Ecuador: Mediation And Arbitration In The Petroleum Industry

Last Updated: 4 December 2001
Article by Diego Romero

To foreigners contemplating or initiating investments and contracts in Ecuador, one of the unknown factors regards how potential legal disputes are to be solved. This concern exists regardless of whether the contract is to be signed with a private or governmental entity.

Aware of the aforementioned concern, Ecuador modernized its "Justice Administration System" and allowed parties to turn to "Alternate Dispute Resolution" methods. Or in other words, allowed for the utilization of Mediation and Arbitration as a mechanism to solve controversies between parties.

Mediation

In Ecuador, mediation is regulated by the new Arbitration and Mediation Law and by the Constitution. As a result, mediation is now a sanctioned legal process where parties approach an authorized mediation center in the event of a legal dispute. An expert mediator trained in facilitating voluntary agreements guides the process.

In the petroleum industry, companies signing contracts can stipulate in a clause that any dispute will be submitted to mediation. In this situation mediation will be obligatory and neither party may file a lawsuit in the event of a future legal dispute. If a lawsuit is presented regardless of the mediation clause, the court may not proceed with the suit unless an "impossibility of mediation decree" has been issued or the parties have expressly agreed to renounce their mediation clause.

If there is no obligation to mediate, one of the parties may still invite at any time the other to solve a conflict via mediation as in this case the mediation would be of a voluntary nature.

In the event that the parties reach a agreement in the mediation meetings, they must execute a document describing their pact. With the signature of the parties and the mediator of a qualified mediation center, the agreement has the legal force of a final and judged decision. As a result, mediation agreements are not subject to appeal and are considered final. A point of great importance to companies doing business in the petroleum industry is the agility in which the parties can reach a total or partial agreement to their legal disputes. These agreements, in turn, allow the parties to continue their commercial relationship if they so desire, as mediation agreements are usually satisfactory to the parties and the non-adversarial nature of mediation limits rancor.

The mediator is an independent third party designated by the corresponding center whose mission is to help the parties reach an agreement about the discrepancy in issue.

It is worth emphasizing that mediation is not a trial. Rather it is an extra-judicial process to which the parties voluntarily submit themselves. If the parties do not reach agreement, they are entirely free to sue each other regarding the legal rights that they believe have been impinged.

Information divulged in mediation, as well as the final agreement, is confidential. Neither the parties nor the mediator may disclose the content or results of the process. The confidential nature of the process facilitates the parties’ ability to explore a wide range of options and alternatives, often generated by the mediator.

By its nature of being an extra-judicial mechanism, mediation does not require formalities. As such, the parties may appear at mediation meetings with whichever type of advisors they consider useful depending on the subject matter of the dispute.

Arbitration

The Constitution of the Republic of Ecuador, the Hydrocarbons Law and the Arbitration and Mediation Law allows the parties to negotiate and include an arbitration clause in their contracts. Such clauses allow the parties to submit their divergences to an arbitration process in the event of a conflict. Arbitrations must be administered by specialized centers legally authorized to operate in Ecuador or abroad.

Arbitration, in contrast to mediation, is a form of trial or litigation, which is heard by designated arbitrators that can be appointed by the parties by mutual agreement. If the parties cannot settle on an arbitrator, the center will administer a drawing from their list of approved arbitrators who have to carry out the important and delicate role as the dispute’s judge.

If for any reason the parties have not negotiated an arbitration clause into their contract before its execution, they may later include one via addendum while their commercial relationship exists. It is recommendable to stipulate an arbitration clause before the contract is executed, as there is more ability to negotiate at this stage than when a dispute arises.

Ecuadorian law permits international arbitration when the parties have agreed to it and when certain stipulated requirements have been met.

The innovation of the Arbitration and Mediation Law is that it allows the state to submit itself to domestic or international arbitration. This means that the contract’s participants may distance themselves from the traditional justice system, which is widely known to be overloaded with cases. As a result the traditional legal process is often very long and subject to lengthy delays prolonging a final result for the parties. The appeals process further retards the ultimate conclusion.

Once the arbitrators have issued their arbitration sentence or award, their decision is not subject to appeal. If one of the parties solicit it, however, the award may be clarified or amplified. There also exists the possibility of instigating an action to nullify an arbitration decision if certain specific circumstances have been met.

Because it is a private and single stage proceeding, arbitration in Ecuador is much more agile and expedient than traditional litigation. Companies and entities doing business in the petroleum industry in Ecuador also benefit from the transparency of the arbitration process as the certified arbitrators are widely recognized as pillars of moral authority in the country.

When an arbitration is held in law, the arbitrators decision must be based on the law, universal principles of jurisprudence and doctrine. Arbitrators in these proceedings must be attorneys. If the parties wish to have their arbitration held in law, they must so specify in their contract’s arbitration clause.

If an arbitration is held "in equity", the arbitrators must resolve controversies in an impartial manner using prudent criterion. As such, arbitrators in equity proceedings do not have to be attorneys and are often experts in the field in which the controversy lays. If the arbitration clause does not specify whether a future proceeding will be held in law or equity, the case will be heard in equity.

Conclusions

In light of the major foreign investments involved in its contracts with Ecuadorian companies and the government, companies and individuals doing business in the petroleum industry have always been concerned about how to resolve legal controversies in an impartial and efficient manner. Now, with the new alternate dispute mechanisms authorized by the law, it is possible to solve a wide range of legal problems arising in this sector in a more agile and efficient manner. As a practical matter, these two forms of alternate dispute resolution have gained much credibility in the country and are now widely accepted and used.

It is indeed important to be aware that Ecuadorian law permits and enforces mediation and arbitration so that when a commercial controversy arises the parties can in the first instance attempt to amicably and efficiently resolve the matter by mediation. If no agreement can be made in mediation, the parties may avail themselves to the arbitration process.

Published in Official Register No. 145 on September 4, 1997.

Constitution of the Republic of Ecuador, Article 191.

Mediation and Arbitration Law, Article 47.

Constitution of the Republic of Ecuador, Article 191.

Law 44, published in Official Register No. 326 on November 29, 1993.

Mediation and Arbitration Law, published in Official Register No. 145 on September 4, 1997.

Mediation and Arbitration Law, Article 41.

Mediation and Arbitration Law, Article 41.

Mediation and Arbitration Law, Article 4.

Mediation and Arbitration Law, Article 30.

Mediation and Arbitration Law, Article 31.

Mediation and Arbitration Law, Article 3.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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