Ecuador threatens cancellation of oil contracts unless ICSID nixed as arbitration forum
By Fernando Cabrera Diaz
29 August, 2008
The Ecuadorian government will consider contracts with oil companies terminated unless they remove the International Centre for Settlement of Investment Dispute (ICSID) as the venue of arbitration. The threat comes as the Andean nation considers domestic legal reforms which would make it unconstitutional for the country to be involved in arbitrations in venues outside of Latin America.
Ecuador’s Oil and Mining Minister, Galo Chiriboga, said Ecuador has doubts about the impartiality of ICSID arbitration, and offered Chile’s Centre for Arbitration and Mediation (Centro de Arbitrajes y Mediación de Santiago) as an alternative venue.
A proposed draft constitution, which will be put to a public referendum on 28 September, would make it illegal under Ecuadorian law for the country to enter into international treaties that could lead to investor-state arbitration unless disputes are settled in Latin American forums.
However, it is unclear how the draft constitution would affect the rights of foreign investors to use the ICSID facility under Ecuador’s bilateral investment treaties (BITs) that refer to the Centre as an option for arbitrating disputes.
Hernán Pérez Loose of the Quito-based law firm Coronel & Pérez Abogados said that the constitutional changes would probably have little impact on the foreign investors currently in the country. Mr. Pérez Loose points out that under international law countries cannot use national legislation, such as their constitutions, to escape commitments they have made under international law, like treaty arbitration clauses, he explained.
Ecuador would therefore have to either modify its BITs or convince potential claimants to keep arbitrations in Latin America. Altering BITs would require the consent of the co-signing country; a time consuming process at best. Moreover, convincing claimants to consent to a regional arbitration venue over ICSID is unlikely, concluded Mr. Pérez Loose, adding that the lack of experience and jurisprudence in the region would make investors wary of regional arbitration.
Ecuador is currently defending itself in nine arbitrations at ICSID, from claims totaling over US$ 10 billion. Most of the claims relate to the 2006 “Ley 42”, which levied a 50% tax on oil company windfall profits.
Foreign oil companies operating in Ecuador, including Repsol, Murphy, Burlington, City Oriente and Parenco, have responded by initiating arbitration proceedings through ICSID.
Ecuador is also seeking a larger share of oil profits by modifying contracts with foreign oil companies by converting them to service contracts under which Ecuador holds ownership of the operations.
Minister Galo Chiriboga is currently negotiating with the oil companies, looking to both re-structure contracts and end arbitrations over the windfall tax. Ecuador recently settled with City Oriente, agreeing to pay the company US$ 70 million. In return, the company agreed to exit the country and withdraw its US$ 400 million claim at ICSID.