Closing Doors to Investor-State Dispute Settlement

Global South countries have often asserted that Bilateral Investment Treaties (BITs) ensnare them, culminating in manifestations of neocolonialism, where their populations endure poverty while foreign corporations profit from their vast reserves of natural resources. BITs include both substantive and procedural provisions. The substantive provisions provide safeguards for foreign direct investors, promoting investments in host countries, typically developing countries. The procedural provisions allow either the states or the investors themselves to bring disputes before an international arbitration tribunal without exhausting domestic remedies first. The Investor-State Dispute Settlement (ISDS) mechanism has garnered criticism, particularly among Latin American countries. In fact, countries like Bolivia, Nicaragua, and Venezuela have even withdrawn from the International Centre for Settlement of Investment Disputes Convention following political shifts towards left governments at the beginning of the XXI century.

Turning now to the Ecuadorian case, the Constitutional Court of Ecuador (CCE) finally settled the long-standing debate on the constitutionality of the ISDS mechanism concerning the interpretation of Article 422 of the Constitution of Montecristi (2008). This article states that “[t]reaties or international instruments where the Ecuadorian State cedes its sovereign jurisdiction to international arbitration entities in disputes involving contracts or trade between the State and natural persons or legal entities cannot be entered into.” The Constitution of Montecristi granted the CCE significant authority, mandating a constitutionality review for nearly every normative, administrative, and political action including international treaties (art. 438. 1). In 2-23-TI/23, the CCE ruled that the Agreement of Trade Association between the Republic of Ecuador and the Republic of Costa Rica’s (Agreement) provisions on ISDS violated the prohibition of international trade and contract arbitration. Concerning the court’s methodology, the CCE opted for a combination of original and literal interpretations to define the scope of the terms: i) to cede sovereign jurisdiction to international arbitration bodies and ii) in contractual or commercial disputes (paras 167-175).

In this comment, I assert that while the CCE’s chosen original interpretation remains loyal to the confines of the Constitution of Montecristi, its intention to bar investment arbitration unnecessarily disregards exceptions related to Latin American integration. Therefore, I argue that, like the minority opinion stated, rather than an original interpretation, a systematic interpretation considering all constitutional provisions would resolve the ambiguity.

The Majority Opinion: the Original Interpretation of the Constitution

The majority opinion, written by Justice Enrique Herrería Bonnet, responds to different amici curiae that defend the constitutionality of the ISDS provision on the merits that terms of trade and contract arbitration do not encompass investment arbitration (paras 164-171). The amici curiae go further by saying that the treaty provisions in question do not aim to cede sovereignty but are an exercise of it, as it is the will of the state to enter into an international agreement.

Then, Justice Herrería Bonnet resorted to the Montecristi Constitution’s long-forgotten acts to determine assembly members’ original intent when drafting the provision. The majority of the CCE asserted that the amici curiae inadequately tackled constitutionality concerns by relying solely on the terminological aspects specific to the field of arbitration law. Furthermore, the CCE concluded that the original intention of the Montecristi assembly members was to bar all forms of international arbitration as well as foreign direct investment because they were often accompanied by conditions detrimental to life, health, and nature (paras 166-170).

The CCE also concluded that the treaty provisions indeed cede sovereignty to international arbitration bodies. First, the majority opinion determined that the ISDS treaty provisions allowed any disputes arising from the agreement to bypass Ecuadorian courts’ jurisdiction, enabling direct recourse to arbitration tribunals without the requirement to first exhaust domestic remedies (paras 174-176).  Second, the Court ruled that the framers of the Constitution did not intend to differentiate between different types of disputes, such as trade, contractual, or investment. This clarification underscores that investments are not independent entities but rather arise from investment agreements, which serve as a contractual basis (paras 170 & 182).

Finally, regarding the exception of treaties “…that establish the resolution of disputes between states and citizens in Latin America through regional arbitral bodies or through jurisdictional bodies designated by the signatory countries,” Justice Herrería Bonnet concluded that the agreement does not fall within the category of a regional integration mechanism because it follows the dynamics of bilateral agreements rather than multilateral integration bodies. The CCE further determined that the treaty provisions do not align with the second exception, as they grant the plaintiff, whether the investor or the state, the power to select the arbitration forum rather than the signatory states, specifically Ecuador and Costa Rica (paras 188-191).

The ruling of unconstitutionality led to the treaty being sent back for further negotiations between Ecuador and Costa Rica in order to align the provision with the Constitution of Ecuador.

The Dissenting Opinion: the Ordinary Legislator and the Latin American Integration Exception

Justices Andrade, Corral, Nuques, and Salazar’s dissenting opinion suggests that a comprehensive and systematic approach, taking into account both existing legislation and the principle of Latin American integration, could have provided clarity to the ambiguous terms of Article 422. Their argument centers around the assertion that investment arbitration was already recognized prior to this decision, as evidenced by Article 16.2 of the Código Orgánico de la Producción, Comercio e Inversions enacted by the Ecuadorian General Assembly “[f]or investment contracts exceeding ten million United States dollars, the State shall establish national or international arbitration in accordance with the law.” Hence, the Justices concluded that there is no forced relinquishment of jurisdiction, as the country has the power to establish investment arbitration through legislative authority (para 19-20).

A persuasive argument involves the invocation of the provision that allows designated jurisdictional bodies to resolve disputes between states and citizens in Latin America. This approach considers the inclusion of ISDS provisions within the second exception, as it aligns with the shared intent of Ecuador and Costa Rica. By following a regulated process, this approach prevents one contracting party from unilaterally imposing their will while still upholding principles of international arbitration prohibition and Latin American integration (para 21-26).

The need to Harmonize Opposing Constitutional Provisions

The Court’s fundamental challenge lay in harmonizing two constitutional provisions: the prohibition of international arbitration and the principle of Latin American integration. This came to a head in case 2-23-TI/23, where the Court’s decision favored prioritizing the prohibition over the principle of Latin American integration, even with a clear exception in Article 422. As a result, the Ecuadorian State found itself unable to proceed with ratifying the agreement with Costa Rica. Although the Montecristi framer’s main intention was to prevent harmful conditions imposed by Global North powers prior to investment in the nation, it also paved the way for fostering trade and foreign direct investment within the Latin American region.

The dissenting opinion appropriately argues that a comprehensive approach to interpretation was needed, combining various methods, including an examination of the principles of Latin American integration. By utilizing the original interpretation of Article 422 and conducting a methodological analysis centered on the provisions of Latin American integration, both perspectives could have been harmonized.

The original interpretation, from the standpoint of the majority, appears to prioritize minority rights less and overlooks the importance of individual rights within the entire system. The doors for future treaties containing ISDS provisions are now completely closed. If the sovereign State of Ecuador intends to enter into an international investment agreement, it would undoubtedly encounter challenges as no international forum for resolving disputes would be permissible apart from domestic courts.