The Law on Incentives for Public-Private Partnerships and Foreign Investment (the “PPP Act”) was enacted in December 2015 with the aim of promoting greater domestic and foreign investment.
It is known that the rules governing dispute resolution -especially when it comes to FDI- are key for an investor when assessing an investment project. In particular, investors evaluate whether the legislation allows them to claim their rights in a neutral forum in case their investments are illegitimately affected by the host State. Unfortunately, the PPP Act does not meet this expectation.
The PPP Act contains a set of rules that governs the resolution of disputes that may arise from the so-called “Delegated Management Agreements” (Contratos de Gestión Delegada), which are the instruments through which public-private partnerships are to be implemented in various economic sectors including infrastructure, real estate, ports, airports, among others.
Below we highlight some of the features of this dispute resolution regime:
Multi-tier dispute resolution
The regime combines some ADR mechanisms -including negotiation, mediation and arbitration- together with administrative instances.
Multi-tier clauses are often useful when they allow the parties to amicably settle their disputes instead of escalating them to arbitration.
Exhaustion of local remedies
In order to reach the arbitration phase, local administrative remedies must be exhausted.
The effectiveness of this type of provisions is in doubt because, under certain circumstances, they could become a mere formality. In addition, arbitration practice shows that local remedies provisions could be circumvented through MFN clauses that may exist in other instruments.
Local or regional-international arbitration
Pursuant to the PPP Act, arbitration can be either domestic or “regional-international”. The latter refers to arbitration before “arbitral jurisdictional bodies in the Latin American region”.
This categorization seems to be inspired by Article 422 of the Ecuadorian Constitution that prohibits entering into international treaties under which the country assigns “sovereign jurisdiction to international arbitration bodies”, unless such bodies are “regional”. This provision, however, is intended for the execution of international treaties, not for contracts.
Further, the use of the terms “regional international arbitration” and “arbitral jurisdictional bodies” raises concerns. These terms seem to have a political (rather than a legal) connotation. To our knowledge, there are no arbitral jurisdictional bodies in Latin America (eg. a Latin American arbitration court); there are only institutions that administer arbitration cases.
The arbitration shall commence before the State issues its final administrative decision with which the administrative phase is exhausted; otherwise, the arbitration agreement would lose effect and the ordinary courts would assume competence.
As previously mentioned, a party wishing to initiate an arbitration proceeding must first exhaust the administrative phase. However, the same Act determines that a request for arbitration should be filed before the State notifies the investor its administrative decision. Therefore, the PPP Act requires that, on the one hand, the investor activates the arbitral instance before the administrative phase concludes and, on the other hand, the Act warns that arbitration cannot commence unless the administrative phase is exhausted. Consequently, the Act would provide for a circular condition under which arbitration might never initiate.
Relevant issues cannot be arbitrated
Finally, the PPP Act prevents tax matters or any “other act arising directly from the legislative and regulatory powers of the Ecuadorian State” from being submitted to arbitration.
The tax exception is not new. What is novel is that investors could not submit to arbitration issues related to legislative or administrative acts that may affect their contractual rights. It must be stressed that under a “Delegated Management Agreement”, which creates an alliance between an individual and the Ecuadorian State, disputes may arise precisely from the State’s legislative and regulatory conduct, as arbitral jurisprudence shows. If, for example, an investor cannot submit to arbitration the breaking of the economic equilibrium of a concession contract due to the enactment of new laws or regulations, or a contract unlawful termination, what would be the purpose of having an arbitration agreement? Note that one of the obligations that the Ecuadorian State assumes under the PPP Act is to provide taxation and legal stability, agreeing not to modify certain rules during the contract term. If the State fails to fulfill such obligation, the investor could not claim said breach in arbitration? Some may argue that administrative and legislative acts are not arbitrable per se, but only their economic effects. In any event, it is reasonable to agree that the wording used by the PPP Act is unfortunate.
Considering the foregoing, despite its recent enactment, the dispute resolution regimen set forth under the PPP Act would need an amendment to be effective. If the Ecuadorian State wishes to offer investors an arbitration instance to resolve disputes, it should do so in a technical, open and unequivocal manner.