Merits of investor-state arbitration debated at international arbitration seminar hosted by Ecuador’s Attorney General
By Fernando Cabrera Diaz
9 December 2008
On 1-2 December Investment Treaty News attended a two-day seminar on international arbitration in Quito, Ecuador, hosted by Ecuador’s Attorney General’s Office. The seminar focused on international investment arbitration and its relation to state sovereignty.
Opinions from different sides of the debate were voiced, including from Ecuadorean government officials and international lawyers and arbitrators representing some of the most respected law firms in the field.
Ecuador’s Attorney General Diego García Carrión opened the seminar by noting that investment arbitration had recently attracted a lot of press Ecuador.
In the past year, Ecuador has attempted to withdraw its natural resource sectors from the jurisdiction of the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), terminated multiple bilateral investment treaties (BITs) and adopted changes to its constitution, notably Article 422, which makes it unconstitutional for the Andean nation to submit itself to arbitration unless it is with a Latin American citizen and in a Latin American forum.
The seminar was staged in order to inform Ecuador’s in-house legal team about investment treaty arbitration, as well as to clarify Ecuador’s position with respect to its actions in the field, explained García. The Attorney General attempted to dispel the notion that Ecuador was anti international arbitration, pointing out that the government was defending itself in a number of investor claims and had even initiated an arbitration claim of its own against Brazil’s state-bank.
ITN asked García about Ecuador’s recent move to withdraw from over a dozen BITs. Mr. García explained that the decision to terminate the BITs was not due to any dislike for or unwillingness to sign BITs on the part of Ecuador. Rather, the decision was made solely for the reason that these BITs were determined not to have helped attract foreign investment into Ecuador.
When asked whether Ecuador would be renegotiating its existing BITs to conform to Article 422, Mr. García said it was an issue that would be decided by Ecuador’s Executive, not his office. He also refused to speculate on whether Ecuador would be signing new BITs in the future.
Prominent lawyer and former Ecuadorean Supreme Court Justice Dr. Alberto Wray, another speaker at the seminar, took Ecuador to task for its constitutional changes that attempt to curb arbitration suits against the state from outside Latin America. He said investor-state arbitration could not exist without the consent of the state in the first place, and so it should not infringe on state sovereignty.
Dr. Wray acknowledged, however, that there were some problems raised by investor-state arbitration, given that the jurisprudence in this area is relatively young. One of the problems he noted was the challenge in determining which types of indirect expropriation required compensation and which should not.
This issue had come to the fore in the high-profile NAFTA cases of Methanex Corp. v. the United States and Metalclad v. Mexico: arbitrations initially used as examples to argue that investor-state arbitration was a threat to governmental policy space. Dr. Wray said tribunals were deciding such claims on a case-by-case basis as opposed to adopting a general theory.
However, Dr. Wray called the path adopted in Article 422 of Ecuador’s Constitution, which was approved by a September referendum, an overreaction to these sorts of uncertainties. Instead, he favoured drafting future BITs and arbitration agreements to include clauses similar to the one found in the Dominican Republic-Central American Free Trade Agreement (CAFTA-DR), which clarify the limits of indirect expropriation.
Annex 10C of CAFTA-DR states that “Except in rare circumstances, nondiscriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.”
When asked what would happen to BITs and arbitration agreements signed before the new constitution in light of Article 422, Dr. Wray responded: “Nothing. They must be withdrawn or terminated to be made void.”
Meanwhile, a prominent Paris-based lawyer and arbitrator, who asked to remain anonymous, criticized what he viewed as the liberal application of BIT protections by certain international tribunals. In particular, this person blamed what he called the artificial distinction made by tribunals between treaty and contract claims for creating a situation where governments could no longer rely on dispute settlement mechanisms in contracts.
He cited several examples in which foreign companies had contractually agreed to limit themselves to resolving disputes through national courts, only to then seek international arbitration under a BIT when they were unhappy with results. In such cases, it was common for international tribunals to overlook the terms of the relevant contract and accept jurisdiction by artificially dividing claims into contract and treaty components.
It used to be said that states simply needed to negotiate good contracts to protect their sovereignty, but that is no longer the case, he said.