Ecuador Denounces ICSID: Much Ado About Nothing?

Ecuador Denounces ICSID: Much Ado About Nothing?

Much has been made of Ecuador’s recent withdrawal from the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (’ICSID’). The notice has the effect of terminating the jurisdiction of the Centre effective 7 January 2010. The most reported justification for this move is the perception in many Latin American countries that international investment arbitration is biased towards investors (see comment entitled ‘International Investment Arbitration: Poisoned at the Root?‘), and more specifically, outstanding international investment claims against Ecuador in the range of $10 to $12 billion US.

However, on review of Ecuador’s international legal position, and, more specifically, international legal obligations generated by her outstanding bilateral investment treaties, it seems that withdrawal from ICSID, whilst perhaps remaining a poignant political statement, offers less than might first be thought in terms of radical change with respect to the country’s exposure to investment claims.

By way of background, the ICSID Convention provides one mechanism by which an international arbitral tribunal might be seised with jurisdiction to hear a claim brought by an investor against a host State. Rather than offering any substantive protections to the investor, it merely provides a forum within which to bring a particular dispute, by arrogating jurisdiction to a tribunal in particular circumstances according to a set procedure. In order for a tribunal to be duly seised, the State subject to a claim must have given its consent to jurisdiction. As pointed out by Gaillard in his considered article relating to Bolivia’s denunciation of the Convention, consent can be given in a number of ways. Foremost among these is via a bilateral or multilateral investment treaty (’BIT’ or ‘MIT’). As Gaillard interestingly points out, at the time the ICSID Convention was negotiated, BITs and MITs were ‘not common in state practice’. In line with their subsequent proliferation, this article is primarily concerned with what Ecuador’s obligations under her BITs tell us about the efficacy of denunciation of the ICSID Convention on the enduring nature of international investment arbitration.

According to UNCTAD, as of 1 June 2008, Ecuador had signed a total of 29 BITs. However, after terminating eight of these agreements—mostly with Latin American States-this number was reduced to 21. A review of these treaties* provides two interesting insights. First, the withdrawal from ICSID has less impact than the fanfare surrounding it suggests. Second, in light of the present Ecuadorian Government’s views on international investment arbitration, there are a number of other immediate options that it might take.  In order to demonstrate these two points, Ecuador’s currently existing BITs must be examined.

For the purposes of this paper, two aspects of her BITs are relevant: the dispute settlement mechanisms that the investor might avail itself of and the provisions that are usually refereed to as ‘entry into force’.

In relation to the dispute settlement mechanisms available to an investor, they consist of a number of various combinations of ICSID, the Additional Facility under ICSID, UNCITRAL, ad-hoc arbitration and the domestic courts of the State in which the investment is made. Ecuador’s BITs are interesting, in that there are only two countries that provide for sole recourse to ICSID-Chile and France. The rest provide for a menu of options to the investor, such as:

(1) ICSID or UNCITRAL (Argentina, Bolivia, Finland, Netherlands, Romania, Sweden, and Venezuela)

(2) ICSID, the Additional Facility, or UNCITRAL (Canada, Cost Rica, and the United States)

(3) solely ad-hoc arbitration (China)

(4) ICSID, UNCITRAL or ad-hoc (Netherlands)

(5) ICSID or domestic courts (Germany, Peru)

(6) ICSID or ad-hoc (Spain)

Thus, even after withdrawal from ICSID, Ecuador remains subject to arbitration in a number of fora for violations under her bilateral investment treaties.

In relation to entry into force and denunciation, her treaties might be broken down into a number of different categories:

(1) treaties that have no initial term of operation (and by definition, operate indefinitely), with the Contracting Parties enjoying the right to issue a notice of termination that takes a particular period to become effective

(2) treaties with an inaugural term, that, once they have passed that term:

a. continue in operation until such a time as one of the Contracting Parties issue a notice of termination, which takes a specified period to become effective

b. renew for a specific term, with the Contracting Parties enjoying the right to issue a notice of termination prior to a prescribed time period before to the expiry of the term

All of her treaties provide a grandfathering provision for investments made either before the termination becomes effective or after the notification of termination, with any substantive rights arising under the treaty extended for a set period of 10 or 15 years.

When one looks at the above treaties, some aspects become immediately obvious. First, the only treaties whose initial term is still yet to expire are those with Finland, Netherlands, Peru and Sweden. The remaining treaties (those that have exhausted their initial term) are with Argentina, Bolivia, Canada (although Canada’s treaty has always operated on an indefinite basis), Chile, Costa Rica, France, Germany, Romania, Spain, Switzerland, the United Kingdom, the United States and Venezuela. Out of these States, only Bolivia, Costa Rica, Romania, Spain, and Switzerland operate on a term renewal system. This means that Ecuador is entitled to issue a termination notice that would become effective after one year for Argentina, Canada, Chile, China, France, Germany, Venezuela, and very importantly the United Kingdom and the United States. Even the obligations under treaties operating on term renewals could be terminated relatively quickly-Bolivia by 15 August 2017, Spain by 18 June 2012, and Switzerland by 9 November 2010. If Ecuador took such steps she could limit the accretion of new investment claims being made for investments made after 18 June 2012 to Bolivia (until 15 August 2017), Finland (16 December 2010), Netherlands (1 July 2011), Peru (9 December 2014) and Sweden (31 May 2011). Admittedly, in relation to these countries, investment claims might continue to accrue, as all BITs provide for the extension of investor protection for investments made prior to either the termination of the treaty, or in the case of Bolivia receipt of the notice, for a period of either 10 or 15 years.

In light of the fact that Ecuador seems stalwartly opposed to international investment arbitration, and the fact that by remaining bound by these treaties she continues to be exposed to the majority of claims that might be brought against her, and in light of the ease with which she could begin to truly dismantle the system of international investment arbitration by issuing notice under the vast majority of her BITs, the question remains as to why she has not decided to do so. The reality is that although the denunciation of ICSID may signal a political change that combines well with the rhetoric of the current Government, and offers a convenient jab at the World Bank, one must question the real efficacy it has on the international legal position of Ecuador. Indeed, the multipolar character of international investment law, and its web of BITs and competent fora are in line with the empirical conclusions of this paper-dismantling this web takes more than merely denunciation of one convention. As has been demonstrated in the empirical investigation in this paper, denunciation of ICSID is but one step in Ecuador escaping her international investment obligations.

It goes without saying that the Ecuadorean Government is free, as is any other government, to pursue policies (such as the temporary retention of bilateral investment treaties) in circumstances where to do so suits the national interests of the State. However, the way in which events have developed might give us pause to consider Ecuador’s underlying motivations; in light of the fiery rhetoric of the current Government-the likening of international investment arbitration to colonialism and slavery-and the relative ease with which it terminated existing bilateral investment treaties with fellow Latin American countries on the basis that the were not brining in enough investment, we might wonder why it has chosen not to do the same to the western countries with which it currently has BITs.

* The only treaties no included in this analysis were those with Russia and Italy. The Russia-Ecuador BIT has not yet come into force. The Italy-Ecuador BIT was not readily available.