By Fernando Cabrera Diaz
2 September 2009
Ecuador’s announcement in July that it was denouncing the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) has prompted renewed debate on the legal effects of the decision with respect to settling disputes under the auspices of the ICSID arbitration facility.
Following Ecuador’s formal notice of denunciation, the ICSID Secretariat declared: “In accordance with Article 71 of the ICSID Convention, the denunciation will take effect six months after the receipt of Ecuador’s notice, i.e., on January 7, 2010.”
Yet this seemingly simple statement belies the ambiguity that surrounds Ecuador’s decision. The uncertainty stems in part from the fact that Article 71 on denunciation, and in particular Article 72 on the effects of denunciation, are unspecific and have yet to be interpreted by a tribunal in the context of a country exiting the Convention.
Indeed, before Ecuador, Bolivia was the only country to have denounced the ICSID Convention. Bolivia was taken to arbitration in October of 2007, five months after its announcement in May of 2007 (within the six month period required under Article 71 for denunciation to take effect). Yet that case*, which could potentially be the first to deal with the effects of denouncing the Convention, is still in the preliminary stages of a jurisdictional dispute.
In a recent paper “Once and Forever? The Legal Effects of a Denunciation of ICSID” (Transnational Dispute Management, Vol 6, Issue 1, March 2009) Christian Tietje, Karsten Nowrot and Clemens Wackernagel examine the issue of denunciation.
According to the authors, the central question is the meaning of consent in Article 72 which reads: “Notice by a Contracting State pursuant to Articles 70 or 71 shall not affect the rights or obligations under this Convention of that State or of any of its constituent subdivisions or agencies or of any national of that State arising out of consent to the jurisdiction of the Centre given by one of them before such notice was received by the depositary.” (Italics added)
Disagreement over the meaning of consent in this last phrase has lead to three broad theories explaining the effect of denouncing the Convention.
On one side of the spectrum are those who argue that once the denunciation has been received by ICSID, investors who have not already done so can no longer initiate arbitration. According to this position, consent in Article 72 implies mutual consent to arbitration which is perfected when an investor files a notice of arbitration.
A contrasting opinion, held by the authors of the paper, is that consent in Article 72 is simply unilateral consent such as that offered by a country in a Bilateral Investment Treaty. According to this theory, any BITs in which a country offers its consent to ICSID arbitration before it denounces the Convention continue to protect the relevant investors for the life of the BIT even after the denunciation takes effect.
A third opinion holds that investors can initiate arbitration after the denunciation has been made but before it takes effect six months later. This view appears to lack a basis in Article 72, said Dr. Tietje in an interview with ITN.
Adding more uncertainty to the situation are BITs like that between the United States and Ecuador. Article VI(3)(a)(ii) of that BIT appears to allow investors of one party to launch arbitration against the host party at ICSID under the Additional Facility Rules if the host party is not a member of the Convention.
According to Dr. Tietje, this type of clause and indeed the Additional Facility Rules themselves were intended to give states which were considering joining the Convention a chance to test the system. In his view an argument could be made that the purpose of this clause and the Rules precludes them from applying to a country such as Ecuador which has left the Convention.
However, focusing on the text of the BIT itself an argument could be made that this clause does indeed allow U.S. investors to continue to take Ecuador to ICSID under the Additional Facility Rules even after it fully exits the Convention, says Dr. Tietje.
Given this disagreement on the issue it is not surprising that Ecuador has begun to prepare itself for the different possible effects of its denunciation. A senior Ecuadorian official, who wished to remain anonymous because he was not speaking in his official capacity, said that Ecuador is trying to reach agreements with investor considering arbitration in order to prevent future ICSID claims from arising.
Meanwhile, the government is finalizing a model BIT to be used as a basis for re-negotiating existing BITs and in future negotiations with other countries, says the official. As expected the model BIT will not include ICSID arbitration, but instead arbitration under UNCITRAL Rules with a venue not yet decided in the final text.
Ecuador is also part of a move to create a regional arbitration forum under the auspices of the Union of South American States (UNASUR) to deal with investment disputes. A working group has already been formed and will meet in September to advance the proposed regional centre for arbitration.
*E.T.I. Euro Telecom International N.V. v. Plurinational State of Bolivia is currently in a jurisdictional phase; Bolivia objected to the tribunal’s jurisdiction and filed its memorial on jurisdiction in March of 2009, while E.T.I. Euro Telecom filed its counter-memorial on jurisdiction in June of 2009.