Urbaser v. Argentina and Burlington v. Ecuador: Investment arbitration is not over the counterclaims yet

Two recent decisions by tribunals have advanced the body of tribunal practice considering the issue of counterclaims by respondent states in investment treaty arbitration: Burlington Resources Inc. v. Ecuador, in which the tribunal awarded damages against the investor for breach of Ecuadorian environmental law in the performance of its investment, and Urbaser SA and Consorcio de Aguas Bilbao Bizkaia v. Argentina, in which the tribunal accepted jurisdiction to hear Argentina's counterclaim asserting that the investor had violated international human rights obligations. These decisions arise in the context of conceptual challenges to the pursuit of counterclaims in investment arbitration.

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Ecuadorian Bill for the Enforcement of Awards and Judgments: will recent developments give the bill further impetus?

The Bill for the Enforcement of Awards and Judgments was introduced into the National Assembly of Ecuador in December 2013, against the backdrop of the ongoing dispute between Chevron and Ecuador which is playing out in a number of fora. Recent developments in this matter, as well as the US Supreme Court’s decision in the case of BG v Argentina, in which Ecuador had submitted an amicus curiae brief in support of Argentina, may give Ecuador further will to bring the Bill into law.

The Bill seeks to amend various pieces of legislation, including Ecuador’s Arbitration Law (the “Ley de Arbitraje y Mediación”), with the objective of strengthening the mechanisms of protection of public resources and services. The Bill attempts to achieve its purpose by two broad means, firstly, by amending provisions relating to the enforcement of foreign awards and other measures issued by arbitral tribunals and secondly, by amending laws to bolster the protection given to State assets and resources.

According to the Explanatory Memorandum of the Bill, existing mechanisms have proven insufficient to preserve the integrity of public resources from “illegitimate” enforcements, attachments and other measures taken against State property in the satisfaction of judgments and arbitral awards against the State, an experience expressly stated as one similarly shared by Ecuador’s sister republics, and specifically, the Republic of Argentina. The Explanatory Memorandum also highlights the need for the creation of rules to regulate the performance and compliance of the Ecuadorian State with rulings adverse to its interests.

Whilst Ecuador has signed the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards, if passed into law, the Bill will have the effect of making enforcement of foreign awards more onerous and enforcement against state assets more difficult.

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Ecuador to establish commission to audit bilateral investment treaties

On 5 October 2013, the President of Ecuador, Rafael Correa, confirmed that a commission is to be established to audit the bilateral investment treaties (BITs) that Ecuador currently has with other countries.

According to the national Ministry of Planning and Development, Ecuador intends to audit 26 BITs which are considered prejudicial to national interests. This figure establishes that the scope of the audit would thereby cover the majority of Ecuador’s current BITs, although further guidance from the government is needed as to which specific BITs will be targeted – it is highly likely that Ecuador’s BIT with the U.S. will be one. The audit committee will comprise of individuals, including academics, specialists and former judges, from various Latin American countries.

Ecuador’s actions follow a recent ministerial summit in Ecuador itself where a bloc of Latin American countries, including Bolivia and Venezuela, agreed to take collective action to oppose an ever-increasing number of lawsuits brought by multinational corporations against the governments of developing countries for alleged violations of trade agreements. Indeed, according to a study released earlier this year by the Institute for Policy Studies, a Washington think-tank, Latin American countries were the focus of around half of all investor-state lawsuits pending in March 2013 before the International Center for Settlement of Investment Disputes (ICSID).

Those wishing to invest in Ecuador, and more widely in Latin America, should, as always, continue to include appropriate contractual investment protection mechanisms as well as actively managing the structure of their investments to obtain access, where possible, to international law protections and investor-state arbitration. Although Ecuador’s actions currently only extend to the establishment of an audit committee, investors would be well-advised to keep a close eye on developments in the region.

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Further steps given by Ecuador to terminate its bilateral investment treaty with the USA

On 6 March 2013, Ecuador’s President, Mr Rafael Correa, requested that Ecuador’s legislature (the National Assembly) approve the denunciation of the bilateral investment treaty (BIT) between the USA and Ecuador (the Treaty).  This is a further testament to the Government of Ecuador’s disaffection with the investor-state protection system implemented before Mr Correa became the country’s President in 2007.  This blog post provides general background on this development and briefly discusses the legal consequences of Ecuador denouncing the Treaty.

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Record Award Against Ecuador Demonstrates Willingness of Tribunal to Review State Decisions on Grounds of Proportionality

In an award notified to the parties on 5 October 2012 (the Award), the majority of a three-member arbitral tribunal established under the ICSID Convention has directed the Republic of Ecuador (Ecuador or the Respondent) to pay US companies Occidental Petroleum Corporation (Occidental) and Occidental Exploration and Production Company (OEPC)(collectively, the Claimants) damages in the sum of approximately USD1.77 billion (if interest is taken into account it has been reported that this sum would exceed USD2.3 billion)1.  It has been reported that this is the largest sum ever awarded by a tribunal under the ICSID Convention and, unsurprisingly, will be challenged by Ecuador.

The dispute arose out of Ecuador’s decision to terminate in April 2006 by way of a decree (the Decree) the contract (the Participation Contract) under which the Claimants were undertaking oil operations in an area known as Block 15 (which covers 200,000 hectares situated in the Oriente Basin, in the Ecuadorean Amazon rainforest).

Notwithstanding the fact that the Claimants breached the Participation Contract (and, according to one member of the tribunal, acted illegally), Ecuador was found to have acted disproportionately and therefore had violated the US-Ecuador bilateral investment treaty (the BIT).  In particular, the tribunal held that Ecuador failed “to accord fair and equitable treatment to the Claimants’ investment, and to accord to the Claimants treatment no less than that required under international law“; and breached the BIT “by expropriating the Claimants’ investment in Block 15 through a measure ‘tantamount’ to expropriation.” [876]

Whilst the tribunal –comprised Yves Fortier QC (presiding arbitrator), David AR Williams QC and Professor Brigitte Stern –was unanimous in respect of liability, the impact of the Claimants’ breach of the Participation Contract upon the calculation of damages divided the arbitrators.  The majority concluded that due to their breach of the Participation Contract, “the Claimants have contributed to the extent of 25% to the prejudice they suffered when the Respondent issued the Caducidad [termination] Decree.” [687] Prof Stern, in a strongly-worded dissenting opinion, considered that a 50/50 split would have been justified as she concluded that “the Claimants have acted both very imprudently and illegally.” [7]

The Award is significant for both States and investors for the following reasons:

  • The tribunal considered it within its power to review the suitability of the administrative decisions of Ecuador, particularly on the basis of the principle of proportionality (considered by this tribunal as an aspect of the fair and equitable treatment (FET) standard).
  • Also taking into account the principle of proportionality, the tribunal found that misbehaviour on the part of the investor did not preclude it from obtaining redress against the State.  The breach of the Participation Contract was punished by a reduction in the damages instead.
  • The Award also highlights the importance of dissenting opinions: it is no surprise that Ecuador reportedly plans to rely upon Prof Stern’s dissenting opinion to seek the annulment of the Award.

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