ICSID tribunal accepts Ecuador’s objections to jurisdiction in dispute with electricity firm

By Fernando Cabrera Diaz
15 July 2009

A tribunal at the International Centre for Settlement of Investment Disputes (ICSID) has accepted Ecuador’s objections to jurisdiction in an arbitration commenced by Empresa Eléctrica del Ecuador, Inc (EMELEC). In a ruling handed down on June 2 the tribunal held that the claimant Mr.  Miguel Lluco was not authorized to commence the claim on behalf of EMELEC.

EMELEC, an electricity company incorporated in the state of Maine, signed a 60-year concession contract in 1925 to produce, transmit and distribute electricity to Guayaquil, Ecuador’s second largest city.  When the contract ended in 1985 EMELEC continued to operate in Ecuador under provisional permits.

According to the claimants, on 23 March 2000 the company’s assets were frozen by an order of Ecuador’s National Council for Electricity (CONELEC). CONELEC claimed to have taken this action in response to, among other things, EMELEC’s failure to finalize a new concession contract in the time frame provided under the Electric Sector Law.

Mr. Lluco responded by lodging a claim against Ecuador in 2004, alleging that  EMELEC’s assets had been expropriated in violation of the Ecuador-United States bilateral investment treaty.

Before the Tribunal examined the alleged expropriation, Ecuador challenged its jurisdiction on several grounds. Ecuador’s principle argument was that Mr. Lluco was not authorized to launch the claim because EMELEC was owned by trust to which he was not a party.

Mr. Lluco, however, claimed to be the trustee of a trust allegedly set up by EMELEC’s previous owner, Fernando Aspiazu, which held EMELEC as an asset.

The tribunal was presented with complex and conflicting accounts of the history of the ownership of EMELEC. According to the tribunal neither side disputed the fact that in January of 1993 Fernando Aspiazu bought EMELEC through the Bahamian company NEPEC.  Six years later a bank owned by Mr. Aspiazu, Banco del Progreso S.A., was taken over by Ecuador, and Mr. Aspiazu was charged with embezzlement and ordered to pay back all depositors.

In response, Mr. Aspiazu set up the Progreso Repatriation Trust (PRT I), a revocable trust whose beneficiaries were to be first the depositors at the failed bank, followed by himself and his wife.

What happened next is disputed.  According to Ecuador, Mr. Aspiazu and his wife dissolved this first trust in February of 2000 and created the Progreso Depositors Trust (PDT) with the same assets. This second trust is irrevocable for at least 6 years, and therefore still owns EMELEC.

The claimant, however, argues that this second trust was never formed with the proper consent of Mr. and Mrs. Azpiazu and that instead a third trust was formed with the relevant assets in 2003. As the appointed trustee of this alleged third trust, Mr. Lluco contends he is empowered to commence the current arbitration.

Ultimately the tribunal sided with Ecuador, holding that Mr. and Mrs. Aspiazu did authorize the creation of the irrevocable second trust in 2000 and that their consent was evident in several letters written to instruct the trustee of that trust.

Based on this finding the tribunal determined that the third trust could not have been created in 2003 as the claimant contends, given that the assets in question already belonged to the second trust which was irrevocable at the time.  As such, the tribunal determined that Mr. Lluco lacked authority to represent EMELEC as claimant in the arbitration, concluded the tribunal.

The decision represents a rare victory for Ecuador at ICSID, and comes as the country has moved to exit the World Bank’s arbitration facility citing a perceived bias in that body on behalf of foreign investors.

The award in Empresa Eléctrica del Ecuador, Inc. v. Republic of Ecuador, ICSID Case No. ARB/05/9 is available in Spanish here: http://ita.law.uvic.ca/documents/EmpresaElectricaAwardSpanish.pdf