Impact of Ecuador ICSID Exit

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

Ecuadorean President Rafael Correa said last month his country would withdraw from the Washington-based International Center for the Settlement of Investment Disputes, charging that Icsid allows companies to bypass Ecuadorean courts. Ecuador is currently facing more than $12 billion worth of arbitration complaints at Icsid, many of them from energy companies. Can Ecuador successfully withdraw from ICSID? What options would that leave for companies with arbitration proceedings currently pending in ICSID? Would the move make companies less willing to invest in Ecuador?

Carla A. Hills, chair and CEO of Hills & Company, International Consultants; co-chair of the Inter-American Dialogue and former US Trade Representative: President Correa's stated intention to withdraw Ecuador from ICSID, the World Bank's dispute resolution forum, is unfortunate for Ecuador, its people and those wishing to invest there. Created in the mid-1960s, ICSID facilitates investment by assuring foreign investors that if an investment dispute arises with a host government, there is a process for an impartial, timely resolution. ICSID arbitration is increasingly included in modern bilateral and multilateral investment agreements. Why then leave? President Correa complains ICSID compromises Ecuador's sovereignty by removing cases from Ecuador's courts. But removing disputes from courts where justice may be biased, as in Ecuador, is precisely ICSIDs objective, and one shared by Icsid's 140 plus member countries. The US government notes, '… susceptibility to political or economic pressures in the rule of law constitute[s] the most important problem faced by US companies investing in … Ecuador.' Investors in Ecuador today have every reason to seek an impartial international forum: in six years, Ecuador has been a respondent in 13 ICSID cases. Many countries have ICSIDprovisions in their investment treaties with Ecuador; President Correa's statement is, in effect, a short-sighted attempt to abrogate them. His words say much about his desire to impose his will on foreign investors no matter the terms of previously negotiated agreements and his fears that in an impartial forum Ecuador might not prevail. The real losers here will be the Ecuadorean people. Pulling Ecuador out of ICSID will only discourage investment that Ecuador sorely needs, deny people jobs and prevent Ecuador from developing its full potential. President Correa would be wise to rethink his position. (Carla Hills' firm represents a company currently involved in a dispute with Ecuador.)

Kevin P. Gallagher, a professor at Boston University and co-editor of Rethinking Foreign Investment for Sustainable Development: Lessons from Latin America: The international investment treaty-system is in need of fundamental reform. Ecuador's argument that foreign firms can circumvent domestic courts has justification. Nonetheless, Ecuador is threatening to defy international law; actually defying it will do Ecuador more harm than good. Hopefully, such antics are just to gain leverage to reduce the amount Ecuador owes under various ICSID claims. This same strategy was used by foreign investors in Bolivia, but in reverse. When the government announced nationalization, foreign firms threatened Icsid claims. This balanced the terms of the renegotiated contracts under nationalization, and no claims were filed. It is after this process that Bolivia started talking about withdrawal from ICSID, putting Bolivia on higher ground. Ecuador might be better off if it renegotiated and paid existing claims, then withdrew from Icsid. What is ironic however is that according to the latest report from the United Nations Economic Commission for Latin America and the Caribbean, between 2007 and 2008 Ecuador (404 percent), Venezuela (166 percent), and Bolivia (40 percent) saw the largest increases in FDI over the period. Mexico, a nation with numerous bilateral investment treaties (BITs) and Nafta saw one of the more significant declines (-19.5 percent). Ecuador has location-specific assets in hydrocarbons, and the nature of those markets will always make them fairly attractive to foreign investors. President Obama has pledged to reform investment agreements and just this month formed an advisory committee to reform the U.S. Model BIT. Such actions are welcome news.

Jonathan C. Hamilton, Jonathan C. Hamilton is a Washington-based partner of White & Case LLP. He advises clients on matters involving investments in Ecuador: If Ecuador in fact attempts to denounce Icsid, it will not take effect immediately, it will not terminate pending cases and it will not extinguish all dispute mechanisms available under investment treaties. It may, however, affect the environment for foreign investment because it is the latest in a series of steps that could be considered hostile to current and potential investors in Ecuador. Ecuador's latest announcement is best understood in context. Over the past two years, Ecuador gave notice aimed at limiting its consent to ICSID jurisdiction over disputes involving natural resources such as oil, gas and minerals, and has expressed an interest in creating an alternate disputes forum through Unasur. Ecuador also terminated BITs with eight countries, has considered proposing revisions to remaining BITs and adopted a new Constitution that increases regulation of investment and imposes certain limits on state consent to arbitration. If Ecuador proceeds to denounce Icsid, under the Icsid Convention, denunciation would take effect only six months after ICSID receives a formal notice of denunciation. Denunciation does not affect rights or obligations 'arising out of consent to the jurisdiction of the Center' given by such state before receipt of the notice of denunciation; thus, pending cases should not be affected. In addition, Ecuador remains a party to 17 BITs, most of which include non-ICSID options for dispute resolution. Denunciation of Icsid would not extinguish all investment dispute options, depending on the nationality of the foreign investor.

Editor's note: A written comment from Ecuador's embassy in Washington and Foreign Ministry was not submitted by our deadline. However, during an event at the Inter-American Dialogue on June 11, Ecuadorean Foreign Minister Fander Falconi confirmed that Ecuador has begun the process of denouncing the ICSID treaty, but within the mechanism established by law. Although the country is continuing to comply with ICSID rulings, he said, it aims to establish a new "regulatory body" for resolving disputes under the auspices of Unasur, the South American union. Overall investor interest in Ecuador remains strong, Falconi added, with foreign direct investment surpassing $970 million in 2008.