are less restrictive than the proposed new model BIT, as the Law does not require any exhaustion of local remedies before initiating arbitration proceedings.

Arbitral awards issued in international arbitration are immediately enforceable

Of further note, the Law has removed the requirement for recognition of international arbitration awards by the Ecuadorian courts prior to enforcement. This now brings Ecuadorian law in line with its obligations under the New York Convention. Under the former law, the applicant would have had to demonstrate inter alia that the opposing party had been able to exercise its right of defence in the proceedings and that the award was res judicata at the seat. As a result, this caused considerable difficulty for any party wishing to enforce in Ecuador an award which was subject to annulment proceedings.

Cumulatively, these changes demonstrate that Ecuador wants to remain a friendly jurisdiction for foreign investors. The fears prompted by its withdrawal from the ICSID Convention and termination of its bilateral investment treaties have now been allayed in large part by these recent developments. The forthcoming decision of the Constitutional Court on the constitutionality of BITs is eagerly awaited as a positive outcome would provide the keystone for the success of the new investment regime which Ecuador is seeking to create.