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July 19, 2021

Ecuador Rejoins ICSID: Implications for Investors

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ECUADOR REJOINS ICSID: IMPLICATIONS FOR INVESTORS

On June 23, 2021, Ecuador re-signed the 1965 Washington Convention (the “ICSID Convention”) establishing the International Centre for Settlement of Investment Disputes (ICSID) almost 12 years after the State denounced the Convention. This move aligns with the Government’s stated agenda of greater engagement with other nations and international organizations in an effort to attract foreign investment to the country.

Background: Ecuador in the ICSID Convention

Ecuador originally signed the ICSID Convention and deposited the instrument of ratification on January 15, 1986, under the market-oriented Government of the former President León Febres Cordero. In accordance with Art. 68(2), the ICSID Convention entered into force for Ecuador on February 14, 1986.

By ratifying the ICSID Convention, Ecuador consented to allow foreign nationals to bring investment disputes before international arbitral tribunals constituted under the aegis of ICSID. The rights accorded to foreign investors in these disputes arise out of a network of investment treaties to which Ecuador was a party. At the time of its accession to ICSID, Ecuador was party to three bilateral or regional investment treaties. Over the next 23 years, Ecuador entered into 26 additional investment treaties—each with the purpose of increasing the scope of foreign investment in Ecuador.

Ecuador has been named as a respondent in 14 ICSID arbitrations.[1] In eight of those cases, Ecuador was found to have breached its treaty obligations to foreign investors and ordered to pay compensation totaling almost US$ 10 billion. Ecuador prevailed in two cases and the remaining four were withdrawn for various reasons.

On July 6, 2009, Ecuador notified the World Bank Group that it was denouncing the ICSID Convention, which, under ICSID’s Rules, took effect on January 7, 2010.[2] Ecuador’s decision to withdraw from ICSID was the result of then President Rafael Correa’s belief that ICSID was an instrument of “colonialism” that demonstrated a clear pro-investor bias. It came at a time when many Latin American countries were openly protesting the utility and fairness of the international investment law regime and questioning ICSID’s role in that regime. Indeed, in the five years between 2007 and 2012, Bolivia, Ecuador, and Venezuela each withdrew from ICSID. While other countries, such as Colombia and Argentina have subsequently threatened to withdraw from ICSID, no other Latin American countries have since followed suit. Notably, however, President Elect Pedro Castillo from Peru did announce the possibility of withdrawing from ICSID and terminating Peru’s investment treaties during his campaign.[3]

Ecuador’s decision to denounce ICSID proved to be only the first step in its plan to withdraw from the international investment law regime. On May 16, 2017, Ecuador announced that it was terminating all of its bilateral investment treaties. Ecuador started down the path towards terminating all of its investment treaties when, in October 2012, an ICSID tribunal ordered the State to pay US$ 2.3 billion to Occidental Petroleum Corp.—the largest award issued against a State by an ICSID tribunal up to that point. In May 2013, President Correa created an investment treaty audit commission for the purpose of examining the legality and legitimacy of Ecuador’s investment treaties, auditing the cases that were filed against the State, and determining whether the treaties resulted in greater inbound foreign investment to Ecuador. The commission ultimately concluded that Ecuador did not receive more foreign investment as a result of its entering into investment treaties. However, the commission found that such treaties materially increased Ecuador’s potential liability. Based on the result of the audit and on Ecuadors decision to denounce the ICSID Convention, the State terminated its investment treaties, with a stated objective of renegotiating more favorable terms. Thus, it was unclear at the time whether Ecuador’s decision was intended as a permanent withdrawal from the international investment law regime or a tool for leveling what it considered to be an uneven playing field.

With the election victory of the conservative candidate and now President, Guillermo Lasso, Ecuador continues its move towards market-friendly policies, a tendency that follows Lenin Moreno’s administration. One of these perceived essential steps is re-signing the ICSID Convention. Precisely, within the first 100 days of President Lasso’s Government, the Republic of Ecuador’s Ambassador to the United States, Ivonne Juez Abuchacra de Baki, re-signed the ICSID Convention on June 21, 2021. Ecuador becomes the 164th State to sign the Convention, which has been ratified by 155 countries.[4]

Next Steps for the Ratification of the ICSID Convention

The President of Ecuador has the power to directly ratify a treaty, unless the Ecuadorean Constitutional Court decides it will refer the matter to Congress for approval. The Constitutional Court has to base its decision on Article 419 of the Ecuadorean Constitution, which identifies the eight circumstances in which a treaty must be ratified by Congress. One of the circumstances set out in Article 419 is where the treaty in question assigns the State's inherent legal authority to an international or supranational body.

On June 30, 2021, the Constitutional Court held that the ICSID Convention did not have to be approved by Congress. The Court considered that “the Convention does not oblige the signatory or member States to consent to arbitration or conciliation before ICSID (…), so its approval or ratification alone does not confer jurisdiction to ICSID or the arbitrators or conciliators of said Center to hear disputes related to investments; and to that extent it is not possible to affirm that any competence is being “attributed.”[5]

Indeed, merely acceding to the ICSID Convention does not constitute a specific grant of authority to foreign investors to arbitrate. Such authority would come only from a domestic law, by contract, or most likely, through a bilateral or regional investment treaty.

With this decision, the next step will be the ratification of the treaty by the President of Ecuador after a ten-day notice period to Congress.[6]

International Investment Arbitration Implications

Over the last three years, Ecuador has taken steps to rejoin the international investment law regime by commencing negotiations with several countries for new investment treaties. In 2019, Ecuador signed the first of a new generation of BITs with Brazil (its ratification is still pending). Under the terms of that BIT, investors in a dispute with the host State's Government must ask their own State to raise the matter in an inter-State arbitration proceeding.[7] Ecuador is also negotiating a new BIT with Canada and signed a letter of intent to negotiate a BIT with the Netherlands.

These efforts show the willingness of the Ecuadorian Government to create legal certainty to attract investors. Ratification of the ICSID Convention would show foreign investors that Ecuador is committed to protecting their investments and providing them with a neutral forum to resolve investment disputes.[8]

A Clear Message

The signing of the ICSID Convention does not guarantee a free flow of investment in the country, but it does represent an important step on the Government’s path to promote investment and free trade agreements.[9]

The signing of the ICSID Convention was welcomed by the ICSID Secretary-General Meg Kinnear who said that it confirmed Ecuador’s “commitment to strengthen its investment climate.” Precisely, as noted, by signing the Convention, Ecuador is delivering the clear message that the country will provide legal certainty and, as Secretary-General Meg Kinnear mentioned, access to an impartial dispute resolution mechanism which will reduce risk and give greater confidence to investors, thereby attracting crucial investment flow and generating more development opportunities for all.[10]

According to Barclays Investment Bank, a possible return of Ecuador to ICSID could attract higher capital inflow, which in turn could generate economic growth of three percent in 2022, when previously it had estimated growth of 1.5 percent.[11]

Moreover, Ecuador is taking other measures to regain investors’ confidence. For example, the Government is also evaluating free trade agreements with countries like Mexico, which have conditioned any possible agreement on Ecuador joining ICSID.[12] Also, President Lasso seeks to incorporate the country into the trade bloc of the Pacific Alliance formed by Chile, Colombia, Mexico and Peru.[13]

All of these efforts combined with Ecuador rejoining ICSID now seem to be especially relevant within the region, since neighboring countries Peru and Colombia, as well as Chile, are currently undergoing political crises or drastic public policy shifts. Ecuador has made it abundantly clear that its market-oriented policies, coupled with building a legal structure providing certainty to investors, are central to attracting development opportunities.

Special thanks to visiting attorney Adriana Orellana for her valuable assistance with this note.

Footnotes

[1]  ICSID, Concluded Cases Database.

[2] ICSID, “Denunciation of the ICSID Convention by Ecuador,” ICSID NEWS RELEASES, July 9, 2009.

[3] Cosmo Sanderson, “Ecuador rejoins ICSID Convention,” LATIN LAWYER, June 23, 2021.

[4] ICSID, “Ecuador Signs the ICSID Convention,” ICSID NEWS RELEASES, June 21, 2021.

[5] Ecuadorean Constitutional Court, “Decision No. 5-21-T1/21,” June 30, 2021.

[6] Article 418 of the Ecuadorean Constitution.

[7]  Supra note 3.

[8]  UNCTAD, Investment Dispute Settlement database. We note that Ecuador has been party to 25 investment arbitrations in total, with 13 of these being conducted under the UNCITRAL Arbitration Rules.

[9] Presidency of the Republic, Inauguration Speech to the National Assembly, May 24, 2021

[10] Supra note 4.

[11] Patricia Sandoval, “Catorce demandas contra Ecuador se ventilaron en el CIADI, con el 50% de resultados adversos y millonarias multas,” EL UNIVERSO, June 28, 2021.

[12] Alexandra Valencia, “Ecuador apunta a regresar al tribunal arbitral del Banco Mundial para atraer inversión,” REUTERS, June 21, 2021.

[13] Ibidem.

Authors and Contributors

Cynthia Urda Kassis

Partner

Project Development and Finance

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+1 212 848 7969

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Christopher M. Ryan

Partner

International Arbitration

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+1 202 508 8098

Washington DC

Alexandro M. Padrés

Partner

Project Development and Finance

+1 212 848 7499

+1 212 848 7499

New York