The government of Ecuador has decided that the International Centre for the Settlement of Investment Disputes (ICSID) will no longer have jurisdiction to deal with disputes related to oil and gas or mining. This decision will affect investors in the region who will need to consider their options and verify whether their investments remain protected under other regimes.
Background and business impacts
Earlier this year, President Rafael Correa's Administration took practical control of many investments in these industries by increasing the State's participation in production-sharing contracts from 50% to 99% - albeit giving investors the opportunity to attempt to negotiate new contracts with the government if they wished. The latest move goes even further. It effectively precludes investors from bringing arbitration to the World Bank's dispute resolution arm, ICSID, in respect of this nationalisation. Since ICSID is the most popular means of resolving disputes provided for under investment treaties, and Ecuador is currently faced by several energy related arbitrations before ICSID, this is a highly significant move.
Ecuador's decision has been adopted under Art. 25 (4) of the ICSID Convention, which allows any Contracting State to notify the Centre at any time of a class of disputes which it would not consider submitting to ICSID's jurisdiction. In fact, whilst Ecuador's move has fallen short of Bolivia's full withdrawal from ICSID, its impact will be felt almost as strongly: only one of the disputes against Ecuador that are currently before ICSID is non-energy related. Moreover, whilst a full denunciation of the Convention takes effect six months after notice of it is given to the Centre, Ecuador's move would appear to have immediate effect. Nonetheless, investors in Ecuador may have other options available if they wish to bring a dispute against the State.
Alternative methods of resolving disputes against Ecuador
If an investor's state of origin has a bilateral investment treaty (BIT) with Ecuador, this should be carefully checked. Most BITs incorporate dispute resolution mechanisms other than ICSID, namely:
- ad hoc arbitration under the United Nations Commission on International Trade Law (UNCITRAL) Rules;
- arbitration under the Rules of the ICSID Additional Facility; and
- arbitration in accordance with any other arbitration rules, as may be mutually agreed between the parties.
Of these, option 1 is the most practical; it seems unlikely that Ecuador would agree to submit to any other arbitration rules. As regards option 2, which applies where the ICSID rules are not available, it remains to be seen whether this would be available in practice, given that Ecuador is still officially a member of the ICSID Convention.
Crucially, investors should check their applicable BIT to understand the options available. The UK/Ecuador BIT, for example, contains no arbitration option other than ICSID. It does, however, include a Most Favoured Nation (MFN) Clause. Under such clause it might be possible for an investor under the UK/Ecuador BIT to make use of non-ICSID arbitration clauses contained in BITs with third parties, such as the US/Ecuador BIT. However, the issue of whether MFN clauses are applicable in respect of dispute resolution clauses remains highly controversial. Investors will therefore want to consider all these options as well as any contractual remedies that they may have before bringing a dispute against Ecuador.