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Ecuador's National Assembly approved the denunciation of 12 bilateral investment treaties. (Photo: Asamblea Nacional)
Partner Kate Cervantes-Knox and Legal Director Elinor Thomas, DLA Piper. (Photos: DLA Piper)
Wednesday, May 17, 2017
Perspectives

Investor Disputes: Ecuador Uncertainty


Investors can still bring claims against Ecuador, but forum uncertain.

BY KATE CERVANTES-KNOX
AND ELINOR THOMAS

On May 3, 2017, the Ecuadorean National Assembly (Ecuador's legislative body) approved the denunciation of 12 bilateral investment treaties (BITs), with China, Chile, Venezuela, the Netherlands, Switzerland, Canada, Argentina, the United States, Spain, Peru, Bolivia and Italy.

This is the latest in a series of steps by Ecuador to change its existing investment treaty landscape. However, given the other countries taking similar actions in the last few years, it also raises the question of whether this may be part of a wider trend of states reconsidering the traditional bilateral investment treaty and investor state dispute resolution model.

Ecuador's recent history of withdrawal from investment treaties

Bilateral investment treaties are agreements made between two countries that contain reciprocal undertakings regarding the promotion and protection of any investments made by nationals of one country in the territory of the other country. They typically include, amongst other things, prohibitions on nationalization or expropriation and requirements that investors be treated fairly and equitably, and usually contain dispute resolution clauses allowing investors to bring claims directly against the relevant state by way of arbitration if the provisions of the treaty are breached.

Over the last ten years, Ecuador has made a number of moves to denounce international investment treaties and withdraw from existing investor state dispute resolution mechanisms.

In October 2007, the then President Rafael Correa gave formal notice to the International Centre for the Settlement of Investment Disputes (ICSID) purporting to restrict ICSID arbitration of claims relating to the energy and mining sectors. A new Ecuadorean Constitution was then enacted in September 2008, which stated that (except for treaties providing for the settlement of disputes between Latin American parties by regional arbitration entities or organizations designated by the signatory countries) treaties whereby Ecuador "yields its sovereign jurisdiction to international arbitration entities in disputes involving contracts or trade" could not be entered into. Also in 2008, President Correa announced the termination of Ecuador's investment treaties with Cuba, El Salvador, Guatemala, Honduras, Nicaragua, Paraguay, the Dominican Republic and Uruguay.

This was followed in July 2009 by Ecuador's formal denunciation of the Convention on the Settlement of Investment Disputes between States and Nationals of other States (the ICSID Convention), which took effect on January 7, 2010. President Correa said at the time that ICSID signified "colonialism, slavery with respect to transnationals, with respect to Washington, with respect to the World Bank and we cannot tolerate this".

In September 2009 President Correa sought the approval of the National Assembly to denounce various remaining BITs on the grounds that they were unconstitutional, a view echoed by subsequent decisions of the Constitutional Court. The National Assembly approved the denunciation of BITs with Finland, the UK, Germany, Sweden and France in 2010 and 2011.

The recent denunciation of 12 BITs

The decision of the National Assembly to denounce the 12 BITs was based on a report (publicly launched on May 8, 2017) from the Ecuadorean Citizens' Commission for a Comprehensive Audit of Investment Protection Treaties and of the International Arbitration System on Investments (CAITISA), a commission set up by President Correa in 2013. The President of that Commission, Cecilia Olivet said:

"Ecuador's decision to terminate its investment protection treaties is rational and just. It is based on the insurmountable evidence our commission collected on the benefits and costs of these investment protection agreements. Our report revealed that these agreement[s] have not only failed to deliver promised investment, they have cost Ecuadorians billions of dollars and posed a serious threat to Ecuador's capacity to regulate corporate activities in order to protect its citizens. Fortunately Ecuador is not alone in denouncing these unjust investment agreements. It is joining a wave of countries around the world calling for a new international legal framework for investment which prioritizes public interest over corporate profits."

Similarly, the Chair of the Ecuadorean Commission for Sovereignty and International Affairs, Maria Augusta Calle, has made comments highlighting the significant quantum of investment arbitration claims against Ecuador and the amount paid by the state in terms of legal and other arbitration related costs (awards and arbitration costs totaling more than $300 million up to May 2015), which "compromise the financial viability of public social programs". She also rejected the idea that Ecuador's BITs have met their objective of bringing more foreign investment into the country, with Ecuador receiving only 0.79 percent of investment in the region despite being a state with a relatively high number of concluded BITs in the region. Criticisms were also made about BITs negatively affecting the government's ability to regulate and of the terms of some of Ecuador's existing BITs, specifically the broadness of investor protections and failure to prevent investors from bringing claims against the state in multiple fora.

While further steps, such as official communication of Ecuador's decision to the states involved, may be required in order formally to terminate the affected BITs, it seems likely that Ecuador will continue on its course of terminating its existing BIT arrangements under the administration of the president-elect Lenin Moreno (who acted as Vice-President to President Correa), following April's election.

Any termination will not be immediate, however, given that all of the relevant BITs have survival clauses which have the effect of continuing to protect investments made prior to the termination for five, ten or fifteen years after the termination.

For investors that have made investments in Ecuador that previously benefitted from protection under the BITs that are now being unilaterally terminated, this means that (provided the BITs have not been amended to remove the survival clause), it should still be possible to bring claims against Ecuador in respect of any breaches of the BIT protections for the five, ten or fifteen-year survival period stated in the relevant BIT. Investors should, however, be aware of the complicating factor that, as referred to above, Ecuador has also denounced the ICSID Convention. While there remains some uncertainty regarding the effect of withdrawal from ICSID, it is possible that ICSID may not be an available forum to potential claimants against Ecuador during the survival period of the BITs and investors would need to rely on any alternative forums in the dispute resolution clauses of the BITs. The terms of the relevant BIT should be analyzed carefully by any investors with grounds for a claim in order to determine the best course of action.

Part of a trend of reconsideration of existing investment agreements?

Ecuador is one of a number of countries that have recently taken steps to terminate existing investment agreements and/or end their participation in the ICSID system, often as a reaction to claims being brought against them or adverse awards. Bolivia was the first state to withdraw from the ICSID Convention, in 2007, and Venezuela withdrew in 2012. Venezuela also withdrew from its BIT with the Netherlands in 2008. Both Italy and Russia have withdrawn from the Energy Charter Treaty. Following a policy review of its BITs in terms of foreign direct investment flow and given the risk that certain policy and domestic interventionist measures (including black economic empowerment policies) might leave it open to claims, South Africa has terminated BITs with Belgium and Luxembourg, Spain, Germany, Switzerland and the Netherlands. Indonesia has terminated, or allowed to expire, a number of BITs, including with China, Laos, Malaysia, the Netherlands, Italy, France, Slovakia, Bulgaria and Egypt. The Government of India also indicated last year that 58 of its 83 BITs are being terminated, with notices having been sent to the relevant counterparty states.

Ecuador's move is arguably part of a trend towards growing scrutiny of investment agreements and skepticism about existing investor state dispute resolution mechanisms (for example, the EU's proposed replacement of investment arbitration with an investment court to address, amongst other things, concerns about transparency and accountability, has been the subject of much debate in Europe). It may be that states are increasingly looking to alternatives, such as national investment laws, to offer foreign investors substantive protections, rather than entering into BITs.

However, several of the countries that have terminated BITs, including India, Indonesia and South Africa, do not appear to have taken this step on the basis of a desire no longer to participate in investment treaties and investment arbitration, but rather in order to renegotiate and improve the terms of their investment agreements. Some states perceive an imbalance in the terms of their BITs and consider that treaty provisions negotiated at a time of weakness (particularly for developing countries) can now be renegotiated more favorably from a position of greater economic strength. Ecuador has itself indicated that the idea behind the denunciation is "to renegotiate but from the bargaining position of equality of the parties".

While it remains to be seen exactly how Ecuador, and the other countries that have terminated BITs or withdrawn from multilateral arrangements, will proceed in terms of future investment protection, it appears that the importance to states of maintaining some form of investment protection provisions is accepted. Investors looking to benefit from treaty protection should always check carefully the status of any BITs with the country in which they are seeking to invest, but can remain reasonably confident that investment protection provisions will continue to remain part of the international investment landscape.

Kate Cervantes-Knox is a London-based  partner with DLA Piper with extensive experience advising clients in relation to international arbitration disputes. Elinor Thomas is a London-based Legal Director at DLA Piper with significant experience in complex international dispute resolution.

This column is based on a DLA Piper alert. Republished with permission.

 

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