Ecuador returns to the ICSID Convention: A brief assessment of its decade-long international investment law ‘exit strategy’

On July 6, 2009, Ecuador notified (here) the World Bank of its denunciation of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention). This denunciation formed part of a strategy of resistance to the international investment regime. Around that time, this South American country also began to terminate its Bilateral investment treaties (BITs) and even inserted an ‘explicit clause’ (Article 422) in the Ecuadorian Constitution to prevent future governments from entering new International Investment Agreements (IIAs) that could ‘yield sovereignty’ to international arbitration. Since that time, the Ecuadorian case has served as a textbook example of an ‘exit strategy’ in debates on Investor-State Dispute resolution (ISDS).

More than a decade later, on 20 June 2021, the current President of Ecuador reversed the nation’s strategy and rejoined the ICSID convention (here). Days later, the Ecuadorian Constitutional Court (here) upheld the President’s decision, deciding that the ICSID Convention could be ratified without further approval from the National Assembly. However, Ecuador cannot sign new IIAs until the Ecuadorian Constitutional Court decides on a second case, a pending request for an interpretation of Article 422 of the Constitution. To put it bluntly, Ecuador has now landed in a gray zone, where it is neither completely inside or outside the IIA regime.

The Ecuadorian ‘exit strategy’

Ecuador’s exit from the IIA regime started in the year 2008 and consisted of three actions: 1) the insertion of an explicit clause in the new constitution to prevent the ‘yield of sovereignty’ to international arbitration; 2) denunciation of the ICSID convention; and 3) termination of all the existing Bilateral Investment Treaties (BITs).

1) Explicit constitutional clause: In 2008, a constitutional assembly drafted the 20th Ecuadorian Constitution containing Article 422, where the following text was inserted:

No international treaties or instruments may be concluded where the Ecuadorian State yields its sovereign jurisdiction to international arbitration entities, in disputes involving contracts or of a commercial nature, between the State and natural persons or legal entities.

This posed two legal problems. First, Article 422 did not use the word ‘investment’ in its prohibition, leaving it unclear whether ISDS clauses contained in the BITs for non-contractual treaty disputes (e.g. standards of treatment) were covered by the prohibition; that is, the Constitutional Court had to determine if the expressions ‘disputes involving contracts’ and ‘commercial nature’ also applied to treaty-based investment disputes. Second, if BITs were indeed contrary to the Constitution, it then became necessary to determine whether these BITs—which had been concluded before the 2008 Constitution entered into force—should be terminated immediately.

2) Denunciation of the ICSID convention: On July 6, 2009, Ecuador notified the World Bank of its denunciation in accordance with Article 71 of the ICSID Convention, a denunciation that became effective on January 7, 2010.

3) Termination of all existing BITs: The President of Ecuador in 2010 asked the Constitutional Court to review and declare 17 BITs that remained in force at the time unconstitutional. In 17 different judgments, made between 2010 and 2014, the Ecuadorian Constitutional Court decided that ISDS clauses were covered by the prohibition in Article 422 and concluded that each and every BIT needed to be terminated. However, each judgment, often rendered by differently composed chambers of the Court, provided different reasons for arriving at the same conclusion (here). Further, the Constitutional Court did not provide a clear argument as to why it considered that investment treaty-based disputes should be considered to be disputes of a ‘commercial nature’ in the sense of Article 422.

Exiting the IIA regime took time.

The Ecuadorian experience illustrated that any ‘exit’ from the IIA regime would not entail a single act, but rather a long series of actions that could take decades to implement. The first obstacle, as the Ecuadorian authorities discovered, was that the internal process of denunciation did not happen overnight. While the ICSID denunciation and the Court’s first judgments terminating Ecuador’s BITs were taken in 2010, Ecuador only began officially notifying other states of the termination of their respective BITs in May 2017, seven years later. In fact, notification of termination is apparently still pending for two BITs.

In addition, the BITs contain sunset clauses that could prolong the obligations undertaken in those treaties for many years, including the ISDS clauses. For example, Article 14 of the United Kingdom-Ecuador BIT contained a sunset clause that gives protection to covered investments for 15 years after the treaty’s official termination. Since Ecuador notified the United Kingdom of its intention to terminate the BIT in 2017, but its obligations under the BIT will remain in force until at least 2032, that is, 22 years since the respective judgment made by the Ecuadorian Court and about the same amount of time since Ecuador’s 2009 denunciation of the ICSID.

Reversing the strategy

In 2018, after the official termination of Ecuador’s BITs, a new government and legislative branch started exploring how to reintegrate Ecuador into the IIA regime, either by amending Article 422 of the Constitution, or by finding some nuance in its interpretation that would allow the South American state to enter into IIAs.

This 180-degree turn can be explained in part by two developments: first, there was a reduced flow of investments coming into Ecuador during the period of disengagement with the regime (2006 to 2017). Over the previous decade compared even to other smaller economies in the region. According to data released by UNCTAD (here, here, here, here, here), foreign direct investment (FDI) arriving in Ecuador represented only 0.5% of total investment in South America. This was also a considerably smaller amount than that of its two neighbors, Peru and Colombia, whose economies greatly outperformed that of Ecuador during this period. While this reduction of FDI inflows might have been influenced by many factors, re-engagement with international adjudication was perceived by the last two Ecuadorian presidents (here, here) as a helpful way to reverse this negative trend.

Second, the constitutional judges, who drafted the previous 17 judgments from 2010 to 2014, were removed from office in 2018 after an internal political process in Ecuador ended their terms. Since new judges have now taken up office, it is possible that the Court will redefine its approach to Article 422 of the Constitution, especially considering that the previous judges did not provide reasons for considering the expressions ‘disputes involving contracts’ and ‘commercial nature’ in the constitution to be the same as non-contractual or treaty-based investment disputes.

In 2018, the President of the Ecuadorian National Assembly filed a request for an interpretation of Article 422 from the Constitutional Court. This request was precisely to clarify if the words ‘commercial nature’ and ‘disputes involving contracts’ in Article 422 covered disputes involving non-contractual investment disputes. In 2019, the new Judges accepted this request for interpretation, but a judgment is still outstanding.

In this context, Ecuador signed the ICSID Convention a few days ago. This constitutes the first concrete step towards reversing its strategy. Furthermore, the Constitutional Court recently decided that this accession fell within the scope of treaties that the President could sign and ratify without the approval of the National Assembly. It determined that the ICSID as such does not in itself confer competences inherent to the domestic legal system to an international body as established by the Constitution. However, the Court has not yet taken a position on the interpretation of Article 422, which is still pending.

Ecuador’s status since signing the ICSID Convention. 

Ecuador is now in a gray zone with respect to the IIA regime for three reasons. First, the President cannot sign new IIAs, until the Court renders its judgment on the interpretation of Article 422. If the Court decides that Article 422 does not cover non-contractual, treaty-based disputes, Ecuador will be able to sign IIAs again. If the Court decides the opposite, Ecuador’s President will need to push for an amendment to the Constitution. Second, Ecuador, as before, continues to be subject to investment arbitration claims since its BIT obligations are active due to the sunset clauses contained in the old BITs. Third, Ecuador could also be subject to investment arbitration if any authority within the executive branch signs new arbitration clauses, despite the fact that the intent of Article 422 has not yet been clarified by the Constitutional Court. While this highly unlikely, but still possible, scenario would be illegal under Ecuadorian Law, Ecuador might still need to argue in front of an International Arbitration Tribunal that the consent was not actually ‘given’ within the context of Article 25(1) ICSID.

Conclusion

The Ecuadorian experience exposed the downsides of an IIA exit strategy. One problem was the considerable amount of time needed to leave the regime, as noted above. Another was that, as an outsider, Ecuador lost its voice in the debates on reform of the investment regime over the last decade. Now, given its accession to the ICSID, it has at least regained some say as a Member State in the ICSID Administrative Council. Finally, the strategy of leaving the IIA regime through the use of a explicit constitutional clause was shown to undermine the resilience of the country against the unexpected. While a country might feel that is appropriate to terminate its IIAs at a certain point, unforeseen events—such as a global pandemic—can occur. In such circumstances, future governments might need to quickly sign the agreements needed to readjust their country’s economic policy.

In the next months, the Ecuadorian Constitutional Court will render its judgment on the interpretation of Article 422. This may provide a way out of the constitutional labyrinth that the country consigned itself to over the last decade.