Case Note: Empresa Eléctrica del Ecuador, Inc. v. Republic of Ecuador

Ita leads this morning with a new English translation of the decision in Empresa Eléctrica del Ecuador, Inc. (“EMELEC”) v. Republic of Ecuador. This is a pretty perplexing decision. The core issue was jurisdiction and the tribunal was asked to decide whether the representative of EMELEC before the tribunal was actually the ultimate shareholder of EMELEC  and entitled to bring the proceedings or a third party with no interest in EMELEC.

The facts are, well I’d be lying if I said they were simple. They are rather robustly opaque. EMELEC claimed against Ecuador for expropriation and denial of justice in relation to an electricity concession it ran in Guayaquil, Ecuador. Ecuador alleged that the claimant did not represent EMELEC and so could not bring proceedings on its behalf.

PRT1 was a trust  constituted to hold the ultimate shareholding of EMELEC for the benefit of the creditors and depositors of a bank that was in compulsory liquidation. The trustee of PRT1 was transferred the ultimate 100% ownership in EMELEC. The settlors of PRT1 exercised  a right of termination and substituted for it by the creation of another trust abbreviated PDT.  PDT included no right of revocation and was expressed to be irrevocable. The settlors of PRT1 and PDT attempted to revoke PDT alleging massive fraud by the trustees and created PRT2 to hold the assets of PRT1. The issue turned on whether they succeeded in doing so. The trust agreements were all governed by Bahamas law.

In essence the the tribunal held that the the construction of the trust deeds led to the result that EMELEC was owned by the trustee of PDT and not the trustee of PRT2. Since the suit was being brought by the trustee of PRT2, this meant the tribunal had no jurisdiction.

I found two issues in this decision particularly confusing. Firstly, its pretty trite law that under Article 42 of the ICSID Convention tribunals are required to judge the dispute by the proper law of the agreement. In most cases that means international law and the domestic law of the Contracting Party. In the current case the domestic law is the law of Ecuador including the conflict of law provisions of Ecuador when interpreting a Bahamian law agreement. Nope, not according to this tribunal which did not concern itself with the fact that a document is executed in a completely different legal system, and might fall to be construed in line with the principles of that system.  I could accept that result if the tribunal had adopted any principles of construction, but apparently legally construing a legal document was just too much work.

Second was the altogether odd treatment of trust law in the Bahamas and the equivalent Ecuadorian concept without any reference to the legal nature of a Bahamian law trust, its legal status in Ecuador or in international law. It appears to me that many of the issues that the tribunal seemed to find difficulty in reconciling are explained by simple doctrines of equity, resulting trusts and constructive trusts which I’m aware that Bahamian law recognise. More sophisticated concepts such as the Quistclose Trust designed to deal with trusts for a particular purpose exist in other jurisdictions (perhaps including the Bahamas) so its not at all clear why the trusts stack and fail from the language of the decision.

I accept that the facts of the case and the cross jurisdictional interaction of complicated law of trusts and equity could have made for a difficult decision, but the decision in EMELEC v Ecuador appears distinctly lacking in legal rigour.


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