Ecuador Moves to Denounce and Leave the ICSID Convention, by vow16147


									                                                                                                                                           June 17, 2009

       Skadden                                                        Ecuador Moves to Denounce and Leave
S k a d d e n , A r ps , S l a t e , M e a g h e r & F l o m L L P
& Affiliates
                                                                     the ICSID Convention, Attempts to Curtail
 If you have any questions regard-
                                                                          Investor-State Arbitration Rights
 ing the matters discussed in this
 memorandum, please contact the
                                                                              n June 12, 2009, Ecuador’s Congress voted to withdraw from the 1965
 following attorneys or call your
 regular Skadden contact.

 John L. Gardiner
                                                                     O        Washington Convention on the Settlement of Investment Disputes between
                                                                              States and Nationals of Other States (the ICSID Convention) because it
                                                                     objected to the arbitration mechanism that the ICSID Convention offers interna-
                                                                     tional investors engaged in disputes with the government of Ecuador. Based in
 New York
 212.735.2442                                                        Washington, D.C., ICSID is a World Bank-affiliated institution that serves as an                                           arbitration forum for investment disputes between foreign investors and states,
                                                                     including claims for expropriation of foreign investment and other violations of free
 Marco E. Schnabl                                                    trade agreements (FTAs) and bilateral investment treaties (BITs). ICSID also serves as
 New York                                                            a venue for investor-state disputes arising under NAFTA, DR-CAFTA and the Energy
 212.735.2312                                                        Charter Treaty.

 Timothy G. Nelson                                                   In recent years, numerous foreign investors have made ICSID claims against
 New York                                                            Ecuador for expropriation, unfair treatment and/or violation of specific contractual
 212.735.2193                                                        commitments (e.g., with respect to tax treatment of foreign investments). Often,                                        these claims have arisen in relation to investments in the energy and resources sec-
                                                                     tors and have raised issues of great political sensitivity. Occasionally, but not
                  *           *            *                         always, these disputes have resulted in awards of damages against Ecuador for
                                                                     breach of contract and/or violation of BIT obligations.
 This memorandum is provided by
 Skadden, Arps, Slate, Meagher &                                     Ecuador’s status as a “repeat” defendant had already prompted it to issue a declara-
 Flom LLP and its affiliates for                                     tion in late 2007 that it would no longer consent to ICSID jurisdiction as a forum
 educational and informational                                       for resolving natural resource disputes, particularly mining and energy disputes,
 purposes only and is not intended
                                                                     with foreign investors. Anti-investor political pressure, however, appears to have
 and should not be construed as
 legal advice. This memorandum                                       continued unabated, especially during the recent presidential elections that secured
 is considered advertising under                                     President Rafael Correa a second term. For example, he has reportedly declared
 applicable state laws.                                              that the ICSID arbitration system stands for “colonialism, slavery with respect to
                                                                     transnationals, with respect to Washington [and] with respect to the World Bank.”

                                                                     Incongruously, however, Ecuador’s decision to denounce the ICSID Convention
                                                                     comes only weeks after its high-profile victory against one investor, whose $1.78
                                                                     billion ICSID claim for expropriation in the electricity/utilities sector was dismissed
                                                                     on jurisdictional grounds. This is not the only time Ecuador has prevailed in an
                                                                     ICSID/BIT claim: on at least one other occasion, Ecuador has obtained complete
                                                                     dismissal of all ICSID claims by the investor. In other words, Ecuador’s actual
                                                                     experience in ICSID does not necessarily support the political rhetoric.

                                                                     Ecuador’s actions follow its recent default and attempted restructuring of its sover-
              WWW.SKADDEN.COM                                        eign debt. Its policies also reflect its membership of the new regional coalition, the
                                                                     Alternativa Bolivariana para las Américas (ALBA), whose “alternative” trade
                                                                     agreement explicitly rejects free trade principles and is explicitly opposed to
2                                                                                             Skadden
    investor protection treaties. Other actions by ALBA members include: Bolivia’s denunciation of
    the ICSID Convention in 2007, Nicaragua’s 2008 threat to denounce the ICSID Convention, and
    Venezuela’s purported withdrawal in late 2008 from the Netherlands-Venezuela BIT.

    Ecuador’s withdrawal from the ICSID Convention may affect United States investors in that country,
    because U.S. investments in Ecuador are now covered by a 1993 BIT known as the “Treaty
    between the United States of America and the Republic of Ecuador concerning the Encouragement
    and Reciprocal Protection of Investment,” allowing for ICSID arbitration of investor-state dis-
    putes. It also will affect investors who channel their investment activities through the numerous
    other countries that have concluded BITs with Ecuador, including Argentina, Canada, China,
    France, Germany, The Netherlands, Romania, Spain, Switzerland and the United Kingdom. Each
    of these BITs contemplates that disputes relating to the treatment of foreign investors in Ecuador
    may be brought before an ICSID arbitration tribunal.

    It bears emphasis, however, that Ecuador’s withdrawal from the ICSID Convention does not nec-
    essarily deprive investors of all arbitral forums for expropriation claims. First, the ICSID
    Convention requires six months’ written notice to the ICSID secretary-general before any denunciation
    becomes effective. Even after Bolivia issued a notice of withdrawal from ICSID in mid-2007, certain
    ICSID claims against Bolivia were registered in the six-month period prior to its withdrawal
    becoming effective, and those proceedings are still pending today.

    Moreover, even after the denunciation takes effect, other alternative venues will exist for bringing
    investor-state claims against Ecuador. Many of the above-described investment treaties, including
    the United States/Ecuador BIT, provide for alternative arbitral venues, e.g., UNCITRAL arbitration, or
    arbitration before the ICSID “Additional Facility.” But unlike ICSID Convention awards, which
    are deemed to have the same status as a judgment rendered in any ICSID Convention contracting
    state, to enforce an UNCITRAL or “Additional Facility” award requires that the investor seek con-
    firmation of the award in the national courts in the same manner as an ordinary commercial arbi-
    tration award (e.g., pursuant to the Panama or New York Conventions governing recognition and
    enforcement of arbitration awards).

    Ecuador’s looming denunciation of the ICSID Convention should be viewed with concern by
    investors, not only because it evinces an intention to curtail foreign investors’ arbitration rights in
    the event that they are subject to future expropriatory or discriminatory state measures, but also
    because it forms part of a pattern of hostility to foreign investment within the ALBA countries. At
    minimum, therefore, Ecuador’s actions should prompt companies with investments in ALBA coun-
    tries or other politically volatile regions to carefully review their investment structures to maximize
    their investment rights in the event of future adverse governmental measures.

                                  Four Times Square, New York, NY 10036
                                          Telephone: 212.735.3000

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