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New interpretation for annulment of arbitral awards

The Constitutional Court has ruled that sentences on nullity action against arbitral awards are subject to review by the highest court through the cassation recourse. The ruling clarifies an issue that has been the source of much debate since the enactment of the Law of Arbitration and Mediation. While this is a positive step towards predictability in arbitration, the decision may open new opportunities for defeated parties to prolong the enforcement of unfavourable arbitral awards.

Since the enactment of the Law of Arbitration and Mediation in 1997 there has been some controversy and uncertainty regarding the procedure to annul arbitral awards. Due in part to the poor wording of the law regulating this procedure, lower courts have issued differing and contradictory interpretations. One of the issues was whether the defeated party in an action to annul an arbitral award could file a cassation recourse to have the highest court review the unfavourable decision. During the years following the law's enactment, the highest court held that it had jurisdiction to hear cassation recourses filed against that sort of decision. Thus, the court issued rulings dealing with some aspects of the nullity action.

However, at one point the court shifted position and began rejecting cassation recourses against sentences on nullity action. In essence, the court argued that the cassation act was applicable only to declaratory judgments issued by lower courts, and that a ruling issued on the action to annul an arbitral award lacked such features because the merit of the dispute has been adjudicated by the arbitrators.

The Constitutional Court ruled against this interpretation.

Case

On July 13 2007 an arbitral tribunal established under the auspices of the arbitral centre of the Quito Chamber of Commerce issued an arbitral award unfavourable to the minister of public works. Thereafter, both the minister and the attorney general, who was a third party to the underlying dispute representing Ecuador, filed an action to annul the arbitral award with the Quito Provincial Court.

On November 19 2008 the president of the Quito Provincial Court dismissed the action to annul the award. On appeal the first chamber for mercantile matters of the provincial court confirmed the ruling of the president of the court and the nullity action against the award was therefore rejected.

Both petitioners filed separate cassation recourses against the chamber's ruling. On April 26 2011 the majority of the chamber judges refused the petition. Following the prevailing jurisprudences, the magistrates argued that the cassation recourse was available against declaratory judgments only, which was not the case for sentences issued in procedures to annul arbitral awards. Therefore, the chamber did not grant the cassation recourse as requested by the minster of public works and the attorney general.

The defeated petitioners then filed an extraordinary protection action with the Constitutional Court.

Constitutional Court

On April 22 2015 the court found the ruling of the provincial court to be unconstitutional.(1) The court ordered the magistrates of the provincial court to grant the cassation recourse that they had denied to both the minister of public works and the attorney general. According to the ruling, in denying the petition for a cassation recourse against their sentence, the Quito Provincial Court breached the due process clause established in the constitution.

The court did not share the position of the Quito Provincial Court and thus the judicial precedents it invoked, that a ruling issued on the action to annul an arbitral award cannot be reviewed through the cassation recourse. According to the Constitutional Court, the magistrates of the provincial court erred when they assumed that there is a relationship:

"between the impossibility of challenging an arbitral award via an appeal, and the possibility of filing a cassation recourse against the sentence that was issued… to adjudicate the action to annul the award."

In other words, the provincial court overlooked the fact that the aim of the cassation recourse was not to have the merits of the underlying dispute reviewed by the highest court. The dispute had been settled by the arbitral tribunal and was not subject to judicial review. For the court, the action to annul an arbitral award served a different purpose. The action sought to control whether arbitrators preserved certain minimum procedural guarantees during the arbitration process. In adjudicating this action judges may incur certain errors in the application of the law and there is no reason to deprive the losing party from the right to file a cassation recourse.

Comment

The ruling of the Constitutional Court is a welcome development, as it has clarified an area of the law which has been the source of much uncertainty. It remains to be seen whether other provincial courts will follow suit and grant the cassation recourse against their rulings on the action to annul arbitral awards when the losing party files such requests. However, one problem with this shift in the interpretation of the law is that it has opened a new avenue for the losing party to delay enforcement of an unfavourable arbitral award.

Compare jurisdictions: Litigation: Enforcement of Foreign Judgments

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