In an action filed by Andina Licores S.A. ("Andina"), an Ecuadorian corporation, against E & J. Gallo Winery ("Gallo"), one of the largest wineries from California, the Second Civil Court of Guayaquil found that it lacked jurisdiction to hear the dispute because both parties had agreed in their distribution contract that their controversies must be heard by a California court and in accordance to California law. Under the rules of civil procedure governing the type of action initiated by Andina the decision of the Court is not subject to appeal. The ruling is important because (i) it confirms that Decree Law 1038-A of 1976 (Law for the Protection of Representatives, Agents and Distributors of Foreign Enterprises) (the "Decree Law 1038"), which was repealed by Congress in 1997, does not apply even to distribution contract signed before that year, (ii) rejects the view entertained by Andina during the proceeding that choice of law clauses like the one included in the Gallo contract are unenforceable because of public order considerations, and (iii) adopts a favorable approach to choice of forum clauses in the context of of international contracts, following a trend adopted by Supreme Court after an amendment of the Civil Code .
The case
In 1978 Gallo and Andina signed a contract for the distribution of wine in Ecuador on a non-exclusive basis. The contract provided, among other things, that California law would govern the agreement and the disputes should be settled by a court of that jurisdiction. At the time the contract Decree Law 1038, had been promulgated by a military junta that ruled Ecuador during those years.. As its name suggests, that Decree Law contained several provisions protecting Ecuadorian distributors in their dealings with foreign principals. One of the key provisions of Decree Law 1038 mandated that all disputes arising out of a distribution contract had to be settled in accordance to Ecuadorian law and before the court of the distributor’s domicile, even if the parties had agreed otherwise. Decree Law 1038 declared that its provisions were "deemed incorporated" into the distribution contracts signed by suppliers and Ecuadorian distributors or agents. In 1997 Congress enacted Law No. 22 which repealed Decree Law 1038 (the "repealing Act"). According to Congress the provisions of Decree Law 1038 violated the equal protection clause of the Constitution and Art.17 of the GATS of the WTO treaty and it was adversely affecting the promotion of foreign investments in Ecuador.
On August of 2004 Andina filed a lawsuit against Gallo for breach of contract. It alleged that Gallo had affected its business because had been dealing directly with a local supermarket. Andina justified the filing of its complaint in Guayaquil, the place of its domicile, and not in California saying that the 1978 contract, in particular its choice-of-law clause, was overruled by Decree Law 1038 Moreover, it claimed that because Decree Law 1038 was "deemed" incorporated into its distribution contract with Gallo, its provisions had survived the 1997 repealing Act of Congress. In other words, for Andina the provisions of Decree Law 1038 had become the lex contractus of the parties and therefore immune to any subsequent legislative change.
Prior to the filing of its complaint Andina had obtained that a third judge appoint an ad litem guardian for Gallo. In its request, Andina claimed that Gallo had not appointed an agent with authority to answer complaints in Ecuador and did not have a known address in the country. The Court appointed an inexperienced lawyer.
In her answer to the lawsuit, the ad litem guardian for Gallo did not raise the defense of lack of jurisdiction of the Guayaquil court. Gallo learned about this lawsuit weeks after the proceedings had started, and it was able to appoint an attorney just two days before the evidence period was to end. Gallo argued that its right to defense had been impaired by the appointment of an ad litem guardian. According to Gallo, such appointment was illegal since it did not meet the requirements of the Civil Code, as Andina knew its address in California.. With regard to the Court’s jurisdiction, Gallo asked the Court to halt the proceedings since the choice-of-law clause in the distribution contract that both parties signed was still binding, and therefore the court of California, not of Guayaquil, had jurisdiction to hear the case.
During the trial, Andina claimed that the protective provisions of Decree Law 1038 were norms of "public order", since they intended to check the power of multinational corporations in their dealings with Ecuadorian companies and therefore could not have been derogated by private parties. It argued that according to Art. 1505 of the Civil Code in force, when the distribution of contract was signed the submission to a foreign jurisdiction by parties to an agreement was deemed null and void as "contrary to public order".
The ruling
The Second Civil Court of Guayaquil ruled in favor of Gallo. The Court found that the appointment of an ad litem guardian for defendant was improper since plaintiff did not disclose to the judge who issued this appointment that it knew the whereabouts of the defendant in California. The Court noted that in a similar case (Grace v. Delta Steamship Lines Inc.) the Supreme Court had ruled that the appointment of a ad litem guardian is improper when the plaintiff knows the address of the defendant. The Court ruled that the presence of the ad litem guardian constituted a violation of Gallo’s right to due process.
The Court then found that it lacked jurisdiction to hear the case since both parties were still bound by the 1978 contract, including its choice-of-law clause. The Court also noted that the plaintiff’s request to have the Court declare null and void that choice of law clause was not attainable in the type of action filled by plaintiff. The Court also suggested that even if that were not the case, plaintiff was still barred by the statute of limitations to seek a declaratory judgment of nullity of said choice-of-law clause, and also by Art. 1726 of the Civil Code which precludes anyone who has executed or performed a contract from requesting thereafter its nullity.
The Court noted that Decree Law 1038, under which plaintiff brought its action, had already been repealed by Congress in 1997. Moreover, the Court underlined the fact that Congress also repealed in 1997 the provision of the Civil Code that declared null and void clauses by which parties who had signed a contract in Ecuador submitted themselves to the courts of a foreign jurisdiction. The Court stressed the importance of the will and freedom of the parties in contract relations and rejected Andina’s view that public order is offended by the choice of a foreign law and forum in a private contract. For the Court, clauses like the one in the Gallo contract are common in international commercial relations, especially in a time of increasing globalization.
The submission to a foreign jurisdiction freely agreed upon by the parties to a contract could never be considered as a violation of the public order, especially in the current times in which the globalized commerce will require many Ecuadorian enterprises to submit themselves to foreign jurisdictions in order to develop their business…"
The Court noted that while it is true that all persons have the right to stand trial before the judge of their domicile, Ecuadorian Procedural Law (Art. 29 of the Code of Civil Procedure) also accepts the freedom of the parties to select a conventional forum. The Court added that this freedom to select a forum is also recognized by Art. 318 of the Code of Private International Law.
Finally the Court pointed out, without any comment, the fact that Gallo had commenced an action against Andina before the Court of Modesto, California.
Comments.
For years Decree Law 1038 has been the source of concern in the field of international commercial distribution in Ecuador. During the 1990s there was a spur of litigation involving its provisions in the face of contracts duly executed by local distributors and foreign corporations. The changing, and more favorable, attitude of Ecuadorian governments during those years toward the international economy, and the abuses showed by some plaintiffs in the invocation of Decree Law 1038, led Congress in 1997 to pass the repealing Act. However, as the case under analysis shows, even after the abrogation of Decree Law 1038 there have been some attempts to resurrect it. The argument that clauses selecting foreign forums for settling contract disputes are null and void as contrary to public policy has been weakened significantly. As noted by the Second Civil Court, in 1997 Congress derogated an old provision in the Civil Code that declared null any agreement of that kind. Following this legislative change, in 2000 the Supreme Court issued an important sentence of cassation in a case involving an international contract. The Court ruled that under Ecuadorian civil and commercial law, parties are free to select the forum and the law applicable for the settlement of their contract disputes. (Societá Italiana Per Condotte d’ Acqua Spa v. Teresa Garcia. Official Register No. 109, June 29, 2000). The only remaining exception are those agreements signed by public entities within the Ecuador territory. A similar trend has been seen regarding the contention that the provisions of Decree Law 1038 were rules based on "public order" considerations. In a case initiated prior to the repealing Act, the Supreme Court ruled rejected such characterization, since the case involved purely business activities. (Sentence No. 205-2003. September 25, 2003. Official Register No. 259. January 26, 2004.).
Finally, the ruling confirm the Supreme Court’s position against the appointments of ad litem guardians to answer complaints on behalf of foreign corporations doing business in Ecuador, without the presence of an agent of their own in the country, when plaintiffs know their addresses abroad. In such cases the local plaintiff has to serve the foreign defendant through a letter rogatory in order to guarantee the foreign corporation’s right to a due process.
These developments are welcomed and they should help local distributors and foreign suppliers to design their long-term relations with less uncertainty.
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